<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                 -------------
                                   FORM 10-K

                                   

[x]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996

[x]           TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
              SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                to
                              ---------------   --------------

                        Commission File Number: 0-18392

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

Indiana                                                      35-1782688
---------------------------------------------                -------------------
(State or other jurisdiction of incorporation                (I.R.S. Employer
 r organization)                                             Identification No.)

2118 Bundy Avenue, New Castle, Indiana                       47362-1048
---------------------------------------------                ----------
(Address of principal executive offices)                     Zip Code

       Registrant's telephone number, including area code (317) 529-2230

       Securities registered pursuant to Section 12(b) of the Act:  None

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

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

         Indicate by check mark whether the registrant (l) 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 or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant based on the closing sales price of the registrant's common
stock as quoted on the NASDAQ National Market System on March 21, 1997 was
$44,272,743 (for purposes of this calculation, directors and executive officers
are not treated as "non-affiliates").

         As of March 21, 1997, there were issued and outstanding 3,261,206
shares of the registrant's common stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

1.       Portions of Annual Report to Shareholders for the Fiscal Year Ended
         December 31, 1996 ("Annual Report") (Part II).
2.       Portions of Proxy Statement for the 1997 Annual Meeting of Shareholders
         ("Proxy Statement") (Part III).
<PAGE>
 
                                    PART I

Item 1.  Business
-----------------

General

         The Company. Ameriana Bancorp (the "Company") was incorporated under
Indiana law in August 1989 for the purpose of becoming the holding company for
Ameriana Savings Bank, F.S.B., New Castle, Indiana (the "Bank"). On March 19,
1990, the Company acquired all of the Bank's outstanding common stock, and each
previously outstanding share of the Bank's common stock became a share of the
Company's common stock, in connection with the Bank's reorganization into the
holding company form of ownership.

         On August 31, 1992, the Company acquired all of the outstanding common
stock of Deer Park Financial Corporation ("DPFC"), the former holding company
for Deer Park Federal Savings and Loan Association, Cincinnati, Ohio (the
"Association"). Subsequently, DPFC was dissolved and liquidated into the
Company, leaving the Association as a direct subsidiary of the Company.

         The Company holds all of the stock of the Bank and Association and,
through them, operates two separate savings institutions. The information in
this report, including financial statements and related information, as of the
dates and for the periods before August 31, 1992 primarily relates to the Bank
and its subsidiaries and as of the dates and for the periods after August 31,
1992 primarily relates to the Bank and Association and their subsidiaries. In
this report, the Bank and Association are collectively referred to as the
"Institutions". In addition, the Company owns Indiana Title Insurance Company,
which provides title insurance services in Central Indiana. In 1995, the Company
invested $1,458,849 in a minority interest in a limited partnership organized to
acquire and manage real estate investments which qualify for federal tax
credits.

         The Company's executive offices are the same as those of the Bank
described below. 

         The Bank. The Bank is a federally chartered savings bank which began
operations in 1890. Since 1935, the Bank has been a member of the Federal Home
Loan Bank System, and its savings deposits have been federally insured. On
February 25, 1987, the Bank converted to a capital stock savings bank.

         The Bank's main office is located at 2118 Bundy Avenue, New Castle,
Indiana. It also conducts business through five branch offices located in New
Castle, Middletown, Knightstown, Greenfield and Anderson, Indiana. In 1995, the
Bank purchased land in Avon, Indiana on which the Bank constructed a new branch
in 1996, which

                                       1
<PAGE>
 
opened for business on January 22, 1997. The Bank, through a wholly owned
subsidiary, also operates an insurance agency with offices in New Castle,
Anderson and Greenfield, Indiana, has an ownership interest in a life insurance
underwriting firm located in New Orleans, Louisiana, and offers a full line of
investments and securities products through its brokerage center.

         The business of the Bank consists primarily of attracting deposits from
the general public and originating mortgage loans on single family residences,
and to a lesser extent on multi-family housing and commercial property. The Bank
also makes home improvement loans and consumer loans and through its subsidiary
engages in insurance and brokerage activities. The principal sources of funds
for the Bank's lending activities include deposits received from the general
public, principal amortization and prepayment of loans. The Bank's primary
sources of income are interest and fees on loans and interest on investments.
The Bank has engaged from time to time in purchasing loans and loan
participations in the secondary market. The Bank also invests in various federal
and government agency obligations and other investment securities permitted by
applicable laws and regulations, including mortgage-backed securities. The
Bank's principal expenses are interest paid on deposit accounts and operating
expenses incurred in the operation of the Bank.

         The Association. The Association is a federally chartered savings and
loan association which began operations in 1915. The Association has been a
member of the Federal Home Loan Bank System since 1933, and its savings deposits
have been federally insured since 1952. On February 26, 1988, the Association
converted to a capital stock savings and loan association.

         The Association's main office is located at 7200 Blue Ash Road,
Cincinnati, Ohio. The Association formerly operated a branch office in
Cincinnati, but, after regulatory approval, closed it on March 27, 1996. The
Association operates a loan production office which was opened in 1996. The
Association's primary market area includes Deer Park and nearby communities in
Hamilton county, as well as adjoining Butler, Clermont and Warren counties.

         The business of the Association consists primarily of attracting
deposits from the general public and originating permanent and construction
first mortgage loans on one- to four-family residences, as well as second
mortgage loans on such properties and other types of consumer loans. The
Association also invests in mortgage-backed securities. The principal sources of
funds for the Association's lending activities include deposits received

                                       2
<PAGE>
 
from the general public, principal amortization and prepayment of loans. The
Association's primary sources of income are interest and fees on loans and
interest on investments. The Association's principal expenses are interest paid
on deposit accounts and operating expenses.

         Proposed Legislative Changes. Legislation recently introduced in the
Senate and the House of Representatives could have a profound impact on the
operations of commercial banks and savings institutions, including the Bank and
the Association. Such legislation includes proposals to eliminate regulatory
distinctions between banks and savings associations under federal law and would
ease the merger of the Savings Association Insurance Fund ("SAIF") and the Bank
Insurance Fund ("BIF"), the two deposit insurance funds. In its current form,
the legislation would require all federally chartered savings associations to
convert to national banks or state depository institutions effective on a
to-be-specified date. The legislation will be subject to major revisions during
the current session of Congress. 

Lending and Investment Activities

         General. The principal lending activity of the Institutions has been
the origination of conventional first mortgage loans secured by residential
property and to a lesser extent commercial real estate, equity lines of credit
and consumer loans. The residential mortgage loans have been predominantly
secured by single family homes and have included construction loans.

         The Institutions may originate or purchase whole loans or loan
participations secured by real estate located in any part of the United States.
Notwithstanding this nationwide lending authority, the majority of the Bank's
mortgage loan portfolio is secured by real estate located in Henry, Hancock,
Madison, Delaware and Marion counties in the state of Indiana, and the majority
of the Association's mortgage loan portfolio is secured by real estate located
in Hamilton, Butler, Clermont and Warren counties in the state of Ohio.

         During the loan approval process, the Institutions assess both the
borrower's ability to repay the loan and the adequacy of the underlying
security. Potential residential borrowers complete an application which is
submitted to a salaried loan officer. As part of the loan application process,
the Institutions obtain information concerning the income, financial condition,
employment and credit history of the applicant. In addition, qualified
appraisers inspect and appraise the property which is offered to secure the
loan.

                                       3
<PAGE>

 
         The Bank's loan committee, consisting of certain officers of the Bank,
analyzes the loan application and the property to be used as collateral and
subsequently approves or denies the loan request. If the loan amount is less
than $300,000, it must be approved by a loan committee consisting of certain
members of management. Loans of $300,000 or more but less than $500,000 must be
approved by a committee consisting of certain members of senior management. The
Board of Directors must approve all loans in excess of $500,000. In connection
with the origination of single family residential adjustable-rate mortgages
("ARMs"), borrowers are qualified at a rate of interest equal to the second year
rate, assuming the maximum increase. It is the policy of management to make
loans to borrowers who not only qualify at the low initial rate of interest, but
who would also qualify following an upward interest rate adjustment. The
Association's loan committee, consisting of authorized officers of the
Association, may approve loan applications up to $250,000. The Association's
Board of Directors reviews and approves loan applications in excess of $250,000.

