SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

    For Annual and Transition Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
 
  [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
            Act of 1934 For the fiscal year ended September 30, 1998

     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 For the transition period from ________ to ________

                         Commission File Number 0-18991

                                 PEOPLES BANCORP
             (Exact name of registrant as specified in its charter)

       INDIANA                                                   35-1811284
(State or other jurisdiction                                 (I.R.S. Employer
of incorporation or organization)                         Identification Number)

  212 West 7th Street, Auburn, Indiana                                   46706
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (219) 925-2500
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act

                     Common Stock, par value $1.00 per share
                                (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 for 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___.

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of  registrant's  knowledge,  in definitive  proxy  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [X ]

     Aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant, as of December 23, 1998: $57,426,692.

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of December 23, 1998:

           3,261,534 shares of Common Stock, par value $1.00 per share

                      Documents Incorporated by Reference:

     Portions of the definitive  Proxy  Statement for the 1999 Annual Meeting of
Stockholders (Part III) and the Annual Report to Stockholders for the year ended
September 30, 1998 (Parts II and IV).
 
<PAGE>
                                     PART I

Item 1.  Business

General


     Peoples  Bancorp (the  "Company")  is an Indiana  corporation  organized in
October,  1990 to become the thrift holding  company for Peoples Federal Savings
Bank (the "Bank" or "Peoples  Federal").  The Company is the sole shareholder of
Peoples Federal.  The Bank conducts  business from its main office in Auburn and
in its six  full-service  offices  located in Avilla,  Columbia  City,  Garrett,
Kendallville,  and LaGrange,  Indiana.  Peoples  Federal  offers a full range of
retail  deposit  services  and lending  services to  northeastern  Indiana.  The
Company has no other business  activity other than being the holding company for
Peoples Federal.

     The Bank was founded in 1925 and  chartered  by the Federal  Home Loan Bank
Board ("FHLBB"),  now the Office of Thrift Supervision  ("OTS"),  in 1937. Since
that  time,  the Bank has been a member of the  Federal  Home  Loan Bank  System
("FHLB  System")  and the  Federal  Home  Loan  Bank of  Indianapolis  ("FHLB of
Indianapolis"),  and its savings accounts are insured up to applicable limits by
the Savings Association  Insurance Fund ("SAIF"), as administered by the Federal
Deposit Insurance Corporation (the "FDIC").

     The  Company  is a unitary  savings  and loan  holding  company  subject to
regulation  by the  OTS.  The  Company's  securities  are  registered  with  the
Securities and Exchange  Commission ("SEC") pursuant to the Securities  Exchange
Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to
the information, proxy solicitation, insider trading, and other restrictions and
requirements of the Exchange Act.

     In May, 1997, the Board authorized a stock repurchase program. Purchases of
up to  240,000  shares  may be made in open  market or in  privately  negotiated
transactions.  As of September  30, 1998,  the Company had  repurchased  136,958
shares.

     On a yearly basis,  Peoples Federal  updates its long-term  strategic plan.
This  plan  includes,  among  other  things,  Peoples  Federal's  commitment  to
maintaining a strong capital base and  continuing to improve the  organization's
return on assets  through  asset  growth  and  controlling  operating  expenses.
Continued  careful  monitoring of Peoples  Federal's  interest rate risk is also
cited as an important  goal. As a result,  continued  origination  of short-term
consumer  and  installment  loans,  prime plus  equity  loans,  adjustable  rate
mortgage loans, and fixed-rate real estate loans with original terms of 15 years
or less will be emphasized.

     The Bank offers a wide range of consumer and commercial financial services.
These services include: consumer demand deposit accounts; NOW accounts;  regular
and term savings accounts and savings  certificates;  residential and commercial
real estate loans;  and secured and unsecured  consumer loans. The Bank provides
these services through a branch network comprised of seven full-service  banking
offices.  It also provides credit card services,  as well as enhancements to its
loan and deposit products designed to provide customers with added conveniences.
The Bank has historically  concentrated its business  activities in northeastern
Indiana. The Bank's current strategy is to maintain its branch office network as
well as remain alert to new opportunities.

     Over the years,  the Bank has  broadened  its product line and enhanced its
operations  in  order  to  accommodate  its  growth  and to  meet  the  vigorous
competition  from various  financial  institutions  and other companies or firms
that engage in similar activities.

The Thrift Industry

     Thrift  institutions are financial  intermediaries  which historically have
accepted  savings  deposits  from the general  public  and, to a lesser  extent,
borrowed  funds from  outside  sources and  invested  those  deposits  and funds
primarily in loans  secured by first  mortgage  liens on  residential  and other
types of real estate.  Such  institutions may also invest their funds in various
types of short- and long-term  securities.  The deposits of thrift  institutions
are insured by the SAIF as administered by the FDIC, and these  institutions are
subject to extensive regulations.  These regulations govern, among other things,
the lending and other investment  powers of thrift  institutions,  including the
terms of mortgage  instruments these institutions are permitted to utilize,  the
types of deposits they are permitted to accept, and reserve requirements.
<PAGE>

     The  operations of thrift  institutions,  including  those of the Bank, are
significantly  affected by general  economic  conditions and by related monetary
and fiscal  policies of the federal  government and  regulations and policies of
financial institution regulatory  authorities,  including the Board of Governors
of the Federal Reserve System and the OTS. Lending  activities are influenced by
a number  of  factors  including  the  demand  for  housing,  conditions  in the
construction  industry,  and availability of funds. Sources of funds for lending
activities  include savings  deposits,  loan principal  payments,  proceeds from
sales of loans,  and  borrowings  from the  Federal  Home  Loan  Banks and other
sources.  Savings  flows at thrift  institutions  are  influenced by a number of
factors including interest rates on competing investments and levels of personal
income.

Earnings

     The Bank's  earnings  depend  primarily on the spread  between  income from
lending activities and, to a lesser extent, investment activities,  and the cost
of money,  that is the difference  between income from  interest-earning  assets
such as loans and investments, and interest paid on interest-bearing liabilities
such as  deposits  and  borrowings.  The Bank  typically  engages  in  long-term
mortgage  lending at fixed rates of interest,  generally for periods of up to 30
years, while accepting deposits for considerably shorter periods.

     Generally, rapidly rising interest rates cause the cost of interest-bearing
liabilities  to increase  more rapidly than yields on  interest-earning  assets,
thereby adversely affecting the earnings of many thrift institutions.  While the
industry  has received  expanded  lending and  borrowing  powers in recent years
permitting  different types of investments  and mortgage loans,  including those
with floating or  adjustable  rates and those with shorter  terms,  earnings and
operations are still highly influenced by levels of interest rates and financial
market conditions and by substantial investments in long-term mortgage loans.

Competition

     The Bank  experiences  strong  competition both in making real estate loans
and in attracting savings deposits.  In the past, thrift institutions  generally
competed  for  real  estate  loans  with  commercial  banks,   mortgage  banking
companies,   insurance  companies,   and  other  institutional  lenders.  Recent
legislative  and regulatory  actions have increased  competition  between thrift
institutions  and other  financial  institutions,  such as commercial  banks, by
expanding  the range of services  that may be offered  such as demand  deposits,
trust services, and consumer and commercial lending. The most direct competition
for savings has historically come from other thrift institutions, mutual savings
banks,  commercial  banks and credit  unions.  During  periods of generally high
interest rates,  additional  significant  competition for savings accounts comes
from corporate and government securities and, more recently, money market mutual
funds.  The  principal  methods  generally  used by the Bank to attract  deposit
accounts include:  competitive interest rates, advertising,  providing a variety
of financial  services,  convenient  office  locations,  flexible  hours for the
public, and promotions for opening or adding to deposit accounts.

Net Interest Income

     Net interest  income  increases  during  periods when the spread is widened
between the Bank's  weighted  average rate at which new loans are originated and
the weighted average cost of interest-bearing liabilities. The Bank's ability to
originate   loans  is  affected  by  market  factors  such  as  interest  rates,
competition, consumer preferences, the supply of and demand for housing, and the
availability of funds.

     The  Bank  has  supplemented  its  interest  income  through  purchases  of
investments when  appropriate.  This activity  generates  positive interest rate
spreads on large principal balances with minimal administrative expense.
<PAGE>

Interest Rate and Volume of Interest-Related Assets and Liabilities

     Both  changes  in  rate  and  changes  in the  composition  of  the  Bank's
interest-earning assets and interest-bearing  liabilities can have a significant
effect on net interest income.

     For  information  regarding the total dollar amount of interest income from
interest-earning assets, the average yields, the amount of interest expense from
interest-bearing liabilities and the average rate, net interest income, interest
rate spread, and the net yield on  interest-earning  assets,  refer to page 9 of
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  in  the  Company's  1998  Annual  Report,   incorporated  herein  by
reference.

     For information  regarding the combined weighted average effective interest
rate earned by the Bank on its loan  portfolio  and  investments,  the  combined
weighted  average  effective  cost of the Bank's  deposits and  borrowings,  the
interest rate spread of the Bank, and the net yield on combined monthly weighted
average   interest-earning  assets  of  the  Bank  on  its  loan  portfolio  and
investments for the fiscal years ending September 30, 1998, 1997, and 1996 refer
to page 6 of  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations in the Company's 1998 Annual Report incorporated herein by
reference.
 
     For  information  concerning  the extent to which changes in interest rates
and changes in volume of  interest-related  assets and liabilities have affected
the Bank's interest income and expense during the fiscal years ending  September
30,  1998,  1997,  and 1996  refer  to page 10 of  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations in the Company's 1998
Annual Report incorporated herein by reference.

Market Area

     The Bank's  market  area in  northeastern  Indiana  spans the  counties  of
DeKalb,  Whitley,  Noble,  and  LaGrange.  This market area has a population  of
approximately  130,000 and consists of a  diversified  industrial  economic base
with an emphasis on the production  sector that includes major  manufacturers of
international  scope.  Moreover,  the  distribution  sector,  primarily  in  the
wholesale and retail  trades,  constitutes  a substantial  portion of the area's
economy, both in terms of product mix, sales receipts, and employment.  The most
rapid  growth  has  occurred  in the  manufacturing  sector,  especially  in the
production of automotive  and  electronics  products,  and in the service sector
with respect to packaging, warehousing, and distribution services.

Lending Activities

    General

     The  Bank  has  attempted  to  emphasize   investments  in  adjustable-rate
residential  mortgages and consumer loans in its market area. In order to lessen
its risk from interest rate fluctuations, the Bank emphasizes the origination of
interest rate sensitive loan products, such as one year adjustable-rate mortgage
loans,  and prime plus equity  loans.  However,  during the current low interest
rate market,  customers have preferred fixed rate products. The Bank has reacted
to this trend by offering a new mortgage product of a seven year fixed rate loan
which converts to a one year adjustable  product at the end of the seventh year.
In this way,  the Bank is offering a fixed rate  product to satisfy the customer
demand,  but is not locked  into low  interest  rates for a long period of time.
These loans show on the various charts in this 10-K as fixed rate product, since
according to  regulatory  treatment,  they are  considered  fixed rate until the
repricing  period is below five years.  Since this is a new  product  this year,
none of these  loans is  currently  considered  adjustable  rate for  regulatory
reporting purposes.
<PAGE>

    Residential Mortgage Loans

     A  substantial   portion  of  the  Bank's  lending  activity  involves  the
origination  of  loans  secured  by  residential  real  estate,   consisting  of
single-family  dwelling  units.  The Bank also lends on the security of mid-size
multifamily  dwelling  units.  The  residential  mortgage  loans included in the
Bank's portfolio are primarily conventional  fixed-rate loans with a maturity of
up to 30 years.

     The Bank also offers adjustable-rate mortgage loans. Currently, these loans
generally have interest rates which adjust (up or down) every year. Currently in
effect is a maximum adjustment of 6% over the life of these loans with a maximum
adjustment  of 2% during  any given  year.  Adjustments  are based upon an index
established at the time the commitment is issued by the Bank. The index used for
most loans is tied to the  applicable  United States  Treasury  security  index.
While the addition of adjustable-rate mortgage loans will better enable the Bank
to maintain a positive  spread during periods of high interest  rates, it is not
expected that  adjustments in interest rates on  adjustable-rate  mortgages will
match  precisely  changes  in the  Bank's  cost of funds.  The  majority  of the
adjustable rate mortgages  originated by the Bank have limitations on the amount
(generally 6%) and frequency of interest rate changes.

     During the fiscal  year  ended  September  30,  1998,  the Bank  originated
$90,939,000  of  residential  loans of which  $89,928,310  were five- to 30-year
fixed-rate  mortgages  and  $1,010,690  were  adjustable-rate  loans.  The rates
offered on the Bank's  adjustable-rate  residential mortgage loans are generally
competitive  with the rates offered by other thrift  institutions  in the Bank's
market  area and are based upon the Bank's  cost of funds and the rate of return
the Bank can receive on comparable investments.  Fixed-rate loans are originated
only under terms and conditions and using documentation which would permit their
sale in the secondary  market and at rates which are generally  competitive with
rates offered by other financial institutions in the Bank's market area.

     Set  forth  below  are  the  amounts  and  percentages  of  fixed-rate  and
adjustable-rate  loans (which include consumer loans) in the Bank's portfolio at
September 30, 1998, 1997, and 1996 (in thousands).

                               September 30,
   -----------------------------------------------------------------------
           1998                    1997                    1996
   ---------------------- -----------------------  -----------------------
     Fixed    Adjustable   Fixed      Adjustable     Fixed     Adjustable
   --------- ------------ ---------- ------------  ---------- ------------
   $225,270    $46,740     $180,631    $59,025      $154,416    $73,159
       82.8%      17.2%        75.4%    24.6%           67.9%     32.1%


     The terms of the residential loans originated by the Bank range from one to
30 years. Experience during recent years reveals that as a result of prepayments
in  connection  with  refinancings  and  sales  of  the  underlying  properties,
residential loans generally remain outstanding for periods substantially shorter
than  maturity  of the  loan  contracts.  At  September 30,  1998,  the  average
contractual  maturity of the Bank's  portfolio of fixed-rate  loans was 10 years
and 11  months,  and 16 years and 4 months  with  respect  to its  portfolio  of
adjustable-rate loans.

     Substantially  all of the Bank's  residential  mortgages  include so-called
"due on sale" clauses, which are provisions giving the Bank the right to declare
a loan  immediately due and payable in the event that,  among other things,  the
borrower  sells or  otherwise  disposes  of the  real  property  subject  to the
mortgage, and the loan is not repaid.

     Generally, the Bank will not lend more than 80% of the appraised value of a
residential property which is owner occupied unless the borrower obtains private
mortgage  insurance  reducing  the  uninsured  portion of the loan to 72% of the
appraised value. If private mortgage insurance is obtained, the Bank's policy is
to lend up to 90% of the appraised value of the property  securing the loan. The
Bank applies the same standards to residential  loans purchased in the secondary
market.
<PAGE>

Commercial Real Estate Loans

     The Bank also originates  commercial real estate loans.  From September 30,
1997,  to  September 30,  1998,  commercial  real estate  loans  increased  from
$7,850,076 to  $10,411,049,  with the percentage of commercial real estate loans
to total  loans  increasing  from  3.30% to  3.80%.  These  loans  consisted  of
construction  and permanent  loans  secured by mortgages on mid-size  commercial
real estate.  The terms of  commercial  real estate loans vary from loan to loan
but are usually  five-year  adjustable-rate  loans with terms of 20 to 25 years.
The  loan-to-value  ratio of  commercial  real estate loans is generally  75% or
less.

     Generally,  commercial  real estate loans involve  greater risk to the Bank
than do residential  loans but usually provide for a higher rate of interest and
increased fee income than do  residential  loans.  Commercial  real estate loans
typically  involve large loan balances to single  borrowers or groups of related
borrowers.  In  addition,  the  payment  experience  on loans  secured by income
producing  properties is typically dependent on the successful  operation of the
related project and thus may be subject to a great extent to adverse  conditions
in the real estate market or in the economy generally.

Construction Loans

     The Bank offers residential  construction loans both to owner-occupants and
to persons building residential property. Construction loans are usually offered
with fixed rates of interest during construction.  Generally, construction loans
have terms  ranging  from six to 12 months at fixed rates over the  construction
period.  Practically  all  residential  construction  loans are written so as to
become permanent loans at the end of the construction period.

     Construction  loans involve greater  underwriting  and default risks to the
Bank than do loans secured by mortgages on existing  properties.  Loan funds are
advanced  upon the  security of the project  under  construction,  which is more
difficult to value prior to the completion of construction. Moreover, because of
the uncertainties  inherent in estimating  construction  costs, it is relatively
difficult  to evaluate  accurately  the total loan funds  required to complete a
project  and the  related  loan-to-value  ratios.  Should a default  occur which
results in foreclosure,  the Bank could be negatively  impacted in that it would
have to take control of the project and attempt either to arrange for completion
of construction or dispose of the unfinished project.

     The Bank's underwriting  criteria are designed to evaluate and minimize the
risks of each construction loan. The Bank carefully  considers a wide variety of
factors before  originating a construction  loan,  including the availability of
permanent  financing  or a takeout  commitment  to the  borrower  (which  may be
provided by the Bank at market  rates);  the  reputation of the borrower and the
contractor;    independent   valuations   and   reviews   of   cost   estimates;
pre-construction  sale  information;  and cash flow projections of the borrower.
Inspections  of  construction  sites  are made by the Bank on a timely  basis to
verify  progress  made to date as a further  reinforcement  of its  conservative
lending policy. To reduce the risks inherent in construction  lending,  the Bank
limits the number of properties  which can be constructed on a "speculative"  or
unsold basis by a developer at any one time and generally  requires the borrower
or its principals to guarantee personally repayment of the loan.

Consumer and Other Loans

 
     Federal  laws  and  regulations   permit  a   federally-chartered   savings
institution to make secured and unsecured  consumer loans  including home equity
loans  (loans  secured  by the  equity  in the  borrower's  residence,  but  not
necessarily  for the purpose of  improvement),  home  improvement  loans  (loans
secured by a residential  second  mortgage),  loans secured by deposit accounts,
educational loans (insured by the State Student Loan Commission of Indiana), and
credit card loans  (unsecured).  The Bank offers all of these types of loans and
is currently  emphasizing  home equity loans to take advantage of the adjustable
interest rate feature of this loan versus the mortgage product. These loans also
carry a higher rate of interest than conventional mortgages,  thereby increasing
the profit potential while reducing the interest rate risk.

<PAGE>

Loan Portfolio Cash Flows

     The following  table sets forth the  estimated  maturity of the Bank's loan
portfolio by type of loan at September 30, 1998. The estimated maturity reflects
contractual  terms at September 30, 1998.  Contractual  principal  repayments of
loans do not  necessarily  reflect the actual term of the Bank's loan portfolio.
The average life of mortgage loans is substantially  less than their contractual
terms because of loan  prepayments  and because of  enforcement of "due on sale"
clauses.  The average life of mortgage  loans tends to increase,  however,  when
current  mortgage  loan rates  substantially  exceed rates on existing  mortgage
loans.

                                           Due After
                               Due in       One Year    Due After  
                               One Year     Through      Five
                               or Less     Five Years    Years         Total
                              ----------- ------------ ------------  --------
                                            (In thousands)
Type of Loan:
Construction loans --
   residential real estate     $ 6,695    $     -       $ - -       $  6,695
Real estate loans:
   Mortgage-residential         44,310     52,114      142,349     238,773
   Commercial                    6,134      4,050          227      10,411
Installment loans -- 
   consumer                     10,955      3,950        1,225      16,130
                              --------- ----------   ----------- ----------
         Total                 $68,094    $60,114     $143,801    $272,009
                              ========= ==========   =========== ==========

     The following table sets forth the total amount of loans due after one year
from September 30, 1998, which have a fixed rate or an adjustable rate. (Dollars
in thousands)
 

       Loans Due
 October 1, 1999 and thereafter
-------------------------------
      Fixed     Adjustable       Total at September 30, 1998
    ---------- ------------     -------------------------------
     $153,320    $50,595                 $203,915



Loan Portfolio Composition

     The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.  The table includes a reconciliation  of
total net loans receivable, after consideration of undisbursed portion of loans,
deferred loan fees and discounts, and allowance for losses on loans.
<PAGE>
<TABLE>
                                                                    At September 30
                                 1998              1997              1996            1995              1994
                         ------------------ ----------------- ---------------- ---------------- -----------------
TYPE OF LOAN               AMOUNT      %      AMOUNT     %      AMOUNT    %     AMOUNT     %     AMOUNT      %
<S>                       <C>        <C>     <C>       <C>    <C>       <C>    <C>       <C>    <C>       <C>
                         ---------- ------- ---------- ------ --------- ------ --------- ------ --------- -------
Residential:                                             (Dollars in thousands)
 Single family units      $243,858    89.7%  $217,528   90.8% $207,028   91.0% $203,211   91.2% $195,525   91.8%
 2-4 family units            1,610     0.6%     1,541    0.6%    1,234    0.5%    1,008    0.4%    1,006    0.4%
 Over 4 family units         2,687     1.0%     2,813    1.2%    2,769    1.2%    1,738    0.8%    1,835    0.8%
Commercial real estate       6,425     2.4%     4,269    1.8%    4,006    1.8%    3,696    1.7%    2,729    1.3%
Land acquisition and
 development                 1,299     0.5%       769    0.3%      702    0.3%      838    0.4%      438    0.2%
Consumer and other loans    15,157     5.6%    11,915    5.0%   10,959    4.8%   11,337    5.1%   10,931    5.1%
Loans on deposits              973     0.4%       821    0.3%      877    0.4%      901    0.4%      860    0.4%
                         ---------- ------- ---------- ------ --------- ------ --------- ------ --------- ------
                           272,009   100.0%   239,656  100.0%  227,575  100.0%  222,729  100.0%  213,324  100.0%
                         ---------- ------- ---------- ------ --------- ------ --------- ------ --------- ------
Less:
Undisbursed portion
     of loans                3,081              2,444            2,717            2,237            1,971
Deferred loan fees and
     discounts               1,323              1,070              959              916              988
                         ----------         ----------        ---------        ---------        -----------
                             4,404              3,514            3,676            3,153            2,959
                         ----------         ----------        ---------        ----------       -----------
Total loans receivable     267,605            236,142          223,899          219,576          210,365
Allowance for losses
     on loans                  947                887              888              912            1,035
                         ----------         ----------        ---------        ----------       -----------
Net loans                 $266,658           $235,255         $223,011         $218,664         $209,330
                         ==========         ==========        =========        ==========       ===========

</TABLE>


Origination, Purchase and Sale of Loans and Loan Concentrations

     The  Bank  originates   residential   loans  in  conformity  with  standard
underwriting  criteria to assure maximum  eligibility for possible resale in the
secondary market. Although the Bank has authority to lend anywhere in the United
States, it has confined its loan origination  activities primarily in the Bank's
service area.

     Loan  originations  are developed from a number of sources,  primarily from
referrals  from  real  estate  brokers,   builders,  and  existing  and  walk-in
customers.  The Bank also utilizes the services of a loan broker located in Fort
Wayne,  Indiana,  who is paid on a commission  basis  (generally  1% of the loan
amount) to originate loans for the Bank.

     The  Bank's  mortgage  loan  approval  process  is  intended  to assess the
borrower's  ability  to repay  the loan,  the  viability  of the  loan,  and the
adequacy of the value of the property that will secure the loan. Residential and
commercial loans ranging up to $200,000 can be approved by the loan committee of
the Bank.  Loans  exceeding  $200,000  must be approved  by the Bank's  Board of
Directors.  The Bank utilizes  independent  qualified appraisers approved by the
Board of Directors to appraise  the  properties  securing its loans and requires
title insurance or title opinions so as to insure that the Bank has a valid lien
on the mortgaged real estate.  The Bank requires  borrowers to maintain fire and
casualty insurance on its secured properties.

     The  procedure  for  approval  of  construction  loans  is the  same as for
residential  mortgage  loans,  except that the appraiser  evaluates the building
plans,  construction  specifications,  and estimates of construction  costs. The
Bank also evaluates the feasibility of the proposed construction project and the
experience  and track record of the  developer.  In addition,  all  construction
loans generally require a commitment from a third-party  lender or from the Bank
for a permanent  long-term loan to replace the construction loan upon completion
of construction.
<PAGE>

     Consumer  loans  are  underwritten  on the basis of the  borrower's  credit
history and an analysis of the borrower's income and expenses,  ability to repay
the loan,  and the  value of the  collateral,  if any.  Consumer  loans  must be
approved by a consumer loan officer.  Consumer loan  originations  currently are
being generated primarily through advertising.

     Currently,  it is the  Bank's  policy  to  originate  both  fixed-rate  and
adjustable-rate  loans,  providing  all such loans are  eligible for sale in the
secondary  market.  It is the  Bank's  intention  to  hold  all  originated  and
purchased  loans in its portfolio and not for sale.  Generally,  the Bank is not
active in the secondary market.

     The following  table shows mortgage and other loan  origination,  purchase,
and repayment activity for the Bank during the periods indicated:

                                                Years Ended September 30
                                       ----------------------------------------
                                          1998           1997           1996
                                       ----------   ------------   ------------
                                                (Dollars in thousands)
Mortgage loans originated
   for the purpose of:
     Construction-commercial            $  1,425       $      -       $    995
     Construction-residential              8,386          9,120          6,582
     Purchase/refinance-commercial         2,324            618          1,905
     Purchase/refinance-residential       82,553         53,374         51,926
Consumer and other loans originated       14,463          9,462          6,837
                                       ----------     ----------     ----------
   Total loans originated                109,151         72,574         68,245
                                       ----------     ----------     ----------
Loans  purchased                               -              -             -
                                       ----------     ----------     ----------
                                         109,151         72,574         68,245
                                       ----------     ----------     ----------
Loan credits:
   Principal repayments                   77,980         60,368         64,146
                                       ----------     ----------     ----------
Other:
   Provision for losses on loans              75             50              9
   Amortization of loan fees                (380)          (271)          (368)
   Loan foreclosures, net                     73            183            111
                                       ----------     ----------     ----------
                                            (232)           (38)          (248)
                                       ----------     ----------     ----------

     Total credits, net                   77,748         60,330         63,898
                                       ----------     ----------     ----------
Net increases in mortgage and other
   loans receivable, net                $ 31,403       $ 12,244       $  4,347
                                       ==========     ==========     ==========

Interest Rates, Points and Fees

     The  Bank  realizes  interest,  point,  and fee  income  from  its  lending
activities.  The Bank also  realizes  income  from  commitment  fees for  making
commitments to originate  loans,  from  prepayment and late charges,  loan fees,
application fees, and fees for other miscellaneous services.

     The  Bank  accounts  for  loan  origination  fees in  accordance  with  the
Statement of Financial Accounting Standards on Accounting for Nonrefundable Fees
and Costs  Associated with Originating or Acquiring Loans ("SFAS No. 91") issued
by the Financial Accounting Standards Board (the "FASB").  SFAS No. 91 prohibits
the immediate recognition of loan origination fees as revenues and requires that
such income  (net of certain  direct  loan  origination  costs) for each loan be
amortized, generally by the interest method, over the estimated life of the loan
as an adjustment of yield.

<PAGE>
Nonperforming Assets

     Loans  are  reviewed  on a  regular  basis  and  are  generally  placed  on
nonaccrual  status when the loans become past due 90 days or more,  or when,  in
the  judgment of  management,  the  probability  of  collection  is deemed to be
insufficient to warrant further  accrual.  When a loan is placed on a nonaccrual
status, previously accrued but unpaid interest is deducted from interest income.
When the Bank is unable to resolve a delinquency  satisfactorily  within 45 days
after the loan is past due, it will undertake  foreclosure or other proceedings,
as necessary, to minimize any potential loss.

     Real estate  acquired by the Bank as a result of  foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until it is sold.  When
property is so  acquired,  it is  recorded at the lower of loan  balance or fair
market  value at the date of  acquisition.  Periodically,  real estate  owned is
reviewed to ensure that net  realizable  value is not less than carrying  value,
and any  allowance  resulting  therefrom is charged to operations as a provision
for loss on real estate owned.  All costs incurred in  maintaining  the property
from the date of acquisition are expensed.

     The following table reflects the amount of loans in delinquent status as of
the dates indicated:
<TABLE>
                                        Loans Delinquent For
                -------------------------------------------------------------------------
                  30-59 Days                     60-89 Days          90 Days and Over
                ------------------------- ----------------------- -----------------------
                                 Percent                 Percent                 Percent
                                 of Loan                 of Loan                 of Loan
                Number  Amount   Category Number Amount  Category Number  Amount Category
<S>               <C>   <C>       <C>       <C>   <C>      <C>     <C>     <C>   <C>    
                ------ --------  -------- ------ ------ --------- ------ ------- --------
Real estate:                                   (Dollars in thousands)
  One to four     28    $1,378     0.56%     6    $171     0.07%    34     $606   0.25%
   family
Consumer          20       256     1.59%     5      21     0.13%     6      146   0.91%
                ------ --------           ------ ------           ------ -------
   Total          48    $1,634     0.60%    11    $192     0.07%    40     $752   0.28%
                ====== ========           ====== ======           ====== =======

</TABLE>

     The following table sets forth the Bank's nonperforming assets at the dates
indicated:

                                          At September 30,
                             ---------------------------------------
                              1998   1997      1996    1995    1994
                             ------ ------- --------- ------ -------
                                      (Dollars in thousands)
Nonaccrual loans              $729   $658     $  814   $765   $1,020
Loans past due 90 days and
    still accruing              23     64         88     99       49
                             ------ ------- --------- ------ --------
                               752    722        902    864    1,069
Real estate owned, net
   of allowance                  -      -        110     47       25
                             ------ ------- --------- ------ --------
Total nonperforming
   assets                     $752   $722    $ 1,012   $911   $1,094
                             ====== ======= ========= ====== ========


     Consumer loans are placed on nonaccrual  generally when the loan exceeds 90
days  delinquent  or if,  in the  opinion  of  management,  the  possibility  of
collecting  the  loan  becomes  questionable.   Mortgage  loans  are  placed  on
nonaccrual  generally when the loan exceeds 90 days delinquent;  however, if the
loan is below a 25%  loan-to-value,  management  may at their  option  decide to
accrue interest on the loan, since collection of the loan appears highly likely.
<PAGE>
 
     Interest  income  that  would  have  been  recognized  for the  year  ended
September  30, 1998, if  nonaccrual  loans had been current in  accordance  with
their original terms,  approximated $39,000.  Interest income recognized on such
loans for the year ended September 30, 1998,  approximated $24,000. At September
30, 1998,  the Bank had no loans which were deemed  impaired in accordance  with
Statement of Financial Accounting Standards No. 114.

     Federal regulations require savings  associations to review their assets on
a regular basis and to classify them as: special mention; substandard;  doubtful
and loss.  Loans  classified as special mention are loans which currently do not
expose the Bank to an unusual  risk of loss but based on  information  available
require the attention of management.  This classification usually includes loans
secured by unusual  collateral,  loans with  documentary  items  which are being
addressed by counsel,  and  relatively  large loans where the borrower has had a
history of  delinquent  payments and the  collateral  has a cashflow  shortfall,
however, the borrower has continued to service the debt.

     Loans classified as substandard or doubtful  generally  represent  balances
where the borrower  has made  several  late  payments and is unable to bring the
loan  current.  Substandard  loans  generally  represent  situations  where  the
borrower  is  attempting  to resolve  the  delinquency  in the normal  course of
business (i.e., sale of the property or infusion of additional  capital).  Loans
classified  as  doubtful  represent  situations  where  the  borrower  has  been
unsuccessful  in  attempts to resolve the  delinquency  in the normal  course of
business.  Doubtful  loans  involve a greater  degree of  uncertainty  regarding
estimate of loss.

     Loans  classified as loss represent  situations  where the loan is severely
delinquent.  These loans typically involve extensive  bankruptcy  proceedings or
other unusual circumstances where the debtor contests foreclosure.

     Loans  classified  as  special  mention,  substandard  or  doubtful  do not
necessarily   require  specific  reserves.   Individual  loan  balances  may  be
classified in one or more categories based on management's analysis and estimate
of the risk underlying each individual situation.

     In accordance with the federal regulations,  Management continually reviews
the mix and delinquency  status of its loan portfolio and classifies those loans
which it deems appropriate.

     As of September  30, 1998,  loan  balances  were  classified by the Bank as
follows:
             Loss                          $   25,152
             Doubtful                              -0-
             Substandard                      872,367
             Special Mention                1,326,626

Allowance for Losses on Loans and Real Estate Owned

     The  allowances  for loan and real estate  owned losses  represent  amounts
available to absorb inherent  losses in the loan portfolio.  Such allowances are
based  on  management's   continuing   review  of  the  portfolios,   historical
charge-offs,  current  economic  conditions,  and such other  factors,  which in
management's  judgment deserve  recognition in estimating  possible  losses.  In
addition,  various regulatory agencies, as an integral part of their examination
process,  periodically  review the allowance for loan losses.  Such agencies may
require   additions  to  the  allowances  based  on  their  judgment  about  the
information  available to them at the time of their examination.  Provisions for
losses are  charged to  earnings to bring the  allowances  to levels  considered
necessary by management.  Losses are charged to the allowances  when  considered
probable. As of September 30,  1998, the allowances for losses on loans and real
estate owned were $947,008 and $-0- respectively.  Management  believes that the
allowances are adequate to absorb known and inherent losses in the portfolio. No
assurance can be given,  however,  that economic  conditions which may adversely
affect the Bank's markets or other circumstances will not result in additions to
the allowance for loan losses.

