SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

 Annual Report Pursuant to Section 10 or 15(D) of the Securities Exchange Act of
                                      1934

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934 For the fiscal year ended September 30, 1996

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

                         Commission File Number 0-18991

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

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

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

       Registrant's telephone number, including area code: (219) 925-2500

           Securities registered pursuant to Section 12(g)of the Act:
                                  

                     Common Stock, par value $1.00 per share
                                (Title of Class)

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

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

     Aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant, as of December 23, 1996: $40,127,665.

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of December 23, 1996:

           2,307,973 shares of Common Stock, par value $1.00 per share

                      Documents Incorporated by Reference:

     Portions of the definitive  Proxy  Statement for the 1997 Annual Meeting of
Stockholders (Part III) and the Annual Report to Stockholders for the year ended
September 30, 1996 (Parts II and IV).

                        Exhibit Index Appears on Page 34

<PAGE>
                                     PART I

ITEM 1.  BUSINESS

GENERAL


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

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

     The Company is  classified  as a unitary  savings and loan holding  company
subject to regulation by the  Securities  and Exchange  Commission of the United
States (the "SEC"), and the OTS.

     In May, 1995, the Board authorized a stock repurchase program. Purchases of
up to  100,000  shares  may be made in open  market or in  privately  negotiated
transactions.  As of September  30,  1996,  the Company had  repurchased  44,970
shares.

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

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

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

THE THRIFT INDUSTRY

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

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

EARNINGS

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

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

COMPETITION

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

NET INTEREST INCOME

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

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

INTEREST RATE AND VOLUME OF INTEREST-RELATED ASSETS AND LIABILITIES

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

     For  information  regarding the total dollar amount of interest income from
interest-earning assets, the average yields, the amount of interest expense from
interest-bearing liabilities and the average rate, net interest income, interest
rate spread, and the net yield on  interest-earning  assets,  refer to page 8 of
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  in  the  Company's  1996  Annual  Report,   incorporated  herein  by
reference.

     For information  regarding the combined weighted average effective interest
rate earned by the Bank on its loan  portfolio  and  investments,  the  combined
weighted  average  effective  cost of the Bank's  deposits and  borrowings,  the
interest rate spread of the Bank, and the net yield on combined monthly weighted
average   interest-earning  assets  of  the  Bank  on  its  loan  portfolio  and
investments for the fiscal years ending September 30, 1996, 1995, and 1994 refer
to page 6 of  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations in the Company's 1996 Annual Report incorporated herein by
reference.

     For  information  concerning  the extent to which changes in interest rates
and changes in volume of  interest-related  assets and liabilities have affected
the Bank's interest income and expense during the fiscal years ending  September
30, 1996, 1995, and 1994 refer to page 9 of Management's Discussion and Analysis
of Financial  Condition and Results of  Operations in the Company's  1996 Annual
Report incorporated herein by reference.

MARKET AREA

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

LENDING ACTIVITIES

    GENERAL

     The  Bank,  like  most  other  thrift   institutions,   had   traditionally
concentrated its lending  activities on the origination of long-term  fixed-rate
loans secured by mortgages on residential real estate. However, in response to a
number of factors, including a changing economic and regulatory environment, the
Bank  since 1984 has  attempted  to  emphasize  investments  in  adjustable-rate
residential  mortgages and consumer loans in its market area. In order to lessen
its risk from interest rate fluctuations, the Bank emphasizes the origination of
interest rate sensitive loan products, such as one year adjustable-rate mortgage
loans, and prime plus equity loans.

    RESIDENTIAL MORTGAGE LOANS

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

     In 1984, the Bank began offering adjustable-rate mortgage loans. Currently,
these loans  generally have interest rates which adjust (up or down) every year.
Currently in effect is a maximum  adjustment  of 6% over the life of these loans
with a maximum  adjustment  of 2% during any given year.  Adjustments  are based
upon an index  established at the time the commitment is issued by the Bank. The
index  used for most  loans is tied to the  applicable  United  States  Treasury
security index. While the addition of adjustable-rate mortgage loans will better
enable the Bank to maintain a positive  spread  during  periods of high interest
rates, it is not expected that adjustments in interest rates on  adjustable-rate
mortgages will match precisely changes in the Bank's cost of funds. The majority
of the adjustable rate mortgages  originated by the Bank have limitations on the
amount (generally 6%) and frequency of interest rate changes.

     During the fiscal  year  ended  September  30,  1996,  the Bank  originated
$58,508,000  of  residential  loans of which  $51,312,000  were five- to 30-year
fixed-rate  mortgages  and  $7,196,000  were  adjustable-rate  loans.  The rates
offered on the Bank's  adjustable-rate  residential mortgage loans are generally
competitive  with the rates offered by other thrift  institutions  in the Bank's
market  area and are based upon the Bank's  cost of funds and the rate of return
the Bank can receive on comparable investments.  Fixed-rate loans are originated
only under terms and conditions and using documentation which would permit their
sale in the secondary  market and at rates which are generally  competitive with
rates offered by other financial institutions in the Bank's market area.

     Set  forth  below  are  the  amounts  and  percentages  of  fixed-rate  and
adjustable-rate   loans  (which  include  consumer  loans  and   mortgage-backed
securities)  in the Bank's  portfolio at September 30, 1996,  1995, and 1994 (in
thousands).

                                  September 30,
--------------------------------------------------------------------------------
         1996                       1995                            1994
-------------------------  ---------------------------  ------------------------
  Fixed        Adjustable    Fixed      Adjustable      Fixed        Adjustable
---------    ------------  ----------  ------------- -----------    ------------
 $155,046         $73,159   $134,302      $89,221      $127,870       $86,414
   67.9%           32.1%      60.1%        39.9%         59.7%          40.3%

     The terms of the residential loans originated by the Bank range from one to
30 years. Experience during recent years reveals that as a result of prepayments
in  connection  with  refinancings  and  sales  of  the  underlying  properties,
residential loans generally remain outstanding for periods substantially shorter
than  maturity  of the loan  contracts.  At  September  30,  1996,  the  average
contractual  maturity of the Bank's  portfolio of fixed-rate  loans was 11 years
and 4  months,  and 19 years  and 1 months  with  respect  to its  portfolio  of
adjustable-rate loans.

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

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

    COMMERCIAL REAL ESTATE LOANS

     Federal  laws  and  regulations   permit  a   federally-chartered   savings
institution to make  commercial  real estate loans.  From September 30, 1995, to
September 30, 1996,  commercial  real estate loans  increased from $6,271,832 to
$7,476,884,  increasing the percentage of commercial  real estate loans to total
loans from 2.82 to 3.30%.  These loans consisted of  construction  and permanent
loans  secured by mortgages  on mid-size  commercial  real estate.  The terms of
commercial  real estate  loans vary from loan to loan but are usually  five-year
adjustable-rate  loans with terms of 20 to 25 years.  The loan to value ratio of
commercial real estate loans is generally 75% or less.

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


    CONSTRUCTION LOANS

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

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

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

     CONSUMER AND OTHER LOANS

     Federal  laws  and  regulations   permit  a   federally-chartered   savings
institution to make secured and unsecured  consumer loans  including home equity
loans  (loans  secured  by the  equity  in the  borrower's  residence,  but  not
necessarily  for the purpose of  improvement),  home  improvement  loans  (loans
secured by a residential  second  mortgage),  loans secured by deposit accounts,
educational loans (insured by the State Student Loan Commission of Indiana), and
credit card loans  (unsecured).  The Bank offers all of these types of loans and
is  currently  emphasizing  home equity  loans to take  advantage  of the recent
changes in the tax laws. These loans are often at adjustable interest rates that
generally are higher than the rates offered on mortgage loans.



    LOAN PORTFOLIO CASH FLOWS

     The following  table sets forth the estimated  cash flows (in thousands) of
the Bank's loan  portfolio by type of loan at September  30, 1996 The  estimated
cash flows reflect contractual terms at September 30, 1996 Contractual principal
repayments  of loans do not  necessarily  reflect  the actual term of the Bank's
loan portfolio.  The average life of mortgage loans is  substantially  less than
their  contractual  terms because of loan prepayments and because of enforcement
of "due on sale" clauses.  The average life of mortgage loans tends to increase,
however, when current mortgage loan rates substantially exceed rates on existing
mortgage loans. 

                                         Cash Flows of Loans
                                      Years Ended September 30
                           -------------------------------------------
                                         1998-    2002 and  
                             1997        2001    thereafter    Total
                           --------   --------   ----------  ---------
Type of Loan:
Construction loans --
   residential real estate $ 5,197    $     -    $      -    $  5,197   
Real estate loans:
   Mortgage-residential     69,747     42,171      91,849     203,767
   Commercial                3,324      2,601         850       6,775
Installment loans --
   consumer                  8,363      2,240       1,233      11,836
                          ---------   --------   ---------  ----------

         Total             $86,631    $47,012     $93,932    $227,575
                          =========   ========   =========  ==========

     The following  table sets forth the estimated cash flows of the Bank's loan
portfolio  (in  thousands)  after  one year  from  September  30,  1996,  in the
categories of fixed rate and adjustable rate.