                                       4
<PAGE>
 
         The following table sets forth information concerning the Company's
aggregate loans by type of loan and security at the dates indicated. Mortgage-
backed securities are not included in this table.
<TABLE> 
<CAPTION> 
                                                          At December 31,
                                         ----------------------------------------------
                                                   1996                     1995          
                                         --------------------     ---------------------   
                                         Amount       Percent     Amount        Percent   
                                         ------       -------     ------        -------
                                                    (Dollars in thousands)
<S>                                      <C>          <C>         <C>           <C> 
Type of Loan:                                                                            
Conventional real estate loans:                                                          
  Non-residential loans...............   $   3,096      1.07%     $   3,670       1.35%     
  Residential loans...................     240,948     83.58        230,992      84.69      
                                                                                         
Consumer Loans:                                                                          
  Mobile home and auto loans..........      31,706     11.00         29,735      10.90      
  Education loans.....................          --        --             --         --      
  Loans secured by deposits...........       1,395       .48          1,318        .48      
  Home improvement loans..............       5,645      1.96             56        .02      
  Other...............................       5,486      1.90          6,947       2.55      
  Leases..............................          24       .01             29        .01      
                                         ---------    ------      ---------     ------ 
     Total............................     288,300    100.00%       272,747     100.00%     
                                         ---------    ======      ---------     ====== 
Less:                                                                                    
  Loans in process....................       4,495                    5,463               
  Deferred loan fees..................         100                      215               
  Loan loss reserve...................       1,104                    1,076               
                                         ---------                ---------                  
   Sub Total..........................       5,699                    6,754               
                                         ---------                ---------              
    Total.............................   $ 282,601                $ 265,993               
                                         =========                =========            
Type of Security:                                                                        
 Residential                                                                             
  Single Family (1-4 units)...........   $ 238,440     82.71%     $ 227,045      83.24%     
  5 or more dwelling units............       2,508       .87          3,947       1.45      
 Other improved real estate...........       3,096      1.07          3,670       1.35      
 Commercial or industrial leases......          24       .01             29        .01      
 Deposit accounts.....................       1,395       .48          1,318        .48      
 Mobile home and auto.................      31,706     11.00         29,735      10.90      
 Other................................      11,131      3.86          7,003       2.57      
                                         ---------    ------      ---------     ------ 
    Total.............................     288,300    100.00%       272,747     100.00%     
                                         ---------    ======      ---------     ====== 
Less:                                                                                    
  Loans in process....................       4,495                    5,463               
  Deferred loan fees..................         100                      215               
  Loan loss reserve...................       1,104                    1,076               
                                         ---------                ---------              
   Sub Total..........................       5,699                    6,754               
                                         ---------                ---------              
    Total.............................   $ 282,601                $ 265,993               
                                         ==========               =========
<CAPTION> 
                                                                              At December 31,
                                               -----------------------------------------------------------------------
                                                         1994                     1993                     1992(a)
                                               ---------------------    ---------------------    ---------------------
                                               Amount        Percent    Amount        Percent    Amount        Percent
                                               ------        -------    ------        -------    ------        -------
                                                                          (Dollars in thousands)
<S>                                            <C>           <C>        <C>           <C>        <C>           <C> 
Type of Loan:                                 
Conventional real estate loans:               
  Non-residential loans...............         $   5,795        2.18%   $   6,960        3.00%   $   6,475        2.80%
  Residential loans...................           237,579       89.34      214,111       92.33      215,895       93.22
                                              
Consumer Loans:                               
  Mobile home and auto loans..........            15,671        5.89        4,300        1.85        3,123        1.35
  Education loans.....................               255         .10          200         .09          238         .10
  Loans secured by deposits...........             1,249         .47        1,521         .66        1,747         .75
  Home improvement loans..............               109         .04           24         .01           71         .03
  Other...............................             5,231        1.97        4,628        2.00        3,730        1.61
  Leases..............................                39         .01          144         .06          321         .14
                                               ---------      ------    ---------      ------    ---------      ------
     Total............................           265,928      100.00%     231,888      100.00%     231,600      100.00%
                                               ---------      ======    ---------      ======    ---------      ====== 
Less:                                         
  Loans in process....................             5,389                    3,948                    2,734
  Deferred loan fees..................               398                      519                      723
  Loan loss reserve...................             1,022                      968                      796
                                               ---------                ---------                ---------             
   Sub Total..........................             6,809                    5,435                    4,253
                                               ---------                ---------                ---------             
    Total.............................         $ 259,119                $ 226,453                $ 227,347
                                               =========                =========                =========             
Type of Security:                             
 Residential                                  
  Single Family (1-4 units)...........         $ 234,601       88.22%   $ 210,604       90.82%   $ 212,699       91.84%
  5 or more dwelling units............             2,978        1.12        3,507        1.51        3,196        1.38
 Other improved real estate...........             5,795        2.18        6,960        3.00        6,475        2.80
 Commercial or industrial leases......                39         .01          144         .06          321         .14
 Deposit accounts.....................             1,249         .47        1,521         .66        1,747         .75
 Mobile home and auto.................            15,671        5.89        4,300        1.85        3,123        1.35
 Other................................             5,595        2.11        4,852        2.10        4,039        1.74
                                               ---------      ------    ---------      ------    ---------      ------ 
    Total.............................           265,928      100.00%     231,888      100.00%     231,600      100.00%
                                               ---------      ======    ---------      ======    ---------      ====== 
Less:                                         
  Loans in process....................             5,389                    3,948                    2,734
  Deferred loan fees..................               398                      519                      723
  Loan loss reserve...................             1,022                      968                      796
                                               ---------                ---------                ---------              
   Sub Total..........................             6,809                    5,435                    4,253
                                               ---------                ---------                ---------               
    Total.............................         $ 259,119                $ 226,453                $ 227,347
                                               =========                =========                =========              
</TABLE> 
------------
(a)       Reflects the Company's acquisition of the Association effective 
          August 31, 1992.

                                       5
<PAGE>
 
         The following table shows, at December 31, 1996, the Company's
aggregate loans based on their contractual terms to maturity (mortgage-backed
securities are not included). Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Contractual principal repayments of loans do not necessarily
reflect the actual term of the 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, which give the
Institutions the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase, however, when current mortgage loan rates substantially
exceed rates on existing mortgage loans.

<TABLE> 
<CAPTION> 
                                                            Amounts of Loans which Mature in
                                  --------------------------------------------------------------------------------
                                                                                 2002 and
                                    1997              1998 - 2001               Thereafter                Total
                                  --------            -----------              ------------              -------
                                                                   (In thousands)
<S>                               <C>                 <C>                      <C>                     <C> 
Type of Loan:
Real estate mortgage...........   $    3,606           $    9,943               $   230,495            $   244,044
Other..........................        3,079               35,740                     5,437                 44,256
                                  ----------           ----------               -----------            -----------
  Total........................   $    6,685           $   45,683               $   235,932            $   288,300
                                  ==========           ==========               ===========            ===========
</TABLE> 


         The following table sets forth the dollar amount of the Company's
aggregate loans due after one year from December 31, 1996 which have
predetermined interest rates and which have floating or adjustable interest
rates (mortgage-backed securities are not included).

<TABLE> 
<CAPTION> 
                                                     Fixed                Adjustable
                                                     Rate                    Rate                Total
                                                    ------                ----------            -------
                                                                        (In thousands)
          <S>                                      <C>                    <C>                  <C> 
          Real estate mortgage loans.............  $   68,942             $ 171,496            $ 240,438
          Other loans............................      35,675                 5,502               41,177
                                                   ----------             ---------            ---------
            Total................................  $  104,617             $ 176,998            $ 281,615
                                                   ==========             =========            =========
</TABLE> 

         Residential Real Estate Lending. The Institutions' primary lending
activities are the origination of loans on one-to-four family residential
dwelling units. The Institutions currently offer fixed-interest-rate first
mortgage and second mortgage loans. The fixed-rate mortgage loans provide for a
maturity of ten to thirty years, with the thirty-year loan bearing a slightly
higher rate of interest. The terms of the first mortgage loans generally conform
to the guidelines established by the Federal Home Loan Mortgage Corporation
("FHLMC") and are, therefore,

                                       6
<PAGE>
 
saleable in the secondary mortgage market. The fixed-rate second mortgage loans
provide for a maturity of ten years and bear interest at a rate slightly higher
than that borne by the first mortgage loans. At the time the Institutions make a
fixed-rate mortgage loan, they determine whether the loan will be held in
portfolio or sold, based primarily on the interest rate and term of the loan.
Once placed in portfolio, loans are not sold. Loans originated for sale are
promptly sold in the secondary market. Mortgage loans in the amount of $18.4
million were originated and sold during 1996.

         The Institutions emphasize the origination of ARMs for portfolio. The
Institutions currently offer several types of ARMs either as first-lien mortgage
loans or as second-lien mortgage loans which are adjustable semi-annually,
annually, or on three-year or five-year intervals and indexed to the yields on
comparable United States Treasury securities.

         The Institutions limit the maximum loan-to-value ratio on one-to-four
family residential first mortgages to 95% of the appraised value with the
requirement that private mortgage insurance be obtained for loan-to-value ratios
in excess of 80%. The Institutions limit the loan-to-value ratio to 80% on
second mortgages on one-to-four family dwellings.