     The following table presents an allocation of the Bank's allowance for loan
losses at the dates  indicated  and the  percentage of loans in each category to
total loans.
<PAGE>

<TABLE>
                                                            September 30,
                            ---------------------------------------------------------------------------
                                1998           1997           1996            1995           1994
                            -------------- -------------- -------------- -------------- ---------------
                            Amount   %     Amount   %     Amount   %     Amount    %    Amount    %
                            ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
<S>                         <C>     <C>    <C>     <C>    <C>     <C>    <C>     <C> 
                                                     (Dollars in thousands)
Balance at end of
period applicable to:
Residential Mortgage Loans   $742    91.5%  $726    91.7%  $594    91.8%  $649    92.2% $  627    92.6%
Commercial Real Estate Loans  121     2.6%    16     3.0%    15     3.0%    13     2.0%    172     1.3%
Consumer Loans                 84     5.9%    37     5.3%    47     5.2%    64     5.8%     76     6.1%
Unallocated                     -            107            231            186             159
                            ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
Total                        $947   100.0%  $886   100.0%  $887   100.0%  $912   100.0% $1,034   100.0%
                            ------ ------- ------ ------- ------ ------- ------ ------- ------- -------
</TABLE>


     The  following  table is a summary of activity in the Bank's  allowance for
loan losses for the periods indicated.

Summary of Loan Loss Experience            Years ended September 30,
                                    --------------------------------------
(Dollars in Thousands)               1998   1997   1996    1995    1994
                                    ------ ------ ------ -------- --------
Balance of loan loss allowance at
     beginning of year               $886   $887   $912   $1,034   $1,025
       Charge-offs
          Residential                   -      -      -      153        5
          Commercial real estate        -      -      -        -        -
          Commercial                    -      -      -        -        -
          Consumer                     47     84     55       47       30
                                    ------ ------ ------ -------- --------
               Total Charge-offs       47     84     55      200       35
                                    ------ ------ ------ -------- --------
        Recoveries
          Residential                   -      -      -        -        -
          Consumer                     33     33     21       28       21
                                    ------ ------ ------ -------- --------
               Total Recoveries        33     33     21       28       21
                                    ------ ------ ------ -------- --------
      Net Charge-offs (Recoveries)     14     51     34      172       14
Provision for loan losses              75     50      9       50       23
                                    ------ ------ ------ -------- --------
Balance of loan loss allowance at
     end of year                     $947   $886   $887   $  912   $1,034
                                    ====== ====== ====== ======== ========
Ratio of net charge-offs to average
     loans outstanding               0.01%  0.02%  0.02%    0.08%    0.01% 

<PAGE>

Investment Activities

     Federal  thrift  institutions  have authority to invest in various types of
liquid assets,  including  United States Treasury  obligations and securities of
various federal  agencies,  certificates  of deposit at insured banks,  bankers'
acceptances  and federal  funds.  As a member of the FHLB System,  the Bank must
maintain  minimum  levels of liquid assets  specified by the OTS which vary from
time to  time.  Subject  to  various  regulatory  restrictions,  federal  thrift
institutions  may also  invest a portion of their  assets in certain  commercial
paper,  corporate  debt  securities and mutual funds whose assets conform to the
investments that a federal thrift institution is authorized to make directly. At
September 30,  1998, the Bank's ratio of liquid assets to total assets was 8.2%,
which exceeds the regulatory requirement.


     The carrying  values of the Bank's  investment  securities,  including  its
liquid assets, as of the dates indicated are presented on the following table.
 
                                             At September 30,
                                   -----------------------------------
                                     1998         1997        1996
                                   ---------  ----------  ------------
Interest-bearing deposits and                   (Dollars in thousands)
     certificates of deposit (1)    $   718      $ 8,715     $ 7,824
U.S. government and federal
     agency securities
     Held to maturity                 4,000        8,000      13,175
     Available for sale              11,287       19,822      20,590
Mortgage backed securities
     Held to Maturity                   372          499         631
Stock in FHLB of Indianapolis         2,218        2,062       2,004
Other
     Held to maturity                   696          758         455
     Available for sale(2)           10,591        8,646       5,296
                                   ---------    ---------   ---------
          Total investments         $29,882      $48,502     $49,975
                                   =========    =========   =========

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

(1)  In insured  certificates  of  deposit at  September  30,  1998;  In FHLB of
     Indianapolis  ($7,739)  and  insured  certificates  of  deposit  ($976)  at
     September 30, 1997; in FHLB of Indianapolis at September 30, 1996.

(2)  Van Kampen Prime Income Fund $3,784, Van Kampen Senior Income Trust $1,677,
     State and Municipal  obligations  $5,130 at September 30, 1998;  Van Kampen
     Prime  Income  Fund  $2,564,  State  and  Municipal  obligations  $6,082 at
     September 30, 1997; State and Municipal obligations at September 30, 1996.

 
     The  following  table  sets  forth   information   regarding  the  maturity
distribution  of investment  securities at September 30, 1998,  and the weighted
average yield on those securities.
<PAGE>
<TABLE>
                                                              At September 30, 1998
                                         --------------------------------------------------------------
                                              Available for Sale             Held to Maturity
                                         ------------------------------ -------------------------------
(Dollars in thousands)                             Weighted Approximate           Weighted Approximate
                                         Amortized  Average     Fair    Amortized  Average    Fair
Maturity Distribution at September 30:     Cost     Yield      Value      Cost     Yield     Value
<S>                                       <C>        <C>     <C>          <C>       <C>     <C>
                                         --------- -------- ----------- --------- -------- -----------
Due in one year or less                   $ 3,453    5.27%   $ 3,464      $4,100    5.26%   $4,105
Due after one through five years           11,392    6.01%    11,508         486    5.69%      502
Due after five through ten years            1,253    6.21%     1,283         110    6.42%      110
Due after ten years                           151    5.63%       162           -                 -
                                         ---------          ----------- ---------          -----------
                                           16,249             16,417       4,696             4,717
Mortgage-backed securities                      -       -          -         372    9.09%      387
Marketable equity securities                5,461              5,461           -                 -
                                         ---------          ----------- ---------          -----------
                  Total                   $21,710            $21,878      $5,068            $5,104
                                         =========          =========== =========          ===========
                                                  
</TABLE>

Sources of Funds

General

     Deposits have  traditionally  been the primary  source of funds of the Bank
for use in lending and investment activities.  In addition to deposits, the Bank
derives funds from loan  prepayments and income on earning assets.  While income
on earning assets is a relatively  stable source of funds,  deposit  inflows and
outflows can vary widely and are influenced by prevailing  interest rates, money
market conditions, and levels of competition.

Deposits

     Deposits are attracted  principally  from within the Bank's  primary market
area  through  the  offering  of a variety  of  deposit  instruments,  including
passbook and statement  accounts and  certificates  of deposit  ranging in terms
from three months to five years. Deposit account terms vary,  principally on the
basis of the minimum balance required, the time periods the funds must remain on
deposit  and the  interest  rate.  The Bank also  offers  individual  retirement
accounts ("IRA's").

     The Bank's policies are designed  primarily to attract  deposits from local
residents rather than to solicit deposits from areas outside its primary market.
The Bank does not accept  deposits from brokers due to the  volatility  and rate
sensitivity of such deposits.  Interest rates paid, maturity terms, service fees
and  withdrawal  penalties  are  established  by the Bank on a  periodic  basis.
Determination  of rates and terms are  predicated  upon  funds  acquisition  and
liquidity  requirements,  rates paid by  competitors,  growth  goals and federal
regulations.

     A major determinant of the Bank's average cost of funds is the distribution
of the Bank's  accounts by  interest rate  paid.  An important  indicator of the
Bank's stability of lendable funds is the distribution of the Bank's accounts by
maturity.

     For  information on the various  interest rate  categories,  the amounts of
certificate accounts at September 30,  1998, maturing during the next five years
and  thereafter  see the  Notes  to  Consolidated  Financial  Statements  in the
Company's 1998 Annual Report.

     The following table lists  maturities of certificates of deposits where the
balance of the certificate  exceeds $100,000 for the periods indicated.  None of
these certificates were brokered deposits.
<PAGE>

                              At September 30,
                             -----------------
                                  1998
                               ----------
  3 months or less               $ 3,045
  3-6 months                       5,426
  6-12 months                      5,419
  over 12 months                   6,234
                               ----------
     Total                      $20,124
                              ===========
    
Borrowings

     As a member of the FHLB  System and the FHLB of  Indianapolis,  the Bank is
eligible to arrange  borrowings or advances for various  purposes and on various
terms..  As of September 30, 1998 the Bank had outstanding  advances to the FHLB
of  Indianapolis  of  $5,000,000.  The Bank had no  outstanding  advances  as of
September 30, 1997 and 1996.
 
     Reverse  repurchase  agreements,  another source of borrowing for the Bank,
are retail  obligations  of the Bank with a maturity of 90 days or less, and are
generally secured with specific investment securities owned by the Bank.

     The  following  tables  set  forth  certain  information  as to the  Bank's
short-term  borrowings  consisting of FHLB of Indianapolis  advances and reverse
repurchase  agreements  for the  periods  and at the  dates  indicated.  Average
balances and average interest rates are based on month-end balances.

                                                   Years Ended September 30
                                                   -------------------------
                                                     1998   1997     1996
                                                   ------- ------- ---------
                                                    (Dollars in thousands)
Average balance of short-term borrowings...........$4,166   $2,412   $  723
Highest month-end balance of total borrowings...... 5,088    3,293    1,000
Weighted average interest rate of total borrowings.  5.21%    4.85%    5.83%

                                                            At September 30
                                                   -------------------------
                                                     1998    1997    1996
                                                   ------- ------- ---------
Reverse Repurchase agreements.....................  4,203    3,162        -
                                                   ------- ------- ---------
Total short-term borrowings....................... $4,203   $3,162   $    -
                                                   ======= ======= =========
Weighted average interest rate....................   5.22%    5.31%       -

Trust Department and Discount Brokerage Services

     In October 1984, the FHLB of Indianapolis  granted full trust powers to the
Bank,  one of the first  savings  institutions  in Indiana  to be  granted  such
powers.  As of September 30,  1998, the Bank's trust  department  assets totaled
approximately $45,368,000 including self-directed Individual Retirement Accounts
("IRA's") , and it was  offering a variety of trust  services  including  estate
planning. As of that date, the trust department was administering  approximately
770 trust accounts, including estates, guardianships,  revocable and irrevocable
trusts,   testamentary  trusts,  and  self-directed  IRA  accounts.   The  trust
department  also  offers  and  administers  self-directed  IRA's and  Simplified
Employee Pension IRA's for small businesses.

<PAGE>
Non-Bank Subsidiary

     Peoples Financial  Services,  Inc. ("PFSI") was organized in 1977 under the
laws of the State of  Indiana.  It is wholly  owned by the Bank and  conducts  a
general insurance business within the State of Indiana under the name of Peoples
Insurance Agency.  During fiscal years ended  September 30,  1998 and 1997, PFSI
recorded total income of $97,493 and $41,094, respectively,  with net income for
such periods amounting to $50,227 and $15,538, respectively.

     Since 1985, the Bank also has offered  discount  brokerage  services to its
customers.  In 1996,  this service was moved to the service  corporation and was
offered through U.S. Clearing Corp. Prior to 1996, another vendor was used. This
service  also reduces the expenses of  securities  transactions  for the various
trust accounts  administered by the trust department and provides customers with
a convenient and inexpensive means of conducting brokerage transactions.

Employees

     As of September 30, 1998, the Bank employed 82 persons on a full-time basis
and 12 persons on a part-time basis. The Bank's employees are not represented by
any collective bargaining group, and management considers its relations with its
employees to be excellent.

 
 
                                   REGULATION

General

     The Company,  as a savings and loan  holding  company,  and the Bank,  as a
federally chartered savings association,  are subject to extensive regulation by
the OTS and the FDIC. The lending  activities and other  investments of the Bank
must  comply  with  various  federal  regulatory   requirements,   and  the  OTS
periodically   examines  the  Bank  for  compliance   with  various   regulatory
requirements and for safe and sound operations.  The FDIC also has the authority
to conduct examinations.  The Bank must file reports with the OTS describing its
activities  and  financial  condition  and is also  subject to  certain  reserve
requirements  promulgated  by the  Board of  Governors  of the  Federal  Reserve
System. This supervision and regulation is intended primarily for the protection
of  depositors  and the deposit  insurance  funds and not for the  protection of
stockholders  of the  Company.  Certain  of these  regulatory  requirements  are
referred to below or appear elsewhere herein.

     In recent years,  significant  legislative  proposals and reforms affecting
the financial  services  industry have been discussed and evaluated by Congress.
Such proposals include  legislation to revise the  Glass-Steagall  Act, the Bank
Holding Company Act of 1956, as amended, and the Home Owners' Loan Act ("HOLA"),
as  amended,  to  expand  permissible  activities  for  banks,   principally  to
facilitate  the  convergence  of  commercial  and  investment  banking.  Certain
proposals also sought to expand  insurance  activities of banks and to eliminate
the thrift charter.  In addition,  certain proposals seek to limit the powers of
unitary savings and loan holding  companies.  It is unclear whether any of these
proposals,  or any form of them,  will be  introduced  in the next  Congress  or
become law.  Consequently,  it is not possible to determine what effect, if any,
they may have on the Company and the Bank.

Regulation of the Company

     General.  The  Company is a unitary  savings  and loan  holding  company as
defined by the HOLA.  As such,  the  Company is  registered  with the OTS and is
subject to OTS regulation, examination,  supervision and reporting requirements.
As a subsidiary  of a savings and loan holding  company,  the Bank is subject to
certain  restrictions  in its dealings with the Company and affiliates  thereof.
The Company also is required to file certain reports with, and otherwise  comply
with, the rules and regulations of the SEC under the federal securities laws.
<PAGE>

     Activities  Restrictions.  There  are  generally  no  restrictions  on  the
activities of a unitary savings and loan holding company.  The broad latitude to
engage in activities  under current law can be restricted if the OTS  determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity  constitutes a serious risk to the financial
safety,  soundness or stability of its subsidiary savings  institution,  the OTS
may impose such  restrictions as deemed necessary to address such risk including
limiting: (i) payment of dividends by the savings institution; (ii) transactions
between the savings institution and its affiliates;  and (iii) any activities of
the savings institution that might create a serious risk that the liabilities of
the  holding   company  and  its  affiliates  may  be  imposed  on  the  savings
institution.   Notwithstanding  the  above  rules  as  to  permissible  business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
institution  subsidiary  of such a holding  company  fails to meet the QTL test,
then such unitary  holding  company shall also become  subject to the activities
restrictions  applicable to multiple  holding  companies and, unless the savings
institution  requalifies as a QTL within one year  thereafter,  register as, and
become subject to, the restrictions  applicable to a bank holding  company.  See
"Regulation of the Bank-Qualified Thrift Lender."

     Restrictions  on  Acquisitions.  Savings  and loan  holding  companies  are
prohibited from acquiring, without prior approval of the OTS, (i) control of any
other savings  institution or savings and loan holding company or  substantially
all the assets  thereof  or (ii) more than 5% of the voting  shares of a savings
institution or holding company thereof which is not a subsidiary.  Under certain
circumstances,  a registered  savings and loan  holding  company is permitted to
acquire,  with the  approval  of the OTS,  up to 15% of the voting  shares of an
undercapitalized  savings  institution  pursuant to a "qualified stock issuance"
without that savings institution being deemed controlled by the holding company.
In order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously  unissued stock or treasury shares, the shares
must be  acquired  for  cash,  the  saving  and  loan  holding  company's  other
subsidiaries  must have  tangible  capital of at least  6-1/2% of total  assets,
there must not be more than one common  director or officer  between the savings
and loan holding company and the issuing savings  institution,  and transactions
between the savings institution and the savings and loan holding company and any
of its  affiliates  must conform to Sections 23A and 23B of the Federal  Reserve
Act.  Except  with the prior  approval  of the OTS,  no director or officer of a
savings and loan holding  company or person  owning by proxy or  otherwise  more
than 25% of such  company's  stock,  may also  acquire  control  of any  savings
institution,  other  than a  subsidiary  savings  institution,  or of any  other
savings and loan holding company.


Regulation of the Bank

     Federal  Home Loan Bank  System.  The Bank is a member of the FHLB  System,
which consists of 12 district Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB").  The Federal Home Loan
Banks provide a central credit facility primarily for member institutions.  As a
member of the FHLB of  Indianapolis,  the Bank is  required  to acquire and hold
shares of capital stock in the FHLB of  Indianapolis in an amount at least equal
to 1% of the  aggregate  unpaid  principal  of its  home  mortgage  loans,  home
purchase  contracts,  and similar  obligations at the beginning of each year, or
1/20 of its advances (i.e., borrowings) from the FHLB of Indianapolis, whichever
is greater.  The Bank was in compliance with this requirement with an investment
in FHLB of Indianapolis stock at September 30, 1998, of $2,217,700.

     The FHLB of Indianapolis serves as a reserve or central bank for its member
institutions within its assigned district.  It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB System.  It makes
advances to members secured by certain prescribed  collateral in accordance with
policies and  procedures  established  by the FHFB and the Board of Directors of
the FHLB of Indianapolis. Long-term advances may only be made for the purpose of
providing funds for residential housing finance.  Members must meet standards of
community investment or service established by the FHLB of Indianapolis in order
to maintain continued access to long-term  advances.  As of September 30,  1998,
the Bank had advances  totaling  $5,000,000  outstanding.  See  "Business of the
Company-Deposit Activity and Other Sources of Funds" and "Borrowings."

     Liquidity  Requirements.  Under OTS regulations,  a savings  association is
required to maintain an average daily balance of liquid assets  (including cash,
certain  time  deposits  and savings  accounts,  bankers'  acceptances,  certain
government obligations,  and certain other investments) in each calendar quarter
of not less than 4% of either (1) its liquidity base  (consisting of certain net
withdrawable accounts plus short-term borrowings) as of the end of the preceding
calendar quarter,  or (2) the average daily balance of its liquidity base during
the preceding  quarter.  This liquidity  requirement may be changed from time to
time by the OTS to any amount  between  4.0% to 10.0%,  depending  upon  certain
factors,  including  economic  conditions  and  savings  flows  of  all  savings
associations.  The  Bank  maintains  liquid  assets  in  compliance  with  these
regulations.   Monetary  penalties  may  be  imposed  upon  an  institution  for
violations of liquidity requirements.
<PAGE>

     Qualified Thrift Lender Test.  Savings  institutions  must meet a qualified
thrift  lender  ("QTL")  test,  which  test may be met either by  maintaining  a
specified level of assets in qualified  thrift  investments as specified in HOLA
or by meeting the definition of a "domestic  building and loan  association"  in
section 7701 of the Internal  Revenue Code of 1986, as amended (the "Code").  If
the Bank  maintains  an  appropriate  level  of  certain  specified  investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities)  and  otherwise  qualifies  as a QTL or a domestic
building  and  loan  association,  it will  continue  to  enjoy  full  borrowing
privileges from the FHLB. The required  percentage of investments  under HOLA is
65% of  assets  while  the  Code  requires  investments  of 60%  of  assets.  An
association  must be in  compliance  with the QTL test or definition of domestic
building and loan association on a monthly basis in nine out of every 12 months.
Associations  that fail to meet the QTL test will  generally be prohibited  from
engaging in any activity not  permitted  for both a national  bank and a savings
association.  As of September 30, 1998, the Bank was in compliance  with its QTL
requirement and met the definition of a domestic building and loan association.

     Regulatory Capital  Requirements.  Under OTS capital  regulations,  savings
institutions  must maintain  "tangible"  capital equal to 1.5% of adjusted total
assets,  "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of risk-weighted
assets.  In addition,  OTS  regulations  which impose  certain  restrictions  on
savings  associations  that have a total  risk-based  capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to  risk-weighted  assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the  institution  is  rated  Composite  1 under  the OTS  examination  rating
system).

     The OTS has adopted an amendment  to its  risk-based  capital  requirements
that requires savings  institutions  with more than a "normal" level of interest
rate  risk  to  maintain   additional   total   capital  (the  OTS  is  delaying
implementation of this requirement).  A savings institution's interest rate risk
will be measured in terms of the  sensitivity  of its "net  portfolio  value" to
changes in interest  rates.  Net portfolio value is defined,  generally,  as the
present  value of expected  cash inflows from  existing  assets and  off-balance
sheet  contracts  less the present value of expected cash outflows from existing
liabilities.  A savings  institution will be considered to have a "normal" level
of interest rate risk  exposure if the decline in its net portfolio  value after
an  immediate  200 basis point  increase or  decrease in market  interest  rates
(whichever  results  in the  greater  decline)  is less  than 2% of the  current
estimated  economic value of its assets.  A savings  institution  with a greater
than normal  interest  rate risk will be required to deduct from total  capital,
for purposes of calculating its risk-based capital  requirement,  an amount (the
"interest rate risk  component")  equal to one-half the  difference  between the
institution's  measured interest rate risk and the normal level of interest rate
risk, multiplied by the economic value of its total assets.
<PAGE>

     The OTS will  calculate  the  sensitivity  of a savings  institution's  net
portfolio  value based on data submitted by the institution in a schedule to its
quarterly  Thrift  Financial Report and using the interest rate risk measurement
model  adopted by the OTS. The amount of the interest  rate risk  component,  if
any, to be deducted from a savings  institution's total capital will be based on
the  institution's  Thrift  Financial  Report  filed two  quarters  earlier.  In
general,  savings  institutions  with  less than $300  million  in assets  and a
risk-based  capital  ratio  above 12% are exempt  from this  interest  rate risk
component unless the OTS terminates such exemption.  Although the Bank qualifies
for the exemption, management believes that based on current financial data, the
Bank would not be deemed to have more than a normal level of interest rate risk.

     In  addition  to  generally   applicable   capital  standards  for  savings
institutions,  the Director of the OTS is  authorized  to establish  the minimum
level of capital  for a savings  institution  at such amount or at such ratio of
capital-to-assets  as the Director determines to be necessary or appropriate for
such  institution in light of the particular  circumstances  of the institution.
The  Director  of the OTS may treat the failure of any  savings  institution  to
maintain capital at or above such level as an unsafe or unsound practice and may
issue a  directive  requiring  any savings  institution  which fails to maintain
capital at or above the minimum  level  required  by the  Director to submit and
adhere to a plan for increasing capital. Such a directive may be enforced in the
same manner as an order issued by the OTS.

     At September 30, 1998,  the Bank exceeded all  regulatory  minimum  capital
requirements as indicated in the table below.

                                             Dollars in Thousands               
                                           Required for Adequate  To Be Well
                                Actual              Capital        Capitalized
                                Amount    %      Amount     %     Amount     %
 
Tier 1 capital
(to adjusted tangible assets)   35,029   11.76%  $8,938   3.0%    $17,875  6.00%
Tier 1 capital
(to adjusted total assets)      35,029   11.76     8,938  3.0      14,896  5.00
Risk-based capital
(to risk-weighted assets)       35,951   22.48    12,793   8.0     15,992 10.00


     Insurance of Deposit  Accounts.  The Bank's deposit accounts are insured by
the SAIF to the maximum  amount  permitted by law.  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.
<PAGE>

     The FDIC charges an annual  assessment  for the insurance of deposits based
on the risk a particular  institution poses to its deposit insurance fund. Under
this system as of December  31,  1995,  SAIF  members  paid within a range of 23
cents  to  31  cents  per  $100  of  domestic   deposits,   depending  upon  the
institution's  risk  classification.  This  risk  classification  is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic  Growth  and  Paperwork  Reduction  Act of 1996 (the  "Act"),  the FDIC
imposed a special  assessment  on SAIF  members  to  capitalize  the SAIF at the
designated  reserve  level of 1.25% as of October  1, 1996.  Based on the Bank's
deposits as of March 31, 1995,  the date for measuring the amount of the special
assessment  pursuant to the Act, at  September  30,  1997,  the Bank  recorded a
pretax  expense of $1,500,871  and paid such special  assessment on November 27,
1996 to recapitalize the SAIF.

     Pursuant  to the Act,  the Bank pays,  in  addition  to its normal  deposit
insurance  premium as a member of the SAIF  ranging from 0 to 27 basis points as
of October 1, 1996, an amount equal to approximately 6.4 basis points toward the
retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s
to assist in the recovery of the savings and loan industry.  Members of the Bank
Insurance  Fund ("BIF"),  by contrast,  pay, in addition to their normal deposit
insurance premium,  approximately 1.3 basis points. Under the Act, the FDIC also
is not  permitted  to  establish  SAIF  assessment  rates  that are  lower  than
comparable  BIF assessment  rates.  Beginning no later than January 1, 2000, the
rate paid to retire the Fico Bonds will be equal for  members of the BIF and the
SAIF.  The Act also  provides for the merging of the BIF and the SAIF by January
1, 1999, provided there are no financial institutions still chartered as savings
associations  at that time.  Should the insurance funds be merged before January
1, 2000,  the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.

     Federal  Reserve  System.  Pursuant to regulations  of the Federal  Reserve
Board, a savings institution must maintain average daily reserves equal to 3% on
the first $54.0 million of transaction accounts, plus 10% on the remainder. This
percentage  is subject to  adjustment  by the  Federal  Reserve  Board.  Because
required  reserves  must  be  maintained  in the  form  of  vault  cash  or in a
non-interest  bearing  account  at a Federal  Reserve  Bank,  the  effect of the
reserve   requirement   is  to   reduce   the   amount   of  the   institution's
interest-earning  assets.  As of  September 30,  1998,  the Bank met its reserve
requirements.

     Dividend Restrictions.  Under OTS regulations, the Bank is not permitted to
pay  dividends on its capital stock if its  regulatory  capital would thereby be
reduced below the remaining balance of the liquidation  account  established for
the benefit of certain  depositors in connection with the conversion of the Bank
from the mutual to stock form of organization. In addition, the Bank is required
by OTS  regulations  to give  the OTS 30  days'  prior  notice  of any  proposed
declaration of dividends to the Company.

     OTS regulations  impose additional  limitations on the payment of dividends
and other capital  distributions  (including stock repurchases and cash mergers)
by the Bank. Under these regulations,  a savings  institution that,  immediately
prior to, and on a pro forma basis after  giving  effect to, a proposed  capital
distribution,  has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital  requirements (a "Tier
1  Association")  is  generally   permitted,   after  notice,  to  make  capital
distributions  during a calendar year in the amount equal to the greater of: (a)
75% of its net income for the previous four  quarters;  or (b) up to 100% of its
net income to date during the calendar  year plus an amount that would reduce by
50% its surplus  capital ratio at the beginning of the calendar  year. A savings
institution  with  total  capital  in excess of current  minimum  capital  ratio
requirements  but not in excess of the fully  phased-in  requirements (a "Tier 2
Association") is permitted,  after notice, to make capital distributions without
OTS approval of up to 75% of its net income for the previous four quarters, less
dividends already paid for such period. A savings institution that fails to meet
current minimum capital requirements (a "Tier 3 Association") is prohibited from
making any capital distributions without the prior approval of the OTS. A Tier 1
Association  that has been  notified  by the OTS that it is in need of more than
normal  supervision  will be treated  as either a Tier 2 or Tier 3  Association.
Except  under  limited   circumstances   and  with  OTS  approval,   no  capital
distributions  would be permitted if they would cause the  institution to become
undercapitalized.  As of September  30, 1998,  the Bank was  considered a Tier 1
Association under OTS regulations.

     Despite the above authority,  the OTS may prohibit any savings  institution
from making a capital  distribution  that would  otherwise  be  permitted by the
regulation,  if the OTS were to determine that the  distribution  constituted an
unsafe or unsound practice.  Furthermore, under the OTS prompt corrective action
regulations,  the Bank would be prohibited from making any capital distributions
if, after making the distribution, it would have: (i) a total risk-based capital
ratio of less than 8.0%;  (ii) a Tier 1  risk-based  capital  ratio of less than
4.0%;  or (iii) a  leverage  ratio of less than  4.0%.  See  "Prompt  Corrective
Regulatory Action."
<PAGE>

     Affiliate Restrictions.  Transactions between a savings association and its
"affiliates"  are subject to  quantitative  and qualitative  restrictions  under
Sections  23A  and 23B of the  Federal  Reserve  Act.  Affiliates  of a  savings
association include,  among other entities,  the savings  association's  holding
company  and  companies   that  are  under  common   control  with  the  savings
association.

     In general,  Sections 23A and 23B and OTS regulations  issued in connection
therewith  limit the extent to which a savings  association or its  subsidiaries
may engage in certain "covered  transactions" with affiliates to an amount equal
to 10% of the  association's  capital  and  surplus,  in  the  case  of  covered
transactions  with  any one  affiliate,  and to an  amount  equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition,  a savings  association  and its  subsidiaries  may  engage in covered
transactions   and  certain   other   transactions   only  on  terms  and  under
circumstances  that are  substantially the same, or at least as favorable to the
savings  association  or its  subsidiary,  as those  prevailing  at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate;  a purchase of
investment  securities  issued by an  affiliate;  a purchase  of assets  from an
affiliate,  with certain  exceptions;  the acceptance of securities issued by an
affiliate as collateral  for a loan or extension of credit to any party;  or the
issuance  of a  guarantee,  acceptance,  or  letter  of  credit  on behalf of an
affiliate.

     In addition, under the OTS regulations,  a savings association may not make
a loan or extension of credit to an  affiliate  unless the  affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate  other than shares of a
subsidiary;  a savings  association  and its  subsidiaries  may not  purchase  a
low-quality asset from an affiliate;  and covered transactions and certain other
transactions  between a savings association or its subsidiaries and an affiliate
must be on terms and conditions  that are consistent with safe and sound banking
practices.  With  certain  exceptions,  each  loan or  extension  of credit by a
savings  association to an affiliate must be secured by collateral with a market
value  ranging from 100% to 130%  (depending on the type of  collateral)  of the
amount of the loan or extension of credit.

     The  OTS  regulation   generally  excludes  all  non-bank  and  non-savings
association  subsidiaries of savings  associations from treatment as affiliates,
except to the  extent  that the OTS or the  Board of  Governors  of the  Federal
Reserve System (the "Federal Reserve Board") decides to treat such  subsidiaries
as affiliates.  The regulation  also requires  savings  associations to make and
retain records that reflect  affiliate  transactions in reasonable  detail,  and
provides that certain  classes of savings  associations  may be required to give
the OTS prior notice of affiliate transactions.

     Prompt  Corrective  Action.  The prompt corrective action regulation of the
OTS  requires   certain   mandatory   actions  and   authorizes   certain  other
discretionary  actions to be taken by the OTS against a savings  bank that falls
within certain undercapitalized capital categories specified in the regulation.

     The regulation establishes five categories of capital classification: "well
capitalized,"  "adequately  capitalized,"   "undercapitalized,"   "significantly
undercapitalized," and "critically  undercapitalized." Under the regulation, the
risk-based  capital,  leverage capital,  and tangible capital ratios are used to
determine an institution's  capital  classification.  At September 30, 1998, the
Bank met the capital  requirements  of a "well  capitalized"  institution  under
applicable OTS regulations.

     In general,  the prompt corrective  action regulation  prohibits an insured
depository  institution  from declaring any dividends,  making any other capital
distribution,  or paying a management fee to a controlling  person if, following
the  distribution or payment,  the institution  would be within any of the three
undercapitalized  categories.  In addition,  adequately capitalized institutions
may accept Brokered Deposits only with a waiver from the FDIC and are subject to
restrictions  on  the  interest  rates  that  can  be  paid  on  such  deposits.
Undercapitalized  institutions  may not accept,  renew,  or  roll-over  Brokered
Deposits.
<PAGE>

     If the OTS  determines  that an  institution  is in an  unsafe  or  unsound
condition,  or if the  institution  is deemed to be  engaging  in an unsafe  and
unsound  practice,  the  OTS  may,  if  the  institution  is  well  capitalized,
reclassify  it as  adequately  capitalized;  if the  institution  is  adequately
capitalized  but not well  capitalized,  require it to comply with  restrictions
applicable  to  undercapitalized  institutions;   and,  if  the  institution  is
undercapitalized,  require it to comply with certain restrictions  applicable to
significantly undercapitalized institutions.

     Community  Reinvestment  Act and  Fair  Lending  Developments.  The Bank is
subject to certain fair lending requirements and reporting obligations involving
home  mortgage  lending  operations  and  Community   Reinvestment  Act  ("CRA")
activities.  The CRA generally requires the federal banking agencies to evaluate
the record of a financial  institution  in meeting the credit needs of its local
communities,   including  low-  and  moderate-income  neighborhoods.  A  savings
association may be subject to substantial  penalties and corrective measures for
a violation of certain fair lending laws. The federal banking  agencies may take
compliance with such laws and CRA  obligations  into account when regulating and
supervising other activities.

     A savings  association's  compliance with its CRA obligations is based on a
performance-based  evaluation system which bases CRA ratings on an institution's
lending service and investment  performance.  When a holding company applies for
approval to acquire  another  financial  institution  or  financial  institution
holding company,  the OTS will review the assessment of each subsidiary  savings
association of the applicant;  and such records may be the basis for denying the
application.  In  February,  1997,  the OTS  rated  the Bank  "satisfactory"  in
complying with its CRA obligations.