        Cash Flows of Loans
  October 1, 1997 and thereafter
----------------------------------
    Fixed             Adjustable           Total at September 30, 1996
-----------      -----------------        ------------------------------
  $99,930             $41,014                      $140,944



LOAN PORTFOLIO COMPOSITION

     The  following  table,  sets  forth  the  composition  of the  Bank's  loan
portfolio  by type of  security  at the dates  indicated.  The table  includes a
reconciliation of total net loans receivable, after consideration of undisbursed
portion of loans, deferred loan fees and discounts,  and allowance for losses on
loans (dollars in thousands).
<TABLE>
  
                                   1996             1995            1994              1993               1992
                           ---------------- ---------------- ----------------- ----------------- -----------------
TYPE OF SECURITY             AMOUNT    %      AMOUNT     %    AMOUNT      %      AMOUNT     %      AMOUNT       %
                           --------- ------ --------- ------ --------- ------- --------- ------- ---------/ ------
<S>                        <C>       <C>    <C>       <C>    <C>       <C>     <C>       <C>     <C>        <C>
Residential:
     Single family units   $207,028   91.0% $203,211   91.2% $195,525   91.7%  $188,135   91.9%  $186,317    92.3%
     2-4 family units         1,234    0.5%    1,008    0.5%    1,006    0.5%       654    0.3%       568     0.3%
     Over 4 family units      2,769    1.2%    1,738    0.8%    1,835    0.9%     1,751    0.9%     1,507     0.7%
Commercial real estate        4,006    1.8%    3,696    1.7%    2,729    1.3%     2,344    1.1%     2,108     1.0%
Land acquisition and
     development                702    0.3%      838    0.4%      438    0.2%       560    0.3%       366     0.2%
Consumer and other loans     10,959    4.8%   11,337    5.1%   10,931    5.1%    10,441    5.1%    10,121     5.0%
Loans on deposits               877    0.4%      901    0.4%      860    0.4%       888    0.4%       883     0.4%
                           --------- ------ --------- ------ --------- ------   -------- ------- ---------- ------
                            227,575  100.0%  222,729  100.0%  213,324  100.0%   204,773  100.0%   201,870   100.0%
                           --------- ------ --------- ------ --------- ------   -------- ------- ---------- ------
Less:
Undisbursed portion
     of loans                 2,717            2,237            1,971              1,763            1,390
Deferred loan fees and
     discounts                  959              916              988                893              779
                           ---------        ---------        ---------          ---------        ---------
                              3,676            3,153            2,959              2,656            2,169
                           ---------        ---------        ---------          ---------        ---------
Total loans receivable      223,899          219,576          210,365            202,117          199,701
Allowance for losses
     on loans                   888              912            1,035              1,025              896
                           ---------        ---------        ---------          ---------        ---------
Net loans                  $223,011         $218,664         $209,330           $201,092         $198,805
                           =========        =========        =========          =========        =========


</TABLE>

ORIGINATION, PURCHASE AND SALE OF LOANS AND LOAN CONCENTRATIONS

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

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

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

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

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

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

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

                                                Years Ended September 30
                                    -------------------------------------------
                                       1996           1995           1994
                                    ------------- -------------- --------------
Mortgage loans originated
   for the purpose of:
     Construction-commercial        $    995,000   $          -   $          -
     Construction-residential          6,582,000      7,069,000      3,120,000
     Purchase/refinance-commercial     1,905,000      1,910,000      1,078,000
     Purchase/refinance-residential   51,926,000     41,376,000     52,074,124
Consumer and other loans originated    6,837,000      9,160,000      7,803,000
                                     ------------  -------------  -------------
   Total loans originated             68,245,000     59,515,000     64,075,124
                                     ------------  -------------  -------------
Loans  purchased                               -              -              -
                                     ------------  -------------  -------------
                                      68,245,000     59,515,000     64,075,124
                                     ------------  -------------  -------------
Loan credits:
   Principal repayments               64,146,215     50,315,657     56,189,605
                                     ------------  -------------  -------------
Other:
   Provision for losses on loans           8,824        50,058         23,746
   Amortization of loan fees            (368,362)     (412,144)      (525,064)
   Loan foreclosures, net                111,000       228,000        149,000
                                     ------------  -------------  -------------
                                        (248,538)     (134,086)      (352,318)
                                     ------------  -------------  -------------
     Total credits, net               63,897,677     50,181,571     55,837,287
                                     ------------  -------------  -------------
Net increases in mortgage and other
   loans receivable, net             $ 4,347,323    $ 9,333,429    $ 8,237,837
                                     ============  =============   =============
    INTEREST RATES, POINTS AND FEES

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

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

NONPERFORMING ASSETS

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

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


    The following table reflects the amount of loans in delinquent  status as of
the dates indicated (dollars in thousands)::

                                        Loans Delinquent For
             -------------------------------------------------------------------
                       30-59 Days           60-89 Days         90 Days and Over
             ------------------------ -------------------- ---------------------
                          Percent                Percent                Percent
                          of Loan                of Loan                of Loan
            Number Amount Category Number Amount Category Number Amount Category
            ------ ------ -------- ------ ------ -------- ------ ------ --------
Real estate:
 One to four  29  $  861   0.41%     10    $293    0.14%     27  $801     0.33%
 family
Consumer      22     193   1.69%     10      39    0.34%     25   101     0.89%
           ------ ------ -------- ------ ------ -------- ------ ------ --------
   Total      51  $1,054   0.46%     20    $332    0.15%     52  $902     0.35%
           ====== ====== ======== ====== ====== ======== ====== =====  ========
                           


             The following table sets forth the Bank's  nonperforming  assets at
the dates indicated (in thousands)::

                                               At September 30,
                           -----------------------------------------------------
                               1996     1995      1994        1993       1992
                           ---------- -------- ---------- ---------- -----------

Nonaccrual loans           $  814,000 $765,000 $1,020,000 $  866,000 $1,748,000
Loans past due 90 days and
    still accruing             88,000   99,000    49,000      87,000     48,000
                           ----------  ------- ---------- ---------- ----------
                              902,000  864,000  1,069,000    953,000  1,796,000
Real estate owned, net
   of allowance               110,297   46,596    25,316     105,825    277,844
                           ----------  ------- ----------  --------- -----------
Total nonperforming
   assets                  $1,012,297 $910,596 $1,094,316 $1,058,825 $2,073,844
                           ========== ======== ========== ========== ==========


    Consumer  loans are placed on nonaccrual  generally when the loan exceeds 90
days delinquent or if in the opinion of management the possibility of collecting
the loan becomes questionable. Mortgage loans are placed on nonaccrual generally
when the loan exceeds 90 days  delinquent,  however,  if the loan is below a 25%
loan to value  management  may at their option decide to accrue  interest on the
loan since collection of the loan appears highly likely.

    Interest income that would have been recognized for the year ended September
1996, if nonaccrual  loans had been current in  accordance  with their  original
terms  approximated  $40,000.  Interest income  recognized on such loans for the
year ended September 30, 1996, approximated $99,000.

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

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

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

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

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



    As of  September  30,  1996 loan  balances  were  classified  by the Bank as
follows.

             Loss                          $   19,273
             Doubtful                             -0-
             Substandard                      773,562
             Special Mention                  266,348

ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE OWNED

    The  allowances  for loan and real estate  owned  losses  represent  amounts
available to absorb future losses.  Such  allowances  are based on  management's
continuing review of the portfolios,  historical  charge-offs,  current economic
conditions,  and such other  factors,  which in  management's  judgment  deserve
recognition  in estimating  possible  losses.  In addition,  various  regulatory
agencies, as an integral part of their examination process,  periodically review
the  allowance  for loan  losses.  Such  agencies  may require  additions to the
allowances  based on their judgment about the  information  available to them at
the time of their examination.  Provisions for losses are charged to earnings to
bring the allowances to levels  considered  necessary by management.  Losses are
charged to the allowances  when considered  probable.  As of September 30, 1996,
the  allowances for losses on loans and real estate owned were $887,478 and $-0-
respectively.  Management  believes that the  allowances  are adequate to absorb
known and inherent losses in the portfolio.  No assurance can be given, however,
that economic  conditions which may adversely affect the Bank's markets or other
circumstances will not result in future losses in the portfolio.

    The following table presents an allocation of the Bank's  allowance for loan
losses at the dates  indicated  and the  percentage of loans in each category to
total loans (dollars in thousands).

<TABLE>
                                                        September 30,
                             ---------------------------------------------------------------------
                                  1996        1995          1994        1993               1992
                             ------------ ------------ ------------ ---------------- -------------
                             Amount    %   Amount    %   Amount    %   Amount    %   Amount    %
                             ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S>                           <C>  <C>     <C>   <C>    <C>    <C>    <C>    <C>     <C>    <C>  
Balance at end of
period applicable to:
Residential Mortgage Loans    $ 19  91.8%  $ 42   92.2% $   20  92.6% $  177  92.4%  $284    92.3%
Commercial Real Estate Loans     -   3.0%     -    2.0%    140   1.3%    140   1.1%   149     1.0%
Consumer Loans                   -   5.2%    30    5.8%     42   6.1%     15   6.5%    39     6.7%
Unallocated                    868          840            832           693          423
                             ----- ------  ----  ------ ------ ------ ------ ------ -----  -------
Total                         $887 100.0%  $912 100.0% $1,034 100.0% $1,025  100.0%  $895   100.0%
                             ----- ------  ----  ------ ------ ------ ------ ------ -----  -------
</TABLE>


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

Summary of Loan Loss Experience          Years ended September 30,
                                  ---------------------------------------
(Dollars in Thousands)             1996   1995     1994    1993    1992
                                  ------ ------  ------- ------- -------
Balance of loan loss allowance at
 beginning of year                 $912  $1,034  $1,025  $  895    $708
   Charge-offs
      Residential                     -     153       5       1       1
      Commercial real estate          -       -       -       -       -
      Commercial                      -       -       -       -       -
      Consumer                       55      47      30      45      46
                                 ------- ------- ------- -------  ------
           Total Charge-offs         55     200      35      46      47
                                 ------- ------- ------- -------  ------
   Recoveries
      Residential                     -       -       -       -       -
      Consumer                       21      28      21      22      22
                                  ------ ------- ------- -------  ------
           Total Recoveries          21      28      21      22      22
                                  ------ ------- ------- -------  ------
   Net Charge-offs (Recoveries)      34     172      14      24      25
Provision for loan losses             9      50      23     154     212
                                  ------ ------- ------- -------  ------
Balance of loan loss allowance at
     end of year                   $887  $  912  $1,034  $1,025    $895
                                  ====== ======= ======= =======  ======
Ratio of net charge-offs to average
     loans outstanding            0.02%   0.08%   0.01%   0.02%   0.01%

INVESTMENT ACTIVITIES

    Federal  thrift  institutions  have  authority to invest in various types of
liquid assets,  including  United States Treasury  obligations and securities of
various federal  agencies,  certificates  of deposit at insured banks,  bankers'
acceptances  and federal  funds.  As a member of the FHLB System,  the Bank must
maintain  minimum  levels of liquid assets  specified by the OTS which vary from
time to  time.  Subject  to  various  regulatory  restrictions,  federal  thrift
institutions  may also  invest a portion of their  assets in certain  commercial
paper,  corporate  debt  securities and mutual funds whose assets conform to the
investments that a federal thrift institution is authorized to make directly. At
September 30, 1996, the Bank's ratio of liquid assets to total assets was 15.7%,
which exceeds the regulatory requirement.

