CONTENTS

Letter to Stockholders . . . . . . . . 1
Highlights and Stock Information  . . .2
Planning Today For a Better Tomorrow  .3
Board of Directors and
Executive Officers  . . . . . . . . . .4
Branch Managers and Associates  . . . .5
Management's Discussion
and Analysis . . . . . . . . . . . . . 6
Selected Consolidated Financial Data  12
Consolidated Financial Statements  . .13
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
         201 North Illinois Street
         Indianapolis, IN  46204

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

Transfer Agent
         Fifth Third Bank
         Corporate Trust Administration
         38 Fountain Square Plaza
         Cincinnati, OH  45263
         TEL:  513-579-6016
                   800-336-6782
         FAX:  513-744-6785

                                CORPORATE PROFILE

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

The Company's  primary asset is Peoples Federal Savings Bank of Dekalb ounty(the
Bank).  The Bank was  formed  in 1925 and has  grown to assets of more than $290
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 46706. As of the
  close of business on September 30, 1997, the Company had  approximately  1,500
  stockholders.

                                 ANNUAL MEETING

  The annual meeting of  stockholders of Peoples Bancorp will be held Wednesday,
  January 14,  1998 at 2:00 p.m. at  Greenhurst  Country  Club,  1740 North Main
  Street, Auburn, Indiana 46706.

                                 ABOUT THE COVER

  Investing in our customers and the  communities  we serve" is this year's 1997
  Annual Report theme. On the cover: (top left) Richard Lewton,  Branch Manager,
  delivers mortgage papers to a customer; (top right) Branch Manager, Kay Smith,
  working with Hertha Moran, Garrett Librarian, a recipient of donation support;
  (lower  left) Clark  Ream,  Branch  Manager  and long term park board  member,
  visiting with Kendallville  Mayor, Larry McGahen, at the newly landscaped park
  garden;  (lower right) Branch  Manager,  Andy  Anderson,  delivering  mortgage
  papers with the Scott Gates family in Columbia City.


<PAGE>



TO OUR STOCKHOLDERS:

         We are pleased to report net income for the fiscal year of  $4,202,192,
an increase of 30% over the  $3,212,458  earned  during the same period one year
ago.  However,  we must remember the F.D.I.C.  assessment in fiscal 1996 reduced
our after-tax income by approximately $893,000.

         Capital  now stands at $44.3  million,  which  gives the  Bancorp a net
worth to asset ratio of 15.24%.  The return on average  assets  (ROA) was 1.47%,
and the return on equity  (ROE) was 9.69%.  Your  Board of  Directors  has taken
steps to improve the ROE, such as renewing the Stock Repurchase Plan. During the
past fiscal  year,  we  repurchased  64,170  shares of common stock at a cost of
$1,360,208.  Cash dividends of $0.41 per share ($1,391,751) were paid during the
year.  This was the tenth  consecutive  year that the cash  dividends  have been
increased.

         An  investment  in  Peoples  Bancorp   continues  to  be  rewarding  to
shareholders.  A stock  split in the form of a stock  dividend  was  declared in
October,  1997.  One  additional  share of common  stock was issued for each two
outstanding shares to stockholders of record on November 7, 1997.

         Assessing the needs of our market area has led us to several  expansion
projects.  We expect to have a new ATM and debit card service for our  customers
by early 1998, and we are in the process of securing a second  banking  location
in the Columbia City area. This new location will provide additional convenience
for our customers in that area.

During the past year,  Max E. Robart retired as Executive  Vice  President.  Mr.
Robart had been with  Peoples  since  1984,  and his banking  career  spanned 41
years.  We thank him for his years of service,  as his  influence  upon the Bank
will  be long  felt.  Jay  Grate  was  promoted  to Vice  President  of  Lending
Operations  upon Mr. Robart's  retirement.  Mr. Grate has worked in the Bank for
the past ten years in several lending areas.

         Donald E. Budd was hired in 1997 as Vice  President and Trust  Officer.
He will service the trust needs of our client base, as well as develop new trust
business for the Bank. Budd has 21 years of experience in the banking  industry,
the past six  years  specializing  in trust,  estate  planning,  and  investment
services.  Mr. Budd was formerly  vice  president  and trust officer of Citizens
Bank of Kentucky.

        Effective January 1998,Jack L. Buttermore, a valued and trusted advisor,
will  retire  from the  Board of  Directors  after  17  years  of  service.  Mr.
Buttermore  was first  elected to the Board of Peoples  Federal  Savings Bank in
1980.  His wise and  valuable  contributions  have helped  guide the Bank to the
position of strength and stability it holds today. Mr.  Buttermore will continue
to serve the Bank as a Director Emeritus.

         On behalf of the Board of  Directors,  we would like to thank  you--our
stockholders,  customers, and fellow employees for your continued confidence and
support.




<PAGE>

         Information listed below has been adjusted for stock split
                        Market Price          Dividends
                 --------------------------
                      Low          High       Per Share
                 ------------   -----------   ----------
Fiscal 1996
1st QTR             $ 12.83      $ 13.67        $0.10        
2nd QTR               13.00        15.33         0.10
3rd QTR               14.50        15.33         0.10
4th QTR               14.67        21.17         0.11

Fiscal 1996
1st QTR             $ 13.50      $ 14.83        $0.09         
2nd QTR               12.50        13.92         0.09
3rd QTR               12.50        14.00         0.09
4th QTR               12.83        13.50         0.10
The price of PFDC stock traded on NASDAQ on November 25, 1997
was $23.00


This page also included graphs depicting comparisons of total assets, net loans,
stockholder's equity, and dividends per share for the years 1992 through 1997.
<PAGE>
Planing Today for a Better Tomorrow

Peoples Federal produced  excellent results in 1997 as this annual report shows,
continuing  on its course of  achieving  customer  satisfaction  through a sound
offering of products  and  services.  Peoples  launched  new products to improve
existing  services  and made plans for  changes  ahead in 1998,  all with an eye
toward improving customer service.

         Our  promise is to invest in the  technology  and people  necessary  to
prepare for the future  while  maintaining  a strong  financial  picture for the
present.  The bank  will  continue  to grow  steadily  for the  long  run  while
producing results for our stockholders,  customers, and the communities we serve
that surpass the competition.

         With  constant new  technology to improve the service we can provide to
our customers,  it is truly an exciting time in the banking industry.  For 1998,
we plan to continue to build on our strength of local  decision  making  through
the branch network while seeking efficiencies corporate-wide

Initiatives already in progress include:

   Introducing Automated Teller (ATM) and Debit Cards;
   Establishing a wide-area computer network to electronically link
   our branches; and
   Implementing a new mortgage processing system.

         Peoples Federal is preparing to launch an ATM and debit card service by
early 1998.  Customers  will be able to tap into the  existing  network at about
7,000 ATM machines worldwide.  Debit cards will give Peoples Federal customers a
convenient  way to pay for  purchases  directly  from  their  checking  accounts
without the hassle of writing a check. As an added safety precaution,  customers
will be able to add their picture on the card to prevent an unauthorized  person
from using the card.