         The Institutions' residential lending activities also include loans
secured by multi-family residential structures, which are structures consisting
of over four separate dwelling units. This has not constituted a significant
portion of the Institutions' lending activities to date. Multi-family
residential structures are generally income producing properties. The
Institutions generally do not lend above 75% of the appraised values of
multi-family residences on first mortgage loans or above 70% on second mortgage
loans (including in the 70% amount any first mortgage loan outstanding against
the property).

         Construction and Commercial Real Estate Lending. The Institutions
originate loans secured by existing commercial properties and construction loans
on residential real estate. The Institutions' commercial real estate loans are
secured by churches, nursing homes, hotels/motels, and other income-producing
properties. The Institutions originate construction loans on single family
residential properties in their primary market areas, and during fiscal 1996
construction loan originations amounted to $14.9 million. The loans are secured
by real estate, and most of the homes to be constructed are already subject to a
sales contract at the time the construction loan is made. The Institutions'
construction loans generally range in size between $50,000 and $500,000, and the
Institutions'

                                       7
<PAGE>
 
commercial real estate loans range from $100,000 to $1,000,000. Substantially
all of the commercial and construction loans originated by the Institutions have
either adjustable interest rates with maturities of 30 years or less or are
loans with fixed interest rates and maturities of five years or less. At
December 31, 1996, the Bank had $9.9 million in outstanding construction loans;
the Association had $325,000 in outstanding construction loans.

         Loans involving construction financing present a greater level of risk
than loans for the purchase of existing homes since collateral value and
construction costs can only be estimated at the time the loan is approved. The
Institutions have sought to minimize this risk by limiting construction lending
to qualified borrowers in their respective market areas and by limiting the
number of construction loans outstanding at any time to individual builders. In
addition, most of the Institutions' construction loans are made on homes which
are pre-sold, for which permanent financing is already arranged.

         The Institutions' underwriting criteria are designed to evaluate and
minimize the risks of each construction loan. Among other things, the
Institutions consider evidence of the availability of permanent financing or a
takeout commitment to the borrower; the reputation of the borrower and his or
her financial condition; the amount of the borrower's equity in the project;
independent appraisal and review of cost estimates; preconstruction sale and
leasing information; and cash flow projections of the borrower.

         The aggregate amount of loans which a federally chartered savings
institution may make on the security of liens on non-residential real property
generally may not exceed 400% of the institution's regulatory capital. These
limits on non-residential real property lending have not materially affected the
Institutions' respective lending activities.

         Consumer Loans. Federally chartered thrift institutions are authorized
to make secured and unsecured consumer loans up to 35% of the institution's
assets. In addition, a federal thrift institution has lending authority above
the 35% category for certain consumer loans, such as home equity loans, property
improvement loans, mobile home loans and loans secured by savings accounts. The
consumer loans granted by the Institutions have included loans on automobiles
and other consumer goods, as well as education loans, loans secured by savings
accounts, credit cards, and secured and unsecured lines of credit. In 1996, the
Company continued to increase the amount of its automobile loans outstanding as
part of its strategic plan. The increase in such loans was $2.0 million and
$14.1


                                       8
<PAGE>
 
million in 1996 and 1995, respectively. Such loans were originated both directly
with customers and through automobile dealers in the Company's lending areas.

         Management believes that the shorter terms and the normally higher
interest rates available on various types of consumer loans have been helpful in
maintaining profitable spreads between average loan yields and costs of funds.
Consumer loans do, however, pose additional risks of collectibility when
compared to traditional types of loans granted by thrift institutions such as
residential first mortgage loans. The Institutions have sought to reduce this
risk by primarily granting secured consumer loans.

         Commercial Business Lending. Under laws and regulations enacted during
the past several years, the Institutions are permitted to make secured and
unsecured loans for commercial, corporate, business and agricultural purposes,
including issuing letters of credit and engaging in inventory financing and
commercial leasing activities. The aggregate outstanding amount of such loans
generally may not exceed 10% of the Institutions' respective assets. The
Institutions do not, as a common practice, make unsecured commercial loans. The
Bank entered asset-based commercial lending, primarily commercial leasing, in
1986 but discontinued originations in this type of lending during 1989. The Bank
sold a portion of its leasing portfolio during 1989 and plans to divest itself
of the remaining portfolio either through normal repayment or sale. The
remaining portfolio at December 31, 1996 was $24,000, net of unearned finance
charges.

         Originations, Purchases and Sales. Historically, all residential and
commercial real estate loans have been originated directly by the Institutions
through salaried loan officers. Residential loan originations have been
attributable to referrals from real estate brokers and builders, depositors and
walk-in customers, and commissioned loan agents. Commercial real estate and
construction loan originations have been obtained by direct solicitation.
Consumer loan originations are attributable to walk-in customers who have been
made aware of the Institutions' programs by advertising, as well as direct
solicitation.

         The Institutions have previously sold whole loans to other financial
institutions and institutional investors. Sales of loans generate income (or
loss) at the time of sale, produce future servicing income and provide funds for
additional lending and other purposes. When the Institutions retain the
servicing of loans they sell, the Institutions retain responsibility for
collecting and remitting loan payments, inspecting the properties, making
certain insurance and tax payments on behalf of borrowers and otherwise
servicing those loans. The Institutions typically receive a

                                       9
<PAGE>
 
fee of between .25% and .50% per annum of the loans' principal amount for
performing this service. At December 31, 1996, the Institutions were servicing
$145 million of loans for others. Sales have been primarily to the FHLMC.


         Management believes that purchases of loans and loan participations are
generally desirable, primarily when area mortgage demand is less than the supply
of funds available for local mortgage origination or when loan terms are
available in areas outside the Institutions' respective local lending areas
which are more favorable to their investment requirements. Additionally,
purchases of loans may be made in order to diversify the Institutions' lending
portfolios. The Institutions' loan purchasing activities fluctuate
significantly. The servicing of purchased loans is generally performed by the
seller. In order to cover servicing costs, a portion of the interest being paid
by the borrower is retained by the servicer. In addition to whole loan
purchases, the Institutions also purchase participation interests in loans. Both
whole loans and participations are purchased on a yield basis. As of December
31, 1996, $9.3 million, or 3.2%, of the Institutions' aggregate loans consisted
of purchased loans which were serviced by others.

         The following table shows aggregate loans originated, purchased and
sold by the Company during the periods indicated.
<TABLE> 
<CAPTION> 


                                                          Year Ended December 31,
                                                     ----------------------------------------
                                                      1996            1995            1994
                                                     ------          ------          ------ 
                                                                 (In thousands)
<S>                                                  <C>             <C>             <C> 
Loans Originated:
 Conventional real estate loans:
  Construction loans.............................    $ 14,885        $ 12,616        $ 17,013
  Loans on existing property.....................      32,115          17,733          34,403
  Loans refinanced...............................      42,178          16,882          34,046
 Other loans.....................................      29,275          34,769          21,889
                                                     --------        --------        --------
  Total loans originated.........................     118,453          82,000         107,351
                                                     --------        --------        --------
Loans Purchased:                                                                     
 Real estate loans:                                                                  
 Conventional....................................          --              --              --
 Mortgage-backed securities......................       2,532           4,964              --
                                                     --------        --------        --------
  Total loans purchased .........................       2,532           4,964              --
                                                     --------        --------        --------
                                                                                     
Total loans originated and purchased.............    $120,985        $ 86,964        $107,351
                                                     ========        ========        ========
Mortgage loans and leases sold...................    $ 18,359        $ 11,180        $  8,622
                                                     ========        ========        ========
</TABLE> 

       For additional information, see "Management's Discussion and Analysis
-- Results of Operations" in Part II of this Report.

                                      10
<PAGE>
 
         Loan Commitments. Conventional loan commitments by the Institutions are
granted for periods of up to 60 days. The total amount of the Institutions'
aggregate outstanding commitments to originate real estate loans at December 31,
1996, was approximately $3.9 million. It has been the Institutions' experience
that few commitments expire unfunded.

         Loan Fee and Servicing Income. In addition to interest earned on loans,
the Institutions receive income through servicing of loans and fees in
connection with loan originations, loan modifications, late payments and changes
of property ownership and for miscellaneous services related to the loan. Income
from these activities is volatile and varies from period to period with the
volume and type of loans made.

         The Institutions charge loan origination fees which are calculated as a
percentage of the amount borrowed and are charged to the borrower at the time of
origination of the loan. The fees received in connection with the origination of
commercial real estate loans generally amount to 3 points (one point being
equivalent to 1% of the principal amount of the loan). The fees received in
connection with the origination of conventional one-to-four family mortgages
typically range from none to 3.00 points. In accordance with Statement of
Financial Accounting Standards No. 91, loan origination and commitment fees and
certain direct loan origination costs are deferred and the net amount amortized
as an adjustment of yield over the contractual life of the related loans.