     Year 2000  Compliance.  In May,  1997, the Federal  Financial  Institutions
Examination  Council  issued an  interagency  statement  to the chief  executive
officers of all federally supervised financial  institutions regarding year 2000
project management awaremess.  It is expected that unless financial institutions
address the  technology  issues  relating to the coming of the year 2000,  there
will be major  disruptions  in the  operations  of financial  institutions.  The
statement  provides  guidance  to  financial  institutions,  providers  of  data
services,  and all examining personnel of the federal banking agencies regarding
the year 2000 problem.  The federal banking agencies intend to conduct year 2000
compliance examinations, and the failure to implement a year 2000 program may be
seen by the federal banking agencies as an unsafe and unsound banking  practice.
The OTS has recently  established an examination  procedure which contains three
catagories    of   ratings:    "Satisfactory,"    "Needs    Improvement,"    and
"Unsatisfactory." Institutions that receive a year 2000 rating of Unsatisfactory
may be subject to formal enforcement action,  supervisory agreements,  cease and
desist orders,  civil money penalties,  or the appointment of a conservator.  In
addition,  federal  banking  agencies  will be  taking  into  account  year 2000
compliance  programs when  analyzing  applications  and may deny an  application
based on year 2000 related issues. The Company is currently  addressing the year
2000  issue,  as  more  fully  discussed  in  the  Company's  Annual  Report  to
Stockholders   for  the  Year  Ended   September  30,  1998  under  the  heading
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations-Year 2000."

Item 2.  Properties

 
The Bank owns seven  full-service  banking  offices  located in Avilla,  Auburn,
Columbia City, Garrett, Kendallville and LaGrange, Indiana.

     The following table provides certain information with respect to the Bank's
full-service offices at September 30, 1998.

        Full Service                                       Net Book
        Offices                      Date Opened           Value(1)
        Main Office, Auburn            1973                $149,283
        Avilla                         1980                 120,858
        Garrett                        1972                  54,096
        Columbia City-Downtown         1971                 136,284
        Columbia City-North            1998                 554,965
        Kendallville                   1941                 472,883
        LaGrange                       1972                 171,010


(1) Of real estate at September 30, 1998.

     The Bank owns data processing equipment including computers,  terminals and
communications  equipment for record keeping  purposes.  The estimated  costs to
make this equipment year 2000 compliant, are not expected to be material.

     The  total  net  book  value  of  the  Bank's  premises  and  equipment  at
September 30, 1998, was $2,396,878.
<PAGE>

Item 3.  Legal Proceedings

     There are no material pending legal  proceedings to which the Company,  the
Bank or any subsidiary is a party or to which any of their property is subject.


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

    Not Applicable.

                                     PART II

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

     Reference is made to page 2 of the Company's Annual Report to Stockholders,
for the year ended  September 30,  1998,  for the  information  required by this
Item, which is hereby incorporated by reference.


Item 6.  Selected Financial Data

     Reference is made to page 13 of the Company's Annual Report to Stockholders
for the year ended September 30, 1998, for the information required by this Item
which is hereby incorporated by reference.


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

     Reference  is  made to  pages 6 to 12 of the  Company's  Annual  Report  to
Stockholders for the year ended September 30, 1998, for the information required
by this Item which is hereby incorporated by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Reference  is made  to page s 7 and 8 of the  Company's  Annual  Report  to
Stockholders for the year ended September 30, 1998, for the information required
by this item  which is  hereby  incorporated  by  reference. 

 Item 8.  Financial Statements and Supplementary Data

     Reference  is made to  pages 14 to 28 of the  Company's  Annual  Report  to
Stockholders for the year ended September 30, 1998, for the information required
by this Item which is hereby incorporated by reference.

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

    None.
 
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     Reference  is  made  to  pages  2 - 4 of  the  Company's  definitive  Proxy
Statement  for the 1999  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.

Item 11.  Executive Compensation

     Reference  is  made  to  pages  5 - 10 of the  Company's  definitive  Proxy
Statement  for the 1999  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     Reference  is  made  to  pages 2 and 5 of the  Company's  definitive  Proxy
Statement  for the 1999  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.

Item 13.  Certain Relationships and Related Transactions

     Reference  is  made  to  pages 5 and 6 of the  Company's  definitive  Proxy
Statement  for the 1999  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.

<PAGE>

 
                                     PART IV

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

     (a) The following  consolidated financial statements of Peoples Bancorp and
Its  Wholly-owned  Subsidiary,  included in the Annual Report to Stockholders of
the registrant for the year ended September 30,  1998, are filed as part of this
report:

        1.  Financial Statements

   o  REPORT OF OLIVE LLP, INDEPENDENT AUDITORS.
   o  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - AS OF SEPTEMBER 30, 1998,
      AND 1997.
   o  CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED SEPTEMBER 30, 1998,
      1997, AND 1996.
   o  CONSOLIDATED  STATEMENT OF CHANGE IN STOCKHOLDERS'  EQUITY FOR THE YEARS
      ENDED SEPTEMBER 30, 1998, 1997, AND 1996.
   o  CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30,
      1998, 1997, AND 1996.
   o  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 
        2.  Financial Statement Schedules

     All schedules are omitted because they are not applicable,  or the required
information is shown in the consolidated financial statements and notes.

        3.  Exhibits

Exhibit No.                   Description of Exhibit                  
 

 3.1    Articles of Incorporation of Peoples Bancorp (1)

 3.2    Bylaws of Peoples Bancorp (1)

10.2    Employment Agreement of Roger J. Wertenberger

10.4    Amended and Restated Stock Option and Stock Grant Plan (2)

10.5    Employee Stock Ownership Plan (1)

10.5(a) First Amendment to Employee Stock Ownership Plan (3)

10.5(b) Second Amendment to Employee Stock Ownership Plan (3)

10.5(c) Third Amendment to Employee Stock Ownership Plan (3)

10.6    Expense and Tax Sharing Agreement between Peoples Bancorp, Peoples
        Federal Savings Bank of DeKalb County and Peoples Financial Services,
        Inc., dated May 28, 1992 (3)

10.7    New option plan

13      Annual Report to Stockholders

22      Subsidiaries of the Registrant

23      Consent of Auditors

27      Financial Data Schedule (4)

     (1)  Incorporated  by reference  to Exhibit  bearing the same number in the
Company's   Registration  Statement  of  Form  S-4  (33-37343)  filed  with  the
Securities and Exchange Commission on October 17, 1990.

     (2)  Incorporated  by reference  to Exhibit  bearing the same number in the
Company's Annual Report on form 10-K for the year ended September 30, 1991.

     (3)  Incorporated  by reference  to Exhibit  bearing the same number in the
Company's Annual Report on form 10-K for the year ended September 30, 1992.
 
     (4) For electronic filing purposes only.
 
     The  Securities and Exchange  Commission  maintains a Web sit that contains
reports,  proxy  and  information  statements  and other  information  regarding
regeistrants that file electronically with the Commission including the Company.
That address is http://www.sec.gov.

<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.

                                                         PEOPLES BANCORP
 
December 23, 1998                       Roger J. Wertenberger
                                        Chairman of the Board,
                                        Principal Executive Officer,
                                        and Director

     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.

 
                                                         
December 23, 1998                        Roger J. Wertenberger,
                                         Chairman of the Board,
                                         Principal Executive Officer,
                                         and Director
 
                                         
December 23, 1998                        Maurice F. Winkler III,
                                         President, and Director

                                         
December 23, 1998                        Deborah K. Stanger
                                         Vice President-Chief Financial Officer
 
                                         
December 23, 1998                        Robert D. Ball, Director

 
                                         
December 23, 1998                        Bruce S. Holwerda

 
                                         
December 23, 1998                        John C. Harvey, Director

 
                                         
December 23, 1998                        Douglas D. Marsh, Director

 
                                        
December 23, 1998                        Lawrence  R. Bowmar, Director

 
                                         
December 23, 1998                        John C. Thrapp, Director
<PAGE>

           EXHIBIT 10.2 EMPLOYMENT AGREEMENT OF ROGER J. WERTENBERGER



                              EMPLOYMENT AGREEMENT


     AGREEMENT dated as of this 30th day of November, 1998, by and among PEOPLES
FEDERAL  SAVINGS BANK OF DEKALB COUNTY,  a savings bank organized under the laws
of the United States (the "Bank") and ROGER J. WERTENBERGER ("Employee").

BACKGROUND

     Employee  is the  Chief  Executive  Officer  and  Chairman  of the Board of
Directors of the Bank (the "Board").  To ensure the future  services of Employee
as Chief Executive  Officer and Chairman of the Board, the Bank is entering into
this employment agreement.

     In consideration of the mutual covenants and agreements  herein  contained,
and intending to be legally bound hereby, the parties agree as follows:

1.       Term of Employment.

The  term of  Employee's  employment  with  the Bank  shall  continue  for a one
(1)-year period beginning on the date hereof  ("Effective  Date"), and ending on
the last day of the month one year from the Effective Date (the "term"). On each
anniversary of the Effective  Date,  the one (1)-year  period may be renewed and
recommenced  in its entirety by mutual consent in writing (a copy of which shall
be appended hereto) of the Bank and Employee.

2.       Employment and Services.

The Bank agrees to employ  Employee  during the term of his  employment as Chief
Executive  Officer  of the  Bank.  The  Bank  agrees  to  nominate  Employee  to
successive  terms as Chairman of the Board and to use its best  efforts to elect
and re-elect  Employee as Chairman of the Board.  Employee agrees to accept such
employment,  and to devote his time and efforts to the  business  and affairs of
the Bank, and to use his best efforts to promote the interests of the Bank.

3.       Place of Performance.

In connection  with his  employment by the Bank,  Employee shall be based at the
principal executive offices of the Bank,  currently located in Auburn,  Indiana,
and shall not be required to be absent  therefrom on travel  status or otherwise
more than 45 days in any calendar year. The Bank shall not,  without the written
consent of Employee,  relocate or transfer  Employee to a location  more than 30
miles  from  Employee's  principal  residence.  The Bank will  promptly  pay (or
reimburse  Employee for) all  reasonable  moving  expenses  incurred by Employee
relating to a change of his  principal  residence  in  connection  with any such
relocation to which Employee has consented and will indemnify  Employee  against
any  loss  realized  in the  sale of his  principal  residence  (defined  as the
difference between the actual sale price of such residence and the higher of (a)
Employee's  aggregate  investment in such residence or (b) the fair market value
of such  residence  as  determined  by a real  estate  appraiser  designated  by
Employee and reasonably  satisfactory  to the Bank) in connection  with any such
change of residence.

Employee  shall  be  furnished  with  a  private  office,  and  other  necessary
secretarial assistance,  and with such other facilities,  amenities and services
as are, in the  reasonable  judgment of  Employee,  appropriate  for  Employee's
position as Chief Executive Officer of the Bank and adequate for the performance
of his duties hereunder.

4.       Compensation.

Subject  to the  provisions  of any  agreement  between  the Bank  and  Employee
relating to the payment of deferred compensation:

4.1 The Bank shall pay Employee for the services to be rendered by him hereunder
during the term of his employment the following compensation, payable at regular
intervals  in  accordance  with  the  Bank's  normal  payroll  practices  now or
hereafter in effect. During the term of his employment, Employee shall be paid a
base salary  (exclusive  of any fees paid to Employee as a Director of the Bank)
at the rate of not less than $120,000 over the term of this  agreement,  subject
to review and upward  adjustments  as may be deemed  appropriate by the Board or
designated committee thereof ("Committee"),  should the Agreement be renewed and
recommenced  in accordance  with  paragraph 1. The Board or Committee  may, from
time to time, recommend an increase in salary for Employee hereunder,  but shall
have no obligation to do so.

4.2 The Bank will, during the term of Employee's employment,  reimburse Employee
for all expenses incurred by Employee which the Bank determines to be reasonable
and  necessary (in  accordance  with its normal  reimbursement  practices now or
hereafter in effect) for Employee to carry out his duties under this Agreement.

4.3 Employee  shall attend,  at his  discretion,  those  professional  meetings,
conventions,  and/or similar  functions that he deems appropriate and useful for
purposes  of keeping  abreast of current  developments  in the  industry  and/or
promoting the interests of the Bank.

5.       Plans and Fringe Benefits.

5.1  During  the  term of his  employment,  Employee  shall be  entitled  (a) to
participate  in any bonus  programs  (including,  but not  limited to  Christmas
bonuses),  incentive  compensation  programs,  profit sharing plans,  retirement
plans,  stock option plans and stock purchase plans, now or hereafter in effect,
which are generally made  available  from time to time to executive  officers of
the Bank,  and (b) to such other fringe  benefits as the Board or the  Committee
shall deem  appropriate  or are  otherwise  to be made  available  to  executive
employees of the Bank.

5.2  During  the term of this  Agreement,  Employee  shall have the use of a new
automobile to be provided by the Bank. The  automobile  shall be of the type and
make,  chosen by Employee,  equal to the type and make of  automobile  generally
provided to the Chief  Executive  Officer of a financial  institution.  The Bank
shall pay for the cost of purchasing or leasing, if the Bank determines to lease
the automobile, insuring, maintaining and operating the automobile.

6.       Insurance.

The Bank shall, during the term of Employee's  employment,  provide Employee, at
no cost to him (other than applicable  taxes),  hospitalization,  major medical,
disability and group life insurance.

7.       Disability Benefits.

If Employee becomes  permanently  disabled during the term of his employment and
consequently   cannot  perform  his  duties  under  this  Agreement,   the  Bank
nevertheless  shall continue to compensate him under the terms of this Agreement
for one (1) year following  disability,  less any other payments  provided under
any Bank disability plan.

8.       Termination by the Bank.

(a) The Bank shall have the right to terminate Employee's  employment hereunder,
for cause,  upon thirty (30) days written notice to Employee.  The term "cause",
as  used  herein,   shall  mean  termination  because  of,  in  the  good  faith
determination of the Board, the Employee's  personal  dishonesty,  incompetence,
willful  misconduct,   breach  of  fiduciary  duty  involving  personal  profit,
intentional failure to perform stated duties, willful violation of any law, rule
or  regulation  (other than traffic  violations or similar  offenses),  or final
cease-and-desist  order,  or material breach of any provision of this Agreement.
No act, or failure to act, on the Employee's part shall be considered  "willful"
unless he has acted, or failed to act, with an absence of good faith and without
a reasonable  belief that his action or failure to act was in the best  interest
of the Bank. Notwithstanding the foregoing, (i) the Employee shall not be deemed
to have been  terminated for cause unless there shall have been delivered to the
Employee a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the entire  membership of the Board at a meeting of the Board
called and held for the purpose (after  reasonable notice to the Employee and an
opportunity for the Employee to be heard before the Board), finding that, in the
good faith  opinion of the Board,  the  Employee was guilty of conduct set forth
above  in the  second  sentence  of this  Subsection  8(a)  and  specifying  the
particulars thereof in detail.

If the Bank exercises its right under this Section 8(a), the Bank shall continue
to pay  Employee  his  salary  and all other  benefits  provided  for under this
Agreement for a period of thirty (30) days from the date of the exercise of that
right.

(b) The Bank shall have the right  (subject to the  limitations of Section 11.1)
to terminate Employee's employment hereunder, without cause, upon the payment to
Employee of the following:

  (i)      2.99 times Employee's salary provided for under Section 4.1;

  (ii)     the bonus provided for under Section 11.2(g) hereof, if any for three
           years;

  (iii)    the insurance provided for under Section 6 hereof for three years;

  (iv)     the  disability  benefits  provided  under Section 7 shall remain in 
           effect, as if this Agreement was still in full force and effect for 
           three years;

  (v)      the benefits  provided for under Section 11.2 (c), (d), and (e) of 
           this Agreement shall become immediately applicable.

(c) Should  there  occur a "change in control" of the Bank as defined in Section
11.1 of this Agreement,  the compensation  provisions provided for under Section
8(b)(i) through (v) hereof shall be suspended  during the remaining term of this
Agreement,  and during such period, if the Bank exercises its right to terminate
without cause the Employee's employment  hereunder,  such termination shall only
be upon  payment to the  Employee of the sums  provided  for as if Employee  had
elected to terminate his employment under the provisions of Section 11.1 of this
Agreement  and he  shall  be  paid  in  accordance  with  Section  11.2  of this
Agreement.

(d) The  failure to elect or  re-elect  or appoint  Employee  as Chairman of the
Board shall be deemed to be a termination  without cause under  Sections 8(b) or
(c) of this Agreement.

9.       Supervisory Suspension.

If Employee is suspended and/or temporarily prohibited from participating in the
conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(l)
of the Federal  Deposit  Insurance Act (12 U.S.C.  1818(e)(3)  and (g)(l)),  the
Bank's  obligations  under this  Agreement  shall be suspended as of the date of
service, unless stayed by appropriate proceedings.  If the charges in the notice
are dismissed,  the Bank shall (a) pay Employee all or part of the  compensation
withheld  while its  obligations  under this  Agreement  were  suspended and (b)
reinstate (in whole or in part) any of its obligations which were suspended.

10.      Supervisory Removal.

If Employee is removed and/or  permanently  prohibited from participating in the
conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(l)
of the Federal  Deposit  Insurance Act (12 U.S.C.  1818(e)(4)  and (g)(l)),  all
obligations of the Bank under this Agreement shall terminate as of the effective
date of the order,  but vested rights of the parties to the Agreement  shall not
be affected.

11.      Change in Management of the Bank.

11.1 In the event that there are changes in the  composition of the Board of the
Bank or Peoples Bancorp, to the extent that current management of the Bank is no
longer in control of the Bank or Peoples  Bancorp,  except for normal changes in
the composition of the Board as a result of retirements and  resignations in the
ordinary  course of business  and not as a result of a "change in  control"  (as
defined in this  Section) or takeover of the Bank or Peoples  Bancorp,  Employee
shall have the right to  terminate  his  employment  with the Bank upon five (5)
days  written  notice to the Board,  such  notice to be  delivered  to the Board
within one  hundred  eighty  (180)  days of the date upon which such  "change in
control" is deemed to have  occurred;  provided,  however,  that during such one
hundred  eighty  (180)  day  period,  the Bank  may not  exercise  its  right to
terminate  Employee  without cause pursuant to Paragraph 8(b). The provisions of
this Section 11.1 shall not apply to changes made in connection  with a takeover
or merger of the Bank or Peoples Bancorp  unanimously  approved by the Boards of
the Bank and  Peoples  Bancorp  and the  required  percentage  of the issued and
outstanding capital stock of the Bank and Peoples Bancorp,  as required,  by the
charter, bylaws and applicable regulations.  For the purposes of this Agreement,
a "change in control"  ("Change in Control") shall mean a change in control of a
nature  that  would be  required  to be  reported  in  response  to item 5(f) of
Schedule 14A of Regulation 14A promulgated under the Securities and Exchange Act
of 1934  ("Exchange  Act"),  except  that any merger,  consolidation,  corporate
reorganizing  where the owner of the Bank's or Peoples  Bancorp's  capital stock
entitled to vote in the election of  directors  ("Voting  Stock")  prior to said
combination  own  seventy-five  percent (75%) or more of the resulting  entity's
Voting  Stock shall not be  considered  a change in control for the  purposes of
this Agreement;  provided that, without limitation, such Change in Control shall
be deemed to have occurred if (i) any "person" (as that term is used in Sections
13(d) and 14(d)(2) of the Exchange Act) is or becomes the "beneficial owner" (as
that term is used in Section 13(d) of the Exchange Act), directly or indirectly,
of more than  twenty-five  percent (25%) of the outstanding  Voting Stock of the
Bank or Peoples  Bancorp or the successor of either  entity;  or (ii) during any
period of two (2)  consecutive  years,  individuals who at the beginning of such
period  constitute  the Board cease,  for any reason,  to  constitute at least a
majority thereof unless the election of each director, who was not a director at
the beginning of the period,  was approved by a vote of at least  three-quarters
(3/4) of the  directors  still in office who were  directors at the beginning of
the period; or (iii) there shall occur the sale of all, or substantially all, of
the assets of the Bank or Peoples Bancorp.

11.2 If Employee exercises his right under Section 11.1:

     (a) The Bank  shall pay  Employee  2.99  times the  salary  provided  under
Section 4.1 hereof and the Bank shall  continue to pay the amounts under Section
5.1  hereof,  for a period of three (3) years from the date of  exercise of that
right.

     (b) The Bank shall transfer to Employee, at no cost to Employee, all of its
right, title and interest to the automobile  provided Employee under Section 5.2
hereof,  or shall make lease  payments for the remaining  term of the lease,  if
any,  and shall pay the  insurance  thereon for a period of three (3) years from
the date of exercise of that right or on any substitute  automobile purchased by
Employee during the three (3)-year period.

     (c) The Bank shall fund fully all unfunded benefits as may be applicable to
Employee under any Bank retirement plan for which Employee shall be, at the time
of such termination, a participant.

     (d)  To  the  extent  that  Employee's  rights  under  any  profit-sharing,
retirement  or other plan,  are not fully  vested under said plan at the time of
his  termination  of  employment  under  Section  11.1,  the Bank shall  provide
Employee with a benefit  equal to the value of his forfeited  rights and provide
Employee  with a benefit  equal to the value of any  benefits  which  would have
accrued on behalf of Employee  had he remained in the service of the Bank during
the period for which  payments  are provided for under this Section as if he was
employed by the Bank during this period.

     (e) Upon a Change in  Control,  all stock  options  granted to  Employee by
Peoples Bancorp shall become immediately  exercisable with respect to all or any
portion of the shares  covered  thereby,  regardless of whether such options are
otherwise  exercisable,  and all service  period  restrictions  on stock  grants
awarded  to  Employee  shall  lapse so as to permit  the  transfer  of all stock
subject to such grants. The Bank shall reimburse Employee for any federal income
tax  liability  incurred  by Employee in  connection  with the  exercise of such
options  and/or the lapse of any service  period  restrictions  on stock  grants
which would not have  otherwise been incurred by Employee in the absence of such
options and grants becoming immediately available upon a Change in Control, such
reimbursement  to be submitted to the Executive  within ten (10) days of written
notification  to the Bank by Employee of the exact amount of such additional tax
liability. To the extent any option granted to Employee, which is unexercised at
such time, cannot otherwise be exercised during the entire three (3)-year period
immediately  following  termination  of  Employee's  employment,  the Bank shall
provide Employee with an equivalent benefit.

     (f) The Bank shall also continue to provide the benefits as provided  under
Section 6 of this  Agreement  for a period  of three (3) years  from the date of
exercise of that right.

     (g) At the end of each  fiscal year of the Bank or portion  thereof  during
the entire three (3)-year period immediately following Employee's termination of
employment,  Employee  shall  be paid an  annual  bonus of one  percent  (1%) of
Peoples Bancorp pre-tax profits on a consolidated  basis  (including the pre-tax
profits of the Bank) as  computed  by Peoples  Bancorp's  independent  certified
public accountants in accordance with generally accepted accounting  principles.
In no event  shall the bonus to be paid  pursuant  to this  paragraph  (g) be in
excess of two hundred percent (200%) of the base salary of Employee provided for
in Section 4.1, as increased either by the Board or the Committee.  For years in
which  this  Agreement  is not in effect  for the  Bank's  entire  fiscal  year,
Employee's  compensation  under this  paragraph  (g) shall be  pro-rated  to the
extent that this  Agreement is in effect.  Payment to Employee  pursuant to this
Section  shall be made  within  sixty  (60) days  after the close of the  Bank's
fiscal year.

     (h) This section 11 shall be interpreted and  administered so that Employee
shall  receive  no  compensation  or other  benefits  subject  to the excise tax
imposed by Section 4999 of the Code taking into account this  Agreement  and all
other plans,  agreements or arrangements  involving the Employee,  the Bank, the
Company and/or their respective affiliates  (including,  but not limited to, any
stock option or incentive plan or restricted stock plan).  The  determination by
the Bank that any  compensation  or other  benefits  would  cause the excise tax
imposed by section 4999 to apply shall be final and conclusive. In the event the
Bank determines that  compensation or other benefits under this Agreement or any
such  plans,  agreements  or  arrangements  must be  reduced  in  order to avoid
imposition  of the excise tax,  the Bank shall  decide  which  benefits  will be
reduced  and by how  much,  provided,  however,  that the Bank  shall  offer the
Employee an  opportunity  or consult with the Bank about said decision  prior to
making the decision.

12.      Waivers Not to be Continued.

Any waiver by a party of any breach of this Agreement by another party shall not
be construed as a continuing  waiver or as a consent to any subsequent breach by
the other party.

13.      Notices.

All notices,  requests,  demands and other communications  hereunder shall be in
writing  and shall be deemed to have  been duly  given if  delivered  by hand or
mailed,  certified or registered mail,  return receipt  requested,  with postage
prepaid, to the following addresses or to such other address as either party may
designate by like notice.

A)        If to the Bank, to:

         Peoples Federal Savings Bank of DeKalb County
         212 West 7th Street
         Auburn, Indiana 46706

B)        If to Employee, to:

         Roger J. Wertenberger
         Peoples Federal Savings Bank of DeKalb County
         212 West 7th Street
         Auburn, Indiana 46706

C)        with a copy to:

         Edward L. Lublin, Esq.
         Manatt, Phelps & Phillips, LLP
         1501 M Street, N.W.
         Suite 700
         Washington, D.C. 20005

and to such other or  additional  person or persons as either  party  shall have
designated to the other party in writing by like notice.

14.      Unauthorized Disclosure.

During the period of his employment  hereunder,  Employee  shall not,  except as
required by any court,  supervisory authority or administrative  agency, without
the written consent of the Board or a person authorized thereby, disclose to any
person,  other than an  employee of the Bank or a person to whom  disclosure  is
reasonably  necessary or  appropriate  in  connection  with the  performance  by
Employee of his duties as an executive of the Bank, any confidential information
obtained  by him  while  in the  employ  of the  Bank  provided,  however,  that
confidential  information  shall not include any information  known generally to
the public  (other than as a result of  unauthorized  disclosure  by  Employee).
Unless  Employee  terminates his employment  hereunder  pursuant to Section 11.1
hereof,  for the period ending two years following the termination of employment
hereunder,  Employee shall not disclose any confidential information of the type
described  above  except as  required  by any court,  supervisory  authority  or
administrative  agency or as  determined  by him to be  reasonably  necessary in
connection with any business or activity in which he is then engaged.

15.      Arbitration.

Any dispute or controversy arising or in connection with this Agreement shall be
settled  exclusively by  arbitration in the State of Indiana in accordance  with
the   rules  of  the   American   Arbitration   Association   then  in   effect.
Notwithstanding  the pendency of any such dispute or controversy,  the Bank will
continue to pay Employee's  full  compensation  in effect when the notice giving
rise to the  dispute  was given  (including,  but no limited to, base salary and
installments under this Agreement) and continue Employee as a participant in all
compensation,  benefit and insurance  plans in which Employee was  participating
when the notice  giving  rise to the  dispute  was given,  until the  dispute is
finally resolved. Judgment may be entered on the arbitrator's award in any court
of competent jurisdiction.

16.      Estate Benefit.

Any monetary payment or benefit to be funded by the payment of money required to
be paid to Employee upon a termination of Employee's  employment  under Sections
9,  11,  and 12 of  this  Agreement  shall  be  paid  to  the  estate  or  legal
representative of Employee if he is deceased.

17.      Regulators' Termination.

     17.1 All obligations under this Agreement may be terminated,  except to the
extent  determined  that the  continuation of the Agreement is necessary for the
continued  operation  of the Bank:  (a) by the  Director of the Office of Thrift
Supervision  at the  time  the  Federal  Deposit  Insurance  Corporation  or the
Resolution Trust Corporation  enters into an agreement to provide  assistance to
or on behalf of the Bank under the  authority  contained in Section 13(c) of the
Federal  Deposit  Insurance  Act; or (b) by the Director of the Office of Thrift
Supervision at the time such Director  approves a supervisory  merger to resolve
problems related to operation of the Bank or when the Bank is determined by such
Director  to be in an unsafe and  unsound  condition.  Any rights of the parties
that have already vested, however, shall not be affected by such action.

     17.2 If the Bank is in default (as defined in Section3(x)(l) of the Federal
Deposit  Insurance Act), all obligations under this Agreement shall terminate as
of the date of default, except that such termination shall not effect any vested
rights of the parties hereto.

18.      General Provisions.

     18.1 This Agreement  constitutes the entire  agreement  between the parties
with respect to the subject matter hereof, and supersedes and replaces all prior
agreements  between the Bank and the parties with the exception of any agreement
between the Bank and Employee relating to the payment of deferred  compensation.
No amendment,  waiver or termination  of any of the  provisions  hereof shall be
effective unless in writing and signed by the party against whom it is sought to
be enforced. Any written amendment, waiver or termination hereof executed by the
Bank and Employee (or his estate)  shall be binding upon them and upon all other
Persons,  without the necessity of securing the consent of any other Person, and
no Person shall be deemed to be a third party beneficiary under this Agreement.

     18.2  "Person"  as used in this  Agreement  means a natural  person,  joint
venture,   corporation,   sole  proprietorship,   trust,  estate,   partnership,
cooperative,   association,   non-profit   organization  or  any  other  legally
cognizable entity.

     18.3 This  Agreement may be executed in one or more  counterparts,  each of
which  shall be  deemed  an  original,  but all of which  taken  together  shall
constitute one and the same Agreement.

     18.4 Except as otherwise expressly set forth herein, no failure on the part
of any party hereto to exercise and no delay in exercising  any right,  power or
remedy  hereunder  shall  operate as a waiver  thereof;  nor shall any single or
partial exercise of any right,  power or remedy hereunder  preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.

     18.5 The headings of the sections of this  Agreement have been inserted for
convenience  of reference only and shall in no way restrict or modify any of the
terms or provisions hereof.

     18.6  This  Agreement  shall  be  governed  and  construed  and  the  legal
relationships of the parties determined in accordance with the laws of the State
of Indiana  applicable to contracts  executed and to be performed  solely in the
State of Indiana.

 19.      Peoples Bancorp Guarantee

Peoples Bancorp hereby guarantees the terms, conditions, and obligations of this
agreement for the Bancorp and the Bank.

IN WITNESS  WHEREOF,  the parties  hereto have executed this Agreement as of the
day and year first mentioned.

                                       PEOPLES FEDERAL SAVINGS
                                       BANK OF DEKALB COUNTY


                                       BY:___________________________________

[CORPORATE SEAL]

                                       ATTEST:_______________________________

                                       PEOPLES BANCORP

[CORPORATE SEAL]
                                       BY:____________________________________



                                       ATTEST:________________________________


<PAGE>
                                   EXHIBIT 13

                         ANNUAL REPORT TO STOCKHOLDERS



                     CONTENTS

Letter to Stockholders..........................1
Highlights and Stock Information................2
Our Mission to Help Customers...................3
Board of Directors and Executive Officers.......4
Branch Managers and Mission Statement...........5
Management's Discussion And Analysis............6
Selected Consolidated Financial Data...........13
Consolidated Financial Statements..............14
Independent Auditor's Report...................29
Statement of Management's Responsibility.......29
Corporate Profile....................Inside Cover

Executive Officers of Bancorp
  Roger J. Wertenberger         Maurice F. Winkler, III      John E. Weigel, III
  Chairman of the Board and     President and                Corporate Secretary
  Chief Executive Officer       Chief Operating Officer

Independent Auditors
         Olive LLP
         201 North Illinois Street
         Indianapolis, IN  46204

Legal Counsel                                      Transfer Agent
         Manatt, Phelps & Phillips                   Fifth Third Bank
         1200 New Hampshire Avenue N.W.              Corporate Trust Services
         Suite 200                                   38 Fountain Square Plaza
         Washington, D.C.  20036                     Cincinnati, OH  45263
                                                     TEL:   513-579-5320
                                                            800-837-2755
        
                                 ANNUAL MEETING
The annual meeting of  stockholders  of Peoples  Bancorp will be held Wednesday,
January,  13,  1999 at 2:00 p.m. at  Greenhurst  Country  Club,  1740 North Main
Street, Auburn, Indiana 47606.



                                CORPORATE PROFILE

Peoples  Bancorp (the Company) is a holding company formed in 1990. Its stock is
traded on NASDAQ National Market System under the symbol PFDC.

The  Company's  primary asset is Peoples  Federal  Savings Bank of DeKalb County
(the  Bank).  The Bank was  formed  in 1925 and has grown to assets of more than
$300 million.

The Bank's main office is located in Auburn,  Indiana with full service  offices
in Avilla,  Columbia City, Garrett,  Kendallville and LaGrange.  A second office
was opened in Columbia City in April, 1998.

The Bank's financial services include mortgages,  trusts,  consumer banking, and
individual retirement accounts.

The Bank is a member of the Federal Home Loan Bank System,  and its deposits are
insured by the Federal Deposit Insurance Corp.

                              CORPORATE INFORMATION
Form 10-K Report
A copy of the Company's 10-K,  including financial  statements as filed with the
Seurities  and  Exchange  Commission,   will  be  furnished  without  charge  to
stockholders  of the Company  upon  written  request to the  Secretary,  Peoples
Bancorp,  212 West 7th Street,  P.O. Box 231,  Auburn,  Indiana 47606. As of the
close of business on September  30, 1998,  the company had  approximately  1,500
stockholders.

                                 ABOUT THE COVER
Pictured are five accomplishments of Peoples Federal in 1998:

(Top left) Vice President-Lending, Jay Grate, with local developer, Dave Graber,
at the Parade of Homes' Peoples Choice Award winner financed by Peoples Federal.
(Top right) One of the ATM's installed in April.
(Left middle)Kristie Prater, taking a construction  application from a customer,
Sue Shankle,  for a new mortgage.  Evening and weekend  appointments have been a
popular  service.
(Right middle) Branch Manager, Andy Anderson, making a contribution to Beth Went
of the Whitley Memorial Hospital Building Fund in Columbia City.
(Lower right) A view of the new Columbia City office of Peoples opened in April.
<PAGE>
                         To Our Stockholders and Friends

Peoples  Bancorp and its  subsidiary,  Peoples  Federal  Savings Bank had record
earnings of $4,206,695 or $1.25 per share, up from $1.22 last fiscal year. While
the  increase  was modest we consider it an  accomplishment  due to the start up
expenses  of a new branch in  Columbia  City and the four new  Automatic  Teller
Machines put into service in 1998.

Other accomplishments this year include:

Assets increased $14,335,186 and now total $304,936,781.