         Peoples also plans to install a wide-area network to enable our offices
to work together better by sharing information  electronically.  The network, to
be completed in `98, will improve communications among the branches, reduce long
distance telephone costs, and most importantly, enhance our customer service.

         All of this  technology  would be  wasted if our staff was not ready to
make the most of it. That's why Peoples is also investing in our greatest asset,
our employees,  through  computer  training and product  knowledge,  so they are
ready to make a smooth transition to the new systems and promote the products.

         Peoples  continues to gain  mortgage  customers in each of the areas we
serve  sparked  by a strong  local  economy.  Whether  it is the new Noble  Hawk
subdivision  in  Kendallville,  Eagle Glen and Sugar  Creek  Estates in Columbia
City, Maple Knoll, Maple Glen, and Baltimore Place in Garrett,  Hunter's Glen or
the  soon-to-be-constructed  Bridgewater development in Auburn, all of the areas
Peoples  serves  are  experiencing  a new  housing  surge,  which  gives  us the
opportunity to provide a higher volume of mortgage  services.  This  established
pattern of  building  is  expected  to  continue  for 1998,  and Peoples has the
products to serve that market.

         While 1998  promises  to be a year of exciting  improvements,  1997 was
also a year of accomplishments.

         A new and dynamic way of presenting checking statements, check imaging,
was fully  implemented.  The new method of sending our customers images of their
canceled  checks along with their  statements has been well received.  With this
new technology,  customers have copies of checks when they need them. All of the
same  information as a traditional  statement is provided more  efficiently with
the added advantage of reducing postage costs.

         Peoples  celebrated the remodeling of the LaGrange  office with an open
house in September. The refurbishing  contributes to an efficient,  contemporary
facility.  We want our customers to enjoy coming to our branches  because of the
pleasant atmosphere and friendly service.

         Sign improvements were recently made in Avilla,  Garrett,  and Columbia
City  enabling  us to  promote  our new  products  and  special  rates.  This is
essential to these markets because some customers may not have a daily newspaper
but often drive by the bank.

         Expanded and improved  training on club checking  products,  such as Rx
Prescription  Advantage and Children's  Safety ID Network were added to the club
accounts.  The Rx  Prescription  Advantage  provides  benefits to checking  club
members with  discounts at local  drugstores  by belonging to the plus  checking
club. The Safety ID Network enables  customers to enter the pictures of children
in a nationwide  protection  network with a digitized photo and description of a
child by calling a toll-free number. A child's  description can be sent anywhere
in the country should the need ever arise.

         We're  excited about our  accomplishments  and look forward to the year
ahead,  but we'll continue to remember the keystone that has  contributed to our
success  for more than 70 years:  Our  commitment  is to our  customers  and the
community.



<PAGE>



This page displayed photographs                                                 
of the members of the board    Roger J. Wertenberger
of directors, and the          Chairman of the Board and Chief Executive
executive officers of the      Officer of the Bank, Auburn, Indiana.
bank.                          Director since 1954.

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

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

                               Jack L. Buttermore
                               Owner of Buttermore Farms, Auburn, Indiana
                               Director since 1980.

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

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

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

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

                               Lloyd M. Cline
                               Director Emeritus

                               Jesse A. (Jack) Sanders
                               Director Emeritus

                               Russell A. Spice  
                               Director Emeritus

                                      EXECUTIVE OFFICERS OF THE BANK
                               
          Roger J. Wertenberger                     Donald E. Budd
          Chief Executive Officer                   Vice President-Trust Officer

          Maurice F. Winkler, III                   Carole J. Leins
          President and Chief Operating Officer     Corporate Secretary

          Jeffery L Grate                           Deborah K. Stanger
          Vice President-Lending Operations         Vice President-Chief
                                                    Financial Officer
          Herma F. Fields
          Vice President-Savings


This page includes a photograph of the Bank's branch managers

ASSOCIATES

Molly Allen o Karyn Alwine o Trisha Arnold o Dewayne  Anderson o Trisha Arnold o
Cathy Banet o Vicki  Beasley o Cheryl  Bherns o Debby  Blevins o Lisa Boardman o
Elaine  Bolinger o Shane Bowen o Kay Brandon o Susan Branscum o Mona Brown o Don
Budd 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  Delores  Forbes o
Teresa  Fox o Mandy  Fugate o Scott  Gates o Jay  Grate o Sheryl  Hanes o Bonnie
Harlan o Marilee  Harris o  Stefanie  Harris o CJ  Herendeen  o Paula  Hertsel o
Jennifer  Hochstetler o Adina Houser o Courtney  Jacobs o Sherry Johnson o Cindy
Jollief o Dixie Jones o Heather Jones o Paula Jones o Heather  Kaiser o Mary Ann
Ketzenberger o Rebecca Klingenberger o Lisa LaVergne o Carole Leins o Ann Leis o
Richard  Lewton o Helen  Lindley o Jodi Manier o Eleanor Manns o Sandra McAfee o
Delara Miller o Gayle Morris o Nadia  Mundroff o Donna O'Dell  oTrisha  Patton o
Linda  Plattner  oJane Pepple o Kristie  Prater o Jenny  Pressler o Clark Ream o
Lora Refner o Standing First Row: DeWayne Anderson Karen Reust o Rita Richardson
o Dawn Rieke o Linda Columbia City, Kristie Prater,  Avilla,  Second Rodebaugh o
Joatta Sayles o Richard Shankle o Monica Row: R. Clark Ream,  Kendallville,  Kay
Smith  Sheets o Kay  Shepherd o Diane  Slone o Kay Smith o  Garrett,  Third Row:
Richard Lewton,  LaGrange Deborah Stanger o, Brenda Strohm o Cheri Taylor o John
Thrapp o Shalisa  Troyer o Patricia  Trumbull o Kathy  VanAllen o Linda Walker o
Tracy Walker o John Weigel o Mary Welch 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--414-418 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  six
full-service  offices located in Avilla,  Columbia City, Garrett,  Kendallville,
and LaGrange,  Indiana.  Peoples  Federal  offers a full range of retail deposit
services and lending  services to northeastern  Indiana.  The Company's  primary
business activity is being the holding company for Peoples Federal.

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

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

         On a yearly basis,  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, 1997, 1996, and 1995.


                                           September 30
                                   -----------------------------
                                      1997      1996     1995
                                   --------- --------- ---------
Weighted average interest rate on:
     Loans                            8.15%     8.33%     8.17%
     Securities                       5.89      5.64      5.20
     Other interest-earning assets    6.42      6.19      7.19
     Combined                         7.76      7.85      7.68
Weighted average cost of:
     NOW and savings deposits         2.78      2.64      2.61
     Certificates of deposit          5.64      5.70      5.59
     Borrowings                       4.85      5.94      5.73
     Combined                         4.80      4.79      4.65
Interest rate spread                  2.96      3.06      3.03
Net yield on weighted average
     interest-earning assets          3.70      3.75      3.70


         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, 1997, 1996 and 1995.