     The carrying  values of the Bank's  investment  securities,  including  its
liquid assets, as of the dates indicated are presented on the following table.

                                                At September 30,
                                   ----------------------------------------
                                       1996           1995          1994
                                   ------------  ------------  ------------
Interest-bearing deposits and
     certificates of deposit (1)   $ 7,823,900   $ 8,190,942   $         -
U.S. government and federal
     agency securities
     Held to maturity               13,175,118    26,987,247    27,983,373
     Available for sale             20,590,450     6,966,562    10,802,600
Mortgage backed securities
     Held to Maturity                  630,503       794,328       959,619
Stock in FHLB of Indianapolis        2,004,400     1,941,100     1,871,200
Other
     Held to maturity                  455,414     1,158,980     1,012,514
     Available for sale              5,295,565     4,103,300     3,953,220
                                   ------------  ------------  ------------
          Total investments        $49,975,350   $50,142,459   $46,582,526
                                   ============  ============  ============
----------------------------------

(1)  In FHLB of  Indianapolis  at September  30, 1996;  In FHLB of  Indianapolis
     ($7,800,686)  and insured  certificates of deposit  ($390,256) at September
     30, 1995.


    The  following   table  sets  forth   information   regarding  the  maturity
distribution  of  investment  securities  at September 30, 1996 and the weighted
average yield on those securities.
<TABLE>

                                                                      1996
                                         ----------------------------------------------------------------
                                                Available for Sale                Held to Maturity
                                         ------------------------------ ---------------------------------
                                                            Approximate                      Approximate
                                         Amortized             Fair      Amortized              Fair
Maturity Distribution at September 30:      Cost     Yield    Value        Cost       Yield     Value
<S>                                     <C>          <C>   <C>           <C>           <C>   <C>
                                        ------------ ------ ----------- ------------- -----  ------------
Due in one year or less                 $ 2,932,475  5.09% $ 2,931,213   $ 5,209,172   4.79% $ 5,203,994
Due after one through five years         18,455,266  6.17%  18,295,759     8,130,946   5.42%   7,979,686
Due after five through ten years          4,328,731  7.17%   4,320,827       290,414   6.96%     302,624
Due after ten years                         340,752  7.79%     338,216             -                   -
                                        ------------       ------------ -------------        ------------
                                         26,057,224          25,886,015   13,630,532          13,486,304
Mortgage-backed securities                        -                  -       630,503   8.07%     662,833
                                        $26,057,224         $25,886,015  $14,261,035         $14,149,137
                                        ============       ============= ============        ============

</TABLE>
                             


SOURCES OF FUNDS

    GENERAL

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

    DEPOSITS

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

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

    The following table reflects the make-up of the Bank's deposit  portfolio by
type and weighted average rate paid:
                                
                                                          Weighted
                                                           Average
                                              Balance     Rate Paid
                                           ------------- -----------
Transaction accounts                       $ 24,506,429     1.99%
Savings and money market accounts            43,805,904     3.17%
Certificates of deposit less than $100,000   16,664,414     5.37%
Certificates of deposit over $100,000       149,828,480     5.64%
                                           -------------
                                            234,805,227
Interest payable                                276,213
                                           -------------
                                           $235,081,440
                                           =============


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

     For  information on the various  interest rate  categories,  the amounts of
certificate  accounts at September 30, 1996 maturing  during the next five years
and  thereafter  see the  Notes  to  Consolidated  Financial  Statements  in the
Company's 1996 Annual Report.

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


                          1996           1995          1994
                     ------------   ------------   ------------
3 months or less     $ 4,717,331    $ 2,199,413    $ 2,197,628
3-6 months             2,116,471      1,677,336      2,234,938
6-12 months            2,904,430      4,336,291      2,628,356
over 12 months         6,926,182      5,795,043      5,421,300
                     ------------   ------------   ------------
Total                $16,664,414    $14,008,083    $12,482,222
                     ============   ============   ============
 
The following table sets forth certain  information as to the Bank's deposit
flows at the dates and for the periods indicated:

                                  Years Ended September 30,
                       --------------------------------------------
                           1996            1995           1994
                       -------------  -------------  -------------
Beginning balance      $232,747,018   $226,851,009   $213,590,085
                       -------------  -------------  -------------
New accounts and 
additional deposits,
net of withdrawals,      (8,854,488)    (4,706,433)     4,439,931
Interest credited        11,188,910     10,602,442      8,820,993
                       -------------  -------------  -------------
Net increase              2,334,422      5,896,009     13,260,924
                       -------------  -------------  -------------
Ending balance         $235,081,440   $232,747,018   $226,851,009
                       =============  =============  =============

BORROWINGS

    As a member of the FHLB  System  and the FHLB of  Indianapolis,  the Bank is
eligible to arrange  borrowings or advances for various  purposes and on various
terms. The Bank had no advances at September 30, 1996. As of September 30, 1994,
and 1995 the Bank had  outstanding  advances to the FHLB of Indianapolis of $-0-
and $1,000,000 respectively.

    Reverse repurchase agreements, another source of borrowing for the Bank, are
retail  obligations  of the Bank  with a  maturity  of 90 days or less,  and are
generally secured with specific investment securities owned by the Bank.

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

                                                      Years Ended September 30
                                                  ------------------------------
                                                     1996        1995      1994
                                                  ---------- ---------- --------
Average balance of total borrowings               $  723,000 $  279,000 $176,787
Highest month-end balance of total borrowings      1,000,000  1,000,000  546,960
Weighted average interest rate of total borrowings     5.83%      5.83%    3.95%

                                                           At September 30
                                                  ------------------------------
                                                     1996        1995      1994
                                                  ---------- ---------- --------
Advances from FHLB of Indianapolis                $        - $1,000,000 $      -
Reverse Repurchase agreements                              -          -        -
                                                  ---------- ---------- --------
Total borrowings                                $ $        - $1,000,000 $      -
                                                  ========== ========== ========

Weighted average interest rate                             -      5.83%        -

TRUST DEPARTMENT AND DISCOUNT BROKERAGE SERVICES

    In October 1984, the FHLB of  Indianapolis  granted full trust powers to the
Bank,  one of the first  savings  institutions  in Indiana  to be  granted  such
powers.  As of September 30, 1996,  the Bank's trust  department  assets totaled
approximately  $39,700,000  including  self-directed  IRA  accounts,  and it was
offering a variety of trust services including estate planning. As of that date,
the  trust  department  was  administering  approximately  750  trust  accounts,
including estates, guardianships, revocable and irrevocable trusts, testamentary
trusts,  and  self-directed  IRA accounts.  The trust department also offers and
administers   self-directed   Individual   Retirement   Accounts  ("IRA's")  and
Simplified Employee Pension IRA's for small businesses.

NON-BANK SUBSIDIARY

    Peoples  Financial  Services,  Inc. ("PFSI") was organized in 1977 under the
laws of the State of  Indiana.  It is wholly  owned by the Bank and  conducts  a
general insurance business within the State of Indiana under the name of Peoples
Insurance  Agency.  During  fiscal years ended  September 30, 1996 and 1995 PFSI
recorded total income of $36,851 and $32,809, respectively,  with net income for
such periods amounting to $22,411 and $18,190, respectively.

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

EMPLOYEES

    As of September  30, 1996 the Bank  employed 75 persons on a full time basis
and 10 persons on a part time basis. A comprehensive  employee  benefits program
is  maintained  which  provides  hospitalization  and major  medical  insurance,
retirement  income,  life insurance and disability  insurance  which is provided
under the Bank's  pension  program.  The Bank also  maintains an Employee  Stock
Ownership Plan for the benefit of its employees which provides for distributions
of  an  employee's  vested  portions  upon  retirement,   disability,  death  or
termination  of  employment.  The Bank's  employees are not  represented  by any
collective  bargaining  group,  and management  considers its relations with its
employees to be excellent.


                                   REGULATION

GENERAL

     The Company,  as a savings and loan  holding  company,  and the Bank,  as a
federally chartered savings association,  are subject to extensive regulation by
the OTS. The lending  activities  and other  investments of the Bank must comply
with various federal regulatory requirements,  and the OTS periodically examines
the Bank for compliance with various  regulatory  requirements  and for safe and
sound operations.  The FDIC also has the authority to conduct examinations.  The
Bank must file reports with the OTS  describing  its  activities  and  financial
condition and is also subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is intended primarily for
the protection of depositors and the deposit  insurance funds.  Certain of these
regulatory requirements are referred to below or appear elsewhere herein.