$1,507,566 was paid in cash dividends to stockholders.  The eleventh consecutive
year cash dividends  have been  increased.

The mortgage loan officers  closed  $99,899,634  in mortgage loans during fiscal
'98.

Loan totals  reached a new high of  $267,605,591,  an increase of $31,463,355 or
13.3%.

Return on average assets was approximately  1.4% in fiscal '98, which we believe
will exceed many of our peer group.

$2,354,093 of earnings was used to repurchase 111,302 of Peoples Bancorp shares,
in keeping with our long-term plan for stockholder enhancement.

Deposits and  repurchase  agreements  increased  nearly $7.8 million  dollars in
fiscal '98.

We feel that our opportunities to increase our services in Northeastern  Indiana
will be enhanced  by the mega  banking  mergers  taking  place in our area.  The
strengths of Peoples  Federal are the  experienced and dedicated local staff and
our ability to make  decisions on a local  basis.  The staff at Peoples has been
meeting the financial services needs of Northeastern Indiana for over 75 years.

Effective January, 1999, Robert D. Ball, a valued and trusted friend of the Bank
will retire from the Board of Directors after 27 years of service.  His wise and
valuable contributions guided this bank through the stock conversion in 1987 and
many other major decisions made over the years.  Mr. Ball will continue to serve
the bank as Director Emeritus.

Much has been written about the year 2000 problem for software and computers. We
have already  replaced the majority of our  computers  and have  identified  the
potential  problems.  Peoples  expects to be year 2000 compliant well before the
new millennium.

On behalf of the Board of Directors  and the  employees  of Peoples,  we wish to
thank you for your continued confidence and support.

Roger J. Wertenberger                              Maurice F. Winkler, III
Chairman & Chief Executive Officer           President & Chief Operating Officer

<PAGE>

                              FINANCIAL HIGHLIGHTS

                                     1998          1997
                                   ----------   ----------
                  (dollars in thousands except per share data)
Operating Results:
Net Interest Income                 $ 10,867     $ 10,430
Provision for Loan Losses                 75           50
Dividends Per Share                     0.45         0.41
Average Equity to Average Assets       15.08%       15.22%
At Year End:
Assets                               304,937      290,602
Loans                                267,606      236,142
Allowance for Loan Losses                947          887
Deposits                             248,545      241,790
Stockholders' Equity                  44,671       44,298
Book Value Per Share                   13.62        13.06




              Common Stock Information
Information listed below has been adjusted for stock split
                  Market Price    Dividends
                ---------------------------
                   Low     High   Per Share
                -------- ------- ----------
Fiscal 1998
1st QTR          $20.83   $25.00   $0.11         
2nd QTR           21.50    23.25    0.11
3rd QTR           21.13    23.00    0.11
4th QTR           20.13    22.75    0.12

Fiscal 1997
1st QTR          $12.83   $13.67   $0.10         
2nd QTR           13.00    15.33    0.10
3rd QTR           14.50    15.33    0.10
4th QTR           14.67    21.17    0.11
The price of PFDC stock traded on NASDAQ on November 30, 1998
was $20.62

(This page includes 4 graphs showing Total Assets, Net Loans, Book Value per 
Share, and Dividends per share for the last 5 years.)
 
<PAGE>

               Our Mission is to Help Customers Reach Their Goals

     As a  strong,  local  bank,  our  mission  is to  serve  our  customers  as
individuals. Peoples realize that our customers have many different goals -- the
dream of their first  home,  saving for  retirement,  or  providing  educational
assistance  for their  children.  Peoples and its staff have  provided  personal
service  for 73 years to  northeastern  Indiana.  The Bank has been  growing and
adding  services,  but has no plans to leave our  roots to  become a  nationwide
bank.  Peoples  goal is to help others  reach their goals as we live and work in
the communities we serve.

     As a step in that  direction,  Peoples  launched  new  products  to improve
existing  services  and made plans for  changes  ahead in 1999,  all with an eye
toward improving customer service.

     In the past year,  our service has grown and improved  with the  successful
introduction of the ATM/Debit card network. Four machines have been in operation
since May. Photo identification on debit cards has been added to protect against
theft and this  part of our  business  will grow as we market  the cards to more
people.

     Many customers have brought their mortgage business to Peoples Federal this
past year. We like to think that we are opening doors; Opening doors to families
buying their first homes, opening doors to people who've had to struggle just to
get access to mortgage  credit and opening  doors for  customers by  encouraging
them to save and plan for the future  with  products  like  trusts,  IRA's,  and
certificates  of deposit.  Our Home Savings  Program has  provided  down payment
assistance  in  cooperation  with  Federal  Home Loan Bank.  Our figures in this
report show  increases  in loans.  This has been  accomplished  by adding a more
efficient mortgage servicing system,  providing evening and weekend appointments
with a mobile loan  originator,  and extra effort through loan officers who help
our customers open doors to the dream of home ownership.

     I would like to recount the recent  story of the Brian  Chandler  family of
Kendallville  who recently  purchased a home.  They used the Home Pilot  Savings
program which  provided a 2 for 1 match of dollars up to $5,000 maximum for down
payment  assistance.  During the  required  home  inspection,  the  furnace  was
determined to be defective  and emitting  carbon  monoxide and gas fumes.  Words
cannot convey their appreciation as a possible tragedy was avoided for Brian and
his wife,  Andrea.  Good solid  counseling  and following  all the  requirements
helped newlyweds steer clear of a possible tragedy.

     A second  Peoples  branch  was  opened in  Columbia  City this  April  that
provides  personalized  service,  a  new  ATM  machine,  and  expanded  drive-up
facilities.  Our theory is that customers need to be able to talk with the local
banker instead of following the megabank trend of transferring  their people out
of branch  locations.  Peoples has promoted three experienced loan officers this
year and added one additional officer to keep up with expanding  business.  This
new Columbia  City office will  continue to enable us to expand  market share in
the Columbia City market.

     Peoples  Federal is also a bank that partners with local  organizations  to
reinvest  in the  communities  we serve  and from  which we draw  deposits.  The
primary  responsibility  of  banks  is to  engage  in the  business  of  banking
prudently and for productive purposes.  Some of the organizations that benefited
last year are Habitat for Humanity in several counties; Whitley County Hospital;
Peabody  Library;  Little League baseball teams;  softball teams; and basketball
teams. We also have established  Peoples Charitable  Foundation that has awarded
scholarships  to deserving area students.  Peoples  Federal  strives to meet the
objective  as  an  integral  part  of  their  communities,  because  it  is  the
responsibility of a good corporate citizen.

     A key part of our corporate  philosophy of community banking is that we can
operate best with the  empowerment  of local  managers whom  customers  know and
trust. As we face increased  competition  from megabanks,  we are confident that
local  management  will  remain   profitable  by  addressing   expense  control,
exercising good credit judgment,  and assisting our customers  individually.  We
are excited to face the new  millennium  with a staff that believes in community
participation, both financially and through volunteerism.

     Our  region  continues  to enjoy a low  inflation  rate,  one of the lowest
unemployment  rates in the state and nation,  and sound economic  development of
the region in which we do business.  The prospects for continued economic health
look bright.  We stand ready to do our part by  maintaining  a well  capitalized
bank with a strong balance sheet.

     This report to our  shareholders  shows that Peoples has been  successfully
serving  individuals in small to medium size markets and that community  banking
is the most consistently  profitable type. Our mission remains to help customers
reach their goals.
<PAGE>



Picture of Board of Directors                 Picture of Maury & Bruce Holwerda
Directors: 
Roger J. Wertenberger
Chairman of the Board and Chief Executive
Officer of the Bank, Auburn, Indiana.
Director since 1954.

Robert D. Ball
Former principal owner of Ball Brass and
Aluminum Foundry, Inc., Auburn, Indiana
Director since 1982.

Lawrence R. Bowmar
Retired Vice President-Consumer Loans of
the Bank, Auburn, Indiana
Director from 1974-1992 and 1993-present.

John C. Harvey
Physician, Auburn, Indiana
Director since 1979.

Bruce S. Holwerda
Vice President and Chief Operating Officer
Ambassador Steel Corp., Auburn, Indiana
Director since 1998.

Douglas D. Marsh
Chairman of the Board, Applied
Innovations, Inc., Chicago, Illinois
President, Bridgewater Golf Co., Auburn, Indiana
Associate, Auburn Realty, Auburn, Indiana
Director since 1982.

John C. Thrapp
Attorney, Thrapp & Thrapp,
Kendallville, Indiana
Director since 1990.

Maurice F. Winkler, III
President and Chief Operating Officer
of the Bank, Auburn, Indiana
Director since 1993.

Jack L. Buttermore
Director Emeritus

Lloyd M. Cline
Director Emeritus

Jesse A. (Jack) Sanders
Director Emeritus

Russell A. Spice
Director Emeritus



Picture of Executive Officers
                         EXECUTIVE OFFICERS OF THE BANK

Roger J. Wertenberger              Carole  J. Leins
Chief Executive Officer            Vice President-Service Corporation

Maurice F. Winkler, III            Donald E. Budd
President and Chief Operating      Vice President-Trust Officer
Officer
       
Jeffery L. Grate                   Deborah K. Stanger
Vice President-Lending Operations  Vice President-Chief
                                   Financial Officer

Herma F. Fields                    John E. Weigel, III
Vice President-Savings             Compliance Officer

<PAGE>
OFFICE LOCATIONS:

Auburn Office-212 West 7th St., Auburn, IN  47606

Avilla Office-105 North Main St., Avilla, IN  47610

Columbia City Downtown Office-123-129 S. Main St., Columbia City, IN  46725

Columbia City North Office-507 N. Main St., Columbia City, IN  46725

Garrett Office-1212 S. Randolph St., Garrett, IN  46738

Kendallville Office-116 W. Mitchell St., Kendallville, IN  46755

LaGrange Office-114-118 S. Detroit St., LaGrange, IN  46761

This page  includes  a picture of branch  managers,  Richard  Lewton,  LaGrange,
Dewayne Anderson,  Columbia City, Brenda Strohm, Garrett, Cindy Jollief, Avilla,
Clark Ream, Kendallville, and April Haynes, Columbia City North.

                Peoples Federal Philosophy of Community Banking

     Peoples Federal Savings Bank believes in community banking.  Peoples serves
individuals and small to medium-sized businesses in its market areas. We believe
that community banking is the most consistently profitable type of banking.

     Peoples  believes that community  banking operates best with empowerment of
local management you know and trust.

     Peoples  emphasizes  funding  of  its  assets  with  retail  core  deposits
generated  in its  branches  and main  office.  Peoples  does  not use  brokered
deposits and believes borrowings should be kept to a minimum.

     Peoples is a secured local lender and always emphasizes credit quality over
asset growth. The costs of poor credit far outweigh the benefits of unwise asset
growth.

     Peoples  believes  it is  essential  to be  well-capitalized  with a strong
balance sheet.  Capital is the cushion against poor economic times and errors in
credit judgment.

     Peoples is very expense control oriented.  A profitable community bank must
be a low-cost provider of services.

     Peoples is very sales  oriented  and  believes in sharing  profits with the
community and with all employees

     Peoples places a high priority on the  development of technology to enhance
productivity,  customer service and new products.  Properly  applied  technology
reduces  costs and enhances  services.  Peoples is committed to providing  extra
services  through  convenient  access,  innovative  products  and good  customer
relations. Many of our customers bank with us because we are convenient.

 
     Peoples  encourages  open employee  communications.  Peoples  promotes from
within whenever  possible and places the highest priority on honesty,  integrity
and ethical behavior.

     Peoples believes in community  participation,  both financially and through
volunteerism.

     Peoples  practices  affirmative  action and does not  discriminate  against
anyone in employment or the extension of credit.

     Peoples Federal is committed to providing affordable housing for low income
people.  Several  programs  are in place  with the  Federal  Home  Loan  Bank of
Indianapolis  ("FHLB")  to assist our low income  customers  with their  housing
needs.
<PAGE>

Management's Discussion and Analysis of Financial Conditions and Results of 
Operations:

General

     Peoples  Bancorp (the  "Company")  is an Indiana  corporation  organized in
October,  1990 to become the thrift holding  company for Peoples Federal Savings
Bank (the "Bank").  The Company is the sole stockholder of Peoples Federal.  The
Bank  conducts  business  from  its  main  office  in  Auburn  and  in  its  six
full-service  offices located in Avilla,  Columbia City, Garrett,  Kendallville,
and LaGrange,  Indiana.  Peoples  Federal  offers a full range of retail deposit
services and lending  services to northeastern  Indiana.  The Company's  primary
business activity is being the holding company for Peoples Federal.

     Historically,  the principal  business of savings banks,  including Peoples
Federal, has consisted of attracting deposits from the general public and making
loans secured by  residential  real estate.  Peoples  Federal's net earnings are
contingent on the difference or spread between the interest  earned on its loans
and investments  and the interest paid on its consumer  deposits and borrowings.
The Bank is also  significantly  affected  by  prevailing  economic  conditions,
government policies, regulations, interest rates, and local competition.

     The  Company's  earnings are primarily  dependent  upon the earnings of the
Bank.  Interest  income is a function  of the  balance of loans and  investments
outstanding  during a given  period  and the  yield  earned  on such  loans  and
investments.  Interest  expense is a function  of the  amounts of  deposits  and
borrowings  outstanding  during  the  same  period  and the  rates  paid on such
deposits and borrowings.  Peoples Federal's  earnings are also affected by gains
and  losses  on sales of loans  and  investments,  provisions  for loan  losses,
service  charges,  income from  subsidiary  activities,  operating  expenses and
income taxes.

     On a yearly basis, The Bank updates its long-term strategic plan. This plan
includes,  among other things,  Peoples  Federal's  commitment to  maintaining a
strong  capital  base and  continuing  to improve the  organization's  return on
assets  through  asset  growth and  controlling  operating  expenses.  Continued
careful  monitoring of Peoples Federal's  interest rate risk is also cited as an
important goal. As a result,  continued  origination of short-term  consumer and
installment loans, prime plus equity loans,  adjustable rate mortgage loans, and
fixed-rate  real estate  loans with  original  terms of 15 years or less will be
emphasized.

     The   following   table  sets   forth  the   weighted   average   yield  on
interest-earning  assets and the  weighted  average  rate on  interest-  bearing
liabilities for the years ending September 30, 1998, 1997, and 1996.

                                        September 30
                                   -------------------------
                                     1998     1997   1996
                                   -------- ------- --------
Weighted average interest rate on:
   Loans                             8.03%    8.15%   8.33%
   Securities                        6.02     5.89    5.64
   Other interest-earning assets     6.58     6.42    6.19
   Combined                          7.75     7.76    7.85
Weighted average cost of:
   NOW and savings deposits          2.85     2.78    2.64
   Certificates of deposit           5.62     5.64    5.70
   Borrowings                        5.21     4.85    5.94
   Combined                          4.79     4.80    4.79
Interest rate spread                 2.96     2.96    3.06
Net yield on weighted average
     interest-earning assets         3.67     3.70    3.75

 
     The   following   table  sets   forth  the   weighted   average   yield  on
interest-earning  assets and the  weighted  average  rate of  interest-  bearing
liabilities at September 30, 1998, 1997 and 1996.

                                         At September 30
                                      -----------------------
                                        1998    1997   1996
                                      ------- ------- -------
Weighted average interest rate on:
   Loans                                7.98%   8.34%  8.02%
   Securities                           5.61    5.41   5.18
   Other interest-earning assets        5.01    6.20   6.81
   Combined                             7.76    7.89   7.57
Weighted average cost of:
   NOW and savings deposits             2.78    2.98   2.80
   Certificates of deposit              5.72    5.78   5.72
   Borrowings                           5.22    5.31    ---
   Combined                             4.84    4.97   4.89
Interest rate spread                    2.92    2.92   2.68

Asset and Liability Management

     Peoples Federal, like other savings banks, is subject to interest rate risk
to the degree that its  interest-bearing  liabilities,  primarily  deposits with
short and  medium-term  maturities,  mature or  reprice  more  rapidly  than its
interest-earning assets. Although having liabilities that mature or reprice more
frequently  on average  than assets  will be  beneficial  in times of  declining
interest  rates,  such an  asset/liability  structure  will  result in lower net
income during periods of rising interest  rates,  unless offset by other factors
such as noninterest income.

     Historically, all of Peoples Federal's real estate loans were made at fixed
rates.  More  recently,  the Bank has adopted an asset and liability  management
plan that calls for the  origination  of  residential  mortgage  loans and other
loans  with  adjustable  interest  rates,  the  origination  of  15-year or less
residential  mortgage loans with fixed rates, and the maintenance of investments
with short to medium terms.
<PAGE>

     The following table illustrates the projected  maturities and the repricing
mechanisms of the major asset and liability  categories of Peoples Federal as of
September 30, 1998. Maturity and repricing dates have been stated to reflect the
contractual  maturity and  repricing  dates.  The  information  presented in the
following  table is derived  from  information  that is  provided  to the OTS in
"Schedule CMR: Maturity and Rate" filed as part of Peoples  Federal's  September
30, 1998,  quarterly  report.  The data contained in the following report is the
contractual repricing information and does not contain any assumptions regarding
repricing. 
<TABLE>

                                                  At September 30, 1998
                                                 (Dollars in Thousands)
                                       -----------------------------------------------------------------------------------
<S>                                       <C>        <C>               <C>         <C>          <C>            <C>       
                                        3 Months   More than 3 Months                              Over
Period to maturity or repricing            or Less      Thru 1 Year    1-3 Years    3-5 Years    5 Years         Total
                                        ------------   ------------  ------------  ------------ ------------  ------------
Interest earning assets:
 Adjustable rate loans                    $     -        $34,779       $ 4,355     $      77     $      -       $ 39,211
 Fixed rate loans                           2,881          6,609         2,110         4,925      199,644        216,169
 Investment securities                      9,961          3,781         4,532         7,463        1,927         27,664
 Consumer and other loans                   8,723          1,707         2,000         2,238        1,462         16,130
                                        ------------   ------------  ------------  ------------ ------------  ------------
 Total Assets Subject to Repricing         21,565         46,876        12,997        14,703      203,033        299,174
                                        ------------   ------------  ------------  ------------ ------------  ------------
Liabilities Subject to Repricing:
 Certificates of deposit                   60,242         47,817        57,106         7,707            -        172,872
 N.O.W. and other transaction
 accounts                                  27,407              -             -             -            -         27,407
 Passbook accounts                         34,949              -             -             -            -         34,949
 Money market accounts                     13,034              -             -             -            -         13,034
 Borrowings                                 5,203          1,000             -         1,000        2,000          9,203
                                        ------------   ------------  ------------  ------------ ------------  ------------
Total Liabilities Subject to Repricing    140,835         48,817        57,106         8,707        2,000        257,465
                                        ------------   ------------  ------------  ------------ ------------  ------------
Excess (deficiency) of rate sensitive
 assets over rate sensitive liabilities $(119,270)     $  (1,941)    $ (44,109)    $   5,996     $201,033       $ 41,709
                                        ============   ============  ============  ============ ============  ============

Cumulative excess (deficiency) of rate
 sensitive assets over rate sensitive  $(119,270)      $(121,211)     $(165,320)   $(159,324)    $ 41,709       $ 41,709
 liabilities                           =============   ============  ============  ============ ============  ============
 
As a % of Total Assets Subject
 to Repricing                             (39.87)%       (40.52)%      (55.26)%      (53.25)%      13.94%         13.94%
</TABLE>

     A negative interest rate gap leaves Peoples Federal's  earnings  vulnerable
to periods of rising  interest rates because  during such periods,  the interest
expense  paid on  liabilities  will  generally  increase  more  rapidly than the
interest  income  earned  on  assets.  Conversely,  in a falling  interest  rate
environment,  the total expense paid on liabilities will generally decrease more
rapidly than the interest income earned on assets. A positive  interest rate gap
will have the opposite effect. The Company's management believes that the Bank's
interest rate gap in recent  periods has  generally  been  maintained  within an
acceptable range in view of the prevailing interest rate environment.

     The  OTS  has  proposed  a  regulation,  which  uses  a  net  market  value
methodology  to measure the interest rate risk exposure of thrift  institutions.
Under this OTS regulation, an institution's "normal" level of interest rate risk
in the  event of an  assumed  change  in  interest  rates is a  decrease  in the
institution's  NPV in an amount not  exceeding  2% of the  present  value of its
assets.  Thrift institutions with over $300 million in assets or less than a 12%
risk-based  capital  ratio are  required  to file OTS  Schedule  CMR.  Data from
Schedule  CMR is used by the OTS to  calculate  changes in NPV (and the  related
"normal"  level of interest rate risk) based upon certain  interest rate changes
(discussed  below).  Institutions  which  do  not  meet  either  of  the  filing
requirements  are  not  required  to  file  OTS  Schedule  CMR,  but  may  do so
voluntarily.  Under the proposed  regulation,  institutions  which must file are
required to take a deduction  (the  interest rate risk capital  component)  from
their total capital available to calculate their risk-based capital  requirement
if their  interest  rate exposure is greater than  "normal".  The amount of that
deduction is one-half of the  difference  between (a) the  institution's  actual
calculated  exposure to a 200 basis  point  interest  rate  increase or decrease
(whichever  results  in the  greater  pro  forma  decrease  in NPV)  and (b) its
"normal" level of exposure which is 2% of the present value of its assets.

     Presented  below,  as of  September  30,  1998  and  1997,  is an  analysis
performed  by the OTS of Peoples  Federal's  interest  rate risk as  measured by
changes in NPV for  instantaneous  and  sustained  parallel  shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points. At September
30, 1198 and 1997,  2% of the  present  value of Peoples  Federal's  assets were
approximately $6.2 million and $5.8 million. Because the interest rate risk of a
200 basis point  decrease in market  rates  (which was greater than the interest
rate risk of a 200 basis point  increase) was $7.5 million at September 30, 1998
and $9.8 million at September 30, 1997, Peoples Federal would have been required
to make a deduction from its total capital available to calculate its risk based
capital  requirement if the OTS's  regulation had been enacted.  The decrease in
interest  rate risk from 1997 to 1998 is due to an  improved  match of  expected
cash flows from assets and liabilities.
<PAGE>
                   Intrerest RateRisk As of September 30, 1998

 Changes                  Market Value 
in Rates     $ Amount      $ Change      % Change   NPV Ratio     Change
----------  ------------  -------------  --------- ------------  --------
+400 bp       24,386       (18,384)        -43%       8.62%       (529)
+300 bp       29,960       (12,811)        -30%      10.33%       (357)
+200 bp       35,253        (7,517)        -18%      11.88%       (203)
+100 bp       39,709        (3,061)         -7%      13.11%        (79)
    0 bp      42,770             -           0%      13.91%          -
-100 bp       44,320         1,550           4%      14.26%         35
-200 bp       46,360         3,590           8%      14.73%         82
-300 bp       49,198         6,428          15%      15.40%        149
-400 bp       52,160         9,390          22%      16.08%        217

                   Intrerest RateRisk As of September 30, 1997

 Changes                  Market Value
in Rates     $ Amount      $ Change      % Change   NPV Ratio     Change
---------   ------------  -------------  --------- ----------- ----------
+400 bp       22,411       (21,410)        -49%       8.39%       (651)
+300 bp       28,240       (15,581)        -36%      10.29%       (460)
+200 bp       34,003        (9,818)        -22%      12.08%       (282)
+100 bp       39,396        (4,425)        -10%      13.66%       (123)
    0 bp      43,821             -           0%      14.90%          -
-100 bp       46,396         2,574           6%      15.55%         66
-200 bp       47,503         3,682           8%      15.78%         88
-300 bp       48,959         5,138          12%      16.09%        120
-400 bp       51,640         7,819          18%      16.73%        184


     In  evaluating  the  Bank's   exposure  to  interest  rate  risk,   certain
shortcomings,  inherent in the method of  analysis  presented  in the  foregoing
table must be considered.  For example,  although certain assets and liabilities
may have  similar  maturities  or  period  s to  repricing,  they  may  react in
different degrees to changes in market interest rates.  Also, the interest rates
on certain types of assets and  liabilities  may fluctuate in advance of changes
in market  interest  rates,  while  interest rates on other types may lag behind
changes in market rates.  Further,  in the event of a change in interest  rates,
prepayments and early withdrawal levels could deviate  significantly  from those
assumed in  calculating  the table.  Finally,  the ability of may  borrowers  to
service their debt may decrease in the event of an interest rate increase.  As a
result,  the actual  effect of  changing  interest  rates may  differ  from that
presented in the foregoing table.

Interest Income

     Net interest  income  decreases  during periods when the spread is narrowed
between the Bank's  weighted  average rate at which new loans are originated and
its weighted  average cost of  liabilities.  In addition,  the Bank's ability to
originate and sell mortgage loans is affected by market factors such as interest
rates, competition,  consumer preferences, the supply of and demand for housing,
and the availability of funds.

<PAGE>


     The following  table sets forth the weighted  average  yields earned on the
Bank's  assets  and the  weighted  average  interest  rates  paid on the  Bank's
liabilities.

<TABLE>
                               
                                                                    Years ended September 30
                                                                     (Dollars in Thousands)
                               ------------------------------------------------------------------------------------------
                                              1998                            1997                        1996
                               ----------------------------- ------------------------------- ----------------------------
<S>                             <C>          <C>      <C>      <C>          <C>       <C>    <C>         <C>      <C>
                                  Average    Interest            Average    Interest           Average   Interest
                                Outstanding  Earned/  Yield/   Outstanding   Earned/  Yield/ Outstanding  Earned/ Yield/
                                  Balance      Paid    Rate      Balance      Paid     Rate    Balance     Paid    Rate
-----------                     ----------- --------- ------   ------------ --------- ------ ----------- -------- -------
Interest-earning assets:
 Loans(1)                        $252,520    $20,266   8.03%     $230,278    $18,758   8.15%  $223,861    $18,646   8.33%
 Investment securities(2)          33,665      2,025   6.02        34,992      2,060   5.89     36,655      2,068   5.64
 Other interest-earning assets     10,069        663   6.58        16,822      1,080   6.42     16,513      1,022   6.19
                                ---------- ----------           ----------- ---------        ----------- --------
 Total interest-earning assets    296,254     22,954   7.75       282,092     21,898   7.76    277,029     21,736   7.85
                                           ----------                       ---------                    --------
Allowance for loan losses            (906)                           (883)                        (932)
Other assets                        4,291                           3,484                        3,796
                                ----------                      -----------                  -----------
Total Assets                     $299,639                        $284,693                     $279,893
                                ==========                      ===========                  ===========
Interest-bearing liabilities:
  NOW and savings deposits       $ 74,516    $ 2,124   2.85      $ 70,004    $ 1,949   2.78   $ 70,043     $1,846   2.64
  Certificates of deposit         171,963      9,670   5.62       166,557      9,402   5.64    163,758      9,341   5.70
  Borrowings                        5,623        293   5.21         2,412        117   4.85        724         43   5.94
                                ---------- ----------          ------------ ---------        ----------- --------
  Total interest-bearing
   liabilities                    252,102     12,087   4.79       238,973     11,468   4.80    234,525     11,230   4.79
                                           ----------                       ---------                   ---------
Other liabilities                   2,332                           2,358                        2,513
Stockholders' equity               45,205                          43,362                       42,855
                                ----------                     ------------                  -----------
Total Liabilities and
     Stockholders' equity        $299,639                        $284,693                     $279,893
                                ==========                     ============                  ===========
Net interest income/spread                   $10,867   2.96                  $10,430   2.96              $10,506   3.06
                                           ==========                      ==========                   =========
Net yield on interest earning assets                   3.67                            3.70                        3.75

(1) Average balances include nonaccrual balances.
(2) Yield on investment securities is computed based on amortized cost.

</TABLE>

     Investments  include US Government  securities,  including those issued and
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"),  the Federal
National Mortgage  Association  ("FNMA"),  and the Government  National Mortgage
Association  ("GNMA"),  and state  and  local  obligations.  This  activity  (a)
generates  positive  interest  rate  spreads on large  principal  balances  with
minimal  administrative  expense;  (b) lowers the credit risk of the Bank's loan
portfolio  as a result  of the  guarantees  of full  payment  of  principal  and
interest by FHLMC,  FNMA,  and GNMA;  (c) enables the Bank to use  securities as
collateral  for  financings  in the  capital  markets;  and  (d)  increases  the
liquidity of the Bank.

     In  addition  to changes in  interest  rates,  changes in volume can have a
significant  effect on net interest  income.  The following  table describes the
extent to which  changes in  interest  rates and  changes in volume of  interest
related assets and liabilities have affected Peoples  Federal's  interest income
and expense for the periods indicated.  For the purposes of this table,  changes
attributable  to both  rate and  volume  which  cannot  be  separated  have been
allocated  proportionately  to the  change  due to volume  and the change due to
rate.
<PAGE>

<TABLE>
                                                                Years ended September 30,
                               ------------------------------------------------------------------------------------
                                     1998 vs 1997                    1997 vs 1996              1996 vs 1995
                               --------------------------- --------------------------- ----------------------------
                                 Increase                      Increase                   Increase
                                (Decrease)       Total        (Decrease)     Total       (Decrease)       Total
                                  Due to        Increase        Due to      Increase       Due to        Increase
                               ---------------             ----------------            ----------------
                               Volume    Rate   (Decrease)  Volume   Rate   (Decrease)  Volume   Rate   (Decrease)
<S>                             <C>      <C>     <C>        <C>     <C>       <C>        <C>      <C>    <C>  
                               ------- -------- ---------- -------- ------- ---------- -------- ------- -----------
Interest income from:
  Loans                         $1,779   $(271)  $1,508     $453    $(345)    $108       $403     $344   $  747
  Investment securities            (83)     48      (35)     (86)      82       (4)      (371)     177     (194)
  Other interest-earning assets   (445)     28     (417)      20       38       58        581      (83)     498
                               -------- ------- ---------- -------- ------- ---------- -------- ------- -----------
  Total interest income          1,251    (195)   1,056      387     (225)     162        613      438   $1,051
                               -------- ------- ---------- -------- ------- ---------- -------- ------- -----------
Interest expense from:
  NOW and savings deposits        126       49      175       (1)     104      103        (70)      24      (46)
  Certificates of deposit         301      (33)     268      159      (98)      61        341      181      522
  Borrowings                      167        9      176       80       (6)      74         26        1       27
                               -------- ------- ---------- -------- ------- ---------- -------- ------- -----------
  Total interest expense          594       25      619      238        -      238        297      206      503
                               -------- ------- ---------- -------- ------- ---------- -------- ------- -----------
Net interest income (expense)   $ 657    $(220)   $ 437     $149    $(225)    $(76)      $316     $232   $  548 
                               ======== = ===== ========== ======== ======= ========== ======== ======= ===========
</TABLE>


Operating Expense

     While  operating  expenses have  increased,  the increases have been due in
large part to the expansion of the Bank's  operations.  The increases,  with the
exception of increased  FDIC  premiums,  are service  related and consist of the
following:  appraisal and legal fees in connection with loan originations,  data
processing  due to  automating  manual  systems;  and  start  up  costs  for new
services.  Operating  expenses as a  percentage  of the Bank's total assets were
1.57%,  1.46%,  and 2.12% for fiscal years ended  September 30, 1998,  1997, and
1996, respectively.  However, the ratio for 1996 includes the special assessment
by the FDIC to recapitalize  the SAIF.  Without this  assessment,  the ratio for
1996 would have been 1.58%.

     The Bank continuously seeks to reduce operating  expenses.  In this regard,
the budget  committee  of the Board of  Directors  monitors  the Bank's  current
operating  budget on at least a quarterly basis to ascertain that expense levels
remain  within  projected  ranges and to  establish  competitive,  as opposed to
aggressive, rates for the Bank's various deposit accounts. The Bank's efforts to
contain  operating  expense also include  underwriting  policies that attempt to
reduce potential losses and conservative expansion of personnel.

Liquidity and Capital Resources

     The standard  measure of liquidity  for savings  banks is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings and
borrowings due within one year.  The minimum  required ratio is currently set by
OTS  regulation at 4%, of which 1% must be comprised of  short-term  investments
(i.e.,  generally  with a term of less than one year).  Liquid assets consist of
cash and eligible  investments,  which include  certain  United States  Treasury
obligations,  securities of various federal agencies, certificates of deposit at
insured banks, federal funds, and bankers'  acceptances.  At September 30, 1998,
the Bank had liquid  assets of  $24,313,208.  This  represents a ratio of liquid
assets to total assets of 8.2%.

     The primary  internal  sources of funds for  operations  are  principal and
interest payments on loans and new deposits.  In addition,  if greater liquidity
is required,  the Bank can borrow from the FHLB.  In the opinion of  management,
the Bank's liquid assets are adequate to meet mortgage  commitments  ($6,746,620
at September  30, 1998,  all for  residential  mortgage  loans),  consumer  loan
commitments ($13,612,380 at September 30, 1998, primarily for home equity lines)
and other obligations and expenditures.

     During  the year  ended  September  30,  1998  cash  and  cash  equivalents
decreased over $7.1 million. This decrease was used to fund an increase in loans
of $31.5  million.  The  balance of the  increase  was  funded by a decrease  in
investment  securities  of $10.8  million,  and  increases  in  deposits of $6.8
million and borrowings of $6.0 million. Operations provided $4.2 million.

     During the year ended September 30, 1997,  there was a net decrease of $0.3
million in cash and cash  equivalents.  This decrease was primarily due to lower
levels of cash on hand this  year  versus  last.  The loan  portfolio  increased
approximately  $12 million.  The major  sources of cash during the year were the
increase in deposits of $6.7  million,  the  increase in borrowed  funds of $3.2
million,  securities  maturities of $2.7 million which were not reinvested,  and
operating activities which provided $3.2 million.
<PAGE>

Results of Operations,  Fiscal Year Ended  September 30, 1998 Compared to Fiscal
Year Ended September 30, 1997

     The Company's net interest  income  increased to $10,792,316 for the fiscal
year ended  September 30, 1998, an increase of $412,076 over the previous  year.
The increase was primarily  attributable  to the increased  volume of loans this
year versus last. The increase in loan income was partially  offset by increased
interest expense due to higher volumes of deposits, and higher borrowing volumes
necessary to fund the loans. Interest expense increased $619,706 to $12,087,265.