                                             At September 30
                                      -------------------------------
                                        1997        1996      1995
                                      ----------  ---------  --------
Weighted average interest rate on:
          Loans                         8.34%       8.02%      8.31%
          Securities                    5.41        5.18       5.19
          Other interest-earning assets 6.20        6.81       6.41
          Combined                      7.89        7.57       7.79
Weighted average cost of:
          NOW and savings deposits      2.98        2.80       2.70
          Certificates of deposit       5.78        5.72       5.92
          Borrowings                    5.31         ---       5.83
          Combined                      4.97        4.89       4.94
Interest rate spread                    2.92        2.68       2.85


Asset and Liability Management

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

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

<PAGE>

         The  following  table  illustrates  the  projected  maturities  and the
repricing  mechanisms  of the major asset and  liability  categories  of Peoples
Federal as of September 30, 1997.  Maturity and repricing dates have been stated
to reflect  the  contractual  maturity  and  repricing  dates.  The  information
presented in the following table is derived from information that is provided to
the OTS in "Schedule CMR:  Maturity and Rate" filed as part of Peoples Federal's
September 30, 1997, quarterly report. The data contained in the following report
is the  contractual  repricing  information and does not contain any assumptions
regarding repricing.
<TABLE>

                                                           At September 30, 1997
                                                           (Dollars in Thousands)
                                     ---------------------------------------------------------------------
                                      3 Months More than 3 Months                      Over
Period to maturity or repricing       or Less   Thru 1 Year    1-3 Years   3-5 Years   5 Years     Total
<S>                                  <C>        <C>           <C>         <C>         <C>        <C>
                                     ---------  ------------  ----------- ----------- ---------  ---------
Interest earning assets:
    Adjustable rate loans            $ 15,052    $ 29,351      $ 3,512     $ 6,446    $      -   $ 54,361
    Fixed rate loans                    1,632       2,084          935       3,902     164,006    172,559
    Investment securities              11,799       4,881       12,057       9,555       8,147     46,439
    Consumer and other loans            1,216       2,571        2,843       3,439       2,667     12,736
                                     ---------  ------------  ---------   ----------- ---------  ---------
    Total Assets Subject to Repricing  29,699      38,887       19,347      23,342     174,820    286,095
                                     ---------  ------------  ---------   ----------- ---------  ---------
Liabilities Subject to Repricing:
    Certificates of deposit            52,665      52,008       59,385       6,977          -     171,035
    N.O.W. and other transaction 
      accounts                         25,670           -            -           -          -      25,670
    Passbook accounts                  34,564           -            -           -          -      34,564
    Money market accounts              10,271           -            -           -          -      10,271
    Borrowings                          3,162           -                                           3,162
                                     ---------  ------------  ----------  ---------- ---------  ----------
    Total Liabilities Subject to
      to repricing                    126,332      52,008       59,385       6,977          -     244,702
                                     --------   ------------  ----------  ---------- ---------  ----------
Excess (deficiency) of rate sensitive
    assets over rate sensitive
    liabilities                      $(96,633)  $ (13,121)   $ (40,038)    $16,365    $174,820    $41,393
                                     =========  ============ =========== =========== ========== ==========

Cumulative excess (deficiency) of rate
    sensitive assets over rate
    sensitive liabilities           $(96,633)    $(109,754)  $(149,792)  $(133,427)   $41,393     $41,393
                                    =========   ============ =========== =========== ========== ==========
    

As a % of Total Assets
    Subject to Repricing             (33.78)%    (38.36)%     (52.36)%     (46.64)%     14.47%      14.47%


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

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



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

<TABLE>

                                                                                   Years ended September 30
                                                                                    (Dollars in Thousands)
                                  --------------------------------------------------------------------------------------------------
                                                 1997                             1996                              1995
                                  -------------------------------- --------------------------------  -------------------------------
                                    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(1)                         $230,278    $ 18,758    8.15%     $223,861    $ 18,646    8.33%    $218,789    $ 17,877     8.17%
  Investment securities              34,992       2,060    5.89        36,655       2,068    5.64       43,261       2,284     5.20
  Other interest-earning assets      16,822       1,080    6.42        16,513       1,022    6.19        7,290         524     7.19
                                  ----------- ----------           ------------- ---------           ----------   ---------
  Total interest-earning assets     282,092      21,898    7.76       277,029      21,736    7.85      269,340      20,685     7.68
                                              ----------                         ---------                        ---------
Allowance for loan losses              (883)                             (932)                           (977)
Other assets                          3,484                             3,796                            3,571
                                  -----------                      -------------                     -----------
Total Assets                       $284,693                          $279,893                         $271,934
                                  ===========                      =============                     ===========

Interest-bearing liabilities:
   NOW and savings deposits        $ 70,004    $  1,949    2.78      $ 70,043    $  1,846    2.64     $ 72,382    $  1,892     2.61
   Certificates of deposit          166,557       9,402    5.64       163,758       9,341    5.70      157,902       8,819     5.59
   Borrowings                         2,412         117    4.85           724          43    5.94          279          16     5.73
                                  ----------- ----------           ------------- ---------           ----------   ---------
   Total interest-bearing
       liabilities                   238,973     11,468    4.80       234,525      11,230    4.79      230,563      10,727     4.65
                                              ----------                         ---------                        ---------
Other liabilities                     2,358                             2,513                            1,006
Stockholders' equity                 43,362                            42,855                           40,365
                                  -----------                      -------------                     -----------
Total Liabilities and
   Stockholders' equity            $284,693                          $279,893                         $271,934
                                  ===========                      =============                     ===========

Net interest income/spread                     $ 10,430    2.96                  $ 10,506    3.06                 $  9,958     3.03
                                              ==========                         =========                        =========
Net yield on interest earning assets                       3.70                              3.75                              3.70

(1) Average balances include nonaccrual balances.
</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,
                                 ---------------------------------------------------------------------------------
                                        1997 vs 1996                1996 vs 1995                1995 vs 1994
                                 ---------------------------- -------------------------- --------------------------
                                       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                          $457    $(345)    $112       $417    $352     $ 769    $1,144  $ 696    $1,840
    Mortgage-backed securities       (4)      -        (4)       (14)     (8)      (22)      (26)     -       (26)
    Investment securities           (86)     82        (4)       (371)   177      (194)      274    (84)      190
    Other interest-earning assets    20      38        58         581    (83)      498      (267)   258        (9)
                                 -------- -------  ---------- -------- ------- --------  -------- ------- ---------
    Total interest income           387    (225)      162         613    438     1,051     1,125    870     1,995
                                 -------- -------  ---------- -------- ------- --------  -------- ------- ---------
Interest expense from:
     NOW and savings deposits        (1)    104       103         (70)    24       (46)      (66)     8       (58)
     Certificates of deposit        159     (98)       61         341    181       522       651  1,296     1,947
     Borrowings                      80      (6)       74          26      1        27         9      -         9
                                  ------- -------  ---------- -------- ------- ---------  ------- ------- ---------
     Total interest expense         238       -       238         297    206       503       594  1,304     1,898
                                  ------- -------  ---------- -------- ------- ---------  ------- ------- ---------
Net interest income (expense)      $149   $(225)    $ (76)      $316    $232     $ 548     $ 531  $(434)   $   97
                                  ======= ======= =========== ======== ======= =========  ======= ======= =========

