CONTENTS

Letter to Stockholders ........................................................1
Peoples Federal Philosophy.....................................................2
Highlights and Stock Information...............................................3
Board of Directors and Executive Officers......................................4
Branch Managers and Employees..................................................5
Management Discussion and Analysis.............................................6
Selected Consolidated Financial Data..........................................13
Consolidated Financial Statements.............................................14
Independent Auditor's Report..................................................27
Statement of Management's  Responsibility.....................................28
Corporate Profile...................................................Inside Cover

Executive Officers of Bancorp
Roger J. Wertenberger, 
Chairman of the Board and Chief Executive Officer

Maurice F. Winkler, III, 
President and Chief Operating Officer

Carole J. Leins
Corporate Secretary

Independent Auditors
Geo. S. Olive & Co. LLC
Certified Public Accountants
201 North Illinois Street
Indianapolis, IN  46204

Legal Counsel
Manatt, Phelps & Phillips
1200 New Hampshire Avenue N.W.
Suite 200
Washington, D.C.  20036

CORPORATE PROFILE

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

     The Company's  primary asset is Peoples  Federal Savings Bank ("the Bank").
The Bank was formed in 1925 and has grown to assets of more than $280 million.

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

     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  Securities  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, 1996,  the Company had  approximately  1,500
stockholders.

ANNUAL MEETING

     The  annual  meeting  of  stockholders  of  Peoples  Bancorp  will  be held
Wednesday,  January 8, 1997, at 2:00 p.m. at Greenhurst Country Club, 1740 North
Main Street, Auburn, Indiana 46706.

ABOUT THE COVER

     On the cover,  Melissa  Kennedy makes her first savings  deposit at Peoples
with  the help of her  grandfather,  Dorsey  Fields,  and the  teller,  Mary Ann
Ketzenberger.

<PAGE>

TO OUR STOCKHOLDERS:

     On September 30, 1996, the last day of our fiscal year,  President  Clinton
signed the long-awaited legislation which calls for the re-capitalization of the
Savings  Association  Insurance  Fund portion of the Federal  Deposit  Insurance
Corporation. The immediate impact of this legislation is an assessment of $0.657
for each $100 of insured  deposits as of March 31, 1995.  The  assessment to the
Bank totaled $1,500,870,  which had an after-tax effect on earnings of $893,018.
Without  the SAIF  assessment,  net  income  for  fiscal  1996  would  have been
$4,105,476,  or $1.75 per share, compared to $3,899,430, or $1.65 per share last
year.

     Starting  January 1, 1997,  the Bank's  annual  insurance  premium  will be
reduced  from the $0.23 per $100  assessment  base to  approximately  $0.065 per
$100. Based on September 30, 1996, total deposits,  the Bank will see its annual
FDIC expense  reduced from  $540,000 to  approximately  $153,000.  Since the new
rates do not go into effect until January 1, 1997,  the savings will effect only
three quarters in fiscal 1997.

     In fiscal  1996,  Peoples  Bancorp  repurchased  40,804 of its  outstanding
shares.  The total number of shares  outstanding at year end was 2,325,494.  The
Board of Directors  intends to continue the  repurchase  program  providing  the
market  continues to undervalue  the stock.  We currently  feel this  repurchase
program is in the best interest of the long-term stockholder.

     Effective  October 1, 1996,  Maurice F. Winkler,  III was elected president
and chief  operating  officer of Peoples  Bancorp and the Bank.  Mr. Winkler has
been with the Bank in various capacities since 1979 and has served as a director
since 1993.  Roger J.  Wertenberger  will remain as chairman and chief executive
officer of both Peoples Bancorp and the Bank.

     We enter our new fiscal  year after what would have been a record  earnings
year if not for the special  assessment.  We are pleased that this assessment is
behind the  industry,  and we can move  forward with plans to improve and expand
our services.

     The  continued  success of this  organization  is due to our  dedicated and
motivated employees,  our knowledgeable and dedicated  directors,  and our loyal
clientele and stockholders.

     Please note that our annual  stockholders'  meeting will be held at the new
clubhouse at  Greenhurst  Country Club on January 8, 1997,  at 2:00 P.M. We look
forward to seeing you there as we anticipate the new year and its challenges.



Roger J. Wertenberger                                  Maurice F. Winkler, III
Chairman and C.E.O.                                      President and C.O.O.

<PAGE>

                              FINANCIAL HIGHLIGHTS


                                              1996         1995
                                           -----------   ----------
                          (dollars in thousands except per share data)
Operating Results:
Net Interest Income                         $10,506       $9,958
Provision for Loan Losses                         9           50
Dividends Per Share                            0.56         0.46
                                                

At Year End:
Assets                                        280,012      276,608
Loans                                         223,899      219,576
Allowance for Loan Losses                         887          912
Deposits                                      235,081      232,747
Stockholders' Equity                           42,677       41,624
Book Value Per Share                            18.35        17.62
Average Equity to Average Assets                15.37%       14.84%



                            Common Stock Information
                                   Market Price          Dividends
                          ----------------------------
                               Low            High       Per Share
                          ---------------  -----------   ----------
Fiscal 1996
1st QTR                           $20.25       $22.25     $0.13
2nd QTR                            18.75        20.88      0.14
3rd QTR                            18.75        21.00      0.14
4th QTR                            19.25        20.25      0.15

Fiscal 1995
1st QTR                           $19.50       $21.75     $0.11
2nd QTR                            18.50        20.75      0.11
3rd QTR                            17.75        20.00      0.11
4th QTR                            19.50        22.50      0.13
The price of PFDC stock traded on NASDAQ on November 25, 1996 was $20.25.





This page of the annual report  includes four graphs showing 5 year  information
for total assets, net loans, stockholder's equity, and dividends per share.

<PAGE>

                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>
                                      Board
                                  of Directors

             Photograph of board of directors

     Seated  left  to  right:  Douglas  D.  Marsh,  Lloyd  M.  Cline,  Roger  J.
Wertenberger,  Jesse A. (Jack)  Sanders,  Lawrence R. Bowmar.  Standing  left to
right:  Maurice F. Winkler III, Russell A. Spice, Jack L. Buttermore,  Robert D.
Ball, John C. Harvey, John C. Thrapp.

Roger J. Wertenberger         Jack L. Buttermore          John C. Thrapp
Chairman of the Board         Owner of Buttermore Farms   Attorney, 
and Chief Executive           Auburn, Indiana             Thrapp & Thrapp
Officer of the Bank,          Director since 1980         Kendallville,Indiana
Auburn, Indiana                                           Director since 1990. 
Director since 1954.

Robert D. Ball                John C. Harvey              Maurice F. Winkler,III
Former principal owner of the Physician,                  President and Chief 
Ball Brass and Aluminum       Auburn, Indiana.            Operating Officer of  
Foundry Inc., Auburn, Indiana Director since 1979.        the Bank, Auburn,    
Director since 1982.                                      Indiana, 
                                                          Director since 1993.

Lawrence R. Bowmar            Douglas D. Marsh                 Lloyd M. Cline
Retired Vice President        Sales Associate of Bassett       Director Emeritus
Consumer Loans the Bank       Office Furniture & Supply, 
Director from 1974-1992 and   Auburn, Indiana
1993-1996.                    Regional Director of Excel   Jesse A.(Jack)Sanders
                              Communications Dallas, Texas     Director Emeritus
                              Secretary and Director of Applied
                              Innovations Chicago, Illinois    Russell A. Spice
                              Director since 1982.             Director Emeritus

                         Executive Officers of the Bank

Roger J. Wertenberger                Lee Ann Hines
Chief Executive Officer              Vice President-Trust Officer

Maurice F. Winkler, III              Carole J. Leins
President and Chief                  Corporate Secretary
Operating Officer
                                     Deborah K. Stanger
Max E. Robart                        Vice President-Chief
Executive Vice President             Financial Officer

Herma F. Fields
Vice President-Savings

                                                                          

<PAGE>



Branch Managers and Associates


Photograph of branch managers


     Seated left to right: Kristie Liebing,  Avilla;  Richard Lewton,  LaGrange;
Kay Smith, Garrett. Standing left to right: Dewayne Anderson,  Columbia City; R.
Clark Ream, Kendallville.