     Provision  for  loan  losses  increased   $24,621  to  $74,621   reflecting
adjustments  due  to  management's   continuing  review  of  its  earning  asset
portfolio.  Management's  review of its loan  portfolio  is based on  historical
information, review of specific loans, and general economic conditions.

     Other  income  increased   $113,518  to  $757,682.   This  increase  was  a
combination  of  higher  fiduciary  fees  collected  this  year,  and  gains  on
securities sold.

     Total  non-interest  expense  for the year was  $4,746,908,  an increase of
$518,456.  This  increase  consisted  of  increased  salaries  and  benefits  of
$270,147,  equipment  and  occupancy  expense of $173,995,  and data  processing
expense of  $118,963.  These  increases  were caused by the addition of a second
branch in Columbia City, and the addition of four ATM machines during this year.
Deposit  insurance expense decreased $65,625 due to the lower premium rate being
in effect for the entire fiscal year.

     The  effective  tax rate for the Company for the years ended  September 30,
1998 and 1997 was 38.2%

Results of Operations,  Fiscal Year Ended  September 30, 1997 Compared to Fiscal
Year Ended September 30, 1996

     The Company's net interest income decreased  $117,346 to $10,380,240.  This
decrease  was a  combination  of higher  interest  income  and  higher  interest
expense.  Interest on loans increased  $112,653 due to higher volumes  partially
offset by lower  rates  charged on the loans.  Interest on  securities  remained
stable at $2,052,480.  While  security  volumes  decreased  during the year, the
decrease was offset by higher rates earned on these investments.  Other interest
income  increased  slightly  due to a  combination  of higher  rates and  higher
volumes.  Interest  expense  increased  $237,969 due to a combination  of higher
rates paid on DDA and savings  products,  and higher  volumes on  certificate of
deposit accounts and short term borrowings.

     Provision  for  loan  losses  increased  $41,176  from  $8,824  to  $50,000
reflecting  adjustments  due to  management's  continuing  review of its earning
asset  portfolio.  Management's  review  of  its  loan  portfolio  is  based  on
historical   information,   review  of  specific  loans,  and  general  economic
conditions.

     Other income remained steady at $644,164 as compared to $640,928 last year.

     Total non-interest  expense was $4,228,452,  a decrease of $1,701,597.  The
biggest component of the decrease was deposit insurance  expense.  Last year the
Company  was  assessed  a special  charge of  $1,500,870  to cover the SAIF fund
recapitalization.  After the  special  assessment,  deposit  insurance  premiums
decreased from 23 basis points to 6.3 basis points per $100 of insured  deposits
effective January 1, 1997. This accounted for an additional  savings of $315,332
over the previous year. This savings was partially offset by increased occupancy
and equipment  expense of $111,736 due to the  installation of the check imaging
system and other capital improvements made during the year.

     The  effective  tax rates for the Company for the years ended 1997 and 1996
were 38.2% and 38.3% respectively.

Impact of Inflation and Changing Prices

     The  consolidated  financial  statements and related data presented  herein
have been prepared in accordance with generally accepted  accounting  principles
which require the  measurement of financial  condition and operating  results in
terms of  historical  dollars or fair value without  considering  changes in the
relative purchasing power of money over time due to inflation.

     Virtually all of the assets and liabilities of a financial  institution are
monetary in nature. As a result,  interest rates have a more significant  impact
on a financial  institution's  performance than the effects of general levels of
inflation.  Interest rates do not necessarily move in the same direction or with
the same  magnitude as the prices of goods and  services,  since such prices are
affected by inflation.  In a volatile interest rate  environment,  liquidity and
the maturity  structure of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.

Year 2000

     The  Company  has an ongoing  program to ensure  that its  operational  and
financial systems will not be adversely affected by year 2000 software failures.
They have begun testing mission critical software and hardware applications, and
expect to be finished with this testing  process well in advance of December 31,
1999.  Software and hardware which has been deemed not to be year 2000 compliant
has,  or is  being  replaced.  While  the  Company  believes  it is  taking  all
appropriate  steps to assure year 2000  compliance,  it is  dependent  on vendor
compliance  to some extent.  The Company is  requiring  its systems and software
vendors to represent  that the services and products  provided  are, or will be,
year 2000 compliant.  The Company estimates that the cost to redevelop,  replace
or repair  its  technology  will not have a  material  impact  on its  financial
results.

     In addition to  possible  expenses  related to our own systems and those of
our service providers, we could incur losses if Year 2000 problems affect any of
our depositors or borrowers.  Such problems could include  delayed loan payments
due  to  Year  2000  problems  affecting  any of our  significant  borrowers  or
impairing the payroll systems of large employers in our market area. Because our
loan portfolio to individual  borrowers is diversified  and our market area does
not depend  significantly  upon one employer or  industry,  we do not expect any
such Year 2000 related difficulties that may affect our depositors and borrowers
to significantly affect our net earnings or cash flow.

Future Accounting Issues

     Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income, establishing standards for reporting and display
of  comprehensive  income and its components  (revenues,  expenses,  gains,  and
losses) in a full set of general-purpose  financial statements. It requires that
all items that are  required to be  recognized  under  accounting  standards  as
components of comprehensive  income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This Statement
does not require a specific  format for that  financial  statement  but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement.
<PAGE>

     SFAS No. 130 also requires that an enterprise  (a) classify  items of other
comprehensive  income by their nature in a financial  statement  and (b) display
the accumulated balance of other  comprehensive  income separately from retained
earnings and additional  paid-in capital in the equity section of a statement of
financial position.

     The Statement is effective for fiscal years  beginning  after  December 15,
1997.  Reclassification of financial statements for earlier periods provided for
comparative purposes is required.

     Disclosures about Segments of an Enterprise.  In June 1997, the FASB issued
SFAS  No.  131,   Disclosures  about  Segments  of  an  Enterprise  and  Related
Information,  establishing  standards  for the way public  business  enterprises
report information about operating  segments in annual financial  statements and
requires that those enterprises  report  information about operating segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  It also  establishes  standards  for  related  disclosures  about
products and services, geographic areas, and major customers.

     SFAS No. 131 requires that a public business  enterprise  report  financial
and descriptive  information about its reportable operating segments.  Operating
segments  are  components  of  an  enterprise  about  which  separate  financial
information  is  available  that is evaluated  regularly by the chief  operating
decision  maker  in  deciding  how  to  allocate   resources  and  in  assessing
performance.  Generally, financial information is required to be reported on the
basis that is used  internally for evaluating  segment  performance and deciding
how to allocate resources to segments.

     SFAS No. 131 is effective for financial  statements  for periods  beginning
after  December  15,  1997.  In the  initial  year of  application,  comparative
information  for earlier  years is to be restated.  This  Statement  need not be
applied to interim financial  statements in the initial year of its application,
but  comparative  information  for  interim  periods  in  the  initial  year  of
application is to be reported in financial statements for interim periods in the
second year of application. 

<PAGE>
<TABLE>
                                                          
                                         SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY

                                                            September 30
                               ---------------------------------------------------------------------
                                   1998           1997          1996          1995          1994
                               ------------- ------------- ------------- ------------- -------------
<S>                            <C>           <C>           <C>           <C>           <C>   
Financial Condition Data:
   Total assets                $304,936,781  $290,601,595  $280,011,850  $276,607,771  $266,455,068
   Loans receivable, net        266,658,583   235,255,669   223,011,251   218,663,928   209,330,499
   Investments and other
      interest-earning assets    27,664,033    46,439,468    47,970,950    47,811,103    44,711,326
   Deposits                     248,545,280   241,790,139   235,081,440   232,747,018   226,851,009
   Borrowed funds                 9,202,653     3,162,400             -     1,000,000             -
   Stockholders' equity          44,670,627    44,298,170    42,676,765    41,624,026    38,720,750

                                                                For Year Ended September 30
                               ---------------------------------------------------------------------
                                  1998           1997         1996         1995         1994
                               ------------- ------------- ------------- ------------- -------------
Operating Data:
   Interest income             $ 22,954,202  $ 21,897,799  $ 21,736,000  $ 20,685,111  $ 18,689,877
   Interest expense              12,087,265    11,467,559    11,229,590    10,727,454     8,829,951
                               ------------- ------------- ------------- ------------- -------------
   Net interest income           10,866,937    10,430,240    10,506,410     9,957,657     9,859,926
   Provision
      for losses on loans            74,621        50,000         8,824        50,058        23,746
                               ------------- ------------- ------------- ------------- -------------
   Net interest income
      after provision
      for losses on loans        10,792,316    10,380,240    10,497,586     9,907,599     9,836,180
   Other income                     757,682       644,164       640,928       630,064       606,722
   Other expenses                 4,746,908     4,228,452     5,930,049     4,146,191     4,259,836
                               ------------- ------------- ------------- ------------- -------------
   Income before income taxes     6,803,090     6,795,952     5,208,465     6,391,472     6,183,066
   Income tax expense             2,596,395     2,593,760     1,996,007     2,492,042     2,424,950
                               ------------- ------------- ------------- ------------- -------------
   Net income                  $  4,206,695  $  4,202,192  $  3,212,458   $ 3,899,430   $ 3,758,116
                               ============= ============= ============= ============= =============
   Net income per common share        $1.25         $1.22         $0.91         $1.10         $1.06
                               ============= ============= ============= ============= =============
   Dividends per common share         $0.45         $0.41         $0.37        $0.31         $0.27
                               ============= ============= ============= ============= =============
Other Data:
   Average yield on all interest-
      earning assets                   7.75%         7.76%         7.85%        7.68%        7.26%
   Average cost of all interest-
      bearing liabilities              4.79          4.80          4.79         4.65         4.01
                               -------------  ------------ ------------- ------------- -------------
   Interest rate spread                2.96%         2.96%         3.06%        3.03%        3.25%
                               =============  ============ ============= ============= =============

   Number of full service
      banking offices                   7             7             6            6            6
   Return on assets (net income
      divided by average total
      assets)                          1.40          1.47          1.15         1.43         1.45
   Return on equity (net income 
      divided by average total
      equity)                          9.31          9.69          7.50         9.66        10.06
   Dividend payout ratio (dividends
      per common share divided by
      net income per common share)    36.00         33.61         40.66        41.82        25.79
   Equity to assets ratio (average
      total equity divided by average
      total assets)                   15.08         15.22         15.37        14.84        14.43


</TABLE>

<PAGE>

                         Peoples Bancorp and Subsidiary
                           Consolidated Balance Sheet


                                                           September 30  
                                                       1998             1997
                                                  --------------  --------------

Assets
   Cash and due from banks                         $  3,567,625    $  2,993,154
   Interest-bearing deposits                                  -       7,738,990
                                                  --------------  --------------
         Total cash and cash equivalents              3,567,625      10,732,144
   Interest-bearing time deposits                       718,000         976,000
   Investment securities
     Available for sale                              21,877,758      28,467,800
     Held to maturity                                 5,068,275       9,256,678
                                                  --------------  --------------
          Total investment securities                26,946,033      37,724,478
   Loans                                            267,605,591     236,142,236
   Less:  Allowance for loan losses                     947,008         886,567
                                                  --------------  --------------
         Net loans                                  266,658,583     235,255,669
   Premises and equipment                             2,396,878       1,712,774
   Federal Home Loan Bank of Indianapolis stock,
         at cost                                      2,217,700       2,062,200
   Other assets                                       2,431,962       2,138,330
                                                  --------------  --------------

         Total assets                              $304,936,781    $290,601,595
                                                  ==============  ==============

Liabilities
   Bank overdraft                                  $  1,171,306    $          -
   NOW and savings deposits                          75,428,503      70,539,511
   Certificates of deposit                          173,116,777     171,250,628
   Short-term borrowings                              4,202,653       3,162,400
   Long-term debt                                     5,000,000               -
   Advances by borrowers for taxes and insurance            998           1,591
   Other liabilities                                  1,345,917       1,349,295
                                                  --------------  --------------
         Total liabilities                          260,266,154     246,303,425
                                                  --------------  --------------
Commitments and Contingencies

Stockholders' Equity
   Preferred stock, $1 par value
     Authorized and unissued-5,000,000 shares
   Common stock, $1 par value
     Authorized-7,000,000 shares
     Issued and outstanding-3,280,684 and 
     3,391,986 shares                                 3,280,684       3,391,986
   Additional paid-in capital                         3,020,798       5,263,589
   Retained earnings-substantially restricted        38,272,422      35,573,293
   Net unrealized gain on securities available
     for sale                                            96,723          69,302
                                                  --------------  --------------
         Total stockholders' equity                  44,670,627      44,298,170
                                                  --------------  --------------
         Total liabilities and stockholders'
           equity                                  $304,936,781    $290,601,595
                                                  ==============  ==============


See notes to consolidated financial statements.
<PAGE>

                                              Peoples Bancorp and Subsidiary
                                             Consolidated Statement of Income


                                                 Year Ended September 30  
                                            1998         1997           1996
                                       ------------- ------------- -------------

Interest Income
 Loans                                  $20,271,263   $18,758,262   $18,645,609
 Investment securities                    1,793,778     2,052,480     2,068,753
 Other interest and dividend income         889,161     1,087,057     1,021,638
                                       ------------- ------------- -------------
                                         22,954,202    21,897,799    21,736,000
                                       ------------- ------------- -------------
Interest Expense
 Deposits
   NOW and savings deposits               2,124,060     1,948,834     1,845,731
   Certificates of deposit                9,669,669     9,401,639     9,340,756
 Short-term borrowings                      198,113       117,086        43,103
 Long-term debt                              95,423            -              -
                                       ------------- ------------- -------------
                                         12,087,265    11,467,559    11,229,590
                                       ------------- ------------- -------------
Net Interest Income                      10,866,937    10,430,240    10,506,410
 Provision for loan losses                   74,621        50,000         8,824
                                       ------------- ------------- -------------
Net Interest Income After Provision for
 Loan Losses                             10,792,316    10,380,240    10,497,586
                                       ------------- ------------- -------------
Other Income
 Fiduciary activities                        98,246        54,689        63,089
 Fees and service charges                   455,089       448,124       445,691
 Other income                               204,347       141,351       132,148
                                       ------------- ------------- -------------
       Total other income                   757,682       644,164       640,928
                                       ------------- ------------- -------------
Other Expenses
 Salaries and employee benefits           2,508,878     2,238,731     2,253,254
 Net occupancy expenses                     319,856       294,372       255,784
 Equipment expenses                         377,522       229,011       155,863
 Data processing expense                    403,291       284,328       303,577
 Deposit insurance expense                  150,359       215,984     2,032,186
 Other expenses                             987,002       966,026       929,385
                                       ------------- ------------- -------------
       Total other expenses               4,746,908     4,228,452     5,930,049
                                       ------------- ------------- -------------
Income Before Income Tax                  6,803,090     6,795,952     5,208,465
 Income tax expense                       2,596,395     2,593,760     1,996,007
                                       ------------- ------------- -------------
Net Income                              $ 4,206,695   $ 4,202,192   $ 3,212,458
                                       ============= ============= =============

Basic Earnings per Share                      $1.25         $1.22          $.91

Diluted Earnings per Share                     1.25          1.22           .91



See notes to consolidated financial statements.
<PAGE>

<TABLE>
                                               Peoples Bancorp and Subsidiary
                                  Consolidated Statement of Changes in Stockholders' Equity


                                                                       Net Unrealized
                               Common Stock      Additional             Gain (Loss)   Total
                            --------------------                       on Securities
                              Number              Paid-in     Retained   Available  Stockholders'
                            of Shares   Amount    Capital     Earnings   for Sale     Equity
                            --------- ---------- ---------- ----------- ----------- ------------
<S>                         <C>       <C>        <C>        <C>         <C>         <C>                
Balances October 1, 1995    2,362,898 $2,362,898 $8,423,385 $30,865,260 $(27,517)   $41,624,026
 Exercise of stock options      3,400      3,400     13,600           -        -        17,000
 Repurchase of stock          (40,804)   (40,804)  (746,696)          -        -       (787,500)
 Net income for 1996                -          -          -   3,212,458        -      3,212,458
 Net change in unrealized
  loss on securities
  available for sale,               -          -          -           -  (74,353)       (74,353)
 Cash dividends 
  ($0.37 per share)                 -          -          -  (1,314,866)       -     (1,314,866)
                            --------- ---------- ---------- ----------- ----------- ------------
Balances September 30, 1996 2,325,494  2,325,494  7,690,289  32,762,852 (101,870)    42,676,765
 Repurchase of stock          (64,170)   (64,170)(1,296,038)          -        -     (1,360,208)
 Net income for 1997                -          -          -   4,202,192        -      4,202,192
 Stock split                1,130,662  1,130,662 (1,130,662)          -        -             --
 Net change in unrealized
   gain (loss) on securities
   available for sale               -          -          -           -  171,172        171,172
 Cash dividends
   ($0.41 per share)                -          -          -  (1,391,751)       -     (1,391,751)
                            --------- ---------- ---------- ----------- ----------- ------------
Balances September 30, 1997 3,391,986  3,391,986  5,263,589  35,573,293   69,302     44,298,170
 Repurchase of stock         (111,302)  (111,302)(2,242,791)          -        -     (2,354,093)
 Net income for 1998                -          -          -   4,206,695        -      4,206,695
 Net change in unrealized
  gain on securities
  available for sale                -          -          -           -   27,421         27,421
 Cash dividends
  ($0.45 per share)                 -          -          -  (1,507,566)       -     (1,507,566)
                            --------- ---------- ---------- ----------- ----------- ------------
Balances September 30, 1998 3,280,684 $3,280,684 $3,020,798 $38,272,422 $ 96,723    $44,670,627
                            ========= ========== ========== =========== =========== ============

</TABLE>

See notes to consolidated financial statements.
<PAGE>
<TABLE>

                                              Peoples Bancorp and Subsidiary
                                           Consolidated Statement of Cash Flows

                                                            Year Ended September 30  
                                                      1998         1997          1996
                                                   ------------ ------------ -------------
<S>                                                 <C>         <C>           <C>    
Operating Activities
 Net income                                         $4,206,695  $ 4,202,192   $ 3,212,458
 Adjustments to reconcile net income to
   net cash provided by operating
   activities
   Provision for loan losses                            74,621       50,000         8,824
   Depreciation and amortization                       381,035      255,095       204,083
   Investment securities accretion, net                (40,769)     (36,876)      (23,481)
   Amortization of deferred loan fees                 (379,997)    (271,410)     (368,361)
   Gain on sale of investment securities               (73,541)           -             -
   Change in
     Deferred income tax                              (138,060)     617,401      (385,000)
     Interest receivable                                44,804      116,711      (170,033)
     Interest payable                                   32,522      (26,034)       (4,603)
   Other adjustments                                    81,608   (1,435,368)    1,412,211
                                                   ------------ ------------ -------------
       Net cash provided by operating activities     4,188,918    3,471,711     3,886,098
                                                   ------------ ------------ -------------
Investing Activities
 Net change in interest-bearing deposits               258,000     (976,000)      390,256
 Purchases of securities available for sale         (3,625,859) (14,636,858)  (22,544,576)
 Purchases of securities held to maturity                    -     (320,000)            -
 Proceeds from maturities and paydowns of
   securities held to maturity                       4,203,955    5,342,664    14,688,070
 Proceeds from maturities and paydowns of
    securities available for sale                   10,597,951   14,929,330     7,620,000
 Proceeds from sale of security available for sale   2,661,344            -             -
 Net change in mutual funds                         (2,896,947)  (2,563,954)            -
 Net change in loans                               (31,212,564) (12,205,762)   (4,098,609)
 Purchases of premises and equipment                (1,079,132)    (492,605)      (65,338)
 Proceeds from sale of equipment                        13,993            -             -
 Proceeds from sales of real estate owned              115,026      277,254        42,499
 Purchases of Federal Home Loan Bank of
    Indianapolis stock                                (155,500)     (57,800)      (63,300)
 Other investing activities                           (337,500)    (225,000)            -
                                                   ------------ ------------ -------------
 Net cash used by investing activities             (21,457,233) (10,928,731)   (4,030,998)
                                                   ------------ ------------ -------------
Financing Activities
 Net change in
   NOW and savings deposits                          4,885,569    2,192,329    (2,943,040)
   Certificates of deposit                           1,837,050    4,542,405     5,279,885
   Short-term borrowings                             1,040,253    3,162,400    (1,000,000)
 Net change in advances by borrowers for
    taxes and insurance                                   (593)      (1,859)      (76,603)
 Net change in bank overdraft                        1,171,306            -             -
 Proceeds from Federal Home Loan Bank advances       5,000,000            -             -
 Cash dividends                                     (1,475,696)  (1,377,648)   (1,274,539)
 Exercise of stock options                                   -            -        17,000
 Repurchase of common stock                         (2,354,093)  (1,360,208)     (787,500)
                                                   ------------ ------------ -------------
 Net cash provided (used) by financing activities   10,103,796    7,157,419      (784,797)
                                                   ------------ ------------ -------------
Net Change in Cash and Cash Equivalents             (7,164,519)    (299,601)     (929,697)
Cash and Cash Equivalents, Beginning of Year        10,732,144   11,031,745    11,961,442
                                                   ------------ ------------ -------------
Cash and Cash Equivalents, End of Year              $3,567,625  $10,732,144   $11,031,745
                                                   ============ ============ =============

Additional Cash Flows and Supplementary Information:
   Interest paid                                   $12,054,743  $11,493,593   $11,231,922
   Income tax paid                                   2,612,502    1,511,993     2,315,550


</TABLE>

See notes to consolidated financial statements.

<PAGE>
                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 1 -  Nature of Operations and Summary of Significant Accounting Policies

The accounting and reporting policies of Peoples Bancorp ("Company"), its wholly
owned  subsidiary,  Peoples Federal Savings Bank of DeKalb County ("Bank"),  and
the Bank's wholly owned subsidiary,  Peoples Financial Services,  Inc. ("Peoples
Financial")  conform to generally accepted  accounting  principles and reporting
practices followed by the thrift industry.  The more significant of the policies
are described below.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

The  Company  is a  thrift  holding  company  whose  principal  activity  is the
ownership and  management of the Bank.  The Bank operates under a federal thrift
charter and provides  full banking  services,  including  trust  services.  As a
federally  chartered thrift, the Bank is subject to the regulation of the Office
of Thrift Supervision ("OTS")and the Federal Deposit Insurance Corporation.

The Bank  generates  mortgage and  consumer  loans and  receives  deposits  from
customers located primarily in DeKalb County,  Indiana and surrounding counties.
The Bank's loans are generally secured by specific items of collateral including
real property and consumer assets.

Consolidation-The  consolidated financial statements include the accounts of the
Company,  the Bank and  Peoples  Financial  after  elimination  of all  material
intercompany transactions.

Investment  Securities-Debt  securities  are classified as held to maturity when
the  Company  has the  positive  intent and  ability to hold the  securities  to
maturity.  Securities  held to maturity  are  carried at  amortized  cost.  Debt
securities not classified as held to maturity and marketable  equity  securities
are classified as available for sale.  Securities available for sale are carried
at fair value with unrealized gains and losses reported separately,  net of tax,
in stockholders' equity. The Company holds no securities for trading.

Amortization  of premiums and  accretion  of discounts  are recorded as interest
income from  securities.  Realized gains and losses are recorded as net security
gains  (losses).  Gains and losses on sales of securities  are determined on the
specific-identification method.

Loans are  carried  at the  principal  amount  outstanding.  Interest  income is
accrued on the principal  balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's  opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued,  all
unpaid  accrued  interest is reversed when  considered  uncollectible.  Interest
income is subsequently recognized only to the extent cash payments are received.
Certain  loan fees and  direct  costs are being  deferred  and  amortized  as an
adjustment of yield on the loans.
<PAGE>
                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Allowance for loan and real estate losses are maintained to absorb loan and real
estate losses based on management's continuing review and evaluation of the loan
and real  estate  portfolios  and its  judgment  as to the  impact  of  economic
conditions  on  the   portfolios.   The   evaluation   by  management   includes
consideration  of  past  loss  experience,  changes  in the  composition  of the
portfolios, the current condition and amount of loans and foreclosed real estate
outstanding,  and the probability of collecting all amounts due.  Impaired loans
are  measured by the present  value of expected  future cash flows,  or the fair
value of the collateral of the loan, if collateral dependent.

The  determination  of the  adequacy  of the  allowance  for loan losses and the
valuation of real estate is based on estimates that are particularly susceptible
to  significant  changes in the  economic  environment  and  market  conditions.
Management believes that, as of September 30, 1998 the allowance for loan losses
and carrying  value of foreclosed  real estate are adequate based on information
currently  available.  A worsening or  protracted  economic  decline in the area
within which the Bank  operates  would  increase the  likelihood  of  additional
losses due to credit and market risks and could  create the need for  additional
loss reserves.

Premises  and  equipment  are carried at cost net of  accumulated  depreciation.
Depreciation  is computed  using  accelerated  and  straight-line  methods based
principally on the estimated useful lives of the assets. Maintenance and repairs
are expensed as incurred while major additions and improvements are capitalized.
Gains and losses on dispositions are included in current operations.

Federal Home Loan Bank stock is a required  investment for institutions that are
members of the Federal Home Loan Bank system.  The  required  investment  in the
common stock is based on a predetermined formula.

Foreclosed  real  estate  is  carried  at the lower of cost or fair  value  less
estimated selling costs.  When foreclosed real estate is acquired,  any required
adjustment is charged to the allowance for loan losses. All subsequent  activity
is included in current operations.

Pension  plan costs are based on actuarial  computations  and charged to current
operations.  The funding policy is to pay at least the minimum amounts  required
by ERISA.

Stock  options  are granted for a fixed  number of shares to  employees  with an
exercise price equal to or greater than the fair value of the shares at the date
of grant. The Company accounts for and will continue to account for stock option
grants in  accordance  with APB Opinion No. 25,  Accounting  for Stock Issued to
Employees,  and,  accordingly,  recognizes no compensation expense for the stock
option grants.

Income tax in the consolidated  statement of income includes deferred income tax
provisions or benefits for all significant  temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiaries.

Earnings per share have been computed based upon the weighted average common and
common equivalent shares outstanding during each year.
<PAGE>

                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 2 -  Restriction On Cash

The Bank is required to maintain  reserve  funds in cash and/or on deposit  with
the Federal  Reserve  Bank.  The reserve  required at September  30,  1998,  was
$858,000.

Note 3 - Investment Securities
                                                September 30, 1998
                                  ----------------------------------------------
                                                 Gross     Gross 
                                   Amortized   Unrealized Unrealized   Fair
                                     Cost        Gains     Losses      Value
                                  ------------- ---------- -------- ------------
Available for sale
 Federal agencies                  $11,202,286   $ 84,130   $  -    $11,286,416
 State and municipal obligations     5,046,357     84,753    669      5,130,441
 Marketable equity securities        5,460,901          -      -      5,460,901
                                  ------------- ---------- -------- ------------
    Total available for sale        21,709,544    168,883    669     21,877,758
                                  ------------- ---------- -------- ------------
Held to maturity
 Federal agencies                    4,000,000      4,374    313      4,004,061
 State and municipal obligations       695,993     16,723      -        712,716
 Mortgage-backed securities            372,282     14,511      -        386,793
                                  ------------- ---------- -------- ------------
    Total held to maturity           5,068,275     35,608    313      5,103,570
                                  ------------- ---------- -------- ------------
    Total investment securities    $26,777,819   $204,491   $982    $26,981,328
                                  ============= ========== ======== ============

                                         September 30, 1997
                                  ----------------------------------------------
                                                 Gross      Gross 
                                   Amortized   Unrealized Unrealized    Fair
                                     Cost         Gains     Losses     Value
                                  ------------- ---------- -------- ------------
Available for sale
 Federal agencies                  $19,699,605   $164,200  $ 41,395 $19,822,410
 State and municipal obligations     6,083,716     28,999    31,279   6,081,436
 Marketable equity securities        2,563,954          -         -   2,563,954
                                  ------------- ---------- -------- ------------
    Total available for sale        28,347,275    193,199    72,674  28,467,800
                                  ------------- ---------- -------- ------------
Held to maturity
 Federal agencies                    8,000,000        312    32,814   7,967,498
 State and municipal obligations       757,855     14,699         -     772,554
 Mortgage-backed securities            498,823     24,212         -     523,035
                                  ------------- ---------- -------- ------------
    Total held to maturity           9,256,678     39,223    32,814   9,263,087
                                  ------------- ---------- -------- ------------
    Total investment securities    $37,603,953   $232,422  $105,488 $37,730,887
                                  ============= ========== ======== ============
<PAGE>

                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


The amortized  cost and fair value of securities  held to maturity and available
for sale at  September 30,  1998,  by  contractual  maturity,  are shown  below.
Expected maturities will differ from contractual  maturities because issuers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.
                                                 1998
                           -----------------------------------------------------
                               Held to Maturity        Available for Sale
                           -----------------------------------------------------
                          
Maturity Distributions       Amortized      Fair       Amortized     Fair
 at September 30               Cost         Value        Cost        Value
                           ------------ ------------ ------------- -------------
Within one year             $4,100,000   $4,105,168  $  3,452,896  $  3,463,476
One to five years              485,993      501,609    11,392,063    11,508,461
Five to ten years              110,000      110,000     1,253,111     1,282,884
 After ten years                     -            -       150,573       162,036
                           ------------ ------------ ------------- -------------
                             4,695,993    4,716,777    16,248,643    16,416,857
Mortgage-backed securities     372,282      386,793             -             -
Marketable equity securities         -            -     5,460,901     5,460,901
                           ------------ ------------ ------------- -------------
                            $5,068,275   $5,103,570   $21,709,544   $21,877,758
                           ============ ============ ============= =============

Securities  with a carrying value of $7,545,000  and $4,037,500  were pledged at
September  30,  1998 and 1997 to secure  Federal  Home Loan  Bank  advances  and
repurchase agreements.

Proceeds  from  sales  of  securities   available  for  sale  during  1998  were
$2,661,344.  Gross gains of $74,900 and gross losses of $1,359 were  realized on
those  sales.  There  were  no  sales  of  securities  during  the  years  ended
September 30, 1997 or 1996. The income tax expense on the security gains for the
year ended September 30, 1998 was $29,130.

There were no sales of securities held to maturity.


Note 4 -  Loans and Allowance

                                                        September 30
                                                 1998            1997
                                            --------------   --------------

Real estate loans                            $247,758,749     $221,723,573
Construction loans                              8,120,336        5,196,837
Individuals' loans for
 household and other personal expenditures     16,130,224       12,735,795
                                            --------------   --------------
                                              272,009,309      239,656,205
                                            --------------   --------------
Less:
   Undisbursed portion of loans                 3,080,628        2,443,791
   Deferred loan fees and discounts             1,323,090        1,070,178
                                            --------------   --------------
                                                4,403,718        3,513,969
                                            --------------   --------------
       Total loans                           $267,605,591     $236,142,236
                                            ==============   ==============


Year Ended September 30             1998             1997           1996
                               -----------      ----------       ----------
Allowance for loan losses
   Balances, October 1           $886,567        $887,478         $912,268
   Provision for losses            74,621          50,000            8,824
   Recoveries on loans             32,769          33,188           21,715
   Loans charged off              (46,949)        (84,099)         (55,329)
                               -----------      ----------       ----------
   Balances, September 30        $947,008        $886,567         $887,478
                               ===========      ==========       ==========
<PAGE>
                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements



Note 5 - Premises and Equipment
                                                        September 30
                                                  1998                  1997
                                               ------------         ------------
Land                                            $  356,238           $  356,238
Buildings                                        3,135,359            2,565,259
Equipment                                        2,104,172            1,620,626
                                               ------------         ------------
         Total cost                              5,595,769            4,542,123
Accumulated depreciation                        (3,198,891)          (2,829,349)
                                               ------------         ------------
         Net                                    $2,396,878           $1,712,774
                                               ============         ============

Note 6 - Other Assets and Other Liabilities

                                                         September 30  
                                                   1998                1997
                                               ------------         ------------
Other assets
   Interest receivable
      Loans                                     $1,355,042           $1,226,393
      Investment  securities                       393,269              566,722
   Prepaid expenses and other                      683,651              345,215
                                               ------------         ------------
         Total other assets                     $2,431,962           $2,138,330
                                               ============         ============
Other liabilities
   Dividends payable on common stock            $  393,682           $  361,812
   Deferred income tax liability                   519,626              639,357
   Accrued expenses and other                      432,609              348,126
                                               ------------         ------------
         Total other liabilities                $1,345,917           $1,349,295
                                               ============         ============

Note 7 - Deposits

                                                          September 30  
                                                   1998                  1997
                                             --------------      ---------------
Demand deposits                               $ 40,440,817        $  35,940,976
Savings deposits                                34,949,413           34,563,685
Certificates and other time deposits
   of $100,000 or more                          20,124,050           17,366,591
Other certificates and time deposits           152,748,299          153,668,708
Interest payable                                   282,701              250,179
                                             --------------      ---------------
                                              $248,545,280         $241,790,139
                                             ==============      ===============

Certificates and other time deposits maturing in years ending September 30:

   1999                                       $108,059,189
   2000                                         50,337,906
   2001                                          6,767,822
   2002                                          4,005,284
   2003                                          3,702,148
                                             --------------
                                              $172,872,349
                                             ==============

<PAGE>

                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 8 - Short-term Borrowings

                                                            September 30  
                                                       1998              1997
                                                   ------------     -----------
                                                   ============     ===========

Securities sold under agreement to repurchase totaling $4,202,653 and $3,162,400
at September 30,  1998 and 1997,  consist of obligations of the Company to other
parties.  The  obligations  are  secured  by  investment   securities  and  such
collateral is held by a safekeeping  agent.  The maximum  amount of  outstanding
agreements at any month-end  during 1998 totaled  $5,087,941  and the average of
such agreements totaled $4,165,800. The agreements at September 30, 1998 matured
on October 1, 1998.