</TABLE>



Operating Expense

         While operating expenses have increased, the increases have been due in
large part to the expansion of the Bank's  operations.  The increases,  with the
exception of increased  FDIC  premiums,  are service  related and consist of the
following:  appraisal and legal fees in connection with loan originations,  data
processing  due to  automating  manual  systems;  and  start  up  costs  for new
services.  Operating  expenses as a  percentage  of the Bank's total assets were
1.46%,  2.12%,  and 1.50% for fiscal years ended  September 30, 1997,  1996, and
1995, 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, 1997, the Bank had liquid assets of  $43,773,723.
This represents a ratio of liquid assets to total assets of 15.1%.

          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  ($7,523,329
at September  30, 1997,  all for  residential  mortgage  loans),  consumer  loan
commitments  ($8,808,071 at September 30, 1997, primarily for home equity lines)
and other obligations and expenditures.

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

          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.

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

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

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

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

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

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

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

Impact of Inflation and Changing Prices

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

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

Year 2000

         The Company has an ongoing  program to ensure that its  operational and
financial systems will not be adversely affected by year 2000 software failures.
While the  Company  believes it is taking all  appropriate  steps to assure year
2000  compliance,  it is dependent  on vendor  compliance  to some  extent.  The
Company is  requiring  its systems and software  vendors to  represent  that the
services and products  provided  are, or will be, year 2000  compliant,  and has
planned a program of testing compliance.  The Company estimates that the cost to
redevelop, replace or repair its technology will not be material.

Future Accounting Issues

     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  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.

         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.

         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.

         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.

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

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


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

<PAGE>
<TABLE>

                                  SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
                                                            September 30
                            ---------------------------------------------------------------------
                                1997          1996           1995         1994          1993
<S>                         <C>           <C>           <C>           <C>           <C>    
                            ------------- ------------- ------------- ------------- -------------
Financial Condition Data:
  Total assets              $290,601,595  $280,011,850  $276,607,771  $266,455,068  $251,116,307
  Loans receivable, net      235,255,669   223,011,251   218,663,928   209,330,499   201,092,662
  Investments and other
     interest-earning assets  46,439,468    47,970,950    47,811,103    44,711,326    43,514,676
  Deposits                   241,790,139   235,081,440   232,747,018   226,851,009   213,590,085
  Borrowed funds               3,162,400             -     1,000,000             -       542,659
  Stockholders' equity        44,298,170    42,676,765    41,624,026    38,720,750    36,077,655

                                                For Years ended September 30
                            ---------------------------------------------------------------------
                                1997           1996           1995         1994          1993
                            ------------- ------------- ------------- ------------- -------------
Operating Data:
  Interest income           $ 21,897,799  $ 21,736,000  $ 20,685,111  $ 18,689,877  $ 19,298,823
  Interest expense            11,467,559    11,229,590    10,727,454     8,829,951     9,146,451
                            ------------- ------------- ------------- ------------- -------------
  Net interest income         10,430,240    10,506,410     9,957,657     9,859,926    10,152,372
  Provision
    for losses on loans           50,000         8,824        50,058        23,746       154,343
                            ------------- ------------- ------------- ------------- -------------
  Net interest income
     after provision
     for losses on loans      10,380,240    10,497,586     9,907,599     9,836,180     9,998,029
  Other income                   644,164       640,928       630,064       606,722       508,021
  Other expenses               4,228,452     5,930,049     4,146,191     4,259,836     4,087,292
                            ------------- ------------- ------------- ------------- -------------
  Income before income taxes   6,795,952     5,208,465     6,391,472     6,183,066     6,418,758
  Income tax expense           2,593,760     1,996,007     2,492,042     2,424,950     2,571,899
                            ------------- ------------- ------------- ------------- -------------
  Net income                $  4,202,192  $  3,212,458  $  3,899,430  $  3,758,116  $  3,846,859
                            ============= ============= ============= ============= =============

 Net income per common share       $1.22         $0.91         $1.10         $1.06         $1.09
                            ============= ============= ============= ============= =============

Dividends per common share         $0.41         $0.37         $0.31         $0.27         $0.25
                            ============= ============= ============= ============= =============

Other Data:
Average yield on all
  interest-earning assets          7.76%         7.85%         7.68%         7.26%         7.96%
Average cost of all interest-
  bearing liabilities              4.80          4.79          4.65          4.01          4.40
                            --------------  -----------   -----------  ------------ -------------
   Interest rate spread            2.96%         3.06%         3.03%         3.25%         3.56%
                            ==============  ===========   ===========  ============ =============

Number of full service
 banking offices                      7            6            6              6            6
Return on assets (net income
 divided by average
 total assets)                     1.47         1.15         1.43           1.45         1.58
Return on equity (net income
 divided by average total equity)  9.69         7.50         9.66          10.06        11.10
Dividend payout ratio(dividends
 per common share divided by
 net income per common share)     33.61        40.66        41.82          25.79        22.70
Equity to assets ratio (average
 total equity divided by average
 total assets)                    15.22        15.37        14.84          14.43        14.21


</TABLE>
<PAGE>

                         PEOPLES BANCORP AND SUBSIDIARY
                           Consolidated Balance Sheet


                                                   September 30  
                                            1997               1996
                                      ---------------    ----------------
Assets
 Cash and due from banks               $  2,993,154        $  3,207,845
 Interest-bearing deposits                7,738,990           7,823,900
                                      ---------------    ----------------
   Total cash and cash equivalents       10,732,144          11,031,745
 Interest-bearing time deposits             976,000                  --
 Investment securities
   Available for sale                    28,467,800          25,886,015
   Held to maturity                       9,256,678          14,261,035
                                      ---------------    -----------------
    Total investment securities          37,724,478          40,147,050
 Loans                                  236,142,236         223,898,729
 Less: Allowance for loan losses            886,567             887,478
                                      ---------------    -----------------
   Net loans                            235,255,669         223,011,251
 Premises and equipment                   1,712,774           1,467,764
 Federal Home Loan Bank of Indianapolis 
  stock at cost                           2,062,200           2,004,400
 Other assets                             2,138,330           2,349,640
                                      ---------------     ----------------

   Total assets                        $290,601,595        $280,011,850
                                      ================    ================

Lbilities
 NOW and savings deposits              $ 70,539,511        $ 68,344,163
 Certificates of deposit                171,250,628         166,737,277
 Short-term borrowings                    3,162,400                  --
 Advances by borrowers for taxes
  and insurance                               1,591               3,450
 Other liabilities                        1,349,295           2,250,195
                                      ---------------    ----------------
       Total liabilities                246,303,425         237,335,085
                                      ---------------    ----------------

Cmitments and Contingencies

Sckholders' Equity
 Preferred stock, $1 par value
  Authorized and unissued--5,000,000 shares
 Common stock, $1 par value
  Authorized--7,000,000 shares
  Issued and outstanding--3,391,986 and 
  3,488,241                               3,391,986           3,488,241
 Additional paid-in capital               5,263,589           6,527,542
 Retained earnings--substantially 
  restricteded                           35,573,293          32,762,852
 Net unrealized gain (loss) on secur
  available for sale                         69,302            (101,870)
                                      ---------------    -----------------
  Total stockholders' equity             44,298,170          42,676,765
                                      ---------------    -----------------

  Total liabilities and stockholders
   equity                              $290,601,595        $280,011,850
                                      ===============    =================


See notes to consolidated financial statements.