Associates

Molly Allen o Jodi Altimus o Karyn Alwine o Dewayne Anderson o Katrina Andrews o
Cheryl  Bherns o Lisa  Boardman o Shane  Bowen o Kay Brandon o Mona Brown o Jean
Bush o Retha  Butler o Michele  Carnahan o Chris  Coleman o Larry Cooney o Linda
Cummins o Sharleen  DeJohn o Herma Fields o Terenna  Flauding o Delores Forbes o
Terry Frye o Michelle Gaskill o Scott Gates o Jennifer Gose o Jay Grate o Sheryl
Hanes o Bonnie Harlan o Marilee Harris o Stephanie  Harris o Paula Hertsel o Lee
Ann  Hines o Adina  Houser o Sherry  Johnson  o Cindy  Jollief  o Dixie  Jones o
Heather  Jones o Paula Jones o Debby Kennedy o Mary Ann  Ketzenberger  o Rebecca
Klingenberger  o Lisa  LaVergne  o Carole  Leins o Ann Leis o  Richard  Lewton o
Kristie  Liebing o Helen Lindley o Eleanor Manns o Sandra McAfee o Delara Miller
o Gayle  Morris o Nadia  Mundroff  o Josh  Noel o Donna  O'Dell o Jane  Pepple o
Deborah Pickard o Clark Ream o Lora Refner o Karen Reust o Rita Richardson o Max
Robart o Linda Rodebaugh o Katherine  Rohrbach o Joatta Sayles o Richard Shankle
o Elizabeth  Shawver o Monica  Sheets o Kay Shepherd o Diane Slone o Kay Smith o
Thoma Smith o Deborah  Stanger o Brenda Strohm o Shannon Talley o Cheri Taylor o
John Thrapp o Shalisa Troyer o Patricia Trumbull o Kathy VanAllen o Linda Walker
o Jennifer Warfield o John Weigel o Roger Wertenberger o Maury Winkler o   Becky
Workman o Monique Zawadzke

Office Locations

Auburn Office--212 West 7th St., Auburn, IN 46706

Avilla Office--105 North Main St., Avilla, IN 46710

Columbia City Office--123-129 S. 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

<PAGE>


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  five
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,  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   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, 1996, 1995, and 1994.


                                               September 30
                                  ----------------------------------------
                                      1996          1995         1994
                                   ------------ ------------- ------------
Weighted average interest rate on:
 Loans                                 8.33%          8.17%         7.84%
 Mortgage-backed securities            8.07           9.11          9.37
 Securities                            5.59           5.20          5.42
 Other interest-earning assets         6.19           7.19          3.65
 Combined                              7.85           7.68          7.26
Weighted average cost of:
 NOW and savings deposits              2.64           2.61          2.60
 Certificates of deposit               5.70           5.59          4.74
 Borrowings                            5.94           5.73          3.95
 Combined                              4.79           4.65          4.01
Interest rate spread                   3.06           3.03          3.25
Net yield on weighted average
 interest-earning assets               3.75           3.70          3.83


     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, 1996, 1995 and 1994.

                                               At September 30
                                      -------------------------------
                                        1996        1995      1994
                                      ----------  ---------  --------
Weighted average interest rate on:
 Loans                                  8.02%        8.31%     8.30%
 Mortgage-backed securities             9.22         9.05      8.75
 Securities                             5.18         5.19      4.89
 Other interest-earning assets          6.81         6.41       ---
 Combined                               7.57         7.79      7.72
Weighted average cost of:
 NOW and savings deposits               2.80         2.70      2.71
 Certificates of deposit                5.72         5.92      5.27
 Borrowings                              ---         5.83       ---
 Combined                               4.89         4.94      4.41
Interest rate spread                    2.68         2.85      3.31

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.

     The following  table  illustrates  the projected  maturities and the repri-
cing  mechanisms of the major asset and liability  categories of Peoples Federal
as of September  30,  1996.  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:  Consolidated  Maturity  and Rate"  filed as part of Peoples
Federal's  September  30,  1996,  quarterly  report.  The data  contained in the
following report is the contractual  repricing  information and does not contain
any assumptions regarding repricing.



                                                At September 30, 1996
                                                (Dollars in Thousands)
                             ---------------------------------------------------
                                                More than         Over
Period to maturity           3 Months  3 Months     1-3    3-5     5            
  or repricing               or Less  Thru 1 Year  Years   Years  Years    Total
                             -------- -----------  -----   ----- ------    -----

Interest earning assets:     
 Adjustable rate loans ......  22,590  $43,742   $3,037  $9,345     $--  $78,714
 Fixed rate loans ...........   1,341    1,366    1,106   3,087  127,079 133,979
 Investment securities ......  11,822    4,142   14,801  11,626    4,949  47,340
 Consumer and other loans ...   1,369    2,335    3,050   1,834    3,248  11,836
                             --------- -------- ------- -------- -------- ------
 Total Assets Subject to
    Repricing                  37,122   51,585   21,994  25,892  135,276 271,869
                             --------- -------- ------- -------- -------- ------
Liabilities Subject to Repricing
 Certificates of deposit ....  30,418    64,238   64,181   7,656    --   166,493
 N.O.W. and other
    transaction accounts       24,506      --       --      --      --    24,506
 Passbook accounts ..........  39,584      --       --      --      --    39,584
 Money market accounts ......   4,222      --       --      --      --     4,222
 Borrowings .................       8      --       --      --      --         8
                              -------- --------- ------- -------   ----  ------
 Total Liabilities Subject
    to Repricing               98,738    64,238   64,181   7,656    --   234,813
                              -------- --------- ------- -------   ----- -------
Excess (deficiency) of rate 
 sensitive assets over rate 
 sensitive liabilities       $(61,616) $(12,653)$(42,187)$18,236$135,276 $37,056
                             ========= ========= ======= ======= ======= =======

Cumulative excess (deficiency) 
 of rate sensitive assets 
 over rate sensitive
 liabilities                $(61,616) $(74,269)$(116,456)$(98,220)$37,056$37,056
                            ========= ========= ========= ======== ====== ======
                            
As a % of Total Assets Subject 
 to Repricing                  (22.66)% (27.32)% (42.84)% (36.13)% 13.63% 13.63%


   
     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.

INTEREST INCOME

     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.

     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)
                             ------------------------------------------------------------------------------------
                                           1996                      1995                       1994
                             ----------------------------- --------------------------- ---------------------------
                               Average    Interest         Average    Interest         Average   Interest
                             Outstanding  Earned/  Yield/ Outstanding  Earned/ Yield/ Outstanding Earned/ Yield/
                               Balance      Paid    Rate   Balance      Paid    Rate   Balance     Paid    Rate
                            ------------- --------  ----  ---------    ------   -----  -------     -----   ----
<S>                             <C>       <C>       <C>    <C>        <C>       <C>    <C>       <C>       <C> 
Interest-earning assets:
 Loans                          $223,861  $18,646   8.33%  $218,789   $17,877   8.17%  $204,644  $16,037   7.84%
 Mortgage-backed securities          719       58   8.07        878        80   9.11      1,131      106   9.37
 Investment securities            35,936    2,010   5.59     42,383     2,204   5.20     37,191    2,014   5.42
 Other interest-earning assets    16,513    1,022   6.19      7,290       524   7.19     14,595      533   3.65
                               ---------  -------         ---------   -------          --------  -------
 Total interest-earning assets   277,029   21,736   7.85    269,340    20,685   7.68    257,561   18,690   7.26
                                          -------                     -------                    ------- 
Allowance for loan losses           (932)                     .(977)                     (1,030)
Other assets                       3,796                      3,571                       2,314
                               ---------                  ---------                    -------- 
Total Assets                    $279,893                   $271,934                    $258,845
                               =========                  =========                    ========  

Interest-bearing liabilities:
  NOW and savings deposits       $70,043   $1,846   2.64     $72,382    $1,892   2.61    $75,140   $1,950   2.60
  Certificates of deposit        163,758    9,341   5.70     157,902     8,819   5.59    144,869    6,873   4.74
  Borrowings                         724       43   5.94         279        16   5.73        177        7   3.95
  Total interest-              ---------  -------         ----------   -------          -------- --------
     bearing liabilities         234,525   11,230   4.79     230,563    10,727   4.65    220,186    8,830   4.01
                                          -------                      -------                   --------
Other liabilities                  2,513                       1,006                       1,260
Stockholders' equity              42,855                      40,365                      37,399
                               ----------                 -----------                   ---------
Total Liabilities and
  Stockholders' equity          $279,893                    $271,934                    $258,845
                               ==========                 ===========                   =========