Note 9 - Long-Term Debt

Long-term debt at September 30,  1998 totaling  $5,000,000  consisted of Federal
Home Loan Bank  advances at variable  rates  maturing at various  dates  through
May 5,  2008.  The Federal  Home Loan Bank  advances  are secured by  investment
securities  totaling  $5,500,000.   Advances  are  subject  to  restrictions  or
penalties in the event of repayment.

 Maturities in years ending September 30:
   1999                                             $2,000,000
   2000                                                      -
   2001                                                      -
   2002                                                      -
   2003                                              1,000,000
   Thereafter                                        2,000,000
                                                   ------------
                                                    $5,000,000
                                                   ============

Note 10 - Income Tax
                                             Year Ended September 30  
                                   1998                1997              1996
                                  ------------     ------------     ------------
Income tax expense
   Currently payable
     Federal                       $2,054,730       $1,518,553       $1,809,917
     State                            679,725          457,806          571,090
   Deferred
     Federal                         (110,448)         489,827         (270,000)
     State                            (27,612)         127,574         (115,000)
                                  ------------     ------------     ------------
  Total income tax expense         $2,596,395       $2,593,760       $1,996,007
                                  ============     ============     ============

Reconciliation of federal statutory to actual tax expense
 Federal statutory income
    tax at 34%                     $2,313,044       $2,310,624       $1,770,878
 Tax exempt interest                 (104,677)         (94,100)         (73,214)
 Nondeductible expenses                 4,600            3,931            1,988
 Effect of state income taxes         430,395          386,351          301,019
 Effective of low income
    housing credits                   (15,482)               -                -
 Other                                (31,485)         (13,046)          (4,664)
                                  ------------     ------------     ------------
       Actual tax expense          $2,596,395       $2,593,760       $1,996,007
                                  ============     ============     ============
<PAGE>

                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


A cumulative  net deferred tax liability is included in other  liabilities.  The
components of the liability are as follows:

                                                                 September 30 
                                                      1998              1997
                                                   ------------     ------------
Assets
   Allowance for loan losses                          $375,015         $351,081
   Loan fees                                           444,889          300,842
                                                   ------------     ------------
         Total assets                                  819,904          651,923
                                                   ------------     ------------
Liabilities
   Depreciation                                         68,493           44,639
   State income tax                                     47,773
   Other                                               109,170          150,876
   Tax bad debt reserves in excess of base year        964,077          964,077
   FHLB of Indianapolis stock dividend                  78,527           78,527
   Net unrealized gains on securities
     available for sale                                 71,490           53,161
                                                   ------------     ------------
         Total liabilities                           1,339,530        1,291,280
                                                   ------------     ------------
                                                     $(519,626)       $(639,357)
                                                   ============     ============

Retained earnings at September 30, 1998,  include  approximately  $6,778,000 for
which no  deferred  income  tax  liability  has  been  recognized.  This  amount
represents an allocation  of income to bad debt  deductions as of June 30,  1988
for tax purposes only. Reduction of amounts so allocated for purposes other than
tax bad debt losses or  adjustments  arising  from  carryback  of net  operating
losses would create income for tax purposes only,  which income would be subject
to the then current  corporate  income tax rate. The unrecorded  deferred income
tax liability on the above amount was approximately  $2,300,000 at September 30,
1998.

Note 11 - Commitments and Contingent Liabilities

In  the  normal  course  of  business  there  are  outstanding  commitments  and
contingent  liabilities,  such as commitments  to extend  credit,  which are not
included  in the  accompanying  consolidated  financial  statements.  The Banks'
exposure to credit loss in the event of nonperformance by the other party to the
financial  instruments  for  commitments  to extend credit is represented by the
contractual  or  notional  amount of those  instruments.  The Bank uses the same
credit policies in making such  commitments as it does for instruments  that are
included in the consolidated balance sheet.

Financial   instruments   whose  contract  amount   represents  credit  risk  at
September 30,  1998 and 1997 consisted of commitments to extend credit  totaling
$20,359,000 and $16,331,400, respectively.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent future cash  requirements.  The Bank evaluates each customer's  credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's  credit
evaluation.  Collateral held varies,  but may include  residential  real estate,
income-producing commercial properties, or other assets of the borrower.

The Bank has employment  agreements  with two officers which include  provisions
for payment to them of three years' salary in the event of their  termination in
connection with any change in ownership or control of the Company, other than by
agreement.  The  agreements  have  terms of three  years  which may be  extended
annually for successive periods of one year.

The Company and  subsidiary  are also  subject to possible  claims and  lawsuits
which arise primarily in the ordinary  course of business.  It is the opinion of
management  that the  disposition  or ultimate  determination  of such  possible
claims or lawsuits will not have a material  adverse effect on the  consolidated
financial position of the Company.

Note 12 - Dividends and Capital Restrictions

The  Company is not  subject to any  regulatory  restrictions  on the payment of
dividends  to its  stockholders.  The OTS  regulations  provide  that a  savings
association which meets fully phased-in capital requirements and is subject only
to "normal supervision" may pay out, as a dividend, 100 percent of net income to
date over the calendar  year and 50 percent of surplus  capital  existing at the
beginning of the calendar  year  without  supervisory  approval but with 30 days
prior notice to the OTS. Any additional  amount of capital  distributions  would
require prior regulatory  approval.  At September 30, 1998, total  stockholder's
equity  of the  Bank was  $35,077,292  of which  approximately  $14,898,000  was
available for the payment of dividends to the Company.

In 1997,  the  Company's  board of directors  approved the  repurchase  of up to
240,000 of the Company's  outstanding shares of common stock ("1997 Plan"). Such
purchases will be made subject to market  conditions in the open market or block
transactions.  At September 30, 1998, the Company has repurchased 136,958 shares
of its outstanding stock under the 1997 Plan.

On October 4, 1997, the Company  authorized a  three-for-two  stock split in the
form of a stock  dividend to  stockholders  of record on  November 7,  1997, and
issued  an  additional  1,130,662  shares of the  Company's  common  stock.  All
references in the accompanying  consolidated  financial  statements to per share
amounts have been restated to reflect the stock split.

<PAGE>
                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 13 - Regulatory Capital

The Bank is subject to various regulatory capital  requirements  administered by
the  federal  banking  agencies  and are  assigned  to a capital  category.  The
assigned  capital  category  is  largely  determined  by three  ratios  that are
calculated  according to the regulations:  total risk adjusted  capital,  Tier 1
capital,  and Tier 1 leverage ratios. The ratios are intended to measure capital
relative to assets and credit risk  associated with those assets and off-balance
sheet exposures of the entity.  The capital  category  assigned to an entity can
also be affected by qualitative  judgments made by regulatory agencies about the
risk  inherent in the entity's  activities  that are not part of the  calculated
ratios.

There are five capital categories defined in the regulations,  ranging from well
capitalized to critically  undercapitalized.  Classification of a bank in any of
the  undercapitalized  categories can result in actions by regulators that could
have a material effect on a bank's operations.  At September 30,  1998, the Bank
is  categorized  as  well  capitalized  and  met all  subject  capital  adequacy
requirements.  There are not conditions or events since September 30,  1998 that
management believes have changed the Bank's classification.

The Bank's actual and required capital amounts and ratios are as follows:
                                                                                
                                            September 30, 1998
                            ---------------------------------------------------
                                           Required for Adequate   To Be Well
                                  Actual        Capital(1)       Capitalized(1)
                            ----------------- -------------    ----------------
                              Amount   Ratio   Amount Ratio    Amount   Ratio
                            --------- ------- ------- -----    ------- --------
Total risk-based capital(1)
(to risk-weighted assets)     $35,951  22.48% $12,793  8.0%    $15,992  10.0%
Tier 1 capital(1)
(to adjusted tangible assets)  35,029  11.76%   8,938  3.0%     17,875   6.0%
Tier 1 capital(1)
(to adjusted total assets)     35,029  11.76%   8,938  3.0%     14,896   5.0%


                                             September 30, 1997
                              -------------------------------------------------
                                           Required for Adequate  To Be Well
                                  Actual        Capital (1)     Capitalized (1)
                              --------------- ---------------- ----------------
                              Amount   Ratio   Amount   Ratio  Amount   Ratio
------------------------------------- ------- -------- ------- -------- -------

Total risk-based capital(1)
(to risk-weighted             $34,955  24.67% $11,334    8.0%  $14,167  10.0%
   assets)
Tier 1 capital(1)
(to adjusted tangible assets)  34,080  12.00%   8,523    3.0%   17,046   6.0%
Tier 1 capital(1)
(to adjusted total assets)     34,080  12.00%   8,523    3.0%   14,205   5.0%

(1) As defined by regulatory agencies

The Bank's tangible capital at September 30, 1998 was $35,029,000,  which amount
was 11.76  percent of tangible  assets and exceeded  the  required  ratio of 1.5
percent.


Note 14 - Employee Benefit Plans

The Bank is a participant in a pension fund known as the Financial  Institutions
Retirement Fund ("FIRF"). This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating  employer.  According
to FIRF administrators, the market value of the fund's assets exceeded the value
of vested  benefits in the aggregate as of June 30, 1997, the date of the latest
actuarial valuation.  Pension expense was $3,884, $10,698 and $153,848 for 1998,
1997 and 1996. This plan provides pension benefits for  substantially all of the
Bank's employees.

The Company has established an employee stock  ownership plan ("ESOP")  covering
substantially  all  employees  of the  Company.  The ESOP is  designed to enable
eligible  employees to acquire  Company  common  stock.  The cost of the ESOP is
borne by the Company through annual contributions to an employee stock ownership
trust ("Trust") in amounts determined annually by the Board of Directors. Shares
of common stock  acquired by the ESOP are to be allocated to each  participating
employee and held until the  employee's  termination,  retirement  or death.  At
September  30, 1998 and 1997,  the Trust owned  51,623 and 50,703  shares of the
Company's  common  stock,  of which  50,823 and 50,703  have been  allocated  to
employee  accounts.  Employees may vote allocated  shares,  and the trustees may
vote unallocated shares. Plan contributions  charged to expense totaled $86,233,
$77,932 and $73,940 for 1998, 1997 and 1996, respectively.

<PAGE>

                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 15 - Stock Option Plan

The Company had a stock option plan, which expired in January 1998. The exercise
price of each option  could not be less than the fair market value of the common
stock on the date of the grant of the option. The date on which the options were
first exercisable was determined by the Board of Directors, and the terms of the
stock options will not exceed ten years from the date of grant.

The following is a summary of the status of the Company's  stock option plan and
changes in that plan as of and for the year ended  September 30,  1998, 1997 and
1996.

                                             September 30  
                                1998              1997            1996
                              Weighted-         Weighted-       Weighted-
                               Average          Average         Average
                              Exercise          Exercise        Exercise 
                      Shares   Price    Shares   Price  Shares   Price
                      ------ ---------  ------ -------- ------ ----------
Options Outstanding,
  beginning of year      -                 -             5,100   $3.33
  Exercised              -                 -             5,100
                      ------             ------         ------ 
Outstanding,
  end of year            -                 -                 -
                      ======             ======         ======

Options exercisable
   at year end           -                 -                 -
Weighted-average fair value of options
   granted during the year       $-                $-              $-



Note 16 - Earnings Per Share

Earnings per share (EPS) were computed as follows:

                                                 Year Ended September 30, 1998
                                               --------------------------------
                                                      Weighted Average Per-Share
                                                 Income    Shares       Amount
                                               ---------- ----------- --------- 
Basic Earnings Per Share
   Net income available to common stockholders $4,206,695  3,370,468    $1.25
Effect of Dilutive Securities
   Stock options                                        -          -        -
                                               ---------- ----------- --------
Diluted Earnings Per Share
   Income available to common stockholders
   and assumed conversions                     $4,206,695  3,370,468    $1.25
                                               ========== =========== =========

                                                 Year Ended September 30, 1997
                                               --------------------------------
                                                      Weighted Average Per-Share
                                                 Income    Shares       Amount
                                               ---------- ----------- ---------

Basic and Diluted Earnings Per Share
   Net income available to common stockholders $4,202,192  3,432,177    $1.22
Effect of Dilutive Securities
   Stock options                                        -          -       -
                                               ---------- ----------- ---------
Diluted Earnings Per Share
   Income available to common stockholders
   and assumed conversions                     $4,202,192  3,432,177    $1.22
                                               ========== =========== =========

                                                Year Ended September 30, 1996
                                               --------------------------------
                                                      Weighted Average Per-Share
                                                 Income    Shares       Amount
                                               ---------- ----------- ---------
Basic and Diluted Earnings Per Share
   Net income available to common stockholders $3,212,458  3,528,675    $ 0.91
Effect of Dilutive Securities
   Stock options                                        -      3,080         -
                                               ---------- ----------- ---------
Diluted Earnings Per Share
   Income available to common stockholders
   and assumed conversions                     $3,212,458  3,531,755    $ 0.91
                                               ========== =========== =========

<PAGE>


                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 17 - Fair Values of Financial Instruments

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instrument:

Cash  and  Cash   Equivalents-The  fair  value  of  cash  and  cash  equivalents
approximates carrying value.

Interest-bearing  Deposits-The  fair  value of  interest-bearing  time  deposits
approximates carrying value.

Securities and Mortgage-backed Securities-Fair values are based on quoted market
prices.

Loans-For both short-term loans and variable-rate  loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values.  The fair value for other loans is estimated using  discounted cash flow
analyses  using interest  rates  currently  being offered for loans with similar
terms to borrowers of similar credit quality.

Interest  Receivable/Payable-The  fair  values  of  interest  receivable/payable
approximate carrying values.

FHLB  Stock-Fair  value of FHLB  stock is based on the  price at which it may be
resold to the FHLB.

Deposit-The  fair  values of  noninterest-bearing,  interest-bearing  demand and
savings  accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed-term certificates of deposit
approximate  their  fair  values at the  balance  sheet  date.  Fair  values for
fixed-rate  certificates  of deposit are estimated  using a discounted cash flow
calculation  that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.

Short-term  borrowings-The  fair  value of  short-term  borrowings  approximates
carrying value.

Federal Home Loan Bank  advances-The fair value of these borrowings is estimated
using a discounted  cash flow  calculation,  based on current  rates for similar
advances.

Advances  by  Borrowers  for Taxes and  Insurance-The  fair value of advances by
borrowers for taxes and insurance approximates carrying value.

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
            
                                                               September 30
                                                     1998                     1997
                                           ------------------------- -------------------------
                                             Carrying      Fair        Carrying       Fair
                                              Amount       Value       Amount        Value
                                           ------------ ------------ ------------ ------------ 
<S>                                        <C>          <C>          <C>          <C>  
Assets
 Cash and cash equivalents                 $  3,567,625 $  3,567,625 $ 10,732,144 $ 10,732,144
 Interest-bearing deposits                      718,000      718,000      976,000      976,000
 Investment securities available for sale    21,877,758   21,877,758   28,467,800   28,467,800
 Investment securities held to maturity       5,068,275    5,103,570    9,256,678    9,263,087
 Loans                                      267,605,591  276,023,000  236,142,236  237,213,200
 Interest receivable                          1,748,311    1,748,311    1,793,115    1,793,115
 Stock in FHLB                                2,217,700    2,217,700    2,062,200    2,062,200
 Investment in Limited Partnership              562,500      562,500      225,000      225,000
Liabilities
 Bank overdraft                               1,171,306    1,171,306            -            -
 Deposits                                   248,262,579  249,793,299  241,539,960  241,467,192
 Short-term borrowings                        4,202,653    4,202,653    3,162,400    3,162,400
 Federal Home Loan Bank advances              5,000,000    4,963,000            -            -
 Interest payable                               282,701      282,701      250,179      250,179
 Advances by borrowers for taxes and
   insurance                                        998          998        1,591        1,591

</TABLE>

<PAGE>
                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements


Note 18 - Quarterly Results of Operations (Unaudited)

                                          Provision For        Average Earnings 
Quarter   Interest    Interest  Net Interest  Loan      Net     Shares    Per
Ending     Income     Expense      Income    Losses   Income  Outstanding Share
------- ----------- ----------- ----------- ------- --------- ---------- ------

Dec 97  $ 5,643,863 $ 3,004,754 $ 2,639,109 $ 5,121 $1,025,188 3,391,460  $0.30
Mar 98    5,725,235   2,967,025   2,758,210   2,542  1,120,265 3,382,787   0.33
Jun 98    5,778,664   3,035,049   2,743,615  34,253  1,005,684 3,368,281   0.30
Sep 98    5,806,440   3,080,437   2,726,003  32,705  1,055,558 3,353,829   0.32
        ----------- ----------- ----------- -------- ---------
        $22,954,202 $12,087,265 $10,866,937 $74,621 $4,206,695
        =========== =========== =========== ======= ========== 

Dec 96  $ 5,385,443   2,811,494 $ 2,573,949 $11,315 $  943,729 3,468,419  $0.27
Mar 97    5,329,118   2,803,134   2,525,984    (485) 1,034,761 3,444,413   0.30
Jun 97    5,562,104   2,874,152   2,687,952  22,700  1,093,103 3,414,836   0.32
Sep 97    5,621,134   2,978,779   2,642,355  16,470  1,130,599 3,398,987   0.33
        ----------- ----------- ----------- ------- ---------- 
        $21,897,799 $11,467,559 $10,430,240 $50,000 $4,202,192
        =========== =========== =========== ======= ========== 


Note 19 - Condensed Financial Information (Parent Company Only)

Presented  below is condensed  financial  information as to financial  position,
results of operations and cash flows of the Company.

                             Condensed Balance Sheet

                                                              September 30
                                                           1998          1997
                                                      ------------- ------------
Assets
   Cash                                                $    45,597   $    29,525
   Securities purchased from subsidiary
    under agreement to resell                            4,189,956     4,064,079
   Investment in subsidiary                             35,077,294    34,184,104
   Securities available for sale                         5,535,658     6,081,437
   Securities held to maturity                             185,000       215,000
   Interest receivable                                      74,869        87,261
   Other assets                                                              969
                                                      ------------- ------------
         Total assets                                  $45,108,374   $44,662,375
                                                      ============= ============
Liabilities
   Dividends payable on common stock                   $   393,682  $    361,812
   Other                                                    44,065         2,393
                                                      ------------- ------------
         Total liabilities                                 437,747       364,205
                                                      ------------- ------------
Stockholders' equity
   Common stock                                          3,280,684     3,391,986
   Additional paid-in capital                            3,020,798     5,263,589
   Retained earnings                                    38,272,422    35,573,293
   Net unrealized gain on securities available for sale     96,723        69,302
                                                      ------------- ------------
                                                        44,670,627    44,298,170
                                                      ------------- ------------

         Total liabilities and stockholders' equity    $45,108,374   $44,662,375
                                                      ============= ============

<PAGE>

                         Peoples Bancorp and Subsidiary
                   Notes to Consolidated Financial Statements

                          Condensed Statement of Income

                                                   Year Ended September 30 
                                                    1998              1997
                                                ------------     ------------
Income
   Dividends from subsidiary                     $3,000,000       $3,000,000
   Interest on investments                          412,548          365,654
Expenses                                            (84,142)         (57,937)
                                                ------------     ------------
Income before equity in undistributed income
   of subsidiary and income tax expense           3,328,406        3,307,717
Equity in undistributed income of subsidiary        915,439          927,455
                                                ------------     ------------
Income before income tax                          4,243,845        4,235,172
Income tax expense                                   37,150           32,980
                                                ------------     ------------
Net income                                       $4,206,695       $4,202,192
                                                ============     ============
                                             

                       Condensed Statement of Cash Flows

                                                   Year Ended September 30  
                                                   1998               1997
                                                ------------     ------------
Net cash provided by operating activities        $3,339,173       $3,294,089
                                                ------------     ------------
Cash flows from investing activities
 Purchases of securities available for sale        (628,859)      (1,700,919)
 Proceeds from maturities of securities
    held to maturity                                 30,000           30,000
 Proceeds from maturities and calls of
    securities available for sale                 1,381,016          930,000
 Net change in mutual fund                         (405,217)               -
 Proceeds from sale of securities
   available for sale                              255,625                -
 Net change in securities purchased
    under agreement to resell                      (125,877)         214,211
                                                ------------     ------------
Net cash provided (used) by investing activities    506,688         (526,708)
                                                ------------     ------------
Cash flows from financing activities
 Stock repurchased                               (2,354,093)      (1,360,208)
 Cash dividends                                  (1,475,696)      (1,377,648)
                                                ------------     ------------
       Net cash used by financing activities     (3,829,789)      (2,737,856)
                                                ------------     ------------
Net change in cash                                   16,072           29,525
Cash at beginning of year                            29,525                -
                                                ------------     ------------
Cash at end of year                              $   45,597       $   29,525
                                                ============     ============

<PAGE>


                          Independent Auditor's Report


To the Stockholders and
Board of Directors
Peoples Bancorp
Auburn, Indiana


We have audited the consolidated balance sheet of Peoples Bancorp and subsidiary
as of September 30, 1998 and 1997,  and the related  consolidated  statements of
income,  changes  in  stockholders'  equity and cash flows for each of the three
years in the period  ended  September 30,  1998.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the consolidated  financial  statements described above present
fairly, in all material respects, the consolidated financial position of Peoples
Bancorp and  subsidiary  as of September  30, 1998 and 1997,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  September 30, 1998,  in conformity  with  generally  accepted  accounting
principles.


Olive, LLP

Indianapolis, Indiana
October 19, 1998




                    STATEMENT OF MANAGEMENT'S RESPONSIBILITY


The  management  of  Peoples  Bancorp is  responsible  for the  preparation  and
integrity of the  consolidated  financial  statements and all other  information
presented in this annual report. The consolidated financial statements have been
prepared in accordance with generally accepted accounting  principles applied on
a  consistent  basis and  therefore,  include  estimates  based on  management's
judgment and estimates.

Management  maintains a system of internal  controls to meet its  responsibility
for reliable  financial  information  and the protection of assets.  This system
includes proper segregation of duties, the establishment of appropriate policies
and  procedures,  and careful  selection,  training and supervision of qualified
personnel.  In addition,  both independent auditors and management  periodically
review the system of internal  controls and report  their  findings to the Audit
Committee of the Board of Directors.

The Committee is composed of  non-management  directors  and meets  periodically
with  the  independent  auditors  and  management  to  review  their  respective
activities  and  responsibilities.  Each  has free and  separate  access  to the
Committee to discuss accounting, financial reporting, internal control and audit
matters.

Management  recognized that the cost of a system of internal controls should not
exceed the  benefits  derived  and that  there are  inherent  limitations  to be
considered in the potential  effectiveness  of any system.  However,  management
believes  that the Company's  system of internal  controls  provides  reasonable
assurance  that  financial  information is reliable and that assets and customer
deposits are protected.

Roger J. Wertenberger
Chief Executive Officer

Maurice F. Winkler III
President

Deborah K. Stanger
Chief Financial Officer

                                                       
<PAGE>

                                                     
                                   EXHIBIT 22



                         SUBSIDIARIES OF THE REGISTRANT


Name of Subsidiary                      State of Incorporation  
Peoples Federal Savings
Bank of DeKalb County                  United States of America

and its subsidiary

Peoples Financial Services Inc.                Indiana


<PAGE>

               PEOPLES BANCORP DEFINITIVE PROXY STATEMENT FOR THE
                       1999 ANNUAL MEETING OF STOCKHOLDERS

                                                   
                                 PEOPLES BANCORP
              212 West Seventh Street o Auburn, Indiana 46706-1723
                    Phone: (219)925-2500 o Fax: (219)925-1733



                                                               December 11, 1998


Dear Stockholder,

You are  cordially  invited  to attend the Annual  Meeting  of  Stockholders  of
Peoples Bancorp,  the holding company for Peoples Federal Savings Bank of DeKalb
County (Bank).  The meeting will be held at the Greenhurst Country Club, located
at 1740 North Main Street,  Auburn,  Indiana  46706,  on Wednesday,  January 13,
1999, at 2:00 p.m. local time.

As described in the accompanying materials,  the stockholders are being asked at
the annual  meeting  to elect two  Directors,  approve  the  appointment  of the
Company's  independent  auditors,  and approve the Bank's Stock Option and Grant
Plan. During the meeting,  members of the Company's  management will also report
on operations and other matters affecting the Company,  and will be available to
respond to stockholders' questions.

Your vote is very  important  regardless  of the  number of shares  you own.  On
behalf of the Board of Directors,  I urge you to mark, sign, and date your proxy
card today and return it in the  envelope  provided,  even if you plan to attend
the Annual  Meeting.  This will not prevent you from voting in person,  but will
ensure that your vote is counted if you are unable to attend.

Your  continued  support  of  and  interest  in  Peoples  Bancorp  is  sincerely
appreciated.

Sincerely,

Roger J. Wertenberger
Chairman of the Board

<PAGE>

                                               
                                 PEOPLES BANCORP
                               212 West 7th Street
                              Auburn, Indiana 46706

                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

                         To Be Held on January 13, 1999


     NOTICE IS HEREBY  GIVEN that the  annual  meeting  of the  stockholders  of
Peoples Bancorp (the  "Company"),  will be held at the Greenhurst  Country Club,
1740 North Main Street, Auburn, Indiana, on Wednesday, January 13, 1999, at 2:00
p.m., local time (the "Meeting"), for the following purposes:

1.   To elect two directors.

2.   To approve  the  appointment  of Olive LLP,  independent  certified  public
     accountants,  as the  auditors  of the  Company  for the fiscal year ending
     September 30, 1999.

3.   To approve the Company's 1998 Stock Option and Incentive Plan.

     Execution of a proxy in the form  enclosed also permits the proxy holder to
vote, in his or her sole  discretion,  upon such other  business as may properly
come before the Meeting or any adjournment  thereof.  As of the date of mailing,
the Board of  Directors  is not aware of any other  matters that may come before
the Meeting.

     The Board of Directors  has selected  November 30, 1998, as the record date
for the Meeting.  Only those  stockholders of the Company of record at the close
of  business  on that  date  will be  entitled  to  notice of and to vote at the
Meeting or any adjournment thereof.


BY ORDER OF THE BOARD OF DIRECTORS

John E. Weigel, III
Corporate Secretary

Auburn, Indiana
December 11, 1998

<PAGE>
                                 PEOPLES BANCORP
                             212 West Seventh Street
                              Auburn, Indiana 46706

                         Annual Meeting of Stockholders

                                 PROXY STATEMENT
 
     This proxy  statement is furnished in connection  with the  solicitation of
proxies by the Board of Directors of Peoples Bancorp (the "Company"), for use at
the annual meeting of the  stockholders  of the Company to be held on Wednesday,
January 13, 1999, and at any adjournments  thereof (the  "Meeting").  The Annual
Report to Stockholders  for the fiscal year ended September 30, 1998, and a form
of proxy to be voted at the meeting are being  furnished  to  stockholders  with
this Proxy Statement. The approximate date of mailing of this proxy statement is
December 11, 1998.

     The close of business on November 30, 1998, has been selected as the record
date for the determination of stockholders  entitled to notice of and to vote at
the annual  meeting.  On that date,  3,267,684  shares of the  Company's  Common
Stock,  par value  $1.00  per  share,  were  outstanding.  Stockholders  will be
entitled to one vote for each share of the  Company's  Common Stock held by them
of record at the close of  business on the record date on any matter that may be
presented for consideration and action by the stockholders.

     A plurality of the votes cast by  stockholders in person or by proxy at the
annual meeting will be necessary for approval of Proposal 1 described  herein. A
majority of the votes cast by  stockholders  in person or by proxy at the annual
meeting  will be  necessary  for approval of Proposal 2 and Proposal 3 described
herein.

     All valid proxies received in response to this  solicitation  will be voted
in accordance with the instructions indicated thereon by the stockholders giving
such proxies.  If no  instructions  are given,  signed  proxies will be voted in
favor of the  election of the  directors  named in this proxy  statement  and in
favor of Proposals 2 and 3. Abstentions and broker non-votes (shares as to which
a broker  indicates that it does not have authority to vote) are counted for the
purpose of determining  the presence of a quorum for the transaction of business
at the annual meeting.  Abstentions and broker  non-votes will have no effect on
the  outcome  of the  proposals  presented  herein,  since  such  actions do not
represent votes cast by stockholders.

     The  Board of  Directors  does not know of any  business,  other  than that
described herein, to be presented for action at the annual meeting.  However, if
any other  business  is  properly  presented  before the annual  meeting and may
properly  be voted  upon,  the  proxies  solicited  hereby will be voted on such
matters in accordance with the best judgment of the proxy holders named therein.
Any stockholder has the power to revoke his proxy at any time before it is voted
at the annual meeting by giving written notice of such revocation (including the
filing of a duly executed proxy bearing a later date) to John E. Weigel III, the
Secretary of Peoples  Bancorp,  212 West 7th Street,  Auburn,  Indiana 46706, or
upon request if the stockholder is present at the Meeting and chooses to vote in
person.

                                   PROPOSAL 1

                              ELECTION OF DIRECTORS

     Two  directors  will be  elected at the  meeting to serve for a  three-year
period.  Unless authority is withheld,  all proxies received in response to this
solicitation  will be voted for the election of the nominees listed below.  Each
nominee has indicated a willingness to serve if elected. However, if any nominee
becomes unable to serve, the proxies  received in response to this  solicitation
will be voted for a replacement  nominee  selected in  accordance  with the best
judgment of the proxy holders named therein.
<PAGE>

     The Board of Directors unanimously  recommends that stockholders vote "FOR"
each of the named nominees to the Company's Board of Directors.

     The  following  table lists the directors and their terms for both the Bank
and the Company. The table also sets forth the number of shares of the Company's
Common  Stock  beneficially  owned by the  directors  of the  Company and by the
directors  and  executive  officers of the Company as a group as of November 30,
1998.
                       NOMINEES FOR ELECTION AS DIRECTORS

                                                       Shares of
                                    Present      Common Stock        Percent
      Name         Position Since Term Expires Beneficially Owned  of Class (1)
 
NOMINEES FOR THREE YEAR TERM:

John C. Thrapp        Director 1990   1999          47,853(2)        1.46%
Roger J. Wertenberger C.E.O.   1990   1999         135,586(3)        4.13
                      and Chairman 
                      of The Board

DIRECTORS CONTINUING IN OFFICE:

Douglas D. Marsh      Director 1990   2000          25,500(4)        0.78
Lawrence R. Bowmar    Director 1990*  2000          18,875(5)        0.58
Maurice F. Winkler III Director1993   2000          53,008(6)        1.62
                       and President
Bruce S. Holwerda     Director 1998   2001           1,500(7)        0.05
John C. Harvey        Director 1990   2001          49,229(8)        1.50


All executive officers and directors of the 
Company and Bank as a group (13 persons)           425,648          12.97%

*Mr.  Bowmar  retired  from the Board in July,  1993  after  having  served as a
director of the Company since 1990. He was reelected to the Board in 1994.

1.   Computed based upon a total of 3,280,684  issued and outstanding  shares of
     Common Stock as of September 30, 1998.

2.   Of the shares owned by Mr.  Thrapp,  32,594  shares are held by Mr.  Thrapp
     with sole voting and investment  power, 642 shares are held in the ESOP for
     the benefit of Mr.  Thrapp,  and 14,617 are held by Mr.  Thrapp's wife with
     sole  voting  and  investment   power.
 
3.   Of the  shares  owned by Mr.  Wertenberger,  77,658  shares are held by Mr.
     Wertenberger with sole voting and investment  power,  6,928 shares are held
     in the ESOP for the benefit of Mr. Wertenberger,  48,000 shares are held by
     Mr.  Wertenberger's  wife with sole voting and investment  power, and 3,000
     shares are held jointly by Mr.  Wertenberger's  wife and mother-in-law with
     shared voting and  investment  power. 

4.   Of the shares owned by Mr. Marsh,  16,500 shares are held by Mr. Marsh with
     sole voting and  investment  power and 9,000 shares are held by Mr. Marsh's
     wife with sole voting and investment  power. 

5.   All of the  shares  owned by Mr.  Bowmar  are held  with  sole  voting  and
     investment power.

6.   Of the shares  owned by Mr.  Winkler,  27,151 are held by Mr.  Winkler with
     sole voting and investment  power,  19,742 shares are held by Mr. Winkler's
     wife with sole voting and  investment  power,  2,974 shares are held in the
     ESOP for the benefit of Mr. Winkler, and 3,141 shares are controlled by Mr.
     Winkler as Trustee under a Trust for the benefit of his children, for which
     he has sole voting and investment power.
<PAGE>
7.   All of the  shares  owned  by Mr.  Holwerda  are  owned  jointly  with  Mr.
     Holwerda's wife with shared voting and investment power.

8.   Of the shares owned by Dr.  Harvey,  45,485  shares are held by Dr.  Harvey
     with sole  voting  and  investment  power and 3,744  shares are held by Dr.
     Harvey's  wife  with  sole  voting  and  investment   power.