<PAGE>



                         PEOPLES BANCORP AND SUBSIDIARY
                        Consolidated Statement of Income

                                              Year Ended September 30
                                          1997           1996           1995
                                      -------------  -------------  ------------
  Interest Income
   Loans                               $18,758,262    $18,645,609    $17,877,066
   Investment securities                 2,052,480      2,068,753      2,284,206
   Other interest and dividend income    1,087,057      1,021,638        523,839
                                      -------------  -------------  ------------
                                       21,897,799     21,736,000     20,685,111
                                      -------------  -------------  ------------
  Interest Expense
   Deposits
     NOW and savings deposits            1,948,834      1,845,731      1,892,010
     Certificates of deposit             9,401,639      9,340,756      8,819,245
   Short-term borrowings                   117,086         43,103         16,199
                                      -------------  -------------  ------------
                                        11,467,559     11,229,590     10,727,454
                                      -------------  -------------  ------------

Net Interest Income                     10,430,240     10,506,410      9,957,657
 Provision for loan losses                  50,000          8,824         50,058
                                      -------------  -------------  ------------
Net Interest Income After Provision for
  Loan Losses                           10,380,240     10,497,586      9,907,599
                                      -------------  -------------  ------------
Other Income
 Fiduciary activities                       54,689         63,089         64,146
 Fees and service charges                  448,124        445,691        410,179
 Other income                              141,351        132,148        155,739
                                      -------------  -------------  ------------
       Total other income                  644,164        640,928        630,064
                                      -------------  -------------  ------------
Other Expenses
 Salaries and employee benefits          2,238,731      2,253,254      2,097,596
 Net occupancy expenses                    294,372        255,784        254,707
 Equipment expenses                        229,011        155,863        160,585
 Data processing expense                   284,328        303,577        294,283
 Deposit insurance expense                 215,984      2,032,186        517,351
 Other expenses                            966,026        929,385        821,669
                                      -------------  -------------  ------------
       Total other expenses              4,228,452      5,930,049      4,146,191
                                      -------------  -------------  ------------
Income Before Income Tax                 6,795,952      5,208,465      6,391,472
 Income tax expense                      2,593,760      1,996,007      2,492,042
                                      -------------  -------------  ------------

Net Income                             $ 4,202,192    $ 3,212,458    $ 3,899,430
                                      =============  =============  ============

Net Income Per Common Share                 $1.22           $.91          $1.10

Average Common Shares Outstanding        3,432,177      3,528,675      3,544,157


See notes to consolidated financial statements.

<PAGE>

<TABLE>


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

                                                                                            Net Unrealized
                                           Common Stock         Additional                  Gain (Loss) 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, 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 gain
     (loss) on securities available           --             --           --            --       152,480            152,480
     for sale
   Cash dividends ($0.31 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 gain
     (loss)  on securities                    --             --           --            --       (74,353)           (74,353)
     available for sale,
   Cash dividends ($0.37 per share)           --             --           --    (1,314,866)           --         (1,314,866)
                                    -------------- ------------- ------------- ------------- ------------- ------------------

Balances September 30, 1996            2,325,494      2,325,494    7,690,289    32,762,852      (101,870)        42,676,765
   Repurchase of stock                   (64,170)       (64,170)  (1,296,038)                                    (1,360,208)
   Net income for 1997                                                           4,202,192                        4,202,192
   Stock split                         1,130,662      1,130,662   (1,130,662)
   Net change in unrealized gain
     (loss) on securities available                                                              171,172            171,172
     for sale
   Cash dividends ($0.41 per share)                                             (1,391,751)                      (1,391,751)
                                    -------------- ------------- ------------- ------------- ------------- ------------------

Balances September 30, 1997            3,391,986     $3,391,986   $5,263,589   $35,573,293     $  69,302        $44,298,170
                                    ============== ============= ============= ============= ============= ==================


See notes to consolidated financial statements.

</TABLE>

<PAGE>

                         PEOPLES BANCORP AND SUBSIDIARY
                      Consolidated Statement of Cash Flows

<TABLE>
                                                       Year Ended September 30
                                                    1997         1996         1995
                                                ------------ ------------ ------------
<S>                                             <C>          <C>          <C>   
Operating Activities
 Net income                                     $ 4,202,192  $ 3,212,458  $ 3,899,430
 Adjustments to reconcile net income to
   net cash provided by
   operating activities
   Provision for loan losses                         50,000        8,824       50,058
   Depreciation and amortization                    255,095      204,083      223,897
   Investment securities amortization, net          (36,876)     (23,481)      35,052
   Amortization of deferred loan fees              (271,410)    (368,361)    (412,144)
   Deferred income tax                              617,401     (385,000)     207,773
   Change in
     Interest receivable                            116,711     (170,033)    (216,202)
     Interest payable                               (26,034)      (4,603)     111,051
   Other adjustments                             (1,660,388)   1,412,211       21,547
                                                ------------ ------------ ------------
Net cash provided by operating activities         3,246,711    3,886,098    3,920,462
                                                ------------ ------------ ------------