REGULATION OF THE BANK

     FEDERAL  HOME LOAN BANK  SYSTEM

     The Bank is a member of the FHLB  System,  which  consists  of 12  district
Federal Home Loan Banks  subject to  supervision  and  regulation by the Federal
Housing  Finance Board  ("FHFB").  The Federal Home Loan Banks provide a central
credit facility  primarily for member  institutions.  As a member of the FHLB of
Indianapolis,  the Bank is required to acquire and hold shares of capital  stock
in the FHLB of  Indianapolis  in an amount at least equal to 1% of the aggregate
unpaid  principal of its home  mortgage  loans,  home  purchase  contracts,  and
similar  obligations  at the  beginning  of each year,  or 1/20 of its  advances
(i.e., borrowings) from the FHLB of Indianapolis, whichever is greater. The Bank
was  in  compliance  with  this  requirement  with  an  investment  in  FHLB  of
Indianapolis stock at September 30, 1996 of $2,004,400.

     The FHLB of Indianapolis serves as a reserve or central bank for its member
institutions within its assigned district.  It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB System.  It makes
advances to members secured by certain prescribed  collateral in accordance with
policies and  procedures  established  by the FHFB and the Board of Directors of
the FHLB of Indianapolis. Long-term advances may only be made for the purpose of
providing funds for residential housing finance.  Members must meet standards of
community investment or service established by the FHLB of Indianapolis in order
to maintain  continued access to long-term  advances.  As of September 30, 1996,
the Bank had no advances  outstanding.  See  "Business  of the  Company--Deposit
Activity and Other Sources of Funds" and "--Borrowings."

         LIQUIDITY REQUIREMENTS

     The Bank is required to maintain  average  daily  balances of liquid assets
(cash, certain time deposits, bankers' acceptances,  highly rated corporate debt
and commercial  paper,  securities of certain mutual funds, and specified United
States  government,  state or federal agency  obligations)  equal to the monthly
average  of not  less  than 5% of its net  withdrawable  savings  deposits  plus
short-term  borrowings.  Savings  institutions  are also  required  to  maintain
average daily  balances of short-term  liquid assets of 1% of the total of their
net withdrawable  savings  accounts and borrowings  payable in one year or less.
Monetary penalties may be imposed for failure to meet liquidity requirements.

         QUALIFIED  THRIFT  LENDER TEST

     The Home Owners' Loan Act (the "HOLA") and OTS regulations  require savings
institutions to meet a qualified thrift lender ("QTL") test or the definition of
a domestic building and loan association in the Internal Revenue Service Code of
1986, as amended. A savings institution that does not meet this requirement must
either  convert to a bank charter or comply with the following  restrictions  on
its  operations:  (i) the institution may not engage in any new activity or make
any new investment,  directly or indirectly,  unless such activity or investment
is permissible for a national bank; (ii) the branching powers of the institution
shall be restricted to those of a national bank; (iii) the institution shall not
be eligible to obtain any advances from its FHLB;  and (iv) payment of dividends
by the institution  shall be subject to the rules regarding payment of dividends
by a  national  bank.  Upon  the  expiration  of three  years  from the date the
institution  ceases to meet these  requirements,  it must cease any activity and
not retain any investment not  permissible  for a national bank and  immediately
repay  any   outstanding   FHLB  advances   (subject  to  safety  and  soundness
considerations).

     To meet the QTL test, an institution's  "Qualified Thrift Investments" must
total at least  65% of  "portfolio  assets."  Under OTS  regulations,  portfolio
assets are defined as total assets less intangibles,  property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets.  Qualified Thrift Investments consist of, among other things, (i)
loans,  equity  positions or securities  related to domestic,  residential  real
estate or  manufactured  housing,  (ii) 50% of the dollar amount of  residential
mortgage loans subject to sale under certain  conditions,  and (iii) stock in an
FHLB or the FHLMC or FNMA. In addition,  savings  institutions are able to treat
as Qualified Thrift  Investments  200% of their  investments in loans to finance
"starter  homes"  and loans for  construction,  development  or  improvement  of
housing and community  service  facilities or for financing small  businesses in
"credit-needy"  areas. In order to maintain QTL status, the savings  institution
must maintain a weekly  average  percentage of Qualified  Thrift  Investments to
portfolio  assets  equal  to 65% on a  monthly  average  basis in nine out of 12
months.  A  savings  institution  that  fails to  maintain  QTL  status  will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become  immediately  subject  to all  penalties  as if all time  limits  on such
penalties had expired.

     At September 30, 1996,  approximately  81.8% of the Bank's portfolio assets
were  invested  in  Qualified  Thrift  Investments,  which  was in excess of the
percentage required to qualify the Company under the QTL test.

         UNIFORM LENDING STANDARDS

     Under OTS regulations, savings institutions must adopt and maintain written
policies that  establish  appropriate  limits and  standards  for  extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent  improvements to real estate. These policies must
establish  loan  portfolio  diversification   standards,   prudent  underwriting
standards,  including loan-to-value limits, that are clear and measurable,  loan
administration   procedures  and   documentation   and  approval  and  reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency  Guidelines  for Real  Estate  Lending  Policies  (the  "Interagency
Guidelines") that have been adopted by the federal bank regulators.

     The  Interagency  Guidelines,  among  other  things,  call upon  depository
institutions to establish  internal  loan-to-value  limits for real estate loans
that are not in  excess  of the  following  supervisory  limits:  (i) for  loans
secured by raw land, the supervisory  loan-to-value limit is 65% of the value of
the collateral;  (ii) for land development loans (i.e., loans for the purpose of
improving  unimproved  property  prior  to  the  erection  of  structures),  the
supervisory  limit is 75%, (iii) for loans for the  construction  of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for  loans  for  the  construction  of  one-  to-four  family  properties,   the
supervisory  limit is 85%; and (v) for loans secured by other improved  property
(e.g.,  farmland,  completed  commercial  property  and  other  income-producing
property including  nonowner-occupied,  one- to-four family property), the limit
is 85%.  Although no supervisory  loan-to-value  limit has been  established for
owner  occupied,  one- to-four  family and home equity  loans,  the  Interagency
Guidelines  state that for any such loan with a loan-to-value  ratio that equals
or exceeds 90% at origination,  an institution should require appropriate credit
enhancement  in the form of either  mortgage  insurance  or  readily  marketable
collateral.

     The Interagency  Guidelines  state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value  ratios in excess of the
supervisory  loan-to-value limits, based on the support provided by other credit
factors.   The  aggregate   amount  of  loans  in  excess  of  the   supervisory
loan-to-value limits,  however,  should not exceed 100% of total capital and the
total of such loans secured by commercial,  agricultural,  multifamily and other
non-one- to-four family  residential  properties  should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans  including  loans insured or guaranteed by the U.S.  government and its
agencies or by  financially  capable  state,  local or municipal  governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible  party, loans that are renewed,  refinanced or restructured  without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout,  loans to facilitate sales of real estate acquired
by the  institution  in the  ordinary  course of  collecting  a debt  previously
contracted and loans where the real estate is not the primary collateral.

     Management believes that the Bank's current lending policies conform to the
Interagency Guidelines and that the Interagency Guidelines will have no
material effect on its lending activities.

         REGULATORY CAPITAL REQUIREMENTS

     Under  OTS  capital   regulations,   savings   institutions  must  maintain
"tangible" capital equal to 1.5% of adjusted total assets,  "core" capital equal
to 3% of adjusted  total assets and "total"  capital (a  combination of core and
"supplementary"  capital) equal to 8% of risk-weighted assets. In addition,  the
OTS has recently  adopted  regulations  which  impose  certain  restrictions  on
savings  associations  that have a total  risk-based  capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to  risk-weighted  assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the  institution  is  rated  Composite  1 under  the OTS  examination  rating
system).  For  purposes  of  these  regulations,  Tier 1  capital  has the  same
definition as core capital.  See "Prompt Corrective  Regulatory Action." The OTS
capital  regulations  define  core  capital  as  common   stockholders'   equity
(including  retained  earnings),  noncumulative  perpetual  preferred  stock and
related surplus, minority interests in the equity accounts of fully consolidated
subsidiaries,   certain  nonwithdrawable   accounts  and  pledged  deposits  and
"qualifying  supervisory  goodwill," less  intangible  assets other than certain
qualifying supervisory goodwill and certain purchased mortgage servicing rights.
Tangible  capital is the same as core  capital,  except that it does not include
qualifying  supervisory goodwill and is reduced by the amount of all the savings
institution's  intangible assets other than certain purchased mortgage servicing
rights.

     The OTS capital rule requires that core and tangible  capital be reduced by
an amount  equal to a  savings  institution's  debt and  equity  investments  in
subsidiaries  engaged in activities not permissible  for national  banks,  other
than subsidiaries engaged in activities  undertaken as agent for customers or in
mortgage  banking  activities and subsidiary  depository  institutions  or their
holding companies ("non-includable subsidiaries"). As of September 30, 1996, the
Bank had no material  investments  in or extensions of credit to  non-includable
subsidiaries.