The business  experience  during the past five years of each of the directors is
as follows:

     Mr.  Wertenberger,  66, has served as a director of the Bank since  joining
the Bank in 1954. Mr.  Wertenberger became President of the Bank in January 1964
and Chairman of the Board in January 1979. Mr. Wertenberger serves as a director
and CEO of Peoples  Financial  Services,  Inc., the Bank's  service  corporation
subsidiary ("Peoples Financial").  Mr. Wertenberger became President,  Director,
and  Chairman  of the  Board of  Peoples  Bancorp  upon its  inception  in 1990.
Effective October 1, 1996, Mr. Wertenberger  relinquished the title of president
for Peoples  Bancorp,  Peoples  Federal  Savings  Bank,  and  Peoples  Financial
Services Inc. and remained CEO for those organizations.

     Mr. Bowmar,  70, has served as a director of the Bank from 1974 to 1993 and
was the Bank's Vice  President-Consumer  Loans from 1986 until his retirement in
1993.  In 1993 Mr.  Bowmar  resigned  from the Board of  Directors to fulfill an
assignment  with the Peace Corps in Romania.  Mr.  Bowmar was  reelected  to the
Board in 1994. Mr. Bowmar is currently retired.

     Mr. Holwerda,  50, was elected a director of the Bank in 1998. Mr. Holwerda
is co-owner of Ambassador Steel Corporation Auburn,  Indiana, and serves as Vice
President and Chief  Operating  Officer,  positions he has held since 1990.  Mr.
Holwerda has worked at Ambassador Steel in various capacities since 1979.

     Dr.  Harvey,  67, has served as a director of the Bank since 1979.  He is a
self-employed  physician  engaged in private  practice in Auburn,  Indiana.  Dr.
Harvey also serves as a director of Peoples  Financial .

     Mr. Thrapp,  64, served as a director and officer of First Federal  Savings
and Loan Association of Kendallville  which merged with the Bank in August 1990.
Since 1962,  Mr. Thrapp has been an attorney with the firm of Thrapp & Thrapp in
Kendallville, Indiana.

     Mr.  Marsh,  57,  has  served as a  director  of the Bank  since  1982.  He
currently  serves  as  Chairman  of the Board of  Applied  Innovations  Inc.  in
Chicago,  Illinois,  President  of  Bridgewater  Golf Club in  Auburn,  Indiana,
Regional Director Excel Communications in Dallas, Texas, and Associate of Auburn
Reality  in  Auburn,  Indiana.  From  1991 to 1996,  Mr.  Marsh  served  as Vice
President of Sales for Superior  Chaircraft,  which is a division of JSJ Seating
Corporation, Belton, Texas. From 1976 to 1991, Mr. Marsh served as President and
Chief Executive Officer of Garrett Industries of Hudson, Indiana. Mr. Marsh also
serves as a director of Peoples Financial. 

     Mr.  Winkler,  42, was  appointed to the Board of Directors of the Bank and
Company in June 1993. Mr. Winkler joined the Bank as an accountant in 1979. From
1981 to 1985,  he served as the Bank's  Controller  and in December  1985 became
Vice President-Operations.  From May 1987 to September 1996, Mr. Winkler assumed
responsibilities  as the  Bank's  Vice  President-Finance.  Mr.  Winkler  is the
son-in-law  of Roger J.  Wertenberger.  Mr.  Winkler also serves as Treasurer of
Peoples Bancorp and as a director of Peoples Financial.  Mr. Winkler assumed the
duties of President  and Chief  Operating  Officer of Peoples  Bancorp,  Peoples
Federal Savings Bank, and Peoples Financial Services, Inc. in October 1996.
<PAGE>

Executive Officers of the Company Who Are Not Directors

     John  E.   Weigel   III,   38,   joined  the  Bank  in  1993  as   Internal
Auditor/Compliance  Officer, and Mr. Weigel was appointed Corporate Secretary of
the Bank and of Peoples  Bancorp  in May 1998.  Prior to his  employment  at the
Bank,  Mr. Weigel was a Bank Examiner with the  Department of Treasury from 1985
to 1993. 

Corporate  Governance  and Other  Matters

     The Board of  Directors  of the  Company  held twelve  meetings  during the
fiscal year ended  September 30, 1998.  All directors have attended at least 75%
of all Board of Directors' and committee  meetings.  Four regular members of the
Board of Directors are members of the Executive Committee, which is permitted to
act with any three members  present in the absence of regularly  scheduled Board
meetings.  The Executive  Committee  exercises all the authority of the Board of
Directors  to the  extent  permitted  by the  Company's  Bylaws.  The  Executive
Committee consists of Roger J. Wertenberger,  Chairman, Maurice F. Winkler, John
C. Thrapp,  Douglas D. Marsh,  and John C.  Harvey.  This  Committee  meets when
needed and held no meetings during the fiscal year ended September 30, 1998. The
Board of Directors has standing Budget,  Audit, and Nominating  Committees.

     The Budget  Committee  establishes  policies  and  objectives  relating  to
compensation,  reviews compensation costs, and recommends salaries, bonuses, and
ESOP contributions for all employees and executive officers.  The members of the
Budget  Committee  are:  Robert D. Ball,  Chairman,  John C. Harvey,  Douglas D.
Marsh,  and John C. Thrapp.  The Budget  Committee held four meetings during the
fiscal year ended September 30, 1998. 

     The Audit Committee  reviews and approves the scope of the audit procedures
employed by the  Company's  independent  auditors and meets with the auditors to
discuss the results of their examination of the Company's financial  statements.
The Committee reviews the operations of the Company's  internal audits performed
by  management  and the  results  of its  audit  procedures.  In  addition,  the
Committee  reviews all reports  prepared in connection with the Company's annual
examinations by the regulatory  authorities.  The members of the Audit Committee
are:  John C.  Harvey,  Chairman,  Lawrence  R.  Bowmar and Robert D. Ball.  The
Committee held one meeting during the fiscal year ended September 30, 1998.

     The Nominating Committee meets when director vacancies occur and recommends
individuals  for  nomination  to the  Company's  Board of  Directors  and to the
governing  bodies  of its  subsidiary  corporations.  The  Nominating  Committee
consists of the Board of Directors.  The Committee  held one meeting  during the
fiscal year ended September 30, 1998. The Nominating Committee does not consider
nominees  recommended  by  stockholders.  Under the Company's  Bylaws,  however,
nominations may be made by  stockholders  and voted upon at an annual meeting if
made in writing and  delivered to the  Secretary of the Company at least 20 days
prior to the date of the annual  meeting.  No nominations  for directors  except
those made by the Nominating Committee or by the stockholders in accordance with
the Bylaws shall be voted upon at the annual meeting.

Securities Ownership of Certain Beneficial Owners

     There are no persons known to the Company who own beneficially more than 5%
of the Company's common stock as of November 30, 1998.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors  and  executive  officers,  and  persons  who own  more  than 10% of a
registered class of the Company's equity securities, to file with the Securities
and Exchange  Commission  ("SEC")  initial  reports of ownership  and reports of
changes in ownership of equity  securities of the Company.  Officers,  directors
and greater than 10%  shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
<PAGE>

     To the Company's knowledge,  based solely on a review of the copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports were  required,  during the fiscal year ended  September  30, 1998,  all
Section  16(a) filing  requirements  applicable  to the  Company's  officers and
directors were complied with,  subject to the following  exceptions:  Form 4 for
Jeffrey L. Grate reporting a purchase on June 4, 1998, was filed late.

Transactions With Certain Related Persons

     The Bank has followed the policy of offering loans to the Company's and the
Bank's  directors,  officers and employees for the financing of their  principal
residences.  These  loans  are  made  in the  ordinary  course  of  business  on
substantially the same terms and collateral,  including interest rates, as those
of comparable  transactions  prevailing at the time and do not involve more than
the normal risk of  collectibility or present other  unfavorable  features.  The
Bank grants  consumer loans to directors,  officers,  and employees at rates and
terms applicable to its other customers.

     The Bank has 13 executive  officers and directors,  and the aggregate total
of  loans  outstanding  to these  individuals  as of  September  30,  1998,  was
$969,812.

                COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Executive Compensation
 
Summary of Cash and Certain Other Compensation

     The following table sets forth summary information concerning  compensation
paid or accrued by the Company to or on behalf of the Company's  Chief Executive
Officer.  No other  executive  officers of the Company had an annual  salary and
bonus that exceeded $100,000 during each of the last three fiscal years.

                                        Summary Compensation Table

                                         Annual Compensation 
                                   ------------------------------- 
                                                                    All Other
 Name and Principal Position Year  Salary  Bonus Compensation(1) Compensation(2)
 Roger J. Wertenberger       1998 $120,000 $6,000     $12,000          $6,000
 Chairman and
 Chief Executive Officer     1997  121,000  6,050      10,800           6,050

                             1996  118,000  5,900      10,800           5,900

(1)  The amount shown represents  director's fees. Does not include personal use
     of  an  automobile   provided  by  the  Bank,   which  use  was  valued  at
     approximately $2,000 for each of the periods indicated.

(2)  The amount shown  represents  that portion of the Bank's ESOP  contribution
     allocated to the account of Mr. Wertenberger.

Option Exercises and Holdings

     On May 19, 1987, the Bank's Board of Directors  adopted a Stock Option Plan
(the "Option  Plan") which permits the granting of incentive  and  non-qualified
stock  options.  Stockholders  approved the Option Plan on January 13, 1988.  In
December,  1991,  the Bank's Board of Directors  authorized  the  amendment  and
restatement  of the Option  Plan to provide for the  issuance  of the  Company's
Common Stock,  rather than the Bank's stock,  upon exercise of options,  and the
Company's  Board of Directors  consented to this  action.  Further,  in December
1991, the Bank's Board of Directors adopted amendments to the Option Plan, which
did not  require  stockholder  approval,  to conform  the Option Plan to the new
rules  of  the  Securities  and  Exchange  Commission  under  Section  16 of the
Securities Exchange Act of 1934.
<PAGE>

     Under the Option  Plan,  options  for a maximum of  200,000  shares,  after
adjustment for the 1993 stock split,  and subject to future  adjustments,  could
have been granted  pursuant to the Option Plan. Under the Option Plan, the Board
of Directors,  in its sole discretion,  could have granted options to employees,
officers  and  consultants  who were common law  employees of the Company or the
Bank at a price  not less than 100% of the fair  market  value of the  Company's
Common  Stock on the date of the  grant.  Options  expired  on such dates as the
Board of Directors or Stock Option Committee  determined,  but not later than 10
years from the date of grant. No options were granted to any executive  officers
of the Bank or the Company  during fiscal year 1997, and the Option Plan expired
in May, 1997. As of September 30, 1998, no options were outstanding.

     During  fiscal  1998,  the  Company's  Chief  Executive  Officer,  Roger J.
Wertenberger, did not own or exercise any stock options of the Company.

Defined Benefit Pension Plan

     The Bank maintains a defined benefit pension plan (the  "Retirement  Plan")
for all  eligible  employees  (the  "Participants").  In order to be eligible to
participate, an employee must attain age 21 and complete 1,000 hours of credited
service during an eligibility  computation period. The Retirement Plan is funded
solely by Bank  contributions  and  generally  provides  for vested  benefits to
Participants  with 100%  vesting  after five years of  credited  service.  Total
Retirement  Plan  expenses for the fiscal year ended  September 30,  1998,  were
$3,884. At September 30, 1998, the Retirement Plan was fully funded.

     A Participant's benefit at normal retirement age (65) is dependent upon his
total years of  credited  service  and his  average  annual  salary for the five
consecutive  years of highest  salary  during  credited  service.  However,  the
benefit so determined is subject to proportionate reduction for credited service
of  fewer  than 30  years at  normal  retirement  age,  and is also  subject  to
actuarial  reduction  for  commencement  of  benefit  payment  prior  to  normal
retirement age. The Retirement Plan also provides a death benefit payment in the
event of death prior to retirement.

     The table below shows  estimated  annual  benefits  (computed on the normal
life annuity basis) payable under the Company's  Retirement Plan to any employee
upon retirement in 1998 at age 65 after selected periods of service. There is no
benefit   reduction  for  Social  Security  or  other  offset  amounts.   As  of
September 30, 1998, Roger J. Wertenberger had 44 years of credited service.

Remuneration                        Years of Service
--------------------------------------------------------------------------------
        10 Years 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
 50,000   10,000   15,000    20,000   25,000   30,000   35,000   40,000  45,000
 75,000   15,000   22,500    30,000   37,500   45,000   52,500   60,000  67,500
100,000   20,000   30,000    40,000   50,000   60,000   70,000   80,000  90,000
150,000   30,000   45,000    60,000   75,000   90,000  105,000  120,000 135,000
200,000   40,000   60,000    80,000  100,000  120,000  140,000  160,000 180,000
250,000   50,000   75,000   100,000  125,000  150,000  175,000  200,000 225,000

Employee Stock Ownership Plan

     On  November 15,  1988,  the  Board of  Directors  of the Bank  adopted  an
Employee   Stock   Ownership  Plan  (the  "ESOP")  which  was  approved  by  the
stockholders on January 11, 1989. The ESOP invests primarily in the common stock
of the Company ("Peoples Stock") which, along with other ESOP assets, is held in
trust by Norwest  Bank,  Fort  Wayne,  Indiana,  as trustee  pursuant to a trust
agreement.  The  trustee is  authorized  to invest in and hold up to 100% of the
trust in Peoples Stock but is not required to hold a minimum  percentage of ESOP
assets in  Peoples  Stock.  The  trustee is also  authorized  to invest in other
securities,  such as  certificates  of deposit,  equity stocks,  bonds and other
investments.
<PAGE>

     From  time to time,  the ESOP  purchases  shares of  Peoples  Stock in open
market transactions.  These purchases are made at prices which do not exceed the
fair  market  value of  Peoples  Stock.  To  purchase  such  Stock,  the ESOP is
authorized to borrow funds from an unrelated  third-party  lender secured by the
purchased  shares.  Any such loan is to be repaid  with  funds  from the  Bank's
contributions to the ESOP and earnings on ESOP assets. The ESOP has not borrowed
funds as of September 30, 1998. Contributions from the Bank to the ESOP are made
out of net operating profits in amounts established by the Board of Directors in
its sole discretion.  Such contributions may be made either in cash or in shares
of Peoples Stock.

     The ESOP is administered by a committee appointed by the Board of Directors
(the "Committee").  The Committee directs the trustee as to investments that may
be made by the ESOP and loans that may be incurred for the purchase of shares of
Peoples Stock. The members of the Committee are Robert D.  Ball, John C. Thrapp,
Douglas D. Marsh and Dr. John C. Harvey.

     The ESOP  maintains  an account for each  participant  in the ESOP which is
credited annually with his or her allocable shares of Peoples Stock purchased by
the  trust,  any  forfeitures  of  Peoples  Stock  (i.e.,   that  portion  of  a
participant's account that does not vest in and is not paid to a participant who
resigns or is dismissed from the employ of the Bank) and any stock  dividends on
Peoples Stock  allocated to the  participant's  account.  The amount credited to
each  participant's  account  equals  that  proportion  of the  Company's  total
contribution plus all forfeitures that such  participant's  annual  compensation
bears to the total annual  compensation of all  participants  for that year. All
participants must be employed on the last day of the plan year (September 30) to
be entitled to share in an allocation for that plan year.  Any shares  purchased
by the trust with  borrowed  funds are held in a suspense  account and allocated
proportionately  to  participant  accounts as payments of principal and interest
are made on the loan.  With  respect to shares of Peoples  Stock  allocated to a
participant's  account, each participant is entitled to direct the trustee as to
the manner of voting  such  shares.  If the  Participant  fails to so direct the
trustee, such unvoted shares will be voted by the trustee only upon instructions
from the Committee.  Similarly,  unallocated shares will be voted by the trustee
only upon instructions from the Committee. In either case, the voting of unvoted
or unallocated shares is in the Committee's sole discretion.

     Any  full-time  employee  of the  Bank  who has  attained  the age of 18 is
eligible to become a participant in the ESOP. Each participant becomes vested in
20% of his or her  account  balance  after  three  years of service  and becomes
vested in an  additional  20% for each  subsequent  year of service  until fully
vested  after  seven  years  of  service.   Distributions  from  the  ESOP  upon
retirement, disability, death or termination of employment may be in the form of
cash or Peoples Stock.

     Adoption of the ESOP may be considered an anti-takeover  device,  since the
ESOP may become the owner of a sufficient  percentage  of the total  outstanding
common  stock  of the  Company  so  that  the  vote of the  trustee  (or of plan
participants) may serve as a defense in a hostile takeover.

     As of  September 30,  1998,  the ESOP held  51,623  shares  (1.57%)  of the
Company's  stock, all of which has been allocated to participant  accounts.  The
plan  contributions  charged to ESOP expense  totaled  $86,233 during the fiscal
year ended September 30,  1998. The ESOP also incurred expenses of $4,698 which,
under the terms of the ESOP, were paid by the Bank.

Insurance Plans

     The Bank's officers and employees are provided with hospitalization,  major
medical,  life,  accidental  death and  dismemberment  insurance  and  long-term
disability  insurance under group plans which are available generally and on the
same basis to all full-time employees. 
<PAGE>

Bonus Plan

     The Bank has a bonus plan for all employees of the Bank.  The plan does not
apply to employees of  subsidiaries  or affiliates of the Bank.  Under the plan,
bonus money is made available to the extent of the net profits of the Bank up to
10%  of  an  employee's   base  annual  salary  as  defined  in  the  plan.  The
determination  of the amount of a bonus to be paid under the plan is made by the
Board  of   Directors  in  its  sole   discretion,   after   consideration   and
recommendation by the Budget Committee, based on profitability of the Bank.

     During the fiscal year ended  September 30,  1998,  bonuses under this plan
aggregating  $96,517 were paid to employees of the Bank. Amounts allocated under
the bonus plan are included in the Summary Compensation Table.

Employment Agreement

     The Bank entered into a new  employment  agreement  with Mr.  Wertenberger,
President,  Chief Executive Officer,  and Chairman of the Board of the Bank (the
"Executive"). This employment agreement is intended to ensure that the Bank will
be able to maintain a stable and competent management base.

     The employment  agreement provides for a one-year term which may be renewed
on an annual basis upon mutual  written  consent of the  Executive and the Bank.
The  Bank has  agreed  to pay the  Executive  a base  salary  of  $120,000.  The
agreement  provides that the Executive's  base salary will be reviewed  annually
upon the renewal of the agreement.

     In addition to the base salary,  the agreement  provides  for,  among other
things,   participation  in  stock  benefit  plans  and  other  fringe  benefits
applicable  to personnel of the Bank or as otherwise  determined by the Board of
Directors to be  appropriate.  In the event the Bank  chooses to  terminate  the
Executive's  employment  for any reasons other than for cause (as defined in the
agreement),  or in the event of the Executive's resignation from the Bank upon a
change in control (as defined in the agreement), the Executive would be entitled
to  receive,  among  other  things,  an amount  equal to (i) 2.99 times the base
compensation,  (ii) 1% of the pre-tax  profits of the Company on a  consolidated
basis  for  three  years,  (iii)  the  continuation  of  certain  insurance  and
disability  benefits for three years after termination,  (iv) the vesting of all
stock and retirement  benefits,  including the funding of all unfunded benefits.
As of September 30, 1998,  such  payments and benefits upon the  occurrence of a
termination  without  cause or a change in control are estimated to have a value
of approximately $600,000. However, the Executive is not entitled to any amounts
to the extent the  Executive is subject to an excise tax because such  severance
benefits constitute "excess parachute payments," defined in the Internal Revenue
Code of 1986, as amended (the "Code").  In general,  under the Code, and "excess
parachute  payment" is the amount by which  payments  contingent  on a change in
ownership  or  control  exceed  three  times  the   employee's   average  annual
compensation over five years.

     Although the above-described  employment  agreement could increase the cost
of any  acquisition  of control of the  Company or the Bank,  management  of the
Company  and the  Bank do not  believe  that  the  terms  thereof  would  have a
significant anti-takeover effect.

Director CompensationCompensation

     Directors  do not receive any fees for serving as directors of the Company.
Directors of the Bank  currently  receive  $12,000 per year. For the fiscal year
ended  September 30,   1998,  directors'  fees  totaled  $96,000.  In  addition,
Directors  Emeritus of the Bank are paid for each meeting at a monthly fee equal
to the fee they  received  at the time of  retirement  from the  Board.  For the
fiscal year ended September 30, 1998, Director Emeritus fees totaled $31,800.
<PAGE>

     Directors  are also  eligible to receive  awards under the  Company's  1998
Stock Option and Incentive  Plan. See "Proposal 3 - Approval of Peoples  Bancorp
1998 Stock Option and Incentive Plan."

Report of the Budget Committee

     The  Budget  Committee  of the Bank  establishes  policies  and  objectives
relating to compensation,  reviews  compensation  costs, and recommends salaries
and bonuses for all  employees  and  executive  officers.  All  decisions of the
Budget  Committee  are subject to approval  by the full Board of  Directors.  In
fiscal  1998,  the  Board  of  Directors  made no  modifications  to the  Budget
Committee's  compensation  recommendations.  In recommending the salaries of the
executive officers,  the Budget Committee has access to and reviews compensation
data for comparable financial  institutions.  The officers are also evaluated as
to their performance during the year and compared to the Bank's performance.

     In making  recommendations  with  respect to  executive  compensation,  the
Budget Committee attempts to achieve the following objectives while furthering a
policy of cost containment by controlling expenses:

1.   Provide compensation comparable to that which is offered by other similarly
     situated  financial  institutions  in order to attract and retain  talented
     executives who are critical to the Company's success;

2.   reward  executive  officers based upon their ability to achieve both short-
     and long-term strategic goals and to enhance shareholder value; and

3.   align the interests of the executive officers with the long-term  interests
     of  the   stockholders   by   granting   stock   options  and  making  ESOP
     contributions.

     At the  present  time,  the  Company's  executive  compensation  program is
comprised of base  salary,  annual  incentive  bonuses and  long-term  incentive
bonuses in the form of ESOP contributions.  Reasonable base salaries are awarded
based on salaries  paid by  comparable  financial  institutions  and  individual
performance.  Annual  incentive  bonuses  are tied to the  Company's  net income
performance  for the current fiscal year. The ESOP has a direct  relation to the
long-term enhancement of shareholder value. These plans are designed to motivate
the employee to increase shareholder value.

     For fiscal year 1998, the Budget  Committee  recommended,  and the Board of
Directors  approved,  a  salary  of  $120,000  and a  bonus  of  $6,000  for Mr.
Wertenberger.  In addition,  Mr. Wertenberger received long-term compensation in
the form of a $6,000  allocation to his account under the ESOP. In  recommending
the  salary  and  bonus  amounts  for Mr.  Wertenberger,  the  Budget  Committee
considered the Bank's  financial  performance,  Mr.  Wertenberger's  operational
performance,  and  levels of  executive  compensation  at  comparable  financial
institutions. Although Mr. Wertenberger's compensation is below the median level
for the Bank's peer group, the Budget  Committee  believes that the compensation
awarded is consistent with the Bank's efforts to reward  performance and control
expenses.


Dated:  September 15, 1998                      BUDGET COMMITTEE

                                    Robert D. Ball             Douglas D. Marsh
                                    Jack L. Buttermore         John C. Thrapp
                                    John C. Harvey


<PAGE>
Compensation Committee Interlocks and Insider Participation

     No person who served as a member of the  Budget  Committee  during the 1998
fiscal  year has ever been an officer or  employee  of the Company or any of its
subsidiaries,  except for John Thrapp,  who serves as Asst. Trust Officer of the
Bank.  During the 1998 fiscal year,  no executive  officer of the Company or the
Bank served as a director  or member of the  compensation  committee  of another
entity,  one of whose  directors or executive  officers  served as a director or
member of the Budget Committee of the Company or the Bank.

Performance GraphGraph

     The following graph compares the yearly  percentage change in the Company's
cumulative total shareholder  return on the Common Stock with (i) the cumulative
total return of the NASDAQ market index and (ii) the cumulative  total return of
the SNL Midwest Thrift Index  comprised of all mid-west  publicly traded savings
and loan  associations  and savings and loan holding  companies over the periods
indicated.  The graph assumes an initial  investment of $100 and reinvestment of
dividends. The graph is not necessarily indicative of future price performance.

            COMPARISON OF THE FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
   PEOPLES BANCORP, THE NASDAQ MARKET INDEX, AND THE SNL MIDWEST THRIFT INDEX

(A graph is displayed  here  comparing  Peoples  Bancorp,  NASDAQ for the entire
United States,  and the SNL Midwest Thrift index. It is not deemed  incorporated
in this proxy statement.)

The graph shall not be deemed incorporated by reference by any general statement
incorporating  by  reference  this Proxy  Statement  into any  filing  under the
Securities Act or under the Exchange Act,  except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.

<PAGE>

                                   PROPOSAL 2

                  APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS

     The Board of Directors  has  appointed  the firm of Olive LLP,  independent
certified public accountants,  to audit the consolidated financial statements of
the Company for the fiscal year ending September 30, 1999. A proposal to approve
the appointment of Olive LLP, will be presented to the Company's stockholders at
the  Meeting.  Representatives  of Olive LLP,  are expected to be present at the
Meeting  and  to  be  available  to  respond  to  appropriate   questions.   The
representatives  will also be provided an  opportunity  to make a statement,  if
they desire.

     The Board of Directors unanimously  recommends that stockholders vote "FOR"
the appointment of Geo. S. Olive & Co.

                                   PROPOSAL 3

        APPROVAL OF PEOPLES BANCORP 1998 STOCK OPTION AND INCENTIVE PLAN

Summary of Plan

     General. The Board of Directors of the Company recently adopted the Peoples
Bancorp 1998 Stock Option and Incentive Plan (the "1998 Plan").  Pursuant to the
1998 Plan,  officers,  directors,  employees and consultants of the Company, the
Bank, and its affiliates are eligible to receive shares of Common Stock or other
securities or benefits with a value derived from the value of the Common Stock.

     The purpose of the 1998 Plan is to enable the  Company to  attract,  retain
and motivate officers, directors,  employees and consultants by providing for or
increasing  their  proprietary  interest  in the  Company  and,  in the  case of
non-employee  directors,  to attract  such  directors  and  further  align their
interests  with those of the Company's  shareholders  by providing or increasing
their proprietary interests in the Company.

     The maximum number of shares of Common Stock that may be issued pursuant to
awards  granted  under the Bank  Incentive  Plan  will be  200,000  (subject  to
adjustment  to prevent  dilution).  As of the date of this proxy  statement,  no
shares of Common Stock were subject to awards under the 1998 plan.

     The Board of Directors believes the 1998 Plan is beneficial to the Company,
the Bank, and the Company's shareholder and prospective  shareholders.  The 1998
Plan is  subject to  approval  of the  holders  of a majority  of the issued and
outstanding  shares of the  Company,  subject  to any  required  changes  of any
regulatory agency.

     The Company  intends to register  the Common  Stock  reserved  for issuance
under the 1998 Plan with the SEC prior to issuing any Common Stock upon exercise
thereof.

     Administration. 

     The 1998  Plan is  administered  by a  committee  of two or more  directors
appointed by the Board of Directors of the Company (the "1998 Plan  Committee").
The 1998 Plan Committee has full and final authority to select the recipients of
awards and to grant such awards. Subject to the provisions of the 1998 Plan, the
1998 Plan Committee has a wide degree of  flexibility  in determining  the terms
and conditions of awards and the number of shares to be issued pursuant thereto,
including  conditioning the receipt or vesting of awards upon the achievement by
the Bank and the Company of  specified  performance  criteria.  The  expenses of
administering the 1998 Plan are borne by the Company.
<PAGE>

     Terms of Awards.  The 1998 Plan authorizes the 1998 Plan Committee to award
options  to  purchase  Common  Stock  or  stock  appreciation  rights.  A  stock
appreciation right is a right to receive the appreciation in value, or a portion
of the  appreciation in value, of a specified  number of shares of Common Stock.
An award  granted under the 1998 Plan may include a provision  accelerating  the
receipt of benefits upon the occurrence of specified events, such as a change of
control of the Company or a dissolution,  liquidation, merger, reclassification,
sale of substantially  all of the property and assets of the Company or the Bank
or other  significant  corporate  transactions.  The Committee may grant options
that either are intended to be incentive  stock options or  non-incentive  stock
options.   Awards  to  consultants  and  non-employee   directors  may  only  be
non-incentive stock options.

     Subject to limitations  imposed by law, the Board of Directors may amend or
terminate  the  1998  Plan  at any  time  and in any  manner.  However,  no such
amendment  or  termination  may deprive  the  recipient  of an award  previously
granted under the 1998 Plan of any rights thereunder without his consent.

     Awards may not be granted  under the 1998 Plan after the tenth  anniversary
of the adoption of the 1998 Plan. Although any award that was duly granted on or
prior to such date may thereafter be exercised or settled in accordance with its
terms,  no shares of Common Stock may be issued  pursuant to any award after the
twentieth anniversary of the adoption of the 1998 Plan.

Federal Income Tax Consequences

     The following  discussion is only a summary of the material  federal income
tax  consequences  of the awards  that may that may be made under the 1998 Plan,
and is based on existing federal law (including  administrative  regulations and
rulings)  which  is  subject  to  change,  in  some  cases  retroactively.  This
discussion  is also  qualified by the  particular  circumstances  of  individual
participants,  which may  substantially  alter or modify the federal  income tax
consequences herein discussed.  In addition,  the following  discussion does not
address  state,  local or foreign  income  taxes or any taxes  other than income
taxes.

     Incentive  Stock  Options.  Generally  under  present  law,  when an option
qualifies as an incentive  stock  option under  Section 422 of the Code:  (i) an
optionee will not recognize taxable income either upon the grant or the exercise
of the option, (ii) any gain or loss upon a qualifying disposition of the shares
acquired by the  exercise of the option will be treated as capital gain or loss,
and (iii) no  deduction  will be allowed to the Company  for federal  income tax
purposes in connection  with the grant or exercise of an incentive  stock option
or a qualifying disposition of the shares. A disposition by an optionee of stock
acquired upon exercise of an incentive stock option will constitute a qualifying
disposition if it occurs more than two years after the grant of the option,  and
one year  after the  transfer  of the shares to the  optionee.  If such stock is
disposed of by the optionee  before the  expiration  of those time  limits,  the
transfer may be a  "disqualifying  disposition," in which case the optionee will
recognize  ordinary  income equal to the lesser of (i) the aggregate fair market
value of the shares as of the date of exercise  less the option  price,  or (ii)
the amount realized on the disqualifying  disposition less the option price. The
Company  would  become  entitled  to  a  corresponding  deduction,   subject  to
satisfaction of any applicable  withholding or reporting  obligations.  Ordinary
income from a disqualifying  disposition will constitute  ordinary  compensation
income.  Any gain in addition to the amount  reportable as ordinary  income on a
"disqualifying disposition" generally will be capital gain. The Company does not
obtain a deduction  to the extent gain on  disposition  of the shares is capital
gain.

     Upon the exercise of an incentive stock option,  the difference between the
fair market value of the stock  subject to the  exercised  option on the date of
exercise and the option  exercise  price is treated as an  adjustment to taxable
income in that  taxable  year for  alternative  minimum tax  purposes,  as are a
number of other items  specified by the Code. Such  adjustments  (along with tax
preference  items) form the basis for the alternative  minimum tax (presently at
graduated rates for individuals), which may apply depending on the amount of the
computed   "regular   tax"  of  the  employee  for  that  year.   Under  certain
circumstances the amount of alternative minimum tax is allowed as a carryforward
credit against regular tax liability in subsequent  years.  The Company does not
obtain a deduction due to an optionee's  incurrence of the  alternative  minimum
tax.
<PAGE>

     Non-Incentive  Stock  Options.  n the  case of stock  options  which do not
qualify as an incentive stock option  (non-incentive  stock options),  no income
generally is  recognized by the optionee at the time of the grant of the option.
Under present law the optionee  generally will recognize  ordinary income at the
time the  non-incentive  stock option is exercised  equal to the aggregate  fair
market value of the shares acquired less the option price.  Ordinary income from
a non-incentive stock option will constitute  compensation for which withholding
or reporting may be required under federal and state law.

     Subject to special  rules  applicable  when an  optionee  uses stock of the
Company to exercise an option,  shares acquired upon exercise of a non-incentive
stock  option  will have a tax basis  equal to their  fair  market  value on the
exercise date or other relevant date on which ordinary  income is recognized and
the holding  period for the shares  generally will begin on the date of exercise
or such other  relevant date.  Upon  subsequent  disposition of the shares,  the
optionee generally will recognize capital gain or loss.  Provided the shares are
held by the optionee for more than one year prior to  disposition,  such gain or
loss will be long-term capital gain or loss.

     The Company will generally be entitled to a deduction equal to the ordinary
income (i.e.,  compensation)  portion of the gain  recognized by the optionee in
connection with the exercise of a  non-incentive  stock option provided that the
Company  complies with any applicable  withholding or reporting  requirements of
federal and state law. The Company  does not obtain a deduction  with respect to
the capital gain on disposition of the shares.

     Options to Non-Employee  Directors.  These options are non-incentive  stock
options for tax purposes,  and the tax rules  applicable to them are the same as
the rules for non-incentive stock options described above. However,  because the
optionees are not  employees,  income tax  withholding  would not be required in
order for the Company to qualify for its income tax deduction.

     Stock Appreciation Rights (SARs). A recipient of a stock appreciation right
will be taxed (and the Company will receive a corresponding  deduction) when the
recipient  exercises  the stock  appreciation  right.  Income  generated by such
exercise will be ordinary compensation income and will be measured by the amount
of cash  received or the  then-current  fair market value of the stock  received
upon such event. The Company will have a withholding or reporting obligation.