Net interest income/spread                 $10,506   3.06               $9,958   3.03              $9,860   3.25
                                           =======                     ========                   =======
Net yield on interest earning assets                 3.75                        3.70                       3.83


</TABLE>
                                               
     The Company has  supplemented  its  interest  income  through  purchases of
investment  securities when appropriate.  Such 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,
                             ----------------------------------------------------------------------------
                                     1996 vs 1995              1995 vs 1994              1994 v. 1993
                             ------------------------- ------------------------ -------------------------
                                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                          $417  $352    $769     $1,144   $696   $1,840    $110   $(1,236) $(1,126)
 Mortgage-backed securities      (14)   (8)    (22)       (26)    -       (26)    (73)        9      (64)
 Investment securities          (371)  177    (194)       274    (84)     190     906      (288)     618
 Other interest-earning          581   (83)    498       (267)   258       (9)    (55)       18      (37)
                                -----  ----  ------    -------   ----   ------   ------    -----   ------
 Total interest income           613   438   1,051      1,125    870    1,995     888    (1,497)    (609)
                                -----  ----  ------    -------   ----   -------  ------   -------  ------
Interest expense from:
  NOW and savings deposits        (70)  24     (46)       (66)     8      (58)    279         6      285
  Certificates of deposit         341  181     522        651  1,296    1,947     182      (687)    (505)
   Borrowings                      26    1      27          9     -         9     (82)      (15)     (97)
                                -----  ----   -----    -------   ----   ------   -----    ------    -----
  Total interest expense          297  206     503        594  1,304    1,898     379      (696)    (317)
                                -----  ----   -----    -------  -----   ------   -----    ------    -----
Net interest income (expense)    $316 $232    $548       $531  $(434)     $97    $509     $(801)   $(292)
                                =====  ====   =====    =======  =====   ======   =====    ======   ======

</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
2.12%,  1.50%,  and 1.60% for fiscal years ended  September 30, 1996,  1995, and
1994, 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 5%, 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, 1996,
the Bank had liquid  assets of  $43,897,745.  This  represents a ratio of liquid
assets to total assets of 15.7%.

     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  ($4,229,200
at September  30, 1996,  all for  residential  mortgage  loans),  consumer  loan
commitments  ($7,697,400 at September 30, 1996, primarily for home equity lines)
and other obligations and expenditures.

     During the year ended September 30, 1996,  there was a net decrease of $0.9
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  $4  million.  The major  sources of cash during the year were the
increase in deposits of $2.3 million and  operating  activities  which  provided
$3.8 million.

     During the year ended  September  30, 1995,  there was a net increase of $5
million  in cash  and cash  equivalents.  This  increase  was  primarily  due to
maturities of investment  securities of  approximately $4 million which were not
reinvested  in securities in order to increase  short term  liquidity.  The loan
portfolio increased  approximately $9 million.  The major sources of cash during
the year were the increase in deposits of $5.9 million and operating activities
which provided $3.9 million.

     RESULTS OF  OPERATIONS,  FISCAL YEAR ENDED  SEPTEMBER  30, 1996 COMPARED TO
FISCAL YEAR ENDED SEPTEMBER 30, 1995

     The Company's net interest  income  increased to $10,497,586 for the fiscal
year ended  September 30, 1996, an increase of $589,987 from 1995. This increase
was a combination of higher interest income  partially offset by higher interest
expense.  Interest on loans  increased  $768,543 due to a combination  of higher
loan  volume  and  higher  rates  being  charged  on loans.  Interest  income on
securities  and other  interest  earning  assets showed an increase of $282,346.
These  increases  were  partially  offset by an increase in interest  expense of
$502,136  from  1995.  This  increase  was also due to a  combination  of higher
volumes of deposits and higher rates paid by the Bank on these deposits.

     Provision  for  loan  losses  decreased  $41,234  from  $50,058  to  $8,824
reflecting an adjustment 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  $10,864 to $640,928 from $630,064 due to increased
service charges on NOW accounts.

     Total non-interest expense was $5,930,049,  an increase of $1,783,858.  The
special assessment from the FDIC accounted for $1,500,870 of this increase.  The
balance of the  increase  was  composed  of  several  small  increases.  Deposit
insurance,  excluding the special assessment,  increased $13,964 to $531,316 due
to higher volumes of insured deposits.

     The  effective  tax rates for the Company for the years ended 1996 and 1995
were 38.3% and 39.0% respectively.

     RESULTS OF  OPERATIONS,  FISCAL YEAR ENDED  SEPTEMBER  30, 1995 COMPARED TO
FISCAL YEAR ENDED SEPTEMBER 30, 1994

     The Company's net interest  income  remained  stable at $9,907,599  for the
fiscal year ended  September  30,  1995,  an increase of only $71,419 from 1994.
This  increase was a  combination  of higher  interest  income  offset by higher
interest expense. Interest on loans increased $1,840,037 due to a combination of
higher loan volume and higher rates being charged on loans.  Interest  income on
securities  and  other  interest  earning  assets  showed a slight  increase  of
$155,197. These increases were almost entirely offset by an increase in interest
expense of $1,888,591 from 1994.  This increase was also due to a combination of
higher volumes of deposits and higher rates paid by the Bank on these deposits.

     Provision  for loan  losses  increased  $26,312  from  $23,746  to  $50,058
reflecting the adjustment 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 $23,342 to $630,064 from $606,722. This increase was
due to a $12,000 gain on the sale of the Bank's  education loan  portfolio,  and
increased service charges on NOW accounts.

     Total  non-interest  expense was $4,146,191,  a decrease of $113,645.  This
decrease was composed of several small increases and decreases.  Post-retirement
benefit  expense for 1995 was a credit of $83,234  due to a change in  actuarial
methods used in the  calculation  of the benefit  obligation.  The liability for
post-retirement  benefit obligations has been reduced to a cumulative balance of
$28,379.  Occupancy  expense and equipment  expense both showed slight decreases
due to assets becoming fully depreciated,  and lower maintenance costs incurred.
Deposit insurance increased $29,029 to $517,351 due to higher volumes of insured
deposits.  Salaries and employee benefits increased $85,740 to $2,097,596 due to
normal increases in pay rates, and benefit costs.

     The  effective  tax rates for the Company for the years ended 1995 and 1994
were 39.0% and 39.2% respectively.

REGULATORY CHANGES

     Management  of the  Company  believes  that  competition  has been and will
continue to be influenced by federal legislation affecting the operations of all
federally regulated financial  institutions.  On September 30, President Clinton
signed the Small Business Job Protection  Act ("Act") to  recapitalize  the SAIF
portion of the FDIC and resolve the premium  disparity between federally insured
banks and savings  institutions.  Banks have had their deposit insurance premium
reduced to four cents per $100 in deposits per year, while Savings  Institutions
are still paying 23 cents per $100 until January 1, 1997,  when the premium will
decrease to $.065 per $100 in deposits.  The solution to this  disparity  was an
assessment to all federally  insured  savings  institutions of .657 basis points
per $100 in  deposits  to  build  up the  reserves  of the  Savings  Association
Insurance Fund (SAIF). After this assessment,  the Bank Insurance Fund (BIF) and
the SAIF will be merged into one fund  provided the bank and thrift  charter are
merged into one.

     The above  mentioned  Act also gives  thrift  institutions  relief from the
recapture  of pre-1987  bad debt  reserves if thrifts are required to convert to
banks.  The Act also  provides an income tax  deduction  for the  assessment  on
deposits insured by the SAIF.

     The Act  repeals  the  percentage-of-taxable-income  method in  determining
thrift bad debt deductions  effective for tax years beginning after December 31,
1995.  Under the act,  "large thrift  institutions"  (i.e.,  thrifts with assets
greater  than $500  million)  can no  longer  maintain  a reserve  for bad debts
(similar to the rules  currently  applied to large  commercial  banks).  Thrifts
constituting "small thrifts", such as the Bank will be able to maintain bad debt
reserves  utilizing the bank experience  method (and will be able to continue to
deduct reasonable  additions to the reserve for bad debts).  Furthermore,  small
thrifts will be allowed to maintain  their base year for purposes of determining
experience  method  computations.  For small  thrifts,  the  reserve  subject to
recapture is the excess of the thrift's bad debt reserve (generally the increase
in the tax bad debt  reserve  since  the 1989 tax  year) as of the  close of its
taxable year beginning  before January 1, 1996, over the amount which would have
been  allowed as a reserve  under the  experience  method as of the close of the
same taxable year.