     Adjusted  total  assets  for  purposes  of the  core and  tangible  capital
requirements  are a  savings  institution's  total  assets as  determined  under
generally accepted accounting principles,  increased by certain goodwill amounts
and by a prorated  portion of the assets of  subsidiaries  in which the  savings
institution  holds a minority  interest and which are not engaged in  activities
for which the capital rules require the savings  institution to net its debt and
equity investments in such subsidiaries  against capital,  as well as a prorated
portion  of the  assets of other  subsidiaries  for which  netting  is not fully
required under phase-in  rules.  Adjusted total assets are reduced by the amount
of  assets  that have been  deducted  from  capital,  the  portion  of a savings
institution's  investments in  subsidiaries  that must be netted against capital
under the  capital  rules and,  for  purposes of the core  capital  requirement,
qualifying  supervisory  goodwill.  At September 30, 1996,  the Bank's  adjusted
total  assets for purposes of the core and tangible  capital  requirements  were
$275 million.

     In  determining  compliance  with the  risk-based  capital  requirement,  a
savings  institution  is allowed to include both core capital and  supplementary
capital  in its total  capital,  provided  the amount of  supplementary  capital
included does not exceed the savings  institution's core capital.  Supplementary
capital is defined to include certain  preferred  stock issues,  nonwithdrawable
accounts  and  pledged  deposits  that do not qualify as core  capital,  certain
approved  subordinated debt, certain other capital  instruments and a portion of
the savings institution's general loan and lease loss allowances.

     The  risk-based  capital  requirement  is  measured  against  risk-weighted
assets,   which   equal  the  sum  of  each   on-balance-sheet   asset  and  the
credit-equivalent  amount of each  off-balance-sheet item after being multiplied
by an  assigned  risk  weight.  Under the OTS  risk-weighting  system,  cash and
securities backed by the full faith and credit of the U.S.  government are given
a 0% risk weight.  Mortgage-backed  securities  that qualify under the Secondary
Mortgage Market  Enhancement Act, including those issued, or fully guaranteed as
to principal and interest, by the FNMA or FHLMC, are assigned a 20% risk weight.
Single-family  first mortgages not more than 90 days past due with loan-to-value
ratios  under 80%,  multi-family  mortgages  (maximum  36  dwelling  units) with
loan-to-value  ratios under 80% and average annual occupancy rates over 80%, and
certain qualifying loans for the construction of one- to four-family  residences
presold to home  purchasers are assigned a risk weight of 50%.  Consumer  loans,
non-qualifying  residential construction loans and commercial real estate loans,
repossessed  assets and assets  more than 90 days past due, as well as all other
assets not  specifically  categorized,  are assigned a risk weight of 100%.  The
portion of equity investments not deducted from core or supplementary capital is
assigned  a  100%   risk-weight.   OTS  capital   regulations   require  savings
institutions to maintain minimum total capital,  consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.

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

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

     In April 1991,  the OTS proposed to amend its core capital  requirement  to
establish a 3% core  capital  ratio for savings  institutions  in the  strongest
financial and  managerial  condition.  For all other savings  institutions,  the
minimum  core  capital  ratio would be 3% plus at least an  additional  1 to 2%,
determined on a case-by-case  basis by the OTS after  assessing both the quality
of risk  management  systems  and the level of overall  risk in each  individual
savings  institution.  [The Company  does not expect that it will be  materially
affected by this  regulation if adopted in its current form.] In addition to the
proposed rule, the OTS has adopted a prompt corrective action rule under which a
savings  institution  that has a core  capital  ratio  of less  than 4% would be
deemed to be  "undercapitalized"  and may be subject to certain  sanctions.  See
"--Prompt Corrective Regulatory Action."

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

     At September 30, 1996,  the Bank exceeded all  regulatory  minimum  capital
requirements as indicated in the table below.
                                  Dollars in Thousands
                        Actual          Required              Excess
                    Amount    %       Amount     %        Amount     %

Tangible capital   $33,186  12.09%   $4,118     1.5%     $29,068   10.59%
Core capital        33,186  12.09     8,236     3.0       24,950    9.09
Risk-based capital  34,054  25.63    10,630     8.0       23,424   17.63

     Insurance of Deposit  Accounts and Special  Assessment.  The Bank's deposit
accounts are insured by the Savings  Association  Insurance  Fund  ("SAIF") to a
maximum of $100,000 for each insured member (as defined by law and  regulation).
If an institution has no tangible capital, the FDIC has the authority, should it
initiate proceedings to terminate an institution's deposit insurance, to suspend
the insurance of any such  institution.  However,  if a savings  association has
positive capital when it includes qualifying  intangible assets, the FDIC cannot
suspend deposit  insurance unless capital declines  materially,  the institution
fails to enter into and remain in compliance  with an approved  capital plan, or
the institution is operating in an unsafe or unsound manner.

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

     The FDIC charges an annual  assessment  for the insurance of deposits based
on the risk a particular  institution poses to its deposit insurance fund. Under
this  system,  a  savings   association   pays  premiums,   depending  upon  the
institution's  risk  classification.  This  risk  classification  is based on an
institution's  capital group and supervisory subgroup  assignment.  In addition,
the FDIC is authorized to increase such deposit insurance rates on a semi-annual
basis if it determines that such action is necessary to cause the balance in the
SAIF to reach or maintain the designated  reserve ratio of 1.25% of SAIF-insured
deposits. The SAIF was substantially  underfunded at June 30, 1996. In addition,
the FDIC  may  impose  special  assessments  on SAIF  members  to repay  amounts
borrowed from the U.S.  Treasury or for any other reason deemed necessary by the
FDIC. The Bank's federal  deposit  insurance  premium expense for the year ended
September 30, 1996 amounted to approximately $2,000,000, of which $1,500,000 was
the  special  assessment  on  savings  institutions  to  recapitalize  the SAIF,
discussed  below.  By  comparison,  at September  30, 1996,  members of the Bank
Insurance Fund ("BIF") were required to pay  substantially  lower,  or virtually
no, federal deposit insurance premiums.

     Effective September 30, 1996, federal law was revised to mandate a one-time
special  assessment on SAIF members such as the Bank of approximately 65.7 basis
points  per $100 of  deposits  held on March  31,  1995.  The  Bank  recorded  a
$1,500,871  pre-tax  expense for this assessment at September 30, 1996, and such
assessment was payable on November 27, 1996.  Beginning January 1, 1997, deposit
insurance   assessments   for  SAIF  members  are  expected  to  be  reduced  to
approximately  6.4 basis points per $100 of deposits on an annual basis  through
the end of 1999.  During  this same  period,  BIF  members  are  expected  to be
assessed  approximately  1.3  basis  points  per $100 of  deposits.  Thereafter,
assessments for BIF and SAIF members should be the same and the SAIF and BIF may
be merged.  It is expected that these  continuing  assessments for both SAIF and
BIF  members  will be used  to  repay  outstanding  Financing  Corporation  bond
obligations.  As a result of these changes,  beginning January 1, 1997, the rate
of deposit insurance assessed the Bank will decline by approximately 72%.

     FEDERAL  RESERVE  SYSTEM

     Pursuant to regulations of the Federal Reserve Board, a savings institution
must maintain  average daily  reserves equal to 3% on the first $54.0 million of
transaction accounts,  plus 10% on the remainder.  This percentage is subject to
adjustment  by the Federal  Reserve  Board.  Because  required  reserves must be
maintained in the form of vault cash or in a non-interest  bearing  account at a
Federal  Reserve Bank,  the effect of the reserve  requirement  is to reduce the
amount of the institution's  interest-earning  assets. As of September 30, 1996,
the Bank met its reserve requirements.

     DIVIDEND RESTRICTIONS

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

     OTS regulations  impose additional  limitations on the payment of dividends
and other capital  distributions  (including stock repurchases and cash mergers)
by the Bank. Under these regulations,  a savings  institution that,  immediately
prior to, and on a pro forma basis after  giving  effect to, a proposed  capital
distribution,  has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital  requirements (a "Tier
1  Association")  is  generally   permitted,   after  notice,  to  make  capital
distributions  during a calendar year in the amount equal to the greater of: (a)
75% of its net income for the previous four  quarters;  or (b) up to 100% of its
net income to date during the calendar  year plus an amount that would reduce by
50% its surplus  capital ratio at the beginning of the calendar  year. A savings
institution  with  total  capital  in excess of current  minimum  capital  ratio
requirements  but not in excess of the fully  phased-in  requirements (a "Tier 2
Association") is permitted,  after notice, to make capital distributions without
OTS approval of up to 75% of its net income for the previous four quarters, less
dividends already paid for such period. A savings institution that fails to meet
current minimum capital requirements (a "Tier 3 Association") is prohibited from
making any capital distributions without the prior approval of the OTS. A Tier 1
Association  that has been  notified  by the OTS that it is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association.  In
December  1994,  the OTS issued a  proposal  to amend the  capital  distribution
limits. Under that proposal,  an institution not owned by a holding company with
one of the two highest  examination  ratings  could make a capital  distribution
without notice to the OTS, if it remains  adequately  capitalized,  as described
above,  after the distribution is made. Any other institution  seeking to make a
capital  distribution  that  would not cause the  institution  to fall below the
capital  levels to  qualify  as  adequately  capitalized,  would have to provide
notice to the OTS. Except under limited  circumstances and with OTS approval, no
capital  distributions would be permitted if they would cause the institution to
become  undercapitalized.  As of September 30, 1996,  the Bank was  considered a
Tier 1 Association under OTS regulations.