Investing Activities
  Net change in interest-bearing deposits          (976,000)     390,256     (373,826)
  Purchases of securities available for sale    (14,636,858) (22,544,576)    (117,678)
  Purchases of securities held to maturity         (320,000)          --     (245,000)
  Proceeds from maturities and paydowns
     of securities held to maturity               5,342,664   14,688,070    1,262,258
  Proceeds from maturities of securities
    available for sale                           14,929,330    7,620,000    4,000,000
  Net change in mutual funds                     (2,563,954)
  Net change in loans                           (12,205,762)  (4,098,609)  (9,238,270)
  Purchases of premises and equipment              (492,605)     (65,338)    (101,415)
  Proceeds from sales of real estate owned          277,254       42,499      235,314
  Purchases of Federal Home Loan Bank of 
    Indianapolis stock                              (57,800)     (63,300)     (69,900)
                                                ------------ ------------ ------------
Net cash used by investing activities           (10,703,731)  (4,030,998)  (4,648,517)
                                                ------------ ------------ ------------
Financing Activities
  Net change in
    NOW and savings deposits                      2,192,329   (2,943,040)  (4,773,195)
    Certificates of deposit                       4,542,405    5,279,885   10,560,392
    Short-term borrowings                         3,162,400   (1,000,000)   1,000,000
  Net change in advances by borrowers for
    taxes and insurance                              (1,859)     (76,603)      11,898
  Cash dividends                                 (1,377,648)  (1,274,539)  (1,039,489)
  Exercise of stock options                              --       17,000       20,000
 Repurchase of common stock                      (1,360,208)    (787,500)     (81,927)
                                                ------------ ------------ ------------
Net cash provided (used) by
 financing activities                             7,157,419     (784,797)   5,697,679
                                                ------------ ------------ ------------
Net Change in Cash and Cash Equivalents            (299,601)    (929,697)   4,969,624
Cash and Cash Equivalents, Beginning of Year     11,031,745   11,961,442    6,991,818
                                                ------------ ------------ ------------
Cash and Cash Equivalents, End of Year          $10,732,144  $11,031,745  $11,961,442
                                                ============ ============ ============
Additional Cash Flows and Supplementary Information:
   Interest paid                                $11,493,593  $11,231,922  $10,649,528
   Income tax paid                                1,511,993    2,315,550    2,117,721
</TABLE>

See notes to consolidated financial statements.

<PAGE>

                         PEOPLES BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements




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

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

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

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

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

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

Investment  Securities--Debt  securities are classified as held to maturity when
the  Company  has the  positive  intent and  ability to hold the  securities  to
maturity. Securities held to maturity are carried at amortized cost.

Debt  securities  not  classified  as held to  maturity  and  marketable  equity
securities are classified as available for sale.  Securities  available for sale
are carried at fair value with unrealized gains and losses reported  separately,
net of tax,  in  stockholders'  equity.  The  Company  holds no  securities  for
trading.

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



<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 subsidiaries.

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  1996  consolidated   financial
statements have been made to conform to the 1997 presentation.


<PAGE>

                         PEOPLES BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


Note 2--Restriction On Cash

The Bank is required to maintain  reserve  funds in cash and/or on deposit  with
the Federal  Reserve  Bank.  The reserve  required at September  30,  1997,  was
$788,000.

Note 3--Investment Securities
<TABLE>
                                                 September 30, 1997
                                  ---------------------------------------------------
                                                   Gross        Gross
                                                 Unrealized  Unrealized   Fair
                                  Amortized Cost   Gains       Losses     Value      
                                  -------------- ---------- ----------- -------------
<S>                                <C>            <C>        <C>         <C> 
Available for sale
 Federal agencies                  $19,699,605    $164,200   $ 41,395    $19,822,410
 State and municipal obligations     6,083,716      28,999     31,279      6,081,436
 Marketable equity securities        2,563,954                             2,563,954
                                  -------------- ---------- ----------- -------------
    Total available for sale        28,347,275     193,199     72,674     28,467,800
                                  -------------- ---------- ----------- -------------
Held to maturity
 Federal agencies                    8,000,000         312     32,814      7,967,498
 State and municipal obligation        757,855      14,699                   772,554
 Mortgage-backed securities            498,823      24,212                   523,035
                                  -------------- ---------- ----------- -------------
    Total held to maturity           9,256,678      39,223     32,814      9,263,087
                                  -------------- ---------- ----------- -------------
    Total investment securities    $37,603,953    $232,422   $105,488    $37,730,887
                                  ============== ========== =========== =============

</TABLE>
<TABLE>
                                       September 30, 1996
                                  -------------------------------------------------------------------
                                                   Gross      Gross
                                                 Unrealized Unrealized    Fair
                                  Amortized Cost   Gains      Losses      Value
                                  -------------- ---------- ----------- -------------
<S>                                <C>            <C>        <C>         <C>
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 obligation        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
                                  ============== ========== =========== =============
</TABLE>

<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,  1997,  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.
                                                      1997
                         --------------------------------------------------
                            Held to Maturity         Available for Sale
                         ------------------------ -------------------------
Maturity Distributions    Amortized     Fair       Amortized       Fair
 at September 30            Cost        Value        Cost          Value
                         ----------- ------------ ------------ ------------

Within one year          $2,075,000   $2,065,967  $ 3,321,375   $ 3,326,153
One to five years         6,290,000    6,266,561   14,787,543    14,823,974
Five to ten years           367,855      382,524    5,658,899     5,681,031
After ten years              25,000       25,000    2,015,504     2,072,688
                         ----------- ------------ ------------ ------------
                          8,757,855    8,740,052   25,783,321    25,903,846
Mortgage-backed securities  498,823      523,035           --            --
Marketable equity securities     --                 2,563,954     2,563,954
                         ----------- ------------ ------------ ------------
                         $9,256,678   $9,263,087  $28,347,275   $28,467,800
                         =========== ============ ============ ============

Securities  with a carrying  value of  $4,037,500  were pledged at September 30,
1997 to secure  repurchase  agreements.  There  were no  securities  pledged  at
September 30, 1996.
       
There were no sales of  securities  during the year ended  September  30,  1997,
1996, or 1995.

Note 4--Loans and Allowance
                                                     September 30
                                              1997           1996
                                         --------------  --------------
Real estate loans                         $221,723,573    $210,541,364
Construction loans                           5,196,837       5,197,237
Individuals' loans for household
  and other personal expenditures           12,735,795      11,836,185
                                         --------------  --------------
Less:                                      239,656,205     227,574,786
                                         --------------  --------------
   Undisbursed portion of loans              2,443,791       2,717,235
   Deferred loan fees and discounts          1,070,178         958,822
                                         --------------  --------------
                                             3,513,969       3,676,057
                                         --------------  --------------
    Total loans                           $236,142,236    $223,898,729
                                         ==============  ==============

Year Ended September 30           1997            1996             1995
------------------------------------------  --------------  ----------------

Allowance for loan losses
   Balances, October 1         $887,478        $912,268         $1,034,439
   Provision for losses          50,000           8,824             50,058
   Recoveries on loans           33,188          21,715             27,851
   Loans charged off            (84,099)        (55,329)          (200,080)
                           --------------  ---------------  ----------------

   Balances, September 30      $886,567        $887,478          $ 912,268
                           ==============  ===============  ================


<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
                                                    1997               1996
                                        --------------------  -----------------

Land                                           $   356,238       $    356,238
Buildings                                        2,565,259          2,561,159
Equipment                                        1,620,626          1,204,628
                                        --------------------  -----------------
         Total cost                              4,542,123          4,122,025
Accumulated depreciation                        (2,829,349)        (2,654,261)
                                        --------------------  -----------------
         Net                                    $1,712,774         $1,467,764
                                        ====================  =================