         For additional information, see Note 4 of the Consolidated Financial
Statements in Part II of this Report.

         Delinquencies.  When a borrower defaults upon a required payment on a
loan, the Institutions contact the borrower and attempt to induce the borrower
to cure the default. A late payment notice is mailed to the borrower after a
payment is 10 days past due. An additional late payment notice is mailed to the
borrower and a telephone contact is made after a payment is 15 days past due. If
the delinquency on a mortgage loan exceeds 90 days and is not cured through the
Institutions' normal collection procedures or an acceptable arrangement is not
worked out with the borrower, the Institutions will institute measures to remedy
the default, including commencing a foreclosure action.

         Non-Performing Assets and Asset Classification. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential
mortgage loans are placed on non-accrual status when either principal or
interest is 90 days or more past

                                      11
<PAGE>
 
due unless they are adequately secured and there is reasonable assurance of full
collection of principal and interest. Consumer loans generally are charged off
when the loan becomes over 120 days delinquent. Commercial business and real
estate loans are placed on non-accrual status when the loan is 90 days or more
past due. Interest accrued and unpaid at the time a loan is placed on
non-accrual status is charged against interest income. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.

         Real estate acquired by the Institutions as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until such
time as it is sold. When such property is acquired, it is recorded at the lower
of the unpaid principal balance of the related loan or its fair value. Any
subsequent deterioration of the property is provided for in an allowance for
loss on real estate owned.

         The following table sets forth information with respect to the
Company's aggregate non-performing assets at the dates indicated. At 
December 31, 1996, the Company had no restructured loans or other problem loans
for which the Company had serious doubts as to the ability of the borrowers to
comply with the existing payment terms and conditions.

                                      12
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                             At December 31,
                                                        ----------------------------------------------------
                                                         1996        1995        1994      1993        1992 (a)
                                                        ------      ------      ------    ------       --------
                                                                         (Dollars in thousands)
<S>                                                   <C>         <C>         <C>         <C>         <C> 
Loans accounted for on a non-accrual basis:
 Real Estate:
  Residential.......................................  $    694    $    754    $    339    $  1,298    $    258
  Commercial........................................        --          --         144          --          --
 Commercial business leases.........................        24          29          39         108         132
 Consumer...........................................         3           6           4           1          53
                                                      --------    --------    --------    --------    --------
  Total.............................................       721         789         526       1,407         443
                                                      --------    --------    --------    --------    --------

Accruing loans contractually past due 90 days or      
 more:
 Real Estate:
  Residential.......................................       279         515         122         290         629
  Commercial........................................        --          --          --          --          --
 Commercial business leases.........................        --          --          --          --          36
 Consumer...........................................        36          25          15          13          20
                                                      --------    --------    --------    --------    --------
  Total.............................................       315         540         137         303         685
                                                      --------    --------    --------    --------    --------

   Total of non-accrual and  
    90 days past due loans..........................  $  1,036    $  1,329    $    663    $  1,710    $  1,128
                                                      ========    ========    ========    ========    ========

Percentage of total loans (excluding
  mortgage-backed securities).......................       .36%        .50%        .25%        .74%        .49%
                                                      ========    ========    ========    ========    ========
Other non-performing assets (b).....................  $    101    $    145    $    182    $    943    $  2,031
                                                      ========    ========    ========    ========    ========
</TABLE> 
----------------
(a)     Reflects the Company's acquisition of the Association effective 
        August 31, 1992.
(b)     Other non-performing assets represents property acquired through
        foreclosure or repossession. This property is carried at the lower of
        its fair market value or the principal balance of the related loan.

        During 1996, the Company would have recorded gross interest income of
$41,000 on the loans set forth above as accounted for on a non-accrual basis, if
such loans had been current in accordance with their terms. Instead, the Company
included interest income of $33,000 on those loans in its net income for the
year. For additional information regarding the Company's problem assets and loss
provisions recorded thereon, see "Management's Discussion and Analysis" in Part
II of this Report.

        Federal regulations require that each savings institution shall classify
its assets on a regular basis. In addition, in connection with examinations of
savings institutions, OTS examiners have authority to identify problem assets
and, if appropriate, classify them. The regulation provides for three asset
classification categories (i.e., Substandard, Doubtful and Loss). The
regulations also have a Special Mention category, described as assets which

                                      13
<PAGE>
 
do not currently expose a savings institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
Substandard or Doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified Loss, the savings
institution must either establish specified allowances for loan losses in the
amount of 100 percent of the portion of the asset classified Loss, or charge off
such amount. General loss allowances established to cover possible losses
related to assets classified Substandard or Doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. OTS examiners
may disagree with the savings institution's classifications and amounts
reserved. Based on management's review of the Institutions' assets at December
31, 1996, $465,000 and $33,000 of the Bank's assets were classified as
Substandard and Loss, $535,000 of the Association's assets were classified as
Substandard, and $159,000 and $1,259,000 of the Bank's and Association's assets
were designated as Special Mention, respectively.

Reserves for Losses on Loans and Real Estate

         In making loans, management recognizes the fact that credit losses will
be experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.

         It is management's policy to maintain reserves for estimated losses on
loans and real estate acquired. General loan loss reserves are provided based
on, among other things, estimates of the historical loan loss experience,
evaluation of economic conditions in general and in various sectors of the
Institutions' respective customer bases, and periodic reviews of loan portfolio
quality by the Institutions' personnel. Specific reserves will be provided for
individual loans where the ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security of the loan or
guarantees, if applicable. It is management's policy to establish specific
reserves for estimated losses on delinquent loans and real estate owned when it
determines that losses are anticipated to be incurred on the underlying
properties. At December 31, 1996, the Bank's and Association's allowances for
loan losses amounted to $909,000 and $195,000, respectively.



                                      14
<PAGE>
 
         Future reserves may be necessary if economic conditions or other
circumstances differ substantially from the assumptions used in making the
initial determinations. There can be no assurance that regulators, in reviewing
the Institutions' loan portfolios in the future, will not ask the Institutions
to increase their allowance for loan losses, thereby negatively affecting their
financial condition and earnings.

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

<TABLE> 
<CAPTION> 
                                                                         Year Ended December 31,
                                                      ---------------------------------------------------------
                                                        1996        1995        1994       1993        1992 (a)
                                                       ------      ------      ------     ------       --------
                                                                        (Dollars in thousands)
<S>                                                   <C>         <C>         <C>         <C>         <C> 
Balance at Beginning of Period......................  $  1,076    $  1,022    $    968    $    796    $    819
Addition from Acquisition of the
 Association (a)....................................        --          --          --          --         167
                                                      --------    --------    --------    --------    --------
Balance before Charge-Offs, Recoveries
 and Provision for Possible Loan Losses.............     1,076       1,022         968         796         986
                                                      --------    --------    --------    --------    --------

Charge Offs:
  Real Estate:
    Residential.....................................         1          44          66          50         284
    Commercial......................................        --          --          --          91         470
  Commercial business leases........................        --          --          78          26          21
  Consumer..........................................        51          42          27          36          25
                                                      --------    --------    --------    --------    --------
                                                            52          86         171         203         800
                                                      --------    --------    --------    --------    --------
Recoveries:
  Real Estate:
    Residential.....................................        --           2          17          19          46
    Commercial......................................        --          --          10          --          --
  Commercial business leases........................        10          --           2          --          --
  Consumer..........................................         4          21          15          32          13
                                                      --------    --------    --------    --------    --------
                                                            14          23          44          51          59
                                                      --------    --------    --------    --------    --------

Net Loans Charged-Off...............................       (38)        (63)       (127)       (152)       (741)
Provision for Possible Loan Losses..................        66         117         181         324         551
                                                      --------    --------    --------    --------    --------
Balance at End of Period............................  $  1,104    $  1,076    $  1,022    $    968    $    796
                                                      ========    ========    ========    ========    ========

Ratio of Net Charge-Offs to Average
  Loans Outstanding During the Period...............       .01%        .02%        .05%        .07%        .36%
                                                      ========    ========    ========    ========    ========
</TABLE> 

_______________ 
(a)    Reflects the Company's acquisition of the Association effective August
       31, 1992.

                                      15
<PAGE>
 
         The following table sets forth a breakdown of the Company's aggregate
allowance for loan losses by loan category at the dates indicated. Management
believes that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of further losses and does not restrict the use of the allowance to
absorb losses in any category.