     Like "large  institutions",  a "small"  institution's  bad debt  reserve is
exempt from  recapture  to the extent it does not exceed the  institution's  bad
debt base year reserve.  The exemption also applies to future tax years in which
the institution ceases to be a "small institution".

     The  Department  of the  Treasury  is  currently  studying  the  effects of
eliminating  the current  thrift  charter and forcing  savings  institutions  to
convert  to a federal  or state  bank  charter.  They also are  considering  the
consolidation  of  regulators  under this uniform  charter.  How these  proposed
changes will impact the Company can not be predicted at this time.

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.

CURRENT ACCOUNTING ISSUES

     The Financial  Accounting Standards Board (the "FASB") has issued Statement
of  Financial   Accounting  Standards  ("SFAS")  No.  121,  ACCOUNTING  FOR  THE
IMPAIRMENT OF  LONG-LIVED  ASSETS AND FOR  LONG-LIVED  ASSETS TO BE DISPOSED OF.
This  statement  requires  that  long-lived  assets  and  certain   identifiable
intangibles  held and used by an  entity be  reviewed  for  impairment  whenever
events or changes in  circumstances  indicate  that the  carrying  amount of the
assets  may  not be  recoverable.  A  review  is  required  only  if  events  or
circumstances indicate the need.

     In performing the review for  recoverability,  the entity must estimate the
future cash flows  expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future net cash flows, (undiscounted and
without  interest  charges) is less than the  carrying  amount of the asset,  an
impairment loss must be recognized.  Measurement of the impairment loss for such
assets that an entity  expects to hold and use is based on the fair value of the
asset. Fair value of assets is based on the best information available under the
circumstances.

     After an impairment is recognized,  the reduced carrying value of the asset
becomes its new cost. For depreciable  assets, this new cost is depreciated over
the  asset's  remaining  useful  life.   Restoration  of  previously  recognized
impairment losses is prohibited.

     Longer-lived  assets and identifiable  intangibles that will be disposed of
must be  reported  at the lower of  carrying  amount or fair  value less cost to
sell,  except for assets covered by APB Opinion No. 30, Reporting the Results of
Operations - Reporting  the Effects of Disposal of a Segment of a Business,  and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, which
will continue to be reported at the lower of cost or net realized value.

     The statement is effective for the Company's  financial  statements for the
fiscal year beginning  October 1, 1996. The changes required by SFAS No. 121 are
not expected to have a material impact on the Company's  consolidated  financial
position or results of operations.


     The FASB issued SFAS No. 122,  ACCOUNTING  FOR MORTGAGE  SERVICING  RIGHTS.
SFAS No. 122 pertains to mortgage banking enterprises and financial institutions
that conduct operations that are substantially similar to the primary operations
of  mortgage  banking  enterprises.  SFAS  No.  122  eliminates  the  accounting
distinction  between  mortgage  servicing  rights that are acquired through loan
origination activities and those acquired through purchase  transactions.  Under
SFAS No. 122, if a mortgage banking  enterprise  sells or securitizes  loans and
retains the mortgage  servicing  rights,  the enterprise must allocate the total
cost of the  mortgage  loans to the  mortgage  servicing  rights  and the  loans
(without the rights) based on their relative fair values if it is practicable to
estimate those fair values. If it is not practicable,  the entire cost should be
allocated to the mortgage loans and no cost should be allocated to the  mortgage
servicing  rights.  An entity would  measure  impairment  of mortgage  servicing
rights and loans  based on the  excess of the  carrying  amount of the  mortgage
servicing rights portfolio over the fair value of that portfolio.


     SFAS No. 122 is to be applied prospectively in fiscal years beginning after
December  15,  1995,  to  transactions  in which  an  entity  acquires  mortgage
servicing  rights and the  impairment  evaluation  of all  capitalized  mortgage
servicing  rights.  SFAS No. 122 will not have an impact on the Company since it
is not  currently  in the  business  of selling  loans or  purchasing  servicing
rights.

     The FASB issued SFAS No. 123 ACCOUNTING FOR STOCK- BASED COMPENSATION. This
Statement  establishes a fair value based method of accounting  for  stock-based
compensation  plans.  The FASB  encourages  all entities to adopt this method of
accounting for all arrangements under which employees receive shares of stock or
other equity instruments of the employer,  or the employer incurs liabilities to
employees in amounts based on the price of its stock.

     The Statement  permits a company to continue the accounting for stock-based
compensation   prescribed  in  Accounting   Principles  Board  Opinion  No.  25,
ACCOUNTING  FOR STOCK  ISSUED TO  EMPLOYEES.  If a company  elects that  option,
proforma  disclosures  of net income (and EPS, if presented) are required in the
footnotes  as if the  provisions  of this  Statement  had been  used to  measure
stock-based compensation.

     The disclosure  requirements  of Opinion No. 25 have been superseded by the
disclosure requirements of this Statement.

     Once an entity adopts that fair value based method for accounting for these
transactions, that election cannot be reversed.

     This  Statement is not expected to have a material  impact on the financial
statements of the Company.

     FASB No. 125,  ACCOUNTING  FOR TRANSFERS AND SERVICING OF FINANCIAL  ASSETS
AND EXTINGUISHMENTS OF LIABILITIES, deals with resolving long-standing questions
about whether  transactions  should be accounted for as secured borrowings or as
sales. The Statement provides consistent standards for distinguishing  transfers
of financial  assets that are sales from transfers  that are considered  secured
borrowings.

     A transfer of financial assets in which the transferor  surrenders  control
over those  assets is accounted  for as a sale to the extent that  consideration
other  than  beneficial  interests  in the  transferred  assets is  received  in
exchange. The transferor has surrendered control over transferred assets only if
all of the following conditions are met:

     The  transferred   assets  have  been  isolated  from  the   transferor-put
presumptively  beyond the reach of the  transferor  and its  creditors,  even in
bankruptcy or other receivership.

     Each  transferee  obtains the right,  free of conditions  that constrain it
from taking  advantage  of that right,  to pledge or  exchange  the  transferred
assets, or the transferee is a qualifying special-purpose entity and the holders
of beneficial  interest in that entity have the right,  free of conditions  that
constrain them from taking  advantage of that right, to pledge or exchange those
interests.

     The transferor  does not maintain  effective  control over the  transferred
assets  through an agreement  that both entitles and obligates the transferor to
repurchase or redeem them before their  maturity,  or an agreement that entitles
the  transferor  in  repurchase  or redeem  transferred  assets are not  readily
obtainable.

     This  Statement  provides  detailed  measurement  standards  for assets and
liabilities  included in these  transactions.  It also  includes  implementation
guidance for assessing  isolation of  transferred  assets and for accounting for
transfers of partial interest,  servicing of financial  assets,  securitization,
transfers  or sales  type and direct  financing  lease  receivables,  securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participation,   risk   participation   in   banker's   acceptances,   factoring
arrangements,  transfers of  receivables  with  recourse and  extinguishment  of
liabilities.

     The  Statement  supersedes  FASB No. 76  EXTINGUISHMENT  OF DEBT and No. 77
REPORTING BY TRANSFERORS FOR TRANSFERS OF RECEIVABLES WITH RECOURSE, and No. 122
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS and amends FASB No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,  in addition to clarifying or
amending a number of other statements and technical bulletins.

     This Statement is effective for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted.

     This  Statement is not expected to have a material  impact on the financial
statements of the Company.