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

     ENFORCEMENT

     Under  the  Federal  Deposit  Insurance  Act (the "FDI  Act"),  the OTS has
primary  enforcement  responsibility  over  savings  institutions  and  has  the
authority to bring enforcement action against all "institution-related parties,"
including  stockholders,  and any  attorneys,  appraisers  and  accountants  who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect  on a  savings  institution.  Civil  penalties  cover  a  wide  range  of
violations  and  actions  and range up to  $25,000  per day  unless a finding of
reckless  disregard  is made,  in which  case  penalties  may be as high as $1.0
million  per day.  Criminal  penalties  for most  financial  institution  crimes
include  fines of up to $1.0  million and  imprisonment  for up to 30 years.  In
addition,  regulators have  substantial  discretion to take  enforcement  action
against an institution  that fails to comply with its  regulatory  requirements,
particularly  with  respect to the capital  requirements.  Possible  enforcement
actions  range from the  imposition  of a capital plan and capital  directive to
receivership or  conservatorship.  Under the FDI Act, the FDIC has the authority
to  recommend  to the  Director of the OTS  enforcement  action to be taken with
respect  to a  particular  savings  institution.  If  action is not taken by the
Director,   the  FDIC  has   authority  to  take  such  action   under   certain
circumstances. The FDIC may also take action to terminate deposit insurance.

     TRANSACTIONS   WITH   RELATED   PARTIES

     Transactions between savings institutions and any affiliate are governed by
Sections  23A and 23B of the  Federal  Reserve  Act. An  affiliate  of a savings
institution  is any company or entity which  controls,  is  controlled  by or is
under common control with the savings institution. In a holding company context,
the parent holding  company of a savings  institution  (such as the Company) and
any companies which are controlled by such parent holding company are affiliates
of the savings institution. Generally, Sections 23A and 23B (i) limit the extent
to which the  savings  institution  or its  subsidiaries  may engage in "covered
transactions"  with  any  one  affiliate  to an  amount  equal  to 10%  of  such
institution's  capital stock and surplus,  and contain an aggregate limit on all
such  transactions with all affiliates to an amount equal to 20% of such capital
stock  and  surplus  and (ii)  require  that all such  transactions  be on terms
substantially  the  same,  or at  least  as  favorable,  to the  institution  or
subsidiary as those provided to a non-affiliate.  The term "covered transaction"
includes the making of loans,  purchase of assets,  issuance of a guarantee  and
similar  transactions.  In addition to the restrictions  imposed by Sections 23A
and 23B, no savings  institution  may (i) loan or otherwise  extend credit to an
affiliate,  except for any affiliate which engages only in activities  which are
permissible  for bank  holding  companies,  or (ii)  purchase  or  invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the savings institution.

     Further,  savings institutions are subject to the restrictions contained in
Section  22(h)  of the  Federal  Reserve  Act and the  Federal  Reserve  Board's
Regulation  O  thereunder   on  loans  to  executive   officers  and   principal
stockholders.  Under Section 22(h), loans to a director, executive officer and a
greater than 10%  stockholder of a savings  institution  and certain  affiliated
interests of such persons,  may not exceed,  together with all other outstanding
loans to such person and affiliated interests,  the institution's lending limit.
Section 22(h) also prohibits the making of loans above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and greater
than 10% stockholders of a savings institution, and their respective affiliates,
unless such loan is approved in advance by a majority of the board of  directors
of the  institution  with any  "interested"  director not  participating  in the
voting.  Regulation  O  prescribes  the loan amount  (which  includes  all other
outstanding  loans to such  person)  as to which such  prior  board of  director
approval  is  required  as being the  greater of  $25,000  or 5% of capital  and
surplus  (up to  $500,000).  Further,  Section  22(h)  requires  that  loans  to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as offered in comparable  transactions to other persons.
Section 22(h) also generally prohibits a depository  institution from paying the
overdrafts of any of its executive officers or directors.

     Savings  institutions are also subject to the requirements and restrictions
of  Section  22(g)  of the  Federal  Reserve  Act and  Regulation  O on loans to
executive  officers and the  restrictions of 12 U.S.C. ss. 1972 on certain tying
arrangements and extensions of credit by correspondent  banks.  Section 22(g) of
the  Federal  Reserve  Act  requires  approval  by the board of  directors  of a
depository  institution  for  extension of credit to  executive  officers of the
institution,  and imposes reporting requirements for and additional restrictions
on the type,  amount  and terms of credits to such  officers.  Section  1972 (i)
prohibits a  depository  institution  from  extending  credit to or offering any
other  services,  or fixing or varying the  consideration  for such extension of
credit or service,  on the condition  that the customer  obtain some  additional
service from the institution or certain of its affiliates or not obtain services
of a competitor  of the  institution,  subject to certain  exceptions,  and (ii)
prohibits extensions of credit to executive officers, directors and greater than
10% stockholders of a depository  institution by any other institution which has
a correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable  transactions  with other  persons and does not involve more than the
normal risk of repayment or present other unfavorable features.

     PROMPT CORRECTIVE  REGULATORY  ACTION

     The federal  banking  regulators  are  required  to take prompt  corrective
action if an institution fails to satisfy certain minimum capital  requirements,
including a leverage  limit,  a risk-based  capital  requirement,  and any other
measure deemed  appropriate by the federal banking  regulators for measuring the
capital  adequacy  of  an  insured  depository  institution.  All  institutions,
regardless  of their  capital  levels,  are  restricted  from making any capital
distribution  or paying any management  fees that would cause the institution to
become undercapitalized. An institution that fails to meet the minimum level for
any relevant capital measure (an "undercapitalized  institution")  generally is:
(i)  subject  to  increased   monitoring  by  the  appropriate  federal  banking
regulator; (ii) required to submit an acceptable capital restoration plan within
45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses. The
capital  restoration plan must include a guarantee by the institution's  holding
company  that the  institution  will  comply  with  the  plan  until it has been
adequately capitalized on average for four consecutive quarters, under which the
holding  company  would be  liable up to the  lesser of 5% of the  institution's
total  assets or the amount  necessary  to bring the  institution  into  capital
compliance as of the date it failed to comply with its capital restoration plan.
A significantly  undercapitalized  institution,  as well as any undercapitalized
institution that does not submit an acceptable capital  restoration plan, may be
subject to  regulatory  demands for  recapitalization,  broader  application  of
restrictions on transactions with affiliates, limitations on interest rates paid
on  deposits,  asset  growth  and  other  activities,  possible  replacement  of
directors and officers,  and  restrictions on capital  distributions by any bank
holding  company  controlling  the  institution.  Any  company  controlling  the
institution may also be required to divest the institution. The senior executive
officers  of such an  institution  may  not  receive  bonuses  or  increases  in
compensation without prior regulatory approval and the institution is prohibited
from making  payments of principal or interest on its  subordinated  debt,  with
certain  exceptions.  If an  institution's  ratio of  tangible  capital to total
assets falls below the "critical  capital level"  established by the appropriate
federal  banking  regulator,  the institution is subject to  conservatorship  or
receivership  within  90 days  unless  periodic  determinations  are  made  that
forbearance  from such action would better protect the deposit  insurance  fund.
Unless  appropriate  findings  and  certifications  are made by the  appropriate
federal bank regulatory agencies, a critically undercapitalized institution must
be placed in receivership if it remains critically  undercapitalized  on average
during  the  calendar  quarter  beginning  270 days  after  the  date it  became
critically undercapitalized.

     The OTS has adopted  regulations  implementing the prompt corrective action
requirements.  Under those regulations,  the OTS measures a saving institution's
capital adequacy on the basis of its total  risk-based  capital ratio (the ratio
of its total capital to risk-weighted  assets),  Tier 1 risk-based capital ratio
(the ratio of its core capital to risk-weighted  assets) and leverage ratio (the
ratio of its core capital to adjusted total assets). A savings  institution that
is not subject to an order or written  directive  to meet or maintain a specific
capital  level  is  deemed  "well-capitalized"  if it  also  has:  (i)  a  total
risk-based  capital  ratio of 10% or greater;  (ii) a Tier 1 risk-based  capital
ratio of 6.0% or  greater;  and (iii) a leverage  ratio of 5.0% or  greater.  An
"adequately  capitalized" savings institution is a savings institution that does
not meet the  definition  of  well-capitalized  and has: (i) a total  risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 risk-based capital ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the savings  institution has a composite 1 MACRO rating).  An  "undercapitalized
institution" is a savings  institution that has (i) a total  risk-based  capital
ratio less than 8.0%;  or (ii) a Tier 1  risk-based  capital  ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the institution is
rated a Composite 1 under the OTS examination  rating system).  A "significantly
undercapitalized"  institution is defined as a savings institution that has: (i)
a total risk-based  capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage  ratio of less than 3.0%. A
"critically  undercapitalized"  savings  institution  is  defined  as a  savings
institution  that has a ratio of core capital to total assets of less than 2.0%.
The OTS may  reclassify a  well-capitalized  savings  institution  as adequately
capitalized  and may  require  an  adequately  capitalized  or  undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower  capital  category  if the OTS  determines,  after  notice and an
opportunity  for a  hearing,  that the  savings  institution  is in an unsafe or
unsound  condition or that the  institution  has  received  and not  corrected a
less-than-satisfactory  rating for any examination rating category.  The Bank is
classified as "well-capitalized" under the OTS regulations.

     STANDARDS  FOR SAFETY AND  SOUNDNESS

     In July  1995,  the  federal  banking  agencies  adopted  final  guidelines
establishing  standards  for  safety and  soundness.  The  guidelines  set forth
operational and managerial standards relating to internal controls,  information
systems and internal audit systems,  loan  documentation,  credit  underwriting,
interest rate exposure,  asset growth and  compensation,  fees and benefits.  In
August 1996,  guidelines  for asset quality and earnings  standards were issued.
The  guidelines  establish the safety and soundness  standards that the agencies
will use to identify  and address  problems at insured  depository  institutions
before capital becomes impaired. If an institution fails to comply with a safety
and soundness  standard,  the appropriate federal banking agency may require the
institution to submit a compliance plan.  Failure to submit a compliance plan or
to implement an accepted plan may result in enforcement action.