<TABLE> 
<CAPTION> 

                                                                                   At December 31,
                                            ------------------------------------------------------------------------------------- 
                                                      1996                       1995                        1994         
                                            --------------------------    --------------------    -------------------------------  
                                                         Percent of                 Percent of                    Percent of     
                                                         Total Loans                Total Loans                   Total Loans    
                                                          in Each                    in Each                       in Each      
                                                         Category to                Category to                   Category to    
                                               Amount    Total Loans     Amount     Total Loans        Amount     Total Loans    
                                               ------    -----------     ------     -----------        ------     -----------    
                                                                            (Dollars in thousands)
Loans:
<S>                                         <C>          <C>           <C>          <C>             <C>        <C>     
  Real Estate Mortgage.............         $   496         85%        $    486         86%           $   508         92%        
  Commercial business leases.......              24         --               34         --                 34         --        
  Consumer.........................             584         15              556         14                480          8        
                                            -------       ----         --------        ---            -------       ----        
    Total Allowance for Loan
     Losses........................         $ 1,104        100%        $  1,076        100%           $ 1,022        100%         
                                            ========       ===         ========        ===            =======        ===    

<CAPTION> 
                                                                     At December 31,                                 
                                            -----------------------------------------------------------               
                                                         1993                          1992(a)                        
                                            ----------------------------    ---------------------------               
                                                           Percent of                  Percent of                     
                                                           Total Loans                 Total Loans                    
                                                            in Each                     in Each                       
                                                           Category to                 Category to                    
                                                Amount     Total Loans      Amount     Total Loans                    
                                                ------     -----------      ------     -----------                    
                                                               (Dollars in thousands)                                   
<S>                                            <C>         <C>              <C>                                       
Loans:                                                                                                                
Real Estate Mortgage.............              $   605         95%          $  479          96%                       
Commercial business leases.......                  100         --               78          --                        
Consumer.........................                  263          5              239           4                        
                                               -------        ---           ------         ---                        
   Total Allowance for Loan                                                                                           
   Losses........................              $   968        100%          $  796         100%                        
                                               =======        ===           ======         ===                       
</TABLE> 

______________
(a)   Reflects the Company's acquisition of the Association effective August 31,
      1992.
 
                                      16
<PAGE>
 
Investment Activities

      Interest and dividends on investment securities, Federal Home Loan Bank
stock and interest-bearing deposits provides the second largest source of income
for the Company (after interest on loans and mortgage-backed securities),
constituting 12.7% of the Company's total interest income (and dividends) for
fiscal 1996. The Institutions maintain their liquid assets in excess of the
minimum requirements imposed by regulation at levels believed adequate to meet
requirements of normal banking activities and potential savings outflows. At
December 31, 1996, the Bank's and Association's liquidity ratios (liquid assets
as a percentage of net withdrawable savings and short-term borrowings) were
11.8% and 4.7%, respectively.

      The Institutions have the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, certificates of deposit at insured savings and
loans and banks, bankers' acceptances, and federal funds. The Institutions may
also invest a portion of their assets in certain commercial paper and corporate
debt securities. The Institutions are also authorized to invest in mutual funds
and stocks whose assets conform to the investments that the Institutions are
authorized to make directly.

      At December 31, 1996, the market values of the Company's aggregate
investment securities, Federal Home Loan Bank stock and mortgage-backed
securities were approximately $49.8 million, $3.3 million and $38.7 million,
respectively. The following table sets forth the carrying value of the Company's
short-term investments, Federal Home Loan Bank stock, and mortgage-backed
securities at the dates indicated.

<TABLE> 
<CAPTION> 
                                                                    At December 31,
                                                          ----------------------------------
                                                          1996           1995           1994
                                                          ----           ----           ----
                                                                    (In thousands)
      <S>                                             <C>            <C>             <C>              
      Investment securities........................   $ 50,744       $  22,600       $  7,000
      Interest-bearing deposits (a)................      4,005           5,069          4,303
      FHLB stock...................................      3,311           2,984          2,947
      Mortgage-backed securities...................     38,542          45,014         48,376
                                                      --------       ---------       --------
      Total investments............................   $ 96,602       $  75,667       $ 62,626
                                                      ========       =========       ========
</TABLE> 

______________
(a)    Consist of overnight deposits and short-term non-negotiable certificates
       of deposit.

                                      17
<PAGE>
 
         The Company's mortgage-backed securities include both fixed- and
adjustable-rate securities, though the Company emphasizes adjustable-rate
investments in order to enhance the interest rate sensitivity of its
interest-earning assets. At December 31, 1996, the Company's mortgage-backed
securities consisted of the following:

<TABLE> 
<CAPTION> 
                                                                     Carrying        Average
                                                                      Amount          Rate
                                                                     --------        ------- 
                                                                      (Dollars in thousands)
        <S>                                                          <C>             <C> 
        Variable rate:
          Repricing in one year or less..........................    $  24,969        7.10%

        Fixed rate:
          Maturing in five years or less.........................        5,234        6.70
          Maturing in five to ten years..........................          624        8.01
          Maturing in more than ten years........................        7,715        7.82
                                                                     ---------        ----
            Total................................................    $  38,542        7.20%
                                                                     =========        ====
</TABLE> 
         As members of the Federal Home Loan Bank System, the Institutions must
maintain minimum levels of liquid assets which vary from time to time. See
"Regulation -- Federal Home Loan Bank System." Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to return on loans. 

Sources of Funds

         General. Savings accounts and other types of deposits have
traditionally been an important source of the Institutions' funds for use in
lending and for other general business purposes. In addition to deposit
accounts, the Institutions derive funds from loan repayments, loan sales,
borrowings and operations. The availability of funds from loan sales is
influenced by general interest rates and other market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in deposits or
deposit inflows at less than projected levels and may be used on a longer term
basis to support expanded lending activities.

         Deposits. The Institutions attract both short-term and long-term
deposits from the general public by offering a wide assortment of deposit
accounts and interest rates. The Institutions offer regular passbook accounts,
NOW accounts, money market accounts, fixed-interest-rate certificates with
varying maturities, and negotiated-rate jumbo

                                      18
<PAGE>
 
certificates with various maturities. The Institutions also offer tax-deferred
individual retirement, Keogh retirement, and simplified employer plan retirement
accounts.

         As of December 31, 1996, approximately 24%, or $75.1 million, of the
Institutions' aggregate deposits consisted of various savings and demand deposit
accounts from which customers are permitted to withdraw funds at any time
without penalty.

         Interest earned on passbook and statement accounts is paid from the
date of deposit to the date of withdrawal and compounded semi-annually for the
savings bank and quarterly for the Association. Interest earned on NOW and money
market deposit accounts is paid from the date of deposit to the date of
withdrawal and compounded and credited monthly. The interest rate on these
accounts is established by management.

         The Institutions also make available to their depositors a number of
certificates of deposit with various terms and interest rates to be competitive
in their respective market areas. These certificates have minimum deposit
requirements as well.

                                      19
<PAGE>
 
         The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Institutions
between the dates indicated.

<TABLE> 
<CAPTION> 

                                         
                                                                        Increase                                      
                                               Balance at              (Decrease)               Balance at            
                                              December 31,              From Prior             December 31,            
                                                 1996                      Year                   1995               
                                          -------------------          -----------        --------------------        
                                                                  (Dollars in thousands) 
<S>                                       <C>                          <C>                <C>           <C> 
Passbook accounts...................      $   46,786    14.68%         $     (869)        $    47,655    16.39%        
NOW accounts........................          20,385     6.40                 823              19,562     6.73        
Money market deposit accounts.......           7,931     2.49              (1,179)              9,110     3.13        
                                                                                                                     
Certificate accounts:                                                                                                
  Jumbo certificates................          17,205     5.40              17,107                  98      .03        
  Fixed rate certificates:                                                                                           
   12 months or less................          88,630    27.81               4,927              83,703    28.78        
   13-24 months.....................          33,783    10.60              11,340              22,443     7.72        
   25-36 months.....................          33,270    10.44               1,141              32,129    11.05        
   37 months or greater.............          64,228    20.14              (5,053)             69,281    23.83        
  Variable rate certificate:                
   18 months........................           6,487     2.04                (317)              6,804     2.34        
                                          ----------   ------          ----------         -----------   ------      
                                          $  318,705   100.00%         $   27,920         $   290,785   100.00%           
                                          ==========   ======          ==========         ===========   ======      

<CAPTION> 
                                            Increase
                                           (Decrease)            Balance at
                                            From Prior           December 31,
                                              Year                  1994
                                          -----------        -------------------
                                                   (Dollars in thousands)
<S>                                       <C>                <C>           <C> 
Passbook accounts...................      $   (3,997)        $  51,652     18.62%
NOW accounts........................            (551)           20,113      7.25
Money market deposit accounts.......            (777)            9,887      3.56
                                       
Certificate accounts:                  
  Jumbo certificates................          (2,744)            2,842      1.02
  Fixed rate certificates:             
   12 months or less................          10,442            73,261     26.41
   13-24 months.....................         (12,008)           34,451     12.42
   25-36 months.....................           5,985            26,144      9.42
   37 months or greater.............          19,268            50,013     18.03
  Variable rate certificate:           
   18 months........................          (2,272)            9,076      3.27
                                          ----------         ---------    ------
                                          $   13,346         $ 277,439    100.00%
                                          ==========         =========    ======
</TABLE> 

                                      20
                                        
                                        
<PAGE>
 
         The variety of deposit accounts offered by the Institutions has
permitted them to be competitive in obtaining funds and has allowed them to
respond with flexibility to, but without eliminating the threat of,
disintermediation (the flow of funds away from depository institutions such as
savings institutions into direct investment vehicles such as government and
corporate securities). In addition, the Institutions have become much more
subject to short-term fluctuation in deposit flows, as customers have become
more interest rate conscious. The ability of the Institutions to attract and
maintain deposits and their costs of funds have been, and will continue to be,
significantly affected by money market conditions.