<PAGE>
<TABLE>

                                    SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY

                                                           September 30
                             ------------------------------------------------------------------
                                 1996          1995         1994          1993        1992
                             ------------  ------------ ------------ ------------ -------------
<S>                           <C>          <C>          <C>          <C>          <C>    
Financial Condition Data:
 Total assets .............   $280,011,850 $276,607,771 $266,455,068 $251,116,307 $234,935,267
 Loans receivable, net ....    223,011,251  218,663,928  209,330,499  201,092,662  198,804,704
 Investments and other 
   interest-earning assets      47,970,950   47,811,103   44,711,326   43,514,676   29,523,448
 Deposits .................    235,081,440  232,747,018  226,851,009  213,590,085  198,723,824
 Borrowed funds ...........           --      1,000,000         --        542,659    2,232,218
 Stockholders' equity .....     42,676,765   41,624,026   38,720,750   36,077,655   33,143,730

                           
                                   1996         1995         1994          1993        1992
                               -----------  -----------  -----------  -----------  -----------
Operating Data:
 Interest income ..........    $21,736,000  $20,685,111  $18,689,877  $19,298,823  $20,072,030
 Interest expense .........     11,229,590   10,727,454    8,829,951    9,146,451   11,132,381
                               -----------  -----------  -----------  ------------  ----------
Net interest income ......      10,506,410    9,957,657    9,859,926    10,152,372   8,939,649
 Provision
   for losses on loans ....          8,824       50,058       23,746       154,343     212,657
                               -----------  -----------  -----------  ------------  ----------
 Net interest income
   after provision
   for losses on loans ....     10,497,586    9,907,599    9,836,180    9,998,029    8,726,992
 Other income .............        640,928      630,064      606,722      508,021      524,949
 Other expenses ...........      5,930,049    4,146,191    4,259,836    4,087,292    3,694,084
                               -----------  -----------  -----------  -----------  -----------
 Income before income taxes      5,208,465    6,391,472    6,183,066    6,418,758    5,557,857
 Income tax expense .......      1,996,007    2,492,042    2,424,950    2,571,899    2,250,618
                               -----------  -----------  -----------  -----------  -----------
 Net income ...............    $ 3,212,458  $ 3,899,430  $ 3,758,116  $ 3,846,859  $ 3,307,239
                               ===========  ===========  ===========  ===========  ===========

 Net income per common share   $    1.37   $     1.65    $    1.59    $    1.63    $      1.43
                               =========== ===========  ============  ===========  ===========
                            
Dividends per common share     $   0.560   $    0.460    $   0.410    $   0.370    $     0.345
                               =========== ===========  ============  ===========  ===========

Other Data:
 Average yield
  on all interest-earning 
  assets...................         7.85%      7.68%         7.26%        7.96%         8.81%
Average cost
  of all interest-bearing 
  liabilities..............         4.79       4.65          4.01         4.40          5.67
                              ------------ -----------  ------------  -----------  ------------
Interest rate spread ......         3.06%      3.03%         3.25%        3.56%         3.14%
                              ============ ===========  ============  ===========  ============
Number of full service 
  banking offices                     6           6             6            6             6
Return on assets (net 
  income divided by
  average total assets) ...         1.15%      1.43%         1.45%        1.58%          1.44%
Return on equity (net 
  income divided by
  average total equity)....         7.50%      9.66%        10.06%       11.10%         10.30%
Dividend payout ratio
  (dividends per common share
  divided by net income
  per common share)........        41.01%     27.88%        25.79%       22.70%         24.13%
Equity to assets ratio (average
  total equity divided by
  average total assets)....        15.37%     14.84%        14.43%       14.21%         13.97%

</TABLE>


<PAGE>


                         PEOPLES BANCORP AND SUBSIDIARY
                           Consolidated Balance Sheet


                                                  September 30,
                                             1996                1995
                                         -------------        -------------
Assets                                     
 Cash and due from banks                 $  3,207,845         $  4,160,756
 Interest-bearing demand deposits           7,823,900            7,800,686
                                         -------------        -------------
    Total cash and cash equivalents        11,031,745           11,961,442
 Interest-bearing time deposits                    --              390,256
 Investment securities
   Available for sale                      25,886,015           11,069,862
   Held to maturity                        14,261,035           28,940,555
                                         -------------        -------------
     Total investment securities           40,147,050           40,010,417
 Loans
   Loans                                  223,898,729          219,576,196
   Less:  Allowance for loan losses           887,478              912,268
                                         -------------        -------------
    Net loans                             223,011,251          218,663,928
 Premises and equipment                     1,467,764            1,606,509
 Federal Home Loan Bank of Indianapolis
   stock, at cost                           2,004,400            1,941,100
 Other assets                               2,349,640            2,034,119
                                         -------------        -------------
    Total assets                         $280,011,850         $276,607,771
                                         =============        =============
Liabilities
 NOW and savings deposits                 $ 68,344,163        $ 71,286,904
 Certificates of deposit                   166,737,277         161,460,114
 Short-term borrowings                              --           1,000,000
 Advances by borrowers for taxes
   and insurance                                 3,450              80,053
 Other liabilities                           2,250,195           1,156,674
                                          -------------       -------------
    Total liabilities                      237,335,085         234,983,745
                                          -------------       -------------
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--2,325,494 
   and 2,362,898 shares                      2,325,494           2,362,898
 Additional paid-in capital                  7,690,289           8,423,385
 Retained earnings-substantially restricted 32,762,852          30,865,260
 Net unrealized loss on securities 
   available for sale                         (101,870)            (27,517)
                                           ------------       -------------
    Total stockholders' equity              42,676,765          41,624,026
                                           ------------       -------------
 Total liabilities and stockholders
    equity                                $280,011,850        $276,607,771
                                          =============       =============

See notes to consolidated financial statements.
<PAGE>



                         PEOPLES BANCORP AND SUBSIDIARY
                        Consolidated Statement of Income



                                           Year Ended September 30
                                     1996         1995             1994
                                -------------   ------------  ------------
Interest Income               
 Loans                            $18,645,609   $17,877,066   $16,037,029
 Investment securities              2,068,753     2,284,206     2,119,746
 Other interest and dividend 
 income                             1,021,638       523,839       533,102
                                --------------  ------------  ------------
                                   21,736,000    20,685,111    18,689,877
                                --------------  ------------  ------------
Interest Expense
 Deposits
    NOW and savings deposits        1,845,731     1,892,010     1,950,180
    Certificates of deposit         9,340,756     8,819,245     6,872,484
 Short-term borrowings                 43,103        16,199         7,287
                                --------------  ------------  ------------  
                                   11,229,590    10,727,454     8,829,951
                                --------------  ------------  ------------  
Net Interest Income                10,506,410     9,957,657     9,859,926
 Provision for loan losses              8,824        50,058        23,746
                                --------------  ------------  ------------  
Net Interest Income After 
 Provision for  Loan Losses        10,497,586     9,907,599     9,836,180
                                --------------  ------------  ------------  
Other Income
 Fiduciary activities                  63,089        64,146        64,284
 Fees and service charges             445,691       410,179       389,539
 Other income                         132,148       155,739       152,899
                                --------------  ------------  ------------   
                                      640,928       630,064       606,722
                                --------------  ------------  ------------  
Other Expenses
 Salaries and employee benefits     2,253,254     2,097,596     2,011,856
 Net occupancy expenses               255,784       254,707       292,115
 Equipment expenses                   155,863       160,585       222,785
 Data processing expense              303,577       294,283       295,973
 Deposit insurance expense          2,032,186       517,351       488,322
 Other expenses                       929,385       821,669       948,785
                                --------------  ------------  ------------   
    Total other expenses            5,930,049     4,146,191     4,259,836
                                --------------  ------------  ------------   
Income Before Income Tax            5,208,465     6,391,472     6,183,066
 Income tax expense                 1,996,007     2,492,042     2,424,950
                                --------------  ------------  ------------   
Net Income                      $  3,212.458    $ 3,899,430   $ 3,758,116
                                ==============  ============  ============

Net Income Per Common Share            $1.37         $1.65         $1.59

Average Common Shares Outstanding  2,352,450      2,362,771     2,360,152

See notes to consolidated financial statements.

<PAGE>

<TABLE>


                                               PEOPLES BANCORP AND SUBSIDIARY
                                  Consolidated Statement of Changes in Stockholders' Equity

                                                                                       
                                        Common Stock                                   Net Unrealized        
                                    ----------------------  Additional                    Loss on            Total
                                       Number               Paid-in      Retained       Securities        Stockholders'
                                      of Shares    Amount    Capital      Earnings   Available for Sale      Equity
                                    ------------  --------   --------     --------  -------------------  -------------
<S>                                    <C>        <C>        <C>         <C>                <C>           <C>
Balances October 1, 1993               2,356,652  $2,356,652 $8,458,558  $25,262,445              --      $36,077,655
   Exercise of stock options               6,600       6,600     26,400          --               --           33,000
   Net income for 1994                        --          --         --    3,758,116              --        3,758,116
   Cumulative effect of change in
     method of accounting for                 --          --         --          --         $(179,997)       (179,997)
     securities
   Cash dividends ($0.41 per share)           --          --         --     (968,024)             --         (968,024)
                                    -------------  ----------  --------- ------------      -----------    -------------
Balances September 30, 1994            2,363,252   2,363,252  8,484,958    28,052,537        (179,997)     38,720,750
   Exercise of stock options               4,000       4,000     16,000            --              --          20,000
   Repurchase of stock                    (4,354)     (4,354)   (77,573)           --                         (81,927)
   Net income for 1995                        --          --         --     3,899,430              --       3,899,430
   Net change in unrealized loss on
     securities available for sale            --          --         --            --         152,480         152,480
   Cash dividends ($0.46 per share)           --          --         --    (1,086,707)             --      (1,086,707)
                                    ------------  ------------  --------- ------------     -----------    ------------
Balances September 30, 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 ($0.56 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
                                    ============  ========== ==========   ============      =========     ============
</TABLE>

See notes to consolidated financial statements.