Note 6--Other Assets and Other Liabilities
                                                    September 30
                                               1997               1996
                                        ----------------  ------------------
Other assets
   Interest receivable
      Loans                                $1,226,393         $1,234,223
      Investment  securities                  566,722            675,603
   Foreclosed real estate                          --            110,297
   Deferred income tax asset                       --            100,545
   Prepaid expenses and other                 345,215            228,972
                                       -----------------  --------------------
         Total other assets                $2,138,330         $2,349,640
                                       =================  ====================
 Other liabilities
   Dividends payable on common stock      $   361,812        $   347,709
   Deferred income tax liability              639,357                 --
   Accrued deposit insurance premium               --          1,500,872
   Accrued expenses and other                 348,126            401,614
                                       ----------------  ---------------------
         Total other liabilities           $1,349,295         $2,250,195
                                       ================  =====================

<PAGE>

                         PEOPLES BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements


Note 7--Deposits
                                                     September 30
                                              1997                  1996
                                      -----------------  ----------------------

Demand deposits                          $ 35,940,976        $ 28,728,351
Savings deposits                           34,563,685          39,583,982
Certificates and other time deposits
  of $100,000 or more                      17,366,591          16,664,414
Other certificates and time deposits      153,668,708         149,828,480
Interest payable                              250,179             276,213
                                      -----------------  ----------------------

         Total deposits                  $241,790,139        $235,081,440
                                      =================  ======================

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

   1998         $104,673,414
   1999           51,082,282
   2000            8,302,959
   2001            4,127,985
   2002            2,848,659
              ----------------

                $171,035,299
              ================


Note 8--Short-term Borrowings

Securities sold under agreement to repurchase  totaling  $3,162,400 at September
30,  1997,  consist  of  obligations  of  the  Company  to  other  parties.  The
obligations are secured by investment  securities and such collateral is held by
a  safekeeping  agent.  The  maximum  amount of  outstanding  agreements  at any
month-end  during 1997  totaled  $3,292,639  and the average of such  agreements
totaled  $2,412,000.  The agreements at September 30, 1997 matured on October 1,
1997. There were no outstanding agreements during 1996.


<PAGE>


                         PEOPLES BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 9--Income Tax
                                              Year Ended September 30
                                    1997            1996             1995
                               -------------  ----------------  ---------------
Income tax expense:
   Currently payable:
     Federal                     $1,518,553      $1,809,917        $1,731,032
     State                          457,806         571,090           553,237
   Deferred:
     Federal                        489,827        (270,000)          186,114
     State                          127,574        (115,000)           21,659
                               -------------  ----------------  ---------------

   Total income tax expense      $2,593,760      $1,996,007        $2,492,042
                               =============  ================  ===============

Reconciliation of federal statutory to actual tax expense:
 Federal statutory income
   tax at 34%                    $2,310,624      $1,770,878        $2,173,100
 Effect of state income taxes       386,351         301,019           379,431
 Other, net                        (103,215)        (75,890)          (60,489)
                               -------------  ----------------  ---------------
         Actual tax expense      $2,593,760      $1,996,007        $2,492,042
                               =============  ================  ===============

A  cumulative  deferred  tax  liability  and asset of $639,357  and  $100,545 is
included in other  liabilities  and other assets at September 30, 1997 and 1996,
respectively. The components of the asset and liability are as follows:
<TABLE>

                                                                          September 30
                                                                     1997           1996
                                                                 --------------  -------------
<S>                                                                  <C>             <C> 
Differences in accounting for accrued expenses                             --        $594,000
Differences in accounting for loan fees                              $300,842         231,457
Differences in depreciation methods                                   (44,639)        (24,389)
Differences in accounting for loan and real estate losses             351,081         351,441
Tax bad debt reserves in excess of base year                         (964,077)       (975,221)
FHLB of Indianapolis stock dividend                                   (78,527)        (78,527)
Differences in accounting for pensions and other employee benefits                      13,469
Net unrealized (gains) losses on securities available for sale        (53,161)         69,340
Other                                                                (150,876)        (81,025)
                                                                 --------------  --------------
                                                                    $(639,357)       $100,545
                                                                 ==============  ==============

Assets                                                               $651,923      $1,259,707
Liabilities                                                         1,291,280)     (1,159,162)
                                                                 --------------  --------------
                                                                    $(639,357)    $   100,545
                                                                 ==============  ==============

</TABLE>
<PAGE>

Retained earnings at September 30, 1997,  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,
1997.


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 Banks'
exposure to credit loss in the event of nonperformance by the other party to the
financial  instruments  for  commitments  to extend credit is represented by the
contractual  or  notional  amount of those  instruments.  The Bank uses the same
credit policies in making such  commitments as it does for instruments  that are
included in the consolidated balance sheet.

Financial  instruments whose contract amount represents credit risk at September
30 were as follows:

                                          1997               1996
                                 ---------------------------------------
Commitments to extend credit          $16,331,400        $11,926,600

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 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, 1997, total  stockholders'
equity  of the  Bank was  $34,184,090  of which  approximately  $14,510,000  was
available for the payment of dividends to the Company.

In 1997,  the  Company's  board of directors  approved the  repurchase  of up to
240,000 of the Company's  outstanding shares of common stock ("1997 Plan"). Such
purchases will be made subject to market  conditions in the open market or block
transactions.  At September 30, 1997, the Company has repurchased  25,656 shares
of its outstanding stock under the 1997 Plan.

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


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, 1997,  the  management  of the Bank believes that it meets all
capital  adequacy   requirements  to  which  it  is  subject.  The  most  recent
notification from the regulatory agency categorized the 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:
<TABLE>
                                                                September 30, 1997
                                              ------------------------------------------------------
                                                              Required for Adequate   To Be Well
                                                  Actual          Capital (1)        Capitalized(1)
                                               ------------------------------------------------------
                                               Amount   Ratio     Amount   Ratio    Amount  Ratio
-----------------------------------------------------------------------------------------------------
<S>                                            <C>      <C>     <C>        <C>     <C>      <C>            
Total risk-based capital (1) (to risk-weighted
   assets)                                     $34,955  24.67%  $11,334    8.0%    $14,167  10.0%
Core capital 1 (to adjusted tangible assets)    34,080  12.00%    8,523    3.0%     17,046   6.0%
Core capital 1 (to adjusted total assets)       34,080  12.00%    8,523    3.0%     14,205   5.0%
(1) As defined by regulatory agencies
</TABLE>

The Bank's tangible capital at September 30, 1997 was $34,080,000,  which amount
was 12.00  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, 1997, the date of the latest
actuarial  valuation.  Pension  expense was  $10,698,  $153,848 and $114,070 for
1997, 1996 and 1995. This plan provides pension benefits for  substantially  all
of the Bank's employees.

The Company has a stock option plan in which 162,000 common shares were reserved
at September 30, 1997, 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 for those options  exercised
in 1996 and 1995, was $3.33 per share.
                                                        September 30
                                                 1997        1996         1995
                                               ---------------------------------
Shares under option after restatement for stock split:
 Outstanding at beginning of year                 --         5,100       11,100
 Exercised during the year                        --         5,100        6,000
 Outstanding and exercisable at end of year       --            --        5,100
                                               =================================



<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


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, 1997 and 1996,  the Trust owned  50,703 and 49,562  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  $77,932,
$73,940 and $72,824 for 1997, 1996 and 1995, respectively.