         The following table sets forth the Institutions' aggregate deposits (in
thousands) and related information as of December 31, 1996 by various product
categories.

<TABLE> 
<CAPTION> 


Interest       Minimum                                                 Minimum                        Percentage of
  Rate          Term                    Category                       Amount          Balances       Total Savings
--------       -------                  --------                       ------          --------       -------------   
<S>            <C>                <C>                                  <C>             <C>            <C> 
1.31%          None               NOW Accounts                         $       1       $ 20,385           6.40%
2.56           None               Passbook & Statement Accounts                1         46,786          14.68
2.55           None               Money Market Demand Accounts             2,500          7,931           2.49

                                  Certificates of Deposit
                                  -----------------------
5.00           18 months          18 Month Variable IRA Account                1          6,487           2.04
5.30           Various            Fixed Term, Non-renewable               95,000         17,205           5.40
4.06            3 months          Fixed Term, Variable Rate                  500          1,306            .41
4.65            5 months          Fixed Term, Variable Rate                  500            336            .10
4.70            6 months          Fixed Term, Variable Rate                  500         18,044           5.66
5.64            9 months          Fixed Term, Variable Rate                  500         10,791           3.39
5.55           11 months          Fixed Term, Variable Rate                  500         23,711           7.44
5.06           12 months          Fixed Term, Variable Rate                  500         34,442          10.81
5.46           18 months          18 Month Fixed IRA Accounts                500          3,092            .97
6.05           19 months          Fixed Term, Variable Rate                  500         14,373           4.51
5.74           24 months          Fixed Term, Variable Rate                  500         16,318           5.12
5.97           30 months          Fixed Term, Variable Rate                  500         20,043           6.29
5.85           36 months          Fixed Term, Variable Rate                  500         13,227           4.15
6.97           37 months          Fixed Term, Variable Rate                  500         34,970          10.97
5.58           48 months          Fixed Term, Variable Rate                  500          2,983            .94
5.87           60 months          Fixed Term, Variable Rate                  500         13,641           4.28
7.15           72 months          Fixed Term, Variable Rate                  500            837            .26
7.31           84 months          Fixed Term, Variable Rate                  500          2,016            .63
6.93           96 months          Fixed Term, Variable Rate                1,000          7,407           2.32
6.98           9-10 Years         Fixed Term, Variable Rate                1,000          2,234            .70
3.27           1-8 Years          Old fixed rate Certificates              1,000            140            .04
----                                                                                   --------         ------
4.93%                                 Total Deposits                                   $318,705         100.00%
====                                                                                   ========         ======
</TABLE> 

                                      21
<PAGE>
 
         The following table sets forth the Company's average aggregate balances
and interest rates. Average balances are derived from balances which management
does not believe are materially different from daily balances (actual daily
balances cannot be obtained without undue effort and expense).

<TABLE> 
<CAPTION> 


                                                          For the Year Ended December 31,
                                    -----------------------------------------------------------------------
                                            1996                     1995                      1994
                                    --------------------     --------------------      --------------------
                                                 Average                  Average                   Average
                                    Average       Rate       Average       Rate        Average       Rate
                                    Balance       Paid       Balance       Paid        Balance       Paid
                                    -------      -------     -------      -------      -------      -------
                                                              (Dollars in thousands)
<S>                                 <C>          <C>         <C>          <C>          <C>          <C> 
Interest-bearing
  demand deposits...............    $  28,691    1.66%       $  28,977     1.80%       $  31,397     1.81%
Savings deposits................       48,556    2.59           49,160     2.68           54,584     2.64
Time deposits...................      233,330    5.76          213,930     5.72          189,353     4.54
                                    ---------                ---------                 ---------
                                    $ 310,577    4.89        $ 292,067     4.82        $ 275,334     3.85
                                    =========                =========                 =========
</TABLE> 

         The following table sets forth the aggregate time deposits in the
Company classified by rates as of the dates indicated.


<TABLE> 
<CAPTION> 

                                                                     At December 31,
                                                    ---------------------------------------------   
                                                       1996             1995              1994
                                                      ------           ------            ------
                                                                    (In thousands)
             <S>                                    <C>              <C>               <C> 
             Less than 4%.........................  $      224       $     1,940       $   45,494
              4% -  5.99%.........................     161,862           113,540          113,118
              6% -  7.99%.........................      77,787            90,175           25,803
              8% -  9.99%.........................       3,730             8,803           11,372
                                                    ----------       -----------       ----------
                                                    $  243,603       $   214,458       $  195,787
                                                    ==========       ===========       ==========
</TABLE> 

         The following table sets forth the amount and maturities of the
Institutions' time deposits at December 31, 1996.


<TABLE> 
<CAPTION> 

                                                                  Amount Due
                                   -------------------------------------------------------------------------
                                   Less Than                                        More Than
      Rate                         One Year        1-2 Years      2-3 Years         3 Years         Total
      ----                         -------         ---------      ---------         ---------       -----
                                                                 (In thousands)
<S>                               <C>             <C>            <C>             <C>              <C> 
Less than 4%....................  $     167       $        4     $       --      $       53       $      224
4% - 5.99%......................    127,482           22,192          6,711           5,477          161,862
6% - 7.99%......................     22,156           41,765          5,621           8,245           77,787
8% - 9.99%......................      2,419              937            347              27            3,730
                                  ---------       ----------     ----------      ----------       ----------
                                  $ 152,224       $   64,898     $   12,679      $   13,802       $  243,603
                                  =========       ==========     ==========      ==========       ==========
</TABLE> 

                                      22
<PAGE>
 
         The following table indicates the amount of the Institutions'
certificates of deposit and other deposits of $100,000 or more by time remaining
until maturity at December 31, 1996.
<TABLE> 
<CAPTION> 
                                                                                      Passbook, NOW
                                                            Certificates                and MMDA
             Maturity Period                                 of Deposit                 Deposits
             ---------------                                ------------               ----------
                                                                         (In thousands)
             <S>                                            <C>                        <C> 

             Three months or less.........................   $  17,740                 $    7,809
             Over three through six months................       6,332                         --
             Over six through twelve months...............       5,280                         --
             Over twelve months...........................       8,370                         --
                                                             ---------                 ----------
                  Total...................................   $  37,722                 $    7,809
                                                             =========                 ==========
</TABLE> 

         The following table sets forth the aggregate savings activities of the
Company for the periods indicated.

<TABLE> 
<CAPTION> 
                                                                               Year Ended December 31
                                                                   ---------------------------------------------
                                                                      1996             1995              1994
                                                                     ------           ------            ------
                                                                                  (In thousands)

      <S>                                                          <C>              <C>              <C> 
      Net increase (decrease) before interest credited...........  $ 12,928         $    (752)       $  (7,332)
      Interest credited..........................................    14,992            14,098            7,960
                                                                   --------         ---------        ---------
        Net increase (decrease) in deposits......................  $ 27,920         $  13,346        $     628
                                                                   ========         =========        =========
</TABLE> 

         Borrowings. Savings deposits are the primary sources of funds for the
Institutions' lending and investment activities and for their general business
purposes. The Bank and Association can also use advances (borrowings) from the
Federal Home Loan Banks of Indianapolis and Cincinnati, respectively, to
supplement their supplies of lendable funds, to meet deposit withdrawal
requirements and to extend the terms of their liabilities. Advances from the
Federal Home Loan Bank are typically secured by the Institutions' stock in its
Federal Home Loan Bank and a portion of the Institutions' first mortgage loans
or investment securities. At December 31, 1996, the Bank and Association had
$14.0 million and $12.5 million, respectively, of advances outstanding from the
Federal Home Loan Banks of Indianapolis and Cincinnati, respectively.

         The Federal Home Loan Banks function as central reserve banks providing
credit for savings institutions and certain other member financial institutions.
As members, the Institutions are required to own capital stock in their Federal
Home Loan Bank and are authorized to apply for advances on the security of such
stock and certain of their home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met.