<PAGE>




                         PEOPLES BANCORP AND SUBSIDIARY
                      Consolidated Statement of Cash Flows


                                                   Year Ended September 30 
                                               1996         1995        1994
                                           -----------  -----------  -----------
 Net income                                $ 3,212,458 $ 3,899,430   $3,758,116
                                                                       
 Adjustments to reconcile net income to net 
  cash provided by operating activities                     
  Provision for loan losses                      8,824      50,058       23,746
  Depreciation and amortization                204,083     223,897      265,950
  Investmentment securities amortization, net  (23,481)     35,052       59,841
  Amortization of deferred loan fees          (368,361)   (412,144)    (525,455)
  Deferred income tax                         (385,000)    207,773      122,717
  Change in
    Interest receivable                       (170,033)   (216,202)    (245,600)
    Interest payable                            (4,603)    111,051         (683)
  Other adjustments                          1,412,211      21,547      (65,670)
                                          ------------  -----------   ----------
      Net cash provided by
        operating activities                 3,886,098   3,920,462    3,392,962
                                          ------------  -----------   ----------
Investing Activities
 Net change in interest-bearing deposits       390,256    (373,826)          --
 Purchases of securities available for sale(22,544,576)   (117,678)          --
 Purchases of securities held to maturity           --    (245,000) (28,989,794)
 Proceeds from maturities and paydowns of 
   securities held to maturity              14,688,070   1,262,258    8,850,468
 Proceeds from maturities of securities
   available for sale                        7,620,000   4,000,000           --
 Net change in loans                        (4,098,609) (9,238,270)  (7,885,222)
 Purchases of premises and equipment           (65,338)   (101,415)     (49,269)
 Proceeds from sales of real estate owned       42,499     235,314      205,912
 Purchases of Federal Home Loan Bank
   of Indianapolis stock                       (63,300)    (69,900)          --
                                           ------------ -----------   ----------
    Net cash used by investing activities   (4,030,998) (4,648,517) (27,867,905)
                                           ------------ -----------  -----------

Financing Activities
 Net change in
   NOW and savings deposits                 (2,943,040) (4,773,195)   4,524,040
   Certificates of deposit                   5,279,885  10,560,392    8,735,211
   Short-term borrowings                    (1,000,000)  1,000,000     (542,659)
 Net change in advances by borrowers
   for taxes and insurance                     (76,603)     11,898       13,805
 Cash dividends                             (1,274,539) (1,039,489)    (943,731)
 Exercise of stock options                      17,000      20,000       33,000
 Repurchase of common stock                   (787,500)    (81,927)          --
                                           ------------ -----------   ----------
   Net cash provided (used) by 
     financing activities                     (784,797)  5,697,679   11,819,666
                                           ------------ -----------  ----------

Net Change in Cash and Cash Equivalents       (929,697)  4,969,624  (12,655,277)

Cash and Cash Equivalents,
     Beginning of Year                      11,961,442   6,991,818   19,647,095
                                           ------------ -----------  -----------
Cash and Cash Equivalents, End of Year     $11,031,745 $11,961,442   $6,991,818
                                           ============ ===========  ===========

Additional Cash Flows and Supplementary Information:
   Interest paid                           $11,231,922 $10,649,528   $8,828,279
   Income tax paid                           2,315,550   2,117,721    2,305,700


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 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 and accounts.

     INVESTMENT   SECURITIES--The   Company   adopted   Statement  of  Financial
Accounting Standards ("SFAS") No. 115 Accounting for Certain Investments in Debt
and Equity Securities, on September 30, 1994.

     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.

<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


     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.  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.

     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, 1996,  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.

     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 subsidiary.

     EARNINGS  PER SHARE  have been  computed  based upon the  weighted  average
common shares  outstanding during each year. The dilutive effect on earnings per
share from unissued stock option shares is not material.

     RECLASSIFICATIONS  of certain  amounts in the 1995  consolidated  financial
statements have been made to conform to the 1996 presentation.

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, 1996, was
$622,000.
<PAGE>
NOTE 3--INVESTMENT SECURITIES

                                               September 30, 1996
                                  ----------------------------------------------
                                                 Gross      Gross
                                    Amortized  Unrealized Unrealized   Fair
                                       Cost      Gains       Losses    Value
                                   -----------   ------- ---------  ------------
Available for sale
  Federal agencies                 $20,710,594   $36,838  $156,982  $20,590,450
  State and municipal obligations    5,346,630     6,981    58,046    5,295,565
                                   -----------   -------  --------  ------------
     Total available for sale       26,057,224    43,819   215,028   25,886,015
                                   -----------   -------  --------  ------------
   
Held to maturity
  Federal agencies                  13,175,118       424   156,862   13,018,680
  State and municipal obligations      455,414    12,210        --      467,624
  Mortgage-backed securities           630,503    32,809       479      662,833
                                   -----------   -------  --------  ------------

     Total held to maturity         14,261,035    45,443   157,341   14,149,137
                                   -----------   -------  --------  ------------

     Total investment securities   $40,318,259   $89,262  $372,369  $40,035,152
                                   ===========   =======  ========  ============

                                               September 30, 1995
                                  ----------------------------------------------
                                                 Gross       Gross          
                                    Amortized  Unrealized  Unrealized    Fair
                                       Cost      Gains       Losses      Value  
                                  ------------   -------   --------  -----------
 Available for sale
  Federal agencies                $  6,992,316   $22,371   $ 48,125  $6,966,562
  State and municipal obligations    4,125,401     7,378     29,479   4,103,300
                                  ------------   -------   --------  -----------
     Total available for sale       11,117,717    29,749     77,604  11,069,862
                                  ------------   -------   --------  -----------

Held to maturity
  Federal agencies                  26,987,247     3,750    341,005  26,649,992
  Corporate obligations                715,374        --     15,044     700,330
  State and municipal obligations      443,606       931         --     444,537
  Mortgage-backed securities           794,328    39,002        625     832,708
                                  ------------   -------   --------  -----------
     Total held to maturity         28,940,555    43,683    356,674  28,627,564
                                  ------------   -------   --------  -----------

     Total investment securities   $40,058,272   $73,432   $434,278 $39,697,426
                                  ============   =======   =======  ============


<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, 1996, 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.
                 
                        Held to Maturity          Available for Sale
                   -------------------------   -------------------------   
                      Amortized     Fair        Amortized       Fair
                       Cost         Value         Cost          Value           
                   -----------  -----------    -----------   -----------  
Within one year    $ 5,209,172  $ 5,203,994    $ 2,932,475   $ 2,931,213
One to five years    8,130,946    7,979,686     18,455,266    18,295,759
Five to ten years      290,414      302,624      4,328,731     4,320,827
After ten years             --           --        340,752       338,216
                   -----------  -----------    -----------   ----------- 
                    13,630,532   13,486,304     26,057,224    25,886,015
Mortgage-backed
 securities            630,503      662,833             --            --
                   -----------  -----------    -----------   -----------
                   $14,261,035  $14,149,137    $26,057,224   $25,886,015
                   ===========  ===========    ===========   ===========  

     Securities  with a carrying  value of $1,995,695  were pledged at September
30, 1995, to secure Federal Home Loan Bank  advances  and for other  purposes as
permitted or required by law. There were no securities  pledged at September 30,
1996.

     There were no sales of securities during the year ended September 30, 1996,
1995, or 1994.