     Restriction  on  Deductions.  Not every  amount  paid as  compensation  for
services is  currently  deductible.  For  example,  depending  upon the services
rendered,  some compensation  payments must be capitalized or added to inventory
costs. Two other restrictions potentially applicable to deductions for executive
compensation  payments are the  restriction  on  deduction of so-called  "excess
parachute  payments" and the Code Section 162(m)  deduction  limit of $1,000,000
per year for certain executive compensation.  Whether any such restrictions will
apply to specific payments of compensation by the Company cannot be predicted at
this time.

     The description  herein is intended to highlight and summarize the material
terms of the 1998 Plan. For further information , shareholders are referred to a
copy of the 1998 Plan which is attached hereto as Annex I.

     The Board of Directors unanimously  recommends that stockholders vote "FOR"
the approval of Peoples Bancorp 1998 Stock Option and Incentive Plan.
<PAGE>

                             COSTS OF SOLICITATION

     The costs of this proxy  solicitation  will be paid by the Company.  To the
extent necessary, proxies may be solicited by personnel of the Company in person
or by telephone, telegram or other means. Company personnel will not receive any
additional  compensation  for  solicitation of proxies unless such  solicitation
requires such persons to work  overtime.  If deemed  necessary,  the Company may
retain a proxy  solicitation  firm.  The Company will request  record holders of
shares  beneficially owned by others to forward this proxy statement and related
materials to the beneficial owners of such shares and will reimburse such record
holders for their reasonable expenses incurred therewith.

                             FORM 10-K ANNUAL REPORT

     THE COMPANY  WILL PROVIDE  (WITHOUT  CHARGE) TO ANY  STOCKHOLDER  SOLICITED
HEREBY A COPY OF ITS 1998 ANNUAL  REPORT ON FORM 10-K FILED WITH THE  SECURITIES
AND EXCHANGE  COMMISSION UPON THE WRITTEN REQUEST OF SUCH STOCKHOLDER.  REQUESTS
SHOULD BE  DIRECTED TO THE  COMPANY'S  SECRETARY,  212 WEST 7TH STREET,  AUBURN,
INDIANA 46706.

                                  OTHER MATTERS

     The  management  does not know of any other  matters  to be  presented  for
action by the stockholders at the annual meeting. If, however, any other matters
not now known are properly brought before the meeting,  the persons named in the
accompanying  proxy will vote such proxy in  accordance  with their  judgment on
such matters.

                             STOCKHOLDERS' PROPOSALS

     All proposals of stockholders to be presented for consideration at the next
annual  meeting  and  included  in the proxy  statement  must be received by the
Company no later than October 12, 1999.

December 11, 1998                                                PEOPLES BANCORP


<PAGE>

                                PEOPLES BANCORP

                      1998 STOCK OPTION AND INCENTIVE PLAN


1. Purpose of the Plan.

     The purpose of this Peoples  Bancorp 1998 Stock Option and  Incentive  Plan
(the "Plan") is to advance the interests of the Company through providing select
key  Employees  and  Directors  of the  Company  and  its  Affiliates  with  the
opportunity  to  acquire  shares of Common  Stock.  By  encouraging  such  stock
ownership,  the Bank seeks to attract,  retain,  and motivate the best available
personnel for positions of substantial  responsibility and to provide additional
incentive to  Directors  and key  Employees  of the Company or any  Affiliate to
promote the success of the business.

2. Definitions.

As used herein, the following definitions shall apply.

(a)  "Affiliate" shall mean any "parent corporation" or "subsidiary corporation"
     of the  Company,  as such  terms are  defined  in  Section  424(e) and (f),
     respectively,  of the Code,  and any  other  subsidiary  corporations  of a
     parent corporation of the Company.

(b)  "Agreement"  shall mean a written agreement entered into in accordance with
     Paragraph 5(c).

(c)  "Award"  shall mean  collectively,  Options  and SARs,  unless the  context
     clearly indicates a different meaning.

(d)  "Bank" shall mean Peoples Federal  Savings Bank of DeKalb County,  a wholly
     owned subsidiary of the Company.

(e)  "Board" shall mean the Board of Directors of the Company.

(f)  "Code" shall mean the Internal Revenue Code of 1986, as amended.

(g)  "Committee" shall mean the Stock Option Committee appointed by the Board in
     accordance with Paragraph 5(a) hereof.

(h)  "Common Stock" shall mean the common stock,  par value $1.00 per share,  of
     the Company.

(i)  "Company" shall mean Peoples Bancorp.

(j)  "Continuous  Service"  shall  mean  the  absence  of  any  interruption  or
     termination  of service as an  Employee  or  Director  of the Company or an
     Affiliate.  Continuous  Service shall not be considered  interrupted in the
     case of sick leave,  military leave, or any other leave of absence approved
     by the Company or in the case of transfers between payroll locations of the
     Company or between the Company, an Affiliate, or a successor.
<PAGE>

(k)  "Control"  shall have the meaning  ascribed to such term in 12 C.F.R.  Part
     574.  "Change in Control"  shall  mean:  (i) the sale of all, or a material
     portion, of the assets of the Company; (ii) a merger or recapitalization in
     the  Company  whereby  the Company is not the  surviving  entity;  (iii) an
     acquisition  of Control of the Company as defined in 12 C.F.R.  574.3 or as
     otherwise  defined by the Office of Thrift  Supervision,  or any  successor
     regulation  or  agency  thereto;  or  (vi)  the  acquisition,  directly  or
     indirectly, of the beneficial ownership (within the meaning of that term as
     it is used in Section  13(d) of the  Securities  Exchange  Act of 1934,  as
     amended,  and  the  rules  and  regulations   promulgated   thereunder)  of
     twenty-five  percent (25%) or more of the outstanding  voting securities of
     the Company by any person,  entity,  or group. A Change in Control shall be
     deemed to have occurred upon the execution of any agreement or document the
     effect of which will result in a Change in Control.  This definition  shall
     not apply to the purchase of Shares by  underwriters  in connection  with a
     public offering of securities of the Company,  or the purchase of shares of
     up to 25% of any class of  securities  of the  Company  by a  tax-qualified
     employee stock benefit plan which is exempt from the approval  requirements
     of 12 C.F.R.  Part 574.  The term  "person"  refers to an  individual  or a
     corporation,   partnership,   trust,  association,   joint  venture,  pool,
     syndicate, sole proprietorship,  unincorporated organization,  or any other
     form of entity not listed.  The  decision of the  Committee as to whether a
     Change in Control has occurred shall be conclusive and binding.

(l)  "Director"  shall mean any member of the Board, and any member of the board
     of directors of any Affiliate  that the Board has by resolution  designated
     as being eligible for participation in this Plan.  "Non-employee  Director"
     shall have the meaning set forth in Rule 16b-3.

(m)  "Effective Date" shall mean the date specified in Paragraph 15 hereof.

(n)  "Employee"  shall mean any person employed by the Company,  the Bank, or an
     Affiliate who is an employee for federal tax purposes.

(o)  "Exercise Price" shall mean the price per Optioned Share at which an Option
     may be exercised.

(p)  "ISO" means an option to purchase Common Stock which meets the requirements
     set forth in the Plan,  and which is intended to be and is identified as an
     "incentive stock option" within the meaning of Section 422 of the Code.

(q)  "Market  Value"  shall mean the fair market value of the Common  Stock,  as
     determined under Paragraph 7(b) hereof.

(r)  "Measurement Price" shall mean the price of the Common Stock to be utilized
     to determine the extent of stock appreciation.  The Measurement Price as to
     any  particular  SAR shall not be less than the Market Value on the date of
     grant.

<PAGE>
(s)  "Non-ISO"  means an  option  to  purchase  Common  Stock  which  meets  the
     requirements  set forth in the Plan but which is not  intended to be and is
     not identified as an ISO.

(t)  "Option" means an ISO and/or a Non-ISO.

(u)  "Optioned Shares" shall mean Shares subject to an Award granted pursuant to
     this Plan.

(v)  "Participant"  shall mean any key  Employee or other person who receives an
     Award pursuant to the Plan.

(w)  "Plan"  shall mean this Peoples  Bancorp  1998 Stock  Option and  Incentive
     Plan.

(x)  "Rule  16b-3"  shall mean Rule 16b-3 of the General  Rules and  Regulations
     under the Securities Exchange Act of 1934, as amended.

(y)  "Share" shall mean one share of Common Stock.

(z)  "SAR"  (or  "Stock  Appreciation  Right")  means a  right  to  receive  the
     appreciation  in value,  or a portion of the  appreciation  in value,  of a
     specified number of shares of Common Stock.

3. Term of the Plan and Awards.

(a)  Term of the Plan.  The Plan shall continue in effect for a term of 10 years
     from  the  Effective  Date or the date the  Plan is  adopted  by the  Board
     (whichever  period ends  earlier),  unless  sooner  terminated  pursuant to
     Paragraph  17 hereof.  No Award shall be granted  under the Plan after such
     ten year term.

(b)  Term of  Awards.  The term of each  Award  granted  under the Plan shall be
     established  by the  Committee,  but shall not  exceed 10 years;  provided,
     however,  that in the case of an Employee who owns Shares representing more
     than 10% of the outstanding Common Stock at the time an ISO is granted, the
     term of such ISO shall not exceed five years,  subject to the provisions of
     Section 8(e) hereof.

4. Shares Subject to the Plan.

(a)  General Rule.  Except as otherwise  required by the provisions of Paragraph
     12 hereof,  the aggregate number of Shares  deliverable  pursuant to Awards
     shall not exceed 200,000. Such Shares may either be authorized but unissued
     Shares or Shares held in  treasury.  If any Awards  should  expire,  become
     unexercisable, or be forfeited for any reason without having been exercised
     or becoming  vested in full,  the Optioned  Shares  shall,  unless the Plan
     shall have been terminated, be available for the grant of additional Awards
     under the Plan.

(b)  Special Rule for SARs.  The number of Shares with respect to which a SAR is
     granted,  but not the number of Shares which the Company  delivers or could
     deliver to an  Employee or  individual  upon  exercise  of a SAR,  shall be
     charged against the aggregate  number of Shares  remaining  available under
     the  Plan;  provided,  however,  that  in  the  case  of a SAR  granted  in
     conjunction  with an option,  under  circumstances in which the exercise of
     the SAR  results in  termination  of the Option  and vice  versa,  only the
     number of  Shares  subject  to the  Option  shall be  charged  against  the
     aggregate number of Shares  remaining  available under the Plan. The Shares
     involved in an Option as to which option  rights have  terminated by reason
     of the exercise of a related SAR, as provided in Paragraph 10 hereof, shall
     not be available for the grant of further Options under the Plan.

<PAGE>

5. Administration of the Plan.

(a)  Composition  of the  Committee.  The  Plan  shall  be  administered  by the
     Committee,  which shall be composed solely of two (2) or more  Non-employee
     Directors.  Members of the  Committee  shall  serve at the  pleasure of the
     Board. In the absence at any time of a duly appointed  Committee,  the Plan
     shall be administered by the members of the Board.

(b)  Powers of the Committee. Except as limited by the express provisions of the
     Plan or by resolutions  adopted by the Board, the Committee shall have sole
     and  complete   authority  and  discretion,   subject  to  compliance  with
     applicable  regulations of the Office of Thrift  Supervision  (i) to select
     Participants  and grant  Awards,  (ii) to determine the form and content of
     Awards  to be  issued in the form of  Agreements  under the Plan,  (iii) to
     interpret  the  Plan,  (iv) to  prescribe,  amend  and  rescind  rules  and
     regulations  relating  to the Plan,  and (v) to make  other  determinations
     necessary or advisable for the  administration  of the Plan.  The Committee
     shall  have and may  exercise  such  other  power and  authority  as may be
     delegated  to it by the Board from time to time.  A majority  of the entire
     Committee  shall  constitute  a quorum and the action of a majority  of the
     members  present  at any  meeting  of the  committee  at which a quorum  is
     present, or acts approved in writing by a majority of the Committee without
     a meeting, shall be deemed the action of the Committee.

(c)  Agreement.  Each Award shall be evidenced by a written agreement containing
     such  provisions as may be approved by the  Committee.  Each such Agreement
     shall   constitute  a  binding   contract   between  the  Company  and  the
     Participant,  and every  Participant,  upon  acceptance of such  Agreement,
     shall  be  bound  by the  terms  and  restrictions  of the Plan and of such
     Agreement. The terms of each such Agreement shall be in accordance with the
     Plan,  but each  Agreement  may  include  such  additional  provisions  and
     restrictions  determined by the Committee,  in its  discretion,  subject to
     compliance  with  applicable  regulations,  provided  that such  additional
     provisions  and  restrictions  are not  inconsistent  with the terms of the
     Plan. In  particular,  the Committee  shall set forth in each Agreement (i)
     the Exercise  Price of an Option or SAR, (ii) the number of Shares  subject
     to, and the expiration date of, the Award, (iii) the manner, time, and rate
     (cumulative  or otherwise)  of exercise or vesting of such Award,  (iv) the
     restrictions,  if any, to be placed upon such Award,  or upon Shares  which
     may be issued upon  exercise  of such Award,  and (v) whether the Option is
     intended to be an ISO or a Non-ISO.

     The  Chairman of the  Committee  and such other  Directors  and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the  recipients of
Awards.
<PAGE>
(d)  Effect of the Committee's  Decisions.  All decisions,  determinations,  and
     interpretations  of the  Committee  shall be final  and  conclusive  on all
     persons affected thereby.

(e)  Indemnification.  In addition to such other  rights of  indemnification  as
     they may have,  the members of the Committee  shall be  indemnified  by the
     Company in connection with any claim,  action, suit, or proceeding relating
     to any action taken or failure to act under or in connection  with the Plan
     or any Award,  granted  hereunder to the full extent provided for under the
     Certificate   of   Incorporation   of  the  Company  with  respect  to  the
     indemnification of Directors.

6. Grant of Options.

(a)  General  Rule.  On  and  after  the  Effective   Date,  key  Employees  and
     Non-employee Directors shall be eligible to receive discretionary grants of
     Options (or other  Awards)  pursuant to the Plan;  provided that such grant
     shall not be made to an Employee or Non-employee  Director whose Continuous
     Service terminates on or before the date of grant.

(b)  The Option  granted to the optionee  hereunder  (i) shall become vested and
     exercisable in accordance  with the Agreement  regarding such Option,  (ii)
     shall have a term of not more than 10 years from the date of the Award, and
     (iii) shall be subject to the general rule set forth in Paragraph 8(c) with
     respect to the effect of an optionee's termination of Continuous Service on
     the Optionee's right to exercise his or her Options.

(c)  Special Rules for ISOs.

(1)  The Option  granted to the optionee  hereunder  (i) shall become vested and
     exercisable,  on a  cumulative  basis,  with respect to 20% of the Optioned
     Shares upon each of the first five anniversary  dates of the date of grant,
     provided  that  vesting  shall  not  occur  on a  particular  date  if  the
     Optionee's  Continuous  Service has  terminated  on or before such date and
     (ii) shall have a term of 10 years from the date of the Award.

(2)  The aggregate  Market Value,  as of the date the Option is granted,  of the
     Shares with respect to which ISOs are  exercisable for the first time by an
     Employee  during any calendar year (under all incentive stock option plans,
     as defined in Section  422 of the Code,  of the  Company or any  present or
     future Affiliate) shall not exceed $100,000. Notwithstanding the foregoing,
     the Committee may grant Options in excess of the foregoing limitations,  in
     which  case such  Options  granted  in excess of such  limitation  shall be
     Options which are Non-ISOs.

7. Exercise Price for Options and Measurement Price for SARs.

(a)  Limits on Committee  Discretion.  The Exercise  Price as to any  particular
     Option and the  Measurement  Price for any particular SAR shall not be less
     than 100% of the Market Value of the  Optioned  Shares on the date of grant
     without taking into account any restrictions on the Optioned Shares. In the
     case of an  Employee  who owns  Shares  representing  more  than 10% of the
     Company's outstanding Shares of Common Stock at the time an ISO is granted,
     the  Exercise  Price shall not be less than 110% of the Market Value of the
     Optioned Shares at the time the ISO is granted.


<PAGE>

     (b)  Standards for Determining  Exercise Price or Measurement Price. If the
          Common Stock is listed on a national  securities  exchange  (including
          the  Nasdaq  National  Market  or  SmallCap  System)  on the  date  in
          question,  then the Market Value per Share shall be the average of the
          highest and lowest selling prices on such exchange on such date, or if
          there  were  no  sales  on such  date,  then  the  Exercise  Price  or
          Measurement  Price shall be the mean  between the bid and asked prices
          on such  date.  If the  Common  Stock is  traded  otherwise  than on a
          national securities exchange on the date in question,  then the Market
          Value per Share shall be the mean  between the bid and asked prices on
          such date, or, if there is no bid and asked prices on such date,  then
          on the next  prior  business  day on  which  there  was bid and  asked
          priced. If no such bid and asked prices are available, then the Market
          Value per Share shall be its fair market  value as  determined  by the
          Committee, in its sole and absolute discretion.

8. Exercise of Options.

     (a)  Generally. Subject to (e) below, any Option granted hereunder shall be
          exercisable  at such  times  and  under  such  conditions  as shall be
          permissible  under the terms of the Plan and of the Agreement  granted
          to a  Participant.  An Option may not be  exercised  for a  fractional
          Share.

     (b)  Procedure for Exercise. A Participant may exercise Options, subject to
          provisions   relative  to  its  termination  and  limitations  on  its
          exercise,  only by (1) written notice of intent to exercise the option
          with respect to a specified  number of Shares,  and (2) payment to the
          Company  (contemporaneously  with delivery of such notice) in cash, in
          Common Stock, or a combination of cash and Common Stock, of the amount
          of the  Exercise  Price for the number of Shares with respect to which
          the option is then being  exercised.  Each such  notice  (and  payment
          where required) shall be delivered, or mailed by prepaid registered or
          certified  mail,  addressed  to the  Treasurer  of the  Company at the
          Company's executive offices.  Common Stock utilized in full or partial
          payment  of the  Exercise  Price  for  options  shall be valued at its
          Market Value at the date of exercise.

     (c)  Period of  Exercisability.  Except to the extent otherwise provided in
          more restrictive terms of an Agreement,  an Option may be exercised by
          a Participant  only with respect to the vested  portion of such Option
          and only while a  Participant  is an  Employee  or  Director  that has
          maintained  Continuous  Service  from  the  date of the  grant  of the
          Option,  or within three months after  termination of such  Continuous
          Service  (but  not  later  than the date on  which  the  Option  would
          otherwise expire),  except if the Employee's or Director's  Continuous
          Service terminates by reason of:

     (1)  "Just  Cause"  which for  purposes  hereof  shall have the meaning set
          forth in any unexpired  employment  agreement  between the Participant
          and the Company, the Bank, and/or an Affiliate (and, in the absence of
          any such agreement,  shall mean termination  because of the Employee's
          or Director's personal dishonesty,  incompetence,  willful misconduct,
          breach  of  fiduciary  duty  involving  personal  profit,  intentional
          failure to perform stated duties,  willful violation of any law, rule,
          or regulation  (other than traffic  violations or similar offenses) or
          final  cease-and-desist  order),  then  the  Participant's  rights  to
          exercise such Option shall expire on the date of such termination;
<PAGE>

     (2)  death,  then all  Options of the  deceased  Participant  shall  become
          immediately exercisable and may be exercised within two years from the
          date of the Participant's  death (but not later than the date on which
          the Option would otherwise expire) by the personal  representatives of
          the   Participant's   estate  or  person  or   persons   to  whom  the
          Participant's rights under such Option shall have passed by will or by
          laws of descent and distribution;

     (3)  Permanent  and Total  Disability  (as such term is  defined in Section
          22(e)(3) of the Code),  then all Options of the  disabled  Participant
          shall become  immediately  exercisable and may be exercised within one
          year from the date of such  Permanent  and Total  Disability,  but not
          later than the date on which the Option would otherwise expire.

     (d)  Effect of the Committee's  Decisions.  The  Committee's  determination
          whether  a  Participant's  Continuous  Service  has  ceased,  and  the
          effective  date thereof,  shall be final and conclusive on all persons
          affected thereby.

     (e)  Vesting of all Options shall cease immediately upon the termination of
          employment or  directorship of an optionee.  The vesting  schedule for
          ISOs set  forth in  Section  6(c)(1)  of this  Plan is the most  rapid
          vesting permitted under the Plan for ISOs, except in the case of death
          or disability  (which shall be governed by Paragraphs  8(c)(2) and (3)
          above) or a change in control  (which  shall be governed by  Paragraph
          11).

9. Grants of Options to Non-Employee Directors

     (a)  Grants.  Notwithstanding  any  other  provisions  of this  Plan,  each
          Non-employee Director on the Effective Date is elegible to receive, on
          and after said date,  Non-ISOs to purchase Shares. Such Non-ISOs shall
          have an Exercise  Price per Share equal to the Market Value of a Share
          on the date of grant.

     Each  Director  who joins the Board after the  Effective  Date and who is a
Non-employee  Director  shall be eligible  to receive,  on and after the date of
joining the Board, a discretionary  grant of Non-ISOs in accordance with Section
6 of the Plan at an  Exercise  Price per Share  equal to the  Market  Value of a
Share on the date of grant.

     (b)  Terms of  Exercise.  Options  received  under the  provisions  of this
          Paragraph may be exercised in accordance with Paragraph 8 above.

10. SARs (Stock Appreciation Rights)

     (a)  Granting of SARs. In its sole  discretion,  subject to compliance with
          applicable regulations, the Committee may from time to time grant SARs
          to Employees  either in  conjunction  with, or  independently  of, any
          Options  granted under the Plan. A SAR granted in conjunction  with an
          Option may be an alternative  right wherein the exercise of the Option
          terminates  the SAR to the  extent of the  number of shares  purchased
          upon exercise of the Option and, correspondingly,  the exercise of the
          SAR  terminates  the Option to the extent of the number of Shares with
          respect to which the SAR is exercised. Alternatively, a SAR granted in
          conjunction with an Option may be an additional right wherein both the
          SAR and the  Option  may be  exercised.  A SAR may not be  granted  in
          conjunction  with an ISO under  circumstances in which the exercise of
          the SAR affects the right to  exercise  the ISO or vice versa,  unless
          the SAR, by its terms, meets all of the following requirements:
<PAGE>

     (1)  The SAR will expire no later than the ISO;

     (2)  The SAR may be for no more than the  difference  between the  Exercise
          Price of the ISO and the Market Value of the Shares subject to the ISO
          at the time the SAR is exercised;

     (3)  The SAR is transferable  only when the ISO is transferable,  and under
          the same conditions;

     (4)  The SAR may be exercised only when the ISO may be exercised; and

     (5)  The SAR may be  exercised  only when the  Market  Value of the  Shares
          subject to the ISO exceeds the Exercise Price of the ISO.

     (b)  Timing of Exercise.  Any election by a  Participant  to exercise  SARs
          shall be made  during the period  beginning  on the 3rd  business  day
          following the release for publication of quarterly or annual financial
          information  and ending on the 12th business day following  such date.
          This  condition  shall be deemed to be  satisfied  when the  specified
          financial data is first made publicly available. In no event, however,
          may a SAR be exercised  within the six-month period following the date
          of its grant.

     The  provisions  of  Paragraphs  8(c)  and 8(e)  regarding  the  period  of
exercisability  and vesting of Options are incorporated by reference herein, and
shall determine the period of exercisability and vesting of SARs.

     (c)  Exercise of SARs. A SAR granted hereunder shall be exercisable at such
          times and under  such  conditions  as shall be  permissible  under the
          terms of the  Plan  and of the  Agreement  granted  to a  Participant,
          provided that a SAR may not be exercised for a fractional  Share. Upon
          exercise  of a SAR,  the  Participant  shall be  entitled  to receive,
          without  payment  to the  Company  except for  applicable  withholding
          taxes,  an amount equal to the excess of (or, in the discretion of the
          Committee  if provided in the  Agreement,  a portion of) the excess of
          the then aggregate  Market Value of the number of Optioned Shares with
          respect to which the Participant exercises the SAR, over the aggregate
          Measurement Price of such number of Optioned Shares. This amount shall
          be payable by the Company, in the discretion of the Committee, in cash
          or in  Shares  valued  at  the  then  Market  Value  thereof,  or  any
          combination thereof.

<PAGE>
     (d)  Procedure  for  Exercising   SARs.  To  the  extent  not  inconsistent
          herewith,  the  provisions  of Paragraph  8(b) as to the procedure for
          exercising Options are incorporated by reference,  and shall determine
          the procedure for exercising SARs.

11. Change in Control.

     All outstanding Awards shall become immediately exercisable in the event of
a Change in Control of the Company,  as  determined by the Committee in its sole
discretion.  In the event of a Change in Control, the Committee and the Board of
Directors, at their discretion,  will take one or a combination of the following
actions to be effective as of the date of such Change in Control:

     (1)  provide that such Awards shall be assumed,  or equivalent Awards shall
          be  substituted  ("Substitute  Awards") by the acquiring or succeeding
          corporation  (or an  Affiliate  thereof),  provided  that (a) any such
          Substitute  Award  exchanged for ISOs shall meet the  requirements  of
          Section  424(a) of the Code, and (b) the shares of stock issuable upon
          the  exercise of such  Substitute  Award shall  constitute  securities
          registered in accordance  with the  Securities Act of 1933, as amended
          ("Securities  Act"),  or such  securities  shall be  exempt  from such
          registration  in accordance  with  Sections  3(a)(2) or 3(a)(5) of the
          Securities Act, or

     (2)  provide that the  Participants  will receive upon the  consummation of
          the  Change in  Control  transaction  a cash  payment  for each  Award
          surrendered  equal to the  difference  between (1) the Market Value of
          the consideration to be received for each share of Common Stock in the
          Change in Control  transaction times the number of Shares subject to a
          surrendered  Award,  and  (2) the  aggregate  exercise  price  of such
          surrendered  Awards.  Awards to which the  Committee  or the Board has
          determined to provide a cash payment in lieu of the Award  pursuant to
          this section shall be and become, upon the Change in Control the right
          to receive the cash payment only and shall cease to be an Award.

     The  individual  agreements  concerning  Awards  under  this  Plan or other
agreements between  Participants and the Company, the Bank, and/or any Affiliate
thereof,  may provide  restrictions on Awards in the case of a Change in Control
in order to avoid adverse tax results under Section 280G and/or  Section 4999 of
the Code.

12. Effect of Changes in Common Stock Subject to the Plan.

     (a)  Recapitalizations;  Stock  Splits,  Etc. The number and kind of shares
          reserved  for  issuance  under the Plan,  and the  number  and kind of
          shares subject to  outstanding  Awards (and the Exercise Price thereof
          in the case of Options and the Measurement Price in the case of SARs),
          shall be proportionately adjusted for any increase,  decrease, change,
          or  exchange  of Shares  for a  different  number or kind of shares or
          other   securities  of  the  Company  which  results  from  a  merger,
          consolidation,  recapitalization,   reorganization,  reclassification,
          stock dividend,  split-up,  combination of shares, or similar event in
          which the number or kind of shares is changed  without  the receipt or
          payment of consideration by the Company.
<PAGE>

     (b)  Special Rule for ISOs.  Any adjustment  made pursuant to  subparagraph
          (a)  hereof  shall be made in such a  manner  as not to  constitute  a
          modification,  within the  meaning of Section  424(h) of the Code,  of
          outstanding ISOs.

     (c)  Conditions and Restrictions on New, Additional, or Different Shares or
          Securities.  If, by reason of any  adjustment  made  pursuant  to this
          Paragraph,  a  Participant  becomes  entitled to new,  additional,  or
          different  shares of stock or  securities,  such new,  additional,  or
          different  shares of stock or securities shall thereupon be subject to
          all of the conditions  and  restrictions  that were  applicable to the
          Shares pursuant to the Award before the adjustment was made.

     (d)  Other Issuances.  Except as expressly provided in this Paragraph,  the
          issuance  by the  Company  or an  Affiliate  of shares of stock of any
          class,  or of securities  convertible  into Shares or stock of another
          class,  for cash or  property  or for labor or  services  either  upon
          direct sale or upon the  exercise  of rights or warrants to  subscribe
          therefor,  shall  not  affect,  and no  adjustment  shall be made with
          respect to, the number, class, Exercise Price, or Measurement Price of
          Shares then subject to Awards or reserved for issuance under the Plan.

13. Non-Transferability of Awards.

     Awards may not be sold, pledged, assigned,  hypothecated,  transferred,  or
disposed  of in any  manner  other  than by will or by the laws of  descent  and
distribution, or pursuant to the terms of a "qualified domestic relations order"
(within  the  meaning  of  Section  414(p) of the Code and the  regulations  and
rulings  thereunder).  An Award  may be  exercised  only by a  Participant,  the
Participant's personal representative, or a permitted transferee.

14. Time of Granting Awards.

     The date of grant of an Award shall, for all purposes,  be the later of the
date on which the Committee makes the  determination of granting such Award, and
the  Effective  Date.  Notice  of the  determination  shall  be  given  to  each
Participant  to whom an Award is so granted  within a reasonable  time after the
date of such grant.

15. Effective Date.

     The Plan shall become effective immediately upon its approval by the Board;
provided,  however,  that the Plan  shall be  approved  by a  favorable  vote of
stockholders  owning at least a majority  of the Shares  cast at a meeting  duly
held in accordance  with applicable laws within 12 months of the adoption of the
Plan by the Board.  If such approval of  stockholders  is not obtained within 12
months of the adoption of the Plan, all ISOs granted  pursuant to the Plan shall
become Non-ISOs.

16. Modification of Awards.

     At any time,  and from time to time,  the Board may authorize the Committee
to direct  execution of an  instrument  providing  for the  modification  of any
outstanding  Award,  provided no such modification shall confer on the holder of
said Award any right or benefit  which could not be  conferred on such person by
the grant of a new Award at such time,  or impair the Award  without the consent
of the holder of the Award.
<PAGE>

17. Amendment and Termination of the Plan.

     The  Board may from time to time  amend the terms of the Plan,  subject  to
compliance with applicable  regulations,  and, with respect to any Shares at the
time not subject to Awards,  suspend or terminate  the Plan;  provided  that the
provisions  of  Paragraph  9 may not be amended  more than once every six months
(other than to comport with changes in the Code, the Employee  Retirement Income
Security Act of 1974, as amended, or the rules thereunder).

     Shareholder  approval  must be obtained for any  amendment of the Plan that
would change the number of Shares subject to the Plan (except in accordance with
Section 13 above),  change the category of persons  eligible to be Participants,
or materially increase the benefits under the Plan.

     No amendment,  suspension,  or termination  of the Plan shall,  without the
consent  of any  affected  holders  of an Award,  alter or impair  any rights or
obligations under any Award theretofore granted.

18. Conditions upon Issuance of Shares.

     (a)  Compliance with Securities  Laws.  Shares of Common Stock shall not be
          issued with  respect to any Award  unless the issuance and delivery of
          such  Shares  shall  comply  with  all  relevant  provisions  of  law,
          including, without limitation, the Securities Act of 1933, as amended,
          the rules and regulations promulgated thereunder, any applicable state
          securities law, and the  requirements of any stock exchange upon which
          the Shares may then be listed.  The Plan is  intended  to comply  with
          Rule  16b-3,  and  any  provision  of the  Plan  which  the  Committee
          determines in its sole and absolute discretion to be inconsistent with
          said Rule shall, to the extent of such  inconsistency,  be inoperative
          and null and void,  and shall not affect the validity of the remaining
          provisions of the Plan.  The  Committee  shall have the power to amend
          the Plan to conform the Plan with Rule 16b-3.

     (b)  Special Circumstances. The inability of the Company to obtain approval
          from any regulatory body or authority deemed by the Company's  counsel
          to be  necessary  to the  lawful  issuance  and  sale  of  any  Shares
          hereunder shall relieve the Company of any liability in respect of the
          non-issuance or sale of such Shares. As a condition to the exercise of
          an option or SAR,  the Company may require the person  exercising  the
          Option or SAR to make such  representations  and  warranties as may be
          necessary  to  assure  the  availability  of  an  exemption  from  the
          registration requirements of federal or state securities law.

     (c)  Committee  Discretion.  The  Committee  shall  have the  discretionary
          authority,  subject to  compliance  with  applicable  regulations,  to
          impose  in  Agreements  such  restrictions  on  Shares  as it may deem
          appropriate  or desirable,  including but not limited to the authority
          to impose a right of first refusal or to establish  repurchase  rights
          or both of these restrictions.
<PAGE>
                                                      
19. Reservation of Shares.

     The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.

20. Withholding Tax.

     The Company's  obligation to deliver Shares upon exercise of Options and/or
SARs  shall be  subject  to the  Participant's  satisfaction  of all  applicable
federal, state, and local income and employment tax withholding obligations. The
Committee,  in its  discretion,  may  permit  the  Participant  to  satisfy  the
obligation,  in whole or in part,  by  irrevocably  electing to have the Company
withhold  Shares,  or to  deliver to the  Company  Shares  that the  Participant
already owns,  having a value equal to the amount  required to be withheld.  The
value of Shares to be withheld,  or delivered to the Company,  shall be based on
the Market  Value of the Shares on the date the amount of tax to be  withheld is
to be determined.  As an  alternative,  the Company may retain,  or sell without
notice,  a number of such Shares  sufficient to cover the amount  required to be
withheld.

21. No Employment or Other Rights.

     In no event shall an Employee's or Director's eligibility to participate or
participation  in the Plan create or be deemed to create any legal or  equitable
right of the Employee, Director, or any other party to continue service with the
Company,  the Bank, or any Affiliate of such corporations.  Except to the extent
provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right
to be  granted  an Award or,  having  received  an Award,  the right to again be
granted an Award. However, an Employee or Director who has been granted an Award
may, if otherwise eligible, be granted an additional Award or Awards.

22. Governing Law.

     The Plan shall be governed by and construed in accordance  with the laws of
the State of Indiana,  except to the extent that  federal law shall be deemed to
apply.