     INTERSTATE  BANKING AND  BRANCHING

     In  September  1994,  the  Riegel-Neal  Interstate  Banking  and  Branching
Efficiency Act of 1994 (the  "Interstate  Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval to acquire an existing
bank  located  in another  state  without  regard to state  law. A bank  holding
company  would  not  be  permitted  to  make  such  an   acquisition   if,  upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured  depository  institutions  in the United States or (b) 30% or more of
the  deposits in the state in which the bank is  located.  A state may limit the
percentage  of total  deposits that may be held in that state by any one bank or
bank holding  company if application of such  limitation  does not  discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state  bank in  existence  for less than a minimum  length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.

     The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank  into  branches  of  the  resulting   bank.  Each  state  may  permit  such
combinations  earlier than June 1, 1997,  and may adopt  legislation to prohibit
interstate  mergers  after  that date in that  state or in other  states by that
state's  banks.  The  same  concentration  limits  discussed  in  the  preceding
paragraph  apply.  The  Interstate  Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state,  subject to the same  requirements and conditions as for a merger
transaction.

     The Interstate  Act is likely to increase  competition in the Bank's market
areas especially from larger financial institutions and their holding companies.
It is difficult to assess the impact such likely increased competition will have
on the Bank's operations.

         COMMUNITY  REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS

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

     In May 1995, the federal banking  agencies issued final  regulations  which
change  the  manner  in which  they  measure  a bank's  compliance  with its CRA
obligations.  The final regulations adopt a performance-based  evaluation system
which  bases  CRA  ratings  on  an  institution's  actual  lending  service  and
investment  performance rather than the extent to which the institution conducts
needs  assessments,   documents   community  outreach  or  complies  with  other
procedural  requirements.  In March 1994, the federal  Interagency Task Force on
Fair Lending issued a policy statement on discrimination in lending.  The policy
statement  describes the three  methods that federal  agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.

REGULATION OF THE COMPANY

         GENERAL

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

         ACTIVITIES  RESTRICTIONS

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

     Savings  and loan  holding  companies  are the only  financial  institution
holding  companies  which may engage in any commercial  securities and insurance
activities.   However,   congressional  legislative  proposals  that  have  been
introduced or are under  consideration  would either limit  unitary  savings and
loan holding  companies to the same  activities as other  financial  institution
holding  companies or would permit  certain bank holding  companies to engage in
commercial  activities  and expanded  securities and insurance  activities.  The
Company cannot predict if and in what form these proposals might become law.

     If the  Company  were to acquire  control of another  savings  institution,
other than  through  merger or other  business  combination  with the Bank,  the
Company  would  thereupon  become a multiple  savings and loan holding  company.
Except where such acquisition is pursuant to the authority to approve  emergency
thrift  acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries  (other than the
Bank or other subsidiary  savings  institutions)  would thereafter be subject to
further  restrictions.  Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings  institution shall commence
or continue for a limited period of time after  becoming a multiple  savings and
loan holding company or subsidiary  thereof,  any business activity,  upon prior
notice  to,  and no  objection  by,  the OTS,  other  than:  (i)  furnishing  or
performing  management  services  for a  subsidiary  savings  institution;  (ii)
conducting an insurance  agency or escrow business;  (iii) holding,  managing or
liquidating assets owned by or acquired from a subsidiary  savings  institution;
(iv) holding or managing  properties  used or occupied by a  subsidiary  savings
institution;  (v) acting as trustee under deeds of trust;  (vi) those activities
authorized  by  regulation  as of March 5,  1987 to be  engaged  in by  multiple
holding  companies;  or (vii) unless the OTS by  regulation  prohibits or limits
such  activities  for  savings  and loan  holding  companies,  those  activities
authorized  by the  Federal  Reserve  Board  as  permissible  for  bank  holding
companies.  Those  activities  described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.

         RESTRICTIONS ON  ACQUISITIONS

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

     The OTS may only  approve  acquisitions  resulting  in the  formation  of a
multiple savings and loan holding company which controls savings institutions in
more  than one state if:  (i) the  multiple  savings  and loan  holding  company
involved  controls a savings  institution which operated a home or branch office
in the state of the  institution  to be acquired  as of March 5, 1987;  (ii) the
acquiror is authorized to acquire control of the savings institution pursuant to
the  emergency  acquisition  provisions of the FDI Act; or (iii) the statutes of
the state in which the institution to be acquired is located specifically permit
institutions to be acquired by state-chartered  institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).

     Under the Bank  Holding  Company Act of 1956,  bank holding  companies  are
specifically authorized to acquire control of any savings association.  Pursuant
to rules  promulgated  by the Federal  Reserve  Board,  owning,  controlling  or
operating a savings  institution  is a  permissible  activity  for bank  holding
companies, if the savings institution engages only in deposit-taking  activities
and  lending  and  other  activities  that  are  permissible  for  bank  holding
companies.  A bank holding company that controls a savings institution may merge
or consolidate  the assets and liabilities of the savings  institution  with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate  federal banking agency and the Federal
Reserve  Board.  The  resulting  bank  will  be  required  to  continue  to  pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings  institution plus an annual growth increment.
In addition,  the  transaction  must comply with the  restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act of 1956.


                           FEDERAL AND STATE TAXATION


FEDERAL TAXATION

     For  federal  income  tax  purposes,  the  Company  reports  its income and
expenses using the accrual method of accounting and files its federal income tax
returns on the basis of a fiscal year ending  September 30. The Company and Bank
file consolidated federal income tax returns.

    The Company is subject to those rules of federal income  taxation  generally
applicable to  corporations.  Under present  provisions of the Internal  Revenue
Code ("Code"), however, mutual and stock savings institutions which meet certain
definitional  tests  primarily  relating to their assets and the nature of their
businesses are permitted to establish a reserve for bad debts and to make annual
additions thereto. Such institutions may deduct such additions, within specified
formula limits, in arriving at their taxable income.

    A thrift institution must meet an asset test in order to qualify for the bad
debt reserve tax rules described  below. At least 60% of the amount of the total
assets of the  institution  (at the close of the taxable year in question)  must
consist of certain  assets  specified in Section  7701(a)(19)  of Code. A thrift
institution  that  ceases to meet the 60% test in a tax year may not  deduct any
addition to a bad debt reserve  under the special  rules  applicable  to thrifts
and, if the institution is a "large bank" as defined in Section 585(c)(2) of the
Code,  generally  must  include  existing  reserves  in income  over a four-year
period.  At September 30, 1996, in excess of 97% of the Bank's assets  qualified
under Section  7701(a)(19).  Therefore,  the Bank was allowed an addition to its
tax bad  debt  reserve.  The  Bank  also is not a  "large  bank"  under  Section
585(c)(2) of the Code.

    For purposes of computing the  deductible  addition to its bad debt reserve,
the Bank's loans are separated into "qualifying real property loans"  (generally
those loans  secured by interests in real  property) and  "nonqualifying  loans"
(all other loans).  The deduction  with respect to  nonqualifying  loans must be
computed  under the experience  method,  which allows a deduction for the Bank's
actual charge-offs.

    The Bank has generally  computed its annual bad debt deductions with respect
to qualifying real property loans under the percentage of taxable income method,
except  for years  where the Bank  incurred  operating  losses at which time the
experience  method was utilized.  Under the  percentage of taxable income method
("percentage  method"),  the bad debt deduction for qualifying loans is computed
as a percentage of the Bank's taxable income before such deduction,  as adjusted
for certain  items.  Thrift  institutions  are allowed a  percentage  of taxable
income bad debt  deduction  of 8% of such taxable  income.  To the extent the 8%
deduction  exceeds an amount  computed on the basis of actual  loss  experience,
such amount will  constitute  a preference  item for  purposes of the  corporate
minimum tax discussed elsewhere herein.

    Under the Code which  affects the 1996 fiscal year,  the bad debt  deduction
for qualifying real property loans computed under the percentage  method may not
exceed the amount  necessary  to increase  the  balance in the bad debt  reserve
accumulated for such loans to an amount equal to 6% of such loans outstanding at
the end of the taxable year. On September 30, 1996, the balance of such reserves
at the Bank as a percentage of such loans was  approximately  4.5%. In addition,
the  total  bad  debt  deduction  for any  taxable  year  with  respect  to both
qualifying real property and  nonqualifying  loans may not exceed the greater of
(a) the deduction that would be permitted  under the experience  method,  or (b)
the  amount by which 12% of total  deposits  at year end  exceed  the sum of the
Bank's surplus,  undivided profits, and reserves,  as defined for federal income
tax  purposes,  at the  beginning  of the year.  On  September  30,  1996,  this
limitation  did not  restrict the bad debt  reserve  deduction of the Bank.  The
Bank's total bad debt reserve for tax purposes was approximately $9.6 million at
September 30, 1996. Based upon 1996 tax law changes, the above criteria will not
be of concern in future years.