NOTE 4--LOANS AND ALLOWANCE

                                                            September 30 
                                                       1996           1995
                                                   ------------    ------------ 
Real estate loans                                  $210,541,364    $205,047,331
Construction loans                                    5,197,237       5,444,498
Individuals' loans 
 for household and other personal expenditures       11,836,185      12,237,615
                                                   ------------    ------------ 
                                                    227,574,786     222,729,444
                                                   ------------    ------------ 
Less:
   Undisbursed portion of loans                       2,717,235       2,236,763
   Deferred loan fees and discounts                     958,822         916,485
                                                   ------------    ------------ 
                                                      3,676,057       3,153,248
                                                   ------------    ------------
Total loans                                        $223,898,729    $219,576,196 
                                                   ============    ============ 

                                       Year Ended September 30
                                  1996         1995            1994
                               ---------    ----------     -----------
Allowance for loan losses
   Balances, October 1         $912,268     $1,034,439     $1,025,000
   Provision for losses           8,824         50,058         23,746
   Recoveries on loans           21,715         27,851         20,980
   Loans charged off            (55,329)      (200,080)       (35,287)
                               ---------    -----------    -----------  
   Balances, September 30      $887,478     $  912,268     $1,034,439
                               =========    ===========    ===========   


<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements

     The Company adopted Statement of Financial  Accounting Standards (SFAS) No.
114 and No. 118  ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN AND ACCOUNTING
BY CREDITORS FOR IMPAIRMENT OF A  LOAN--INCOME  RECOGNITION  AND  DISCLOSURES on
October 1, 1995.  The  adoption of SFAS Nos. 114 and 118 did not have a material
impact on the Company's financial position or results of operations.

NOTE 5--PREMISES AND EQUIPMENT

                                     September 30
                                1996             1995
                             ----------        ----------   


Land                         $  356,238        $  356,238
Buildings                     2,561,159         2,555,039
Equipment                     1,204,628         1,145,411
                             -----------       ----------
    Total cost                4,122,025         4,056,688
Accumulated depreciation     (2,654,261)       (2,450,179)
                             -----------       -----------
         Net                 $1,467,764        $1,606,509
                             ===========       ===========

NOTE 6--OTHER ASSETS AND OTHER LIABILITIES

                                                    September 30
                                                1996              1995
                                            ------------       ----------
Other assets          
   Interest receivable             
      Loans                                  $1,234,223        $1,143,651
      Investment securities                     675,603           596,142
   Foreclosed real estate                       110,297            46,596
   Deferred income tax asset                    100,545                --
   Prepaid expenses and other                   228,972           247,730
                                             ----------        ----------
                                             $2,349,640        $2,034,119
                                             ==========        ==========
Other liabilities
   Dividends payable on common stock         $  347,709        $  307,177
   Deferred income tax liability                     --           314,926
   Accrued deposit insurance premium          1,500,872                --
   Accrued expenses                             202,470           172,729
   Other                                        199,144           361,842
                                             ----------        ----------
                                             $2,250,195        $1,156,674
                                             ==========        ==========

NOTE 7--DEPOSITS
                                                       September 30 
                                               1996                  1995
                                           ------------         ------------  
   Demand deposits                         $ 28,728,351         $ 30,919,276
   Savings deposits                          39,583,982           40,336,097
   Certificates and other time
     deposits of $100,000 or more            16,664,414           14,008,083
   Other certificates and time deposits     149,828,480          147,204,926
   Interest payable                             276,213              278,636
                                           ------------         ------------   
                                           $235,081,440         $232,747,018
                                           ============         ============    

Certificates maturing in years ending September 30:

   1997                $ 94,820,497
   1998                  52,497,216
   1999                  11,535,760
   2000                   4,901,576
   2001                   2,642,845
   Thereafter                95,000
                       ------------ 
                       $166,492,894
                       ============ 
NOTE 8--SHORT-TERM BORROWINGS

     The Company's  advances  from the FHLB totaled  $1,000,000 at September 30,
1995. Such advances  matured in June, 1996. There were no advances from the FHLB
outstanding at September 30, 1996.

<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements

NOTE 9--INCOME TAX
                                     Year Ended September 30
                                  1996          1995         1994
                               -----------   -----------   ----------
Income tax expense:
   Currently payable:
     Federal                   $1,809,917    $1,731,032    $1,799,938
     State                        571,090       553,237       502,295
   Deferred:
     Federal                     (270,000)      186,114        93,562
     State                       (115,000)       21,659        29,155
                               -----------   -----------   -----------
   Total income tax expense    $1,996,007    $2,492,042    $2,424,950
                               ===========   ===========   ===========


Reconciliation of federal statutory to actual tax expense:
 Federal statutory income
    tax at 34%                 $1,770,878    $2,173,100    $2,102,242
 Effect of state income taxes     301,019       379,431       350,757
 Other, net                       (75,890)      (60,489)      (28,049)
                               -----------   -----------   -----------
         Actual tax expense    $1,996,007    $2,492,042    $2,424,950
                               ===========   ===========   ===========

     A cumulative  deferred tax asset and  liability of $100,545 and $314,926 is
included in other assets and other liabilities  at September 30, 1996, and 1995,
respectively. The components of the asset and liability are as follows:

                                                            September 30
                                                        1996             1995
                                                    ----------       ----------
Differences in accounting for accrued expenses       $594,000        $      --
Differences in accounting for loan fees               231,457           365,304
Differences in depreciation methods                   (24,389)           (9,330)
Differences in accounting for loan and real 
  estate losses                                       351,441           417,915
Tax bad debt reserves in excess of base year         (975,221)       (1,037,545)
FHLB of Indianapolis stock dividend                   (78,527)          (78,527)
Differences in accounting for pensions and 
  other employee benefits                              13,469            11,381
Net unrealized losses on securities available
   for sale                                            69,340            20,338
Other                                                 (81,025)           (4,462)
                                                    ----------       -----------
                                                     $100,545        $ (314,926)
                                                    ==========       ===========
Assets                                             $1,259,707        $  814,938
Liabilities                                        (1,159,162)       (1,129,864)
                                                    -----------      -----------
                                                   $  100,545        $ (314,926)
                                                    ===========      ===========

<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


     Retained earnings at September 30, 1996, 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,
1996.


NOTE 10--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 Bank's
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 were  $11,926,000  for 1996 and  $13,569,350  for 1995  consisting
entirely of committments to extend credit.

     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.
<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


NOTE 11--RESTRICTION ON DIVIDENDS

     The Company is not subject to any regulatory restrictions on the payment of
dividends  to  its  stockholders.  The  Office  of  Thrift  Supervision  ("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, 1996,  total  stockholders'  equity of the Bank was
$33,123,537 of which approximately  $13,778,000 was available for the payment of
dividends to the Company.

     In 1995, the Company's board of directors  approved the repurchase of up to
100,000 of the Company's  outstanding shares of common stock ("1995 Plan"). Such
purchases will be made subject to market  conditions in the open market or block
transactions.  At September 30, 1996, the Company has repurchased  44,302 shares
of its outstanding stock under the 1995 Plan.

NOTE 12--REGULATORY CAPITAL

     The Company and Bank are subject to various regulatory capital requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements  can  initiate   actions  by  the  regulatory   agencies  that,  if
undertaken,  could have a material effect on the Company's financial statements.
Under  capital  adequacy  guidelines  and the  regulatory  framework  for prompt
corrective  action,  the Company and Bank must meet specific capital  guidelines
that  involve  quantitative   measures  of  the  Company's  and  Bank's  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting   practices.   The   Company's   and  Bank's   capital   amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

     At September 30, 1996, the management of the Company believes that it meets
all  capital  adequacy  requirements  to which it is  subject.  The most  recent
notification from the regulatory agency categorized the Company and Bank as well
capitalized under the regulatory  framework for prompt corrective action.  There
have been no  conditions  or events  since  that  notification  that  management
believes have changed this categorization.

<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements

The Bank's actual and required capital amounts and ratios are as follows:

                                         September 30, 1996                    
                               -------------------------------------------------
                                             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)        $34,054 25.63% $10,630  8.0%   $13,288 10.0%
Core capital(1)(to adjusted 
   tangible assets)              33,186 12.09%   8,236  3.0%    16,472  6.0%
Core capital(1)(to adjusted 
   total assets)                 33,186 12.09%   8,236  3.0%    13,727  5.0%
(1)As defined by regulatory agencies  


     The Bank's tangible  capital at September 30, 1996, was $33,186,000,  which
amount was 12.09 percent of tangible  assets and exceeded the required  ratio of
1.5 percent.