Note 15--Fair Values of Financial Instruments

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

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

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

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

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

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

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

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  approximates
market value.



<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


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

The estimated fair values of the Company's financial instruments are as follows:
   
<TABLE>
                                                          September 30
                                                      1997                    1996
                                            ---------------------------------------------------
                                            Carrying         Fair     Carrying       Fair
                                             Amount          Value     Amount        Value
                                            ----------- ------------- ------------ ------------
<S>                                        <C>           <C>          <C>          <C> 
Assets
   Cash and cash equivalents               $ 10,732,144  $ 10,732,144 $ 11,031,745 $ 11,031,745
   Interest-bearing deposits                    976,000       976,000           --           --
   Investment securities available for sale  28,467,800    28,467,800   25,886,015   25,886,015
   Investment securities held to maturity     9,256,678     9,263,087   14,261,035   14,149,137
   Loans                                    236,142,236   237,213,206  223,898,729  224,376,294
   Interest receivable                        1,793,115     1,793,115    1,909,826    1,909,826
   Stock in FHLB                              2,062,200     2,062,200    2,004,400    2,004,400


Liabilities
   Deposits                                 241,539,960   241,467,192  234,805,227  234,919,630
   Short-term borrowings                      3,162,400     3,162,400           --           --
   Interest payable                             251,421       251,421      276,304      276,304
   Advances by borrowers for taxes and            
     insurance                                    1,591         1,591        3,450        3,450


</TABLE>
<PAGE>


                         PEOPLES BANCORP AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

Note 16--Quarterly Results of Operations (Unaudited)
<TABLE>
                                                                       Average 
                                               Provision                Common     Earnings 
Quarter   Interest   Interest    Net Interest   For Loan      Net       Shares      Per
Ending    Income     Expense       Income        Losses      Income   Outstanding   Share
------- ----------- ----------- ------------- ----------- ----------- ----------- ---------
<S>     <C>         <C>          <C>            <C>        <C>         <C>         <C>         <C>  
Dec 96  $ 5,385,443 $ 2,811,494  $ 2,573,949    $ 11,315   $  943,729  3,468,419   $0.27
Mar 97    5,329,118   2,803,134    2,525,984        (485)   1,034,761  3,444,413    0.30
Jun 97    5,562,104   2,874,152    2,687,952      22,700    1,093,103  3,414,836    0.32
Sep 97    5,621,134   2,978,779    2,642,355      16,470    1,130,599  3,398,987    0.33
        ----------- ----------- ------------ ------------ ----------- 
        $21,897,799 $11,467,559  $10,430,240    $ 50,000   $4,202,192
        =========== =========== ============= =========== ===========

Dec 95  $ 5,426,782 $ 2,855,748  $ 2,571,034    $(36,502)  $1,031,209  3,544,347   $0.29
Mar 96    5,511,194   2,800,922    2,710,272      34,739    1,071,819  3,548,097    0.30
Jun 96    5,428,628   2,768,770    2,659,858      17,925    1,027,157  3,522,107    0.29
Sep 96    5,369,396   2,804,150    2,565,246      (7,338)      82,273  3,500,228    0.03
        ----------- ----------- ------------- ----------- ------------ 
        $21,736,000 $11,229,590  $10,506,410    $  8,824   $3,212,458
        =========== =========== ============= =========== ============ 
</TABLE>

Note 17--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
                                                    1997             1996
                                            ---------------  ----------------

Assets
   Cash                                       $    29,525       $       --
   Securities purchased from subsidiary
    under agreement to resell                   4,064,079         4,278,290
   Investment in subsidiary                    34,184,104        33,123,537
   Securities available for sale                6,081,437         5,295,565
   Securities held to maturity                    215,000           245,000
   Interest receivable                             87,261            75,925
   Other assets                                       969             6,157
                                            ---------------  -----------------
       Total assets                           $44,662,375       $43,024,474
                                            ===============  =================

Liabilities
   Dividends payable on common stock          $   361,812      $    347,709
   Other                                            2,393                --
                                            ----------------------------------
       Total liabilities                          364,205           347,709
                                            ----------------------------------

Stockholders' equity
   Common stock                                 3,391,986         3,488,241
   Additional paid-in capital                   5,263,589         6,527,542
   Retained earnings                           35,573,293        32,762,852
   Net unrealized gain (loss) on   
    securities available for sale                  69,302          (101,870)
                                            ----------------------------------
                                               44,298,170        42,676,765
                                            ----------------------------------
Total liabilities and stockholders' equity    $44,662,375       $43,024,474
                                            ==================================


<PAGE>


PEOPLES BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements


                          Condensed Statement of Income

                                                  September 30
                                             1997               1996
                                        ----------------------------------

Income
 Dividends from subsidiary               $3,000,000          $3,500,000
 Interest on investments                    365,654             296,353
Expenses                                    (57,937)           (69,211)
                                        --------------   -----------------

Income before equity in undistributed
 income of subsidiary and income
 tax expense
                                          3,307,717          3,727,142
Equity in undistributed incom
 of subsidiary                              927,455           (489,734)
                                        --------------   -----------------
Income before income tax                  4,235,172          3,237,408
Income tax expense                           32,980             24,950
                                        --------------   -----------------
Net income                               $4,202,192         $3,212,458
                                        ==============   =================

                        Condensed Statement of Cash Flows
        
<TABLE>
                                                                        September 30
                                                                  1997            1996
                                                              -------------  --------------
<S>                                                             <C>            <C>       
 Net cash provided by operating activities                      $3,294,089     $3,738,114
                                                             --------------  ---------------

Cash flows from investing activities:
 Purchases of securities available for sale                    (1,700,919)     (2,876,180)
 Proceeds from maturities of securities held to maturity           30,000               -
 Proceeds from maturities of securities available for sale        930,000       1,620,000
 Net change in securities purchased under agreement to resell     214,211        (517,067)
                                                             --------------  ---------------
  Net cash used by investing activities                          (526,708)     (1,773,247)
                                                             --------------  ---------------
Cash flows from financing activities:
 Stock options exercised                                               --          17,000
 Stock repurchased                                             (1,360,208)       (787,500)
 Cash dividends                                                (1,377,648)     (1,274,539)
                                                             --------------  ---------------
  Net cash used by financing activities                        (2,737,856)     (2,045,039)
                                                             --------------  ---------------
Net change in cash                                                 29,525         (80,172)
Cash at beginning of year                                              --          80,172
                                                             --------------  ---------------
Cash at end of year                                           $    29,525     $        --
                                                             ==============  ===============
</TABLE>
<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, 1997 and 1996, 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,  1997.  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, 1997 and
     1996, and the results of their  operations and their cash flows for each of
     the three years in the period ended  September 30, 1997, in conformity with
     generally accepted accounting principles.



     Geo. S. Olive & Co., LLC
     Indianapolis, Indiana
     October 21, 1997




                    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



                                                       

                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.