    To the  extent  earnings  appropriated  to a thrift  institution's  bad debt
reserves for qualifying  real property loans and deducted for federal income tax
purposes  exceed  the  allowable  amount  of such  reserves  computed  under the
experience   method   ("Excess"),   and  to  the  extent  of  the  institution's
supplemental  reserves  for losses on loans,  such  Excess and the  supplemental
reserve may not,  without adverse tax  consequences,  be utilized for payment of
dividends  or  certain  other   distributions   to  a   shareholder   (including
distributions  in  redemption,  dissolution,  or  liquidation)  or for any other
purpose  (except to absorb bad debt  losses).  Distribution  of a dividend  by a
thrift  institution  to a  shareholder  is  treated  as made:  first  out of the
institution's current and post-1951 accumulated earnings and profits; second out
of the Excess;  third out of the supplemental reserve for losses on loans to the
extent thereof;  and fourth out of such other accounts as may be proper.  In the
case  of   distributions   in  redemption,   dissolution  or  liquidation,   the
distribution  is  deemed  to be  first  out of  the  Excess,  second  out of the
supplemental  reserve for losses on loans,  to the extent  thereof,  then out of
earnings and profits, and finally out of other proper accounts.  To the extent a
distribution  by the Bank is  deemed  paid  out of its  Excess  or  supplemental
reserve,  under these rules, the Excess or supplemental reserve would be reduced
and the Bank's gross  income for tax  purposes  would be increased by the amount
which, when reduced by the income tax, if any,  attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the Excess
or  supplemental  reserve.  As of September 30, 1996,  the Bank's Excess for tax
purposes totaled approximately $9,600,000.

             The Company is subject to an  alternative  minimum tax. This tax is
imposed at a rate of 20% on alternative minimum taxable income, which is the sum
of a corporation's regular taxable income (with certain  adjustments),  plus tax
preference  items,  less any available  exemption.  For alternative  minimum tax
purposes,  special  adjustments  apply to the NOL  deduction,  and such NOLs can
offset no more than 90% of alternative  minimum taxable income.  The alternative
minimum tax is imposed to the extent it exceeds a  corporation's  regular income
tax. The Company has been paying the regular  income tax in recent years instead
of the alternative minimum tax.

    For taxable years beginning after 1986, corporations, including the Company,
are also  subject  to an  environmental  tax  equal to  0.12% of the  excess  of
alternative  minimum  taxable  income for the taxable year  (determined  without
regard to alternative tax NOLs or the deduction for the environmental  tax) over
$2  million.  The  Company  incurred  approximately  $5,000  of this tax for its
taxable year ended September 30, 1996.

    Thrifts have generally not established a liability for deferred taxes on the
bad debt  reserves  on  their  balance  sheet.  Therefore,  if a  thrift  has to
recapture  its bad debt  reserves  because of failure to qualify as a bank,  the
effect on financial statements,  apart from the cash outflow, could be material.
The Company has recorded a liability  for increases in its tax bad debt reserves
from a base year of 1987.

    Due to  changes  made by the 1996 tax law,  the  Bank  must  recapture  into
taxable income the amount of the tax bad debt reserve in excess of the base year
reserve.  This additional tax is to be paid over a six year period, with up to a
two year deferral if certain tests are met. The Bank has the expected  liability
currently recorded in its financial statements.

STATE TAXATION

    Effective  for  fiscal  year  1991,  the State of  Indiana  imposed  an 8.5%
franchise tax on the net income of financial  (including  thrift)  institutions,
exempting  them  from the prior  gross  income,  supplemental  net  income,  and
intangibles  taxes.  Net income for franchise tax purposes  constitutes  federal
taxable  income before net operating  loss  deductions  and special  deductions,
adjusted for certain items, including bad debts.

    Prior to 1991,  the State of  Indiana  imposed a 1.2%  gross  income  tax on
thrift  institutions.  The  state  also  imposed  an  intangibles  tax on thrift
institutions  located in Indiana.  The intangibles tax was based upon the Bank's
capital and deposits.  The rate was .14%; however, the intangibles tax liability
for federally chartered savings institutions was reduced by the gross income and
personal  property taxes paid.  Other  applicable state taxes include sales tax,
use  tax,  property  tax,  and a  supplemental  net  income  tax of  4.5% on the
difference,  generally,  between  taxable  income as defined in the Code and the
amount of gross income tax paid.

    The  Company's  tax  returns  have  not been  audited  by  federal  or state
authorities in the past ten years.

ITEM 2.  PROPERTIES

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

    The following table provides certain  information with respect to the Bank's
full-service offices at September 30, 1996.

     Full Service                                         Net Book
     Offices                     Date Opened              Value(1)
     -------------------         -----------              --------
     Main Office, Auburn            1973                  $208,012
     Avilla                         1980                   143,066
     Garrett                        1972                    64,873
     Columbia City                  1971                   144,087
     Kendallville                   1941                   512,579
     LaGrange                       1972                   191,638


(1) Of real estate at September 30, 1996.

    The Bank owns data processing equipment including  computers,  terminals and
communications equipment for record keeping purposes.

    The total net book value of the Bank's  premises and  equipment at September
30, 1996, was $1,467,764.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    Not Applicable.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    Reference is made to page 2 of the Company's  Annual Report to Stockholders,
for the year ended  September  30, 1996,  for the  information  required by this
Item, which is hereby incorporated by reference.


ITEM 6.  SELECTED FINANCIAL DATA

     Reference is made to page 13 of the Company's Annual Report to Stockholders
for the year ended September 30, 1996, for the information required by this Item
which is hereby incorporated by reference.



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

    Reference  is  made to  pages  6 to 12 of the  Company's  Annual  Report  to
Stockholders for the year ended September 30, 1996, for the information required
by this Item which is hereby incorporated by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    Reference  is made to  pages  14 to 27 of the  Company's  Annual  Report  to
Stockholders for the year ended September 30, 1996, for the information required
by this Item which is hereby incorporated by reference.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURES

    None.
                                                      PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Reference is made to pages 2 - 4 of the Company's definitive Proxy Statement
for the 1996 Annual Meeting of Stockholders for the information required by this
Item which is hereby incorporated by reference.

ITEM 11.  EXECUTIVE COMPENSATION

    Reference  is  made  to  pages  6 - 10 of  the  Company's  definitive  Proxy
Statement  for the 1996  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    Reference  is  made  to  pages  2 and 5 of the  Company's  definitive  Proxy
Statement  for the 1996  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Reference  is  made  to  pages  5 and 6 of the  Company's  definitive  Proxy
Statement  for the 1996  Annual  Meeting  of  Stockholders  for the  information
required by this Item which is hereby incorporated by reference.


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

    (a) The following  consolidated  financial statements of Peoples Bancorp and
Its  Wholly-owned  Subsidiary,  included in the Annual Report to Stockholders of
the registrant for the year ended  September 30, 1996, are filed as part of this
report:

    1.  Financial Statements

        o  REPORT OF GEO. S. OLIVE & CO. LLC, INDEPENDENT AUDITORS.
        o  CONSOLIDATED  STATEMENT OF FINANCIAL  CONDITION - AS OF SEPTEMBER 30,
             1996 AND 1995.
        o  CONSOLIDATED  STATEMENT OF INCOME FOR THE YEARS ENDED  SEPTEMBER  30,
             1996, 1995, AND 1994.
        o  CONSOLIDATED  STATEMENT  OF CHANGE IN  STOCKHOLDERS'  EQUITY FOR THE 
             YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994.
        o  CONSOLIDATED  STATEMENT  OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER
             30, 1996, 1995, AND 1994.
        o  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



    2.  Financial Statement Schedules

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


    3.  Exhibits

Exhibit No.   Description of Exhibit
-----------   ----------------------

3.1           Articles of Incorporation of Peoples Bancorp (1)

3.2           Bylaws of Peoples Bancorp (1)

10.2          Employment Agreement of Roger J. Wertenberger (1)

10.2(a)       Amendment No.1 to Employment Agreement of Roger J. Wertenberger(1)

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

10.5          Employee Stock Ownership Plan (1)

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

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

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


Exhibit No.   Description of Exhibit
-----------   ----------------------
10.6          Expense and Tax Sharing Agreement between Peoples Bancorp, Peoples
              Federal Savings Bank of DeKalb County and Peoples Financial
              Services, Inc., dated May 28, 1992 (3)

13            Annual Report to Stockholders

22            Subsidiaries of the Registrant

28            Definitive Proxy Statement for 1996 Annual Meeting

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

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

    (3)  Incorporated  by  reference  to Exhibit  bearing the same number in the
Company's Annual Report on form 10-K for the year ended September 30, 1992.

<PAGE>
                                                     
                                   SIGNATURES


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


                                   PEOPLES BANCORP


December 24, 1996                  Roger J. Wertenberger
                                   Chairman of the Board,
                                   Principal Executive Officer,
                                   and Director

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


December 24, 1996                  Roger J. Wertenberger,
                                   Chairman of the Board,
                                   Principal Executive Officer,
                                   and Director

December 24, 1996                  Maurice F. Winkler III,
                                   President, and Director


December 24, 1996                  Robert D. Ball, Director


December 24, 1996                  Jack L. Buttermore, Director


December 24, 1996                  John C. Harvey, Director


December 24, 1996                  Douglas D. Marsh, Director


December 24, 1996                  Lawrence  R. Bowmar, Director


December 24, 1996                  John C. Thrapp, Director

                                  EXHIBIT INDEX


Exhibit No.  Description of Exhibit
-----------  ----------------------                                  

3.1          Articles of Incorporation of Peoples Bancorp (1)

3.2          Bylaws of Peoples Bancorp (1)

10.2         Employment Agreement of Roger J. Wertenberger (1)

10.2(a)      Amendment No. 1 to Employment Agreement of Roger J. Wertenberger(1)

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

10.5         Employee Stock Ownership Plan (1)

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

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

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

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

11           Statement Concerning Computation of Per Share Net Income

13           Annual Report to Stockholders

22           Subsidiaries of the Registrant

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

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

    (3)  Incorporated  by  reference  to Exhibit  bearing the same number in the
Company's Annual Report on form 10-K for the year ended September 30, 1992.


<PAGE>


                                   EXHIBIT 22



                         SUBSIDIARIES OF THE REGISTRANT


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

and its subsidiary

Peoples Financial Services Inc.                  Indiana