NOTE 13--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,
1996, the date of the latest actuarial valuation.  Pension expense was $153,848,
$114,070,  and  $96,646  for 1996,  1995 and 1994.  This plan  provides  pension
benefits for substantially all of the Bank's employees.

     The Company has a stock  option plan in which  108,000  common  shares were
reserved at September 30, 1996, for issuance under the plan. The option exercise
price will 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  are  first
exercisable is determined by the Board of Directors,  and the terms of the stock
options will not exceed ten years from the date of grant.

     The  weighted  option  price at  September  30, 1996 and 1995 and for those
options exercised in 1996, 1995, and 1994, was $5.00 per share.

                                                        September 30 
                                                   1996      1995     1994
                                                  -------   -------  -------
Shares under option after restatement for stock split:
   Outstanding at beginning of year                3,400     7,400   14,000
   Exercised during the year                       3,400     4,000    6,600
   Outstanding and exercisable at end of year         --     3,400    7,400

     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, 1996 and 1995, the Trust owned 33,041 and
33,781  shares of the  Company's  common  stock,  all of which  shares have been
allocated to employee  accounts.  Employees may vote allocated  shares,  and the
trustees may vote  unallocated  shares.  Plan  contributions  charged to expense
totaled $73,940, $72,824, and $68,762 for 1996, 1995, and 1994, respectively.


<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


NOTE 14--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  values for certain  mortgage  loans,  including
one-to-four  family  residential,  are based on quoted  market prices of similar
loans  sold  in  conjunction  with  securitization  transactions,  adjusted  for
differences in loan characteristics. 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.

     Deposits--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 is estimated
using a  discounted  cash flow  calculation  based on current  rates for similar
borrowings.

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

     Off-Balance Sheet Commitments--Commitments  include commitments to purchase
and originate  mortgage loans,  commitments to sell mortgage loans,  and standby
letters of credit and are  generally of a short-term  nature.  The fair value of
such  commitments  are based on fees  currently  charged to enter  into  similar
agreements,  taking into account the remaining  terms of the  agreements and the
counterparties' credit standing.

<PAGE>
PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements

The estimated fair values of the Company's financial instruments are as follows:
      
                                               September 30
                                       1996                    1995
                              ------------------------  ------------------------
                                 Carrying     Fair       Carrying       Fair
                                  Amount     Value         Amount       Value
                              ----------- -----------  ------------  -----------
Assets
   Cash and cash equivalents  $11,031,745 $11,031,745   $11,961,442  $11,961,442
   Interest-bearing deposits           --          --       390,256      390,256
   Investment securities
       available for sale      25,886,015  25,886,015    11,069,862   11,069,862
   Investment securities
       held to maturity        14,261,035  14,149,137    28,940,555   28,627,564
   Loans                      227,574,786 228,052,351   222,729,444  223,625,140
   Interest receivable          1,909,826   1,909,826     1,739,793    1,739,793
   Stock in FHLB                2,004,400   2,004,400     1,941,100    1,941,100


Liabilities
   Deposits                   235,081,440 235,195,843   232,468,382  232,544,330
   Short-term borrowings               --          --     1,000,000      998,906
   Interest payable               276,304     276,304       280,908      280,908
   Advances by borrowers
     for taxes and insurance        3,450       3,450        80,053       80,053


Off-balance sheet assets (liabilities)
   Commitments to extend credit        --          --            --           --
   Standby letters of credit           --          --            --           --


<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements

NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
                                                              Average           
                                  Net    Provision For         Common   Earnings
Quarter  Interest    Interest   Interest    Loan       Net     Shares      Per
Ending    Income     Expense     Income     Losses    Income Outstanding  Share
------- ---------- ----------- ----------- --------  ------- ------------ ------

Dec 95 $ 5,426,782 $ 2,855,748 $ 2,571,034 $(36,502) $1,031,209  2,362,898 $0.44
Mar 96   5,511,194   2,800,922   2,710,272   34,739   1,071,819  2,365,398  0.45
Jun 96   5,428,628   2,768,770   2,659,858   17,925   1,027,158  2,348,071  0.44
Sep 96   5,369,396   2,804,150   2,565,246   (7,338)     82,272  2,333,485  0.04
       ----------- ----------- ----------- --------- ----------
       $21,736,000 $11,229,590 $10,506,410   8,824   $3,212,458
       =========== =========== =========== ========= ==========

Dec 94 $ 5,029,904 $ 2,517,810 $ 2,512,094  (20,822) $1,032,181  2,363,252 $0.44
Mar 95   5,119,225   2,620,627   2,498,598    6,405     968,393  2,363,231  0.41
Jun 95   5,223,321   2,751,494   2,471,827 (118,912)    997,243  2,362,228  0.42
Sep 95   5,312,661   2,837,523   2,475,138  183,387     901,613  2,362,376  0.38
       ----------- ----------- ----------- --------- ----------
       $20,685,111 $10,727,454 $ 9,957,657 $ 50,058  $3,899,430
       =========== =========== =========== ========= ==========   

NOTE 16--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
                                                   1996             1995
                                                 ------------    ------------
Assets    
   Cash                                           $      --      $    80,172
   Securities purchased from subsidiary
     under agreement to resell                     4,278,290       3,761,223
   Investment in subsidiary                       33,123,537      33,669,948
   Securities available for sale                   5,295,565       4,103,300
   Securities held to maturity                       245,000         245,000
   Interest receivable                                75,925          62,167
   Other assets                                        6,157           9,393
                                                  -----------    ------------
Total assets                                     $43,024,474     $41,931,203
                                                 ------------    ------------

Liabilities--dividends payable on common stock   $   347,709     $   307,177
                                                 ------------    ------------
Stockholders' equity
   Common stock                                    2,325,494       2,362,898
   Additional paid-in capital                      7,690,289       8,423,385
   Retained earnings                              32,762,852      30,865,260
   Net unrealized loss on securities
      available for sale                            (101,870)        (27,517)
                                                 ------------    ------------ 
                                                  42,676,765      41,624,026
                                                 ------------    ------------
Total liabilities and stockholders' equity       $43,024,474     $41,931,203
                                                 ============    ============


<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


                          Condensed Statement of Income
                                                      September 30 
                                                1996               1995
                                             ------------       -----------
Income
   Dividends from subsidiary                  $3,500,000        $2,500,000
   Interest on investments                       296,353           236,294
Expenses                                         (69,211)          (72,555)
                                             ------------       -----------
Income before equity in undistributed 
   income of subsidiary                        3,727,142         2,663,739
Equity in undistributed income of subsidiary    (489,734)        1,249,891
                                             ------------       -----------
Income before income tax                       3,237,408         3,913,630
Income tax expense                                24,950            14,200
                                             ------------       -----------
Net income                                    $3,212,458        $3,899,430
                                             ============       ===========


                        Condensed Statement of Cash Flows

                                                     September 30 
                                                1996              1995
                                             ------------      ------------
Net cash provided by operating activities     $3,738,114        $2,735,186
                                             ------------      ------------
Cash flows from investing activities:
 Purchases of securities available for sale   (2,876,180)         (150,080)
 Purchase of securities held to maturity             ---          (245,000)
 Proceeds from maturities of securities
    held to maturity                           1,620,000               ---
 Net change in securities purchased under
    agreement to resell                         (517,067)       (1,261,223)
                                             ------------      ------------
     Net cash used by investing activities    (1,773,247)       (1,656,303)
                                             ------------      ------------
Cash flows from financing activities:
 Stock options exercised                          17,000            20,000
 Stock repurchased                              (787,500)          (81,927)
 Cash dividends                               (1,274,539)       (1,039,489)
                                             ------------      ------------
    Net cash used by financing activities     (2,045,039)       (1,101,416)
                                             ------------      ------------ 

Net change in cash and cash equivalents          (80,172)          (22,533)
Cash and cash equivalents at beginning of year    80,172           102,705
                                             ------------     ------------- 
Cash and cash equivalents at end of year      $       --      $     80,172
                                             ============     =============    


<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, 1996 and 1995,  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,  1996.  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,  1996 and 1995,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  September  30, 1996,  in conformity  with  generally  accepted
accounting principles.

     As discussed in the notes to the financial statements,  the Company changed
its method of accounting for certain securities on September 30, 1994.



Indianapolis, Indiana
October 23, 1996


                    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