                                      23
<PAGE>
 
Average Balance Sheet

         The following table sets forth certain information relating to the
Company's aggregate average yield on assets and average cost of liabilities for
the periods indicated and average yields earned and rates paid at December 31,
1996. Such yields and costs are derived by dividing income or expenses by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from balances which management does not
believe are materially different from daily balances (actual daily balances
cannot be obtained without undue effort and expense).

<TABLE> 
<CAPTION> 
                                                                                         Year Ended December 31,       
                                                                                   ------------------------------------ 
                                                        At December 31,                           1996
                                                                                   ------------------------------------ 
                                                             1996                                             Average 
                                                  -------------------------------                                     
                                                  Balance       Average Rate        Balance      Interest    Yield/Cost 
                                                  -------       ------------        -------      --------    ---------- 
                                                                                          (Dollars in thousands)      
                                                                                                                      
<S>                                              <C>            <C>                 <C>          <C>         <C> 
Interest-earning assets:                                                                                              
 Loan portfolio (a).............................  $282,601           8.02%          $276,752     $ 22,060        7.97% 
 Mortgage-backed securities.....................    38,542           7.20             42,326        2,880        6.80  
 Short term investments and other                                                                                     
  interest-earning assets (b)...................    58,060           6.92             54,846        3,627        6.61  
                                                  --------          -----           --------     --------      ------  
    Total interest-earning assets...............   379,203           7.77            373,924       28,567        7.64  
                                                                                                                      
Non-interest-earning assets.....................    17,552                            16,483                           
                                                  --------                          --------                           
    Total assets................................  $396,755                          $390,407                           
                                                  ========                          ========                           
                                                                                                                      
Interest-bearing liabilities:                                                                                         
  Deposits......................................  $318,705           4.93           $310,577       15,183        4.89  
  FHLB advances.................................    26,549           5.83             25,987        1,522        5.86  
                                                  --------          -----           --------     --------      ------  
    Total interest-bearing liabilities:.........   345,254           5.00            336,564       16,705        4.96  
                                                                    -----                        --------              
Non-interest-bearing liabilities................     7,556                             9,289                           
                                                  --------                          --------                           
    Total liabilities...........................   352,810                           345,853                           
Shareholders' equity............................    43,945                            44,554                           
                                                  --------                          --------                           
    Total liabilities and shareholders'                                                                               
      equity....................................  $396,755                          $390,407                           
                                                  ========                          ========                           
                                                                                                                      
Net interest income.............................                                                 $ 11,862              
                                                                                                 ========              
Interest rate spread............................                     2.77%                                       2.68% 
                                                                    =====                                      ======  
Net yield on interest-earning assets.............                                                                3.17% 
                                                                                                               ======  
Ratio of average interest-earning assets                                                                              
  to average interest-bearing liabilities.......                                                               111.10% 
                                                                                                               =======

<CAPTION>                                                                                                      
                                                        ----------------------------------------------------------------------------

                                                                        1995                                    1994
                                                        ----------------------------------       -----------------------------------

                                                                                 Average                                   Average
                                                        Balance     Interest    Yield/Cost       Balance     Interest     Yield/Cost

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

                                                                                      (Dollars in thousands)
                                                
                                                
<S>                                                    <C>          <C>         <C>              <C>         <C>          <C> 
Interest-earning assets:                        
 Loan portfolio (a).............................        $268,110    $  21,078        7.86%       $243,735     $ 17,841         7.32%

 Mortgage-backed securities.....................          46,529        3,137        6.74          53,830        3,095         5.75
 Short term investments and other               
  interest-earning assets (b)...................          20,427        1,393        6.82          18,305          941         5.14
                                                        --------    ---------      ------        --------     --------       ------
    Total interest-earning assets...............         335,066       25,608        7.64         315,870       21,877         6.92
                                                
Non-interest-earning assets.....................          14,630                                   12,657
                                                        --------                                 --------
    Total assets................................        $349,696                                 $328,527
                                                        ========                                 ========
                                                
Interest-bearing liabilities:                   
  Deposits......................................        $292,067       14,079        4.82        $275,334       10,599         3.85
  FHLB advances.................................           4,586          289        6.31             894           48         5.29
                                                        --------     --------      ------        --------     --------       ------
    Total interest-bearing liabilities:.........         296,653       14,368        4.84         276,228       10,647         3.85
                                                                     --------      ------                     --------       ------
Non-interest-bearing liabilities................           6,797                                    7,801
                                                        --------                                 --------
    Total liabilities...........................         303,450                                  284,029
Shareholders' equity............................          46,246                                   44,498
                                                        --------                                 --------
    Total liabilities and shareholders'         
      equity....................................        $349,696                                 $328,527
                                                        ========                                 ========
                                                
Net interest income.............................                     $ 11,240                                 $ 11,230
                                                                     ========                                 ========
Interest rate spread............................                                     2.80%                                     3.07%

                                                                                   ======                                    ======
Net yield on interest-earning assets............                                     3.35%                                     3.56%

                                                                                   ======                                    ======
Ratio of average interest-earning assets        
  to average interest-bearing liabilities.......                                   112.95%                                   114.35%

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

</TABLE> 
(a)  Excludes income earned on late charges and inspection fees. Average
     balances include non-accrual loans.

(b)  Includes interest-bearing deposits in other financial institutions,
     investment securities and FHLB stock.


                                      24
<PAGE>
 
Subsidiary Activities

         As federally chartered savings institutions, the Institutions are
permitted to invest an amount equal to 2% of their respective assets in
subsidiaries with an additional investment of 1% of assets where such investment
serves primarily community, inner-city and community-development purposes. Under
such limitations at December 31, 1996, the Bank and Association were authorized
to invest up to approximately $9.9 million and $2.2 million, respectively, in
the stock of or loans to subsidiaries. In addition, institutions meeting
regulatory capital requirements and certain other tests, which the Institutions
do, may invest up to 50% of their regulatory capital in conforming first
mortgage loans to subsidiaries.

         The Company owns all of the stock of the Bank and Association and
operates as a multiple thrift holding company. The Company also owns all of the
stock of Indiana Title Insurance Company, which provides title insurance
services in the communities it serves.

         The Bank has one direct wholly-owned subsidiary, Ameriana Financial
Services, Inc. ("AFS"). AFS offers insurance products through (i) its ownership
of Ameriana Insurance Agency, New Castle, Indiana, a full service life and
casualty insurance agency, and (ii) its ownership of an interest in Family
Financial Life Insurance Company, New Orleans, Louisiana which offers a full
line of credit related insurance products. AFS also operates a brokerage
facility in conjunction with Linsco/Private Ledger. The Association has one
direct wholly-owned subsidiary, Deer Park Service Corporation, which operates a
brokerage facility in conjunction with Money Concepts/Pinnacle Financial
Advisors, Inc.

         At December 31, 1996, the Bank's and Association's investments in, and
loans to, their subsidiaries were approximately $3.3 million and $4,000,
respectively, consisting of direct equity investments and lines of credit.

         Savings institutions whose deposits are insured by the SAIF are
required to give the FDIC and the OTS 30 days' prior notice before establishing
or acquiring a new subsidiary, or commencing any new activity through an
existing subsidiary. Both the FDIC and the Director of the OTS have authority to
order termination of subsidiary activities determined to pose a risk to the
safety or soundness of the institution. In addition, regulatory capital
requirements require savings institutions to phase-out the amount of their
investments in and extensions of credit to subsidiaries engaged in activities
not permissible to national banks from capital in determining regulatory capital


                                      25
<PAGE>
 
compliance. AFS' indirect insurance underwriting activities are not permissible
to national banks, but the Bank does not anticipate that any resulting deduction
from capital will materially affect its capital for regulatory compliance
purposes. See "Regulation -- Regulatory Capital Requirements."

Competition

         The Institutions experience substantial competition both in attracting
and retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from other savings institutions,
commercial banks, and credit unions located in the Institutions' respective
market areas. Additional significant competition for savings deposits comes from
money market mutual funds and corporate and government debt securities.

         The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally comes
from other thrift institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies. The Institutions have been able to compete
effectively in their respective market areas.

         The Institutions have offices in Henry, Hancock, Hendricks and Madison
Counties in Indiana and in Hamilton County, Ohio. In addition to the financial
institutions which have offices in these counties, the Institutions compete with
several commercial banks and savings institutions in surrounding counties, many
of which have assets which are substantially larger than the Institutions'.

Regulation

         General. As federally chartered savings institutions, the Institutions
are subject to extensive regulation by the OTS. The lending activities and other
investments of the Institutions must comply with various federal regulatory
requirements. The OTS periodically examines the Institutions for compliance with
various regulatory requirements. The FDIC also has the authority to conduct
special examinations of SAIF members. The Institutions must file reports with
the OTS describing their activities and financial condition. The Institutions
are also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and


                                      26
<PAGE>
 
loan holding company, the Company is subject to the OTS' regulation,
examination, supervision and reporting requirements. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.

         Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized" institution) may be: (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
did 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 could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within


                                      27
<PAGE>
 
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.

         Under implementing regulations, the federal banking regulators,
including the OTS, generally will measure a depository institution's capital
adequacy on the basis of the institution's 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). Under the regulations,
a savings institution that is not subject to an order or written directive to
meet or maintain a specific capital level will be 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 an
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 capital
risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or
greater (or 3.0% or greater if the institution has a composite 1 OTS rating). An
"undercapitalized" savings institution is an 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 has a composite 1 OTS rating). A "significantly
undercapitalized" savings institution is defined as an 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 an institution
that has a ratio of "tangible equity" core capital to total assets of less than
2.0%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. 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 (but may not reclassify a significantly undercapitalized
institution as critically undercapitalized) if the OTS determines, after notice


                                      28
<PAGE>
 
and an opportunity for a hearing, that the institution is in an unsafe or
unsound condition or that the institution has received and not corrected a less-
than-satisfactory rating for any composite rating category. The Institutions are
classified as well capitalized under the regulations.

         Standards for Safety and Soundness. FDICIA requires each federal bank
regulatory agency to prescribe, by regulation, safety and soundness standards
for institutions under its authority. In 1995, these agencies, including the
OTS, released Interagency Guidelines Establishing Standards for Safety and
Soundness and published a final rule establishing deadlines for submission and
review of safety and soundness compliance plans. The guidelines require savings
institutions to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
institution's business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure and
asset growth. The guidelines further provide that savings institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss and should take
into account factors such as comparable compensation practices at comparable
institutions. If the OTS determines that a savings institution is not in
compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines. A savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the institution to regulatory
sanctions. Management believes that the Bank and Association meet substantially
all the standards adopted in the interagency guidelines and, therefore, does not
believe that the implementation of these regulatory standards will materially
affect their operations.

         Additionally, each federal banking agency is required to establish
standards relating to the adequacy of asset and earnings quality. In 1995, these
agencies, including the OTS, issued proposed guidelines relating to asset and
earnings quality. Under the proposed guidelines, a savings institution should
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management does not
believe that the asset quality and earnings standards, in the form proposed by
the OTS, would have a material effect on the Bank or Association.


                                      29
<PAGE>
 
         Federal Home Loan Bank System. The Institutions are members of the
Federal Home Loan Bank System. The Federal Home Loan Bank System consists of 12
regional 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 members of the
Federal Home Loan Banks of Indianapolis and Cincinnati, the Institutions are
required to acquire and hold shares of capital stock in their respective Federal
Home Loan Banks amounts at least equal to the greater of 1% of the aggregate
unpaid principal of their residential mortgage loans, home purchase contracts
and similar obligations at the beginning of each year, or 5% of outstanding
advances (borrowings) from the Federal Home Loan Banks, whichever is greater.
The Bank and Association were in compliance with this requirement at December
31, 1996, with investments in Federal Home Loan Bank stock of $2.4 million and
$900,000, respectively.

         The Federal Home Loan Banks serve as reserve or central banks for their
member institutions within their assigned regions. They are funded primarily
from proceeds derived from the sale of consolidated obligations of the Federal
Home Loan Bank System. They make advances to members in accordance with policies
and procedures established by the FHFB and their Boards of Directors. As of
December 31, 1996, the Bank and Association had $14.0 million and $12.5 million,
respectively, of advances from their respective Federal Home Loan Banks.

         Liquidity Requirements. The Institutions are required to maintain
average daily balances of liquid assets (cash, certain time deposits, bankers'
acceptances, specified obligations of the United States government, states or
federal agencies, shares in mutual funds with certain restricted investment
policies and highly rated corporate debt, and commercial paper) equal to a
monthly average of not less than a specified percentage (currently 5%) of their
respective net withdrawable savings deposits plus short-term borrowings. The
Institutions are also required to maintain average daily balances of short-term
liquid assets at a specified percentage (currently 1%) of the total of their
respective net withdrawable savings accounts and borrowings payable in one year
or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The liquidity ratios of the Bank and Association at December 31,
1996 were 11.8% and 4.7%, respectively (much of which qualified as short-term
liquidity). The Institutions exceeded their monthly average requirements in
1996. A substantial sustained decline in savings deposits


                                      30
<PAGE>
 
could adversely affect the Institutions' liquidity which could result in
restricted operations and additional borrowings from the Federal Home Loan Bank.

         Insurance of Accounts. The Institutions are required to pay assessments
based on a percentage of their insured deposits to the FDIC for insurance of
their accounts by the FDIC through the SAIF. Under the Federal Deposit Insurance
Act, the FDIC is required to set semi-annual assessments for SAIF-insured
institutions at a level necessary to maintain the designated reserve ratio of
the SAIF to 1.25% of estimated insured deposits or to a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future losses
to the SAIF.

         Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is based on
the institution's capital level and supervisory evaluations. Based on the data
reported to regulators for date closest to the last day of the seventh month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.

         For the past several semi-annual periods, institutions with
SAIF-assessable deposits, like the Institutions, have been required to pay
higher deposit insurance premiums than institutions with deposits insured by the
BIF. In order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the


                                      31
<PAGE>
 
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points based on the amount of their
SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment the Bank and Association incurred a pre-tax expense of $1,532,000 and
$347,000, respectively, during the quarter ended September 30, 1996.

         The FDIC has proposed a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however, SAIF-
insured institutions, will be required to pay assessments to the FDIC at the
rate of 6.5 basis points to help fund interest payments on certain bonds issued
by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.

         SAIF members generally are prohibited from converting to the BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. The FDIC, however, may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to the SAIF equal to 0.90% of the deposits transferred and an entrance fee
to the BIF based on the current reserve ratio of the BIF. A savings institution
could adopt a commercial bank or savings bank charter if the resulting bank
remains a SAIF member.

         The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however,


                                      32
<PAGE>
 
will not initiate termination of insurance proceedings if the depository
institution has entered into and is in compliance with a written agreement with
its primary regulator, and the FDIC is a party to the agreement, to increase its
Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is
defined as the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets other than mortgage
servicing rights and qualifying supervisory goodwill eligible for inclusion in
core capital under OTS regulations and minus identified losses and investments
in certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings institution is meeting the Tier 1 capital requirement for state
non-member banks of 4% of total assets for all but the most highly rated state
non-member banks.

         Qualified Thrift Lender Test. The Institutions are subject to OTS
regulations which use the concept of a Qualified Thrift Lender to determine
eligibility for Federal Home Loan Bank advances and for certain other purposes.
A savings institution that does not meet the Qualified Thrift Lender test 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 Federal Home Loan Bank; 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 be a Qualified Thrift Lender, it must cease
any activity, and not retain any investment not permissible for a national bank
and immediately repay any outstanding Federal Home Loan Bank advances (subject
to safety and soundness considerations).

         To qualify as a Qualified Thrift Lender, a savings institution must
either qualify as a "domestic building and loan association" under the Internal
Revenue Code or maintain at least 65% of its "portfolio" assets in Qualified
Thrift Investments. 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


                                      33
<PAGE>
 
consist of: (i) loans, equity positions or securities related to domestic,
residential real estate or manufactured housing and educational, small business
and credit card loans and (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions but do not include any intangible
assets. Subject to a 20% of portfolio assets limit, however, 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. A savings institution must
maintain its status as a Qualified Thrift Lender for nine out of every 12
months. A savings institution that fails to maintain Qualified Thrift Lender
status will be permitted to requalify once and if its fails the Qualified Thrift
Lender Test a second time, it will become immediately subject to all penalties
as if all time limits on such penalties had expired. Failure to qualify as a
Qualified Thrift Lender results in a number of sanctions, including the
imposition of certain operating restrictions imposed on national banks and a
restriction on obtaining additional advances from the Federal Home Loan Bank
System. Upon failure to qualify as a Qualified Thrift Lender for two years, a
savings institution must convert to a commercial bank.

         At December 31, 1996, approximately 86% and 94% of the Bank's and
Association's respective assets were invested in Qualified Thrift Investments as
currently defined, substantially in excess of the percentage required to qualify
them as Qualified Thrift Lenders.

         Regulatory Capital Requirements. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to at least 1.5% of adjusted
total assets, "core" capital equal to at least 3% of adjusted total assets and
"total" capital, a combination of core and "supplementary" capital, equal to at
least 8% of "risk-weighted" assets. In addition, the OTS has recently adopted
regulations which impose certain restrictions on savings institutions 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). See "-- Prompt Corrective
Regulatory Action." For purposes of the regulation, Tier 1 capital has the same
definition as core capital which is defined as common shareholders' 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


                                      34
<PAGE>
 
pledged deposits and "qualifying supervisory goodwill." Core capital is
generally reduced by the amount of the savings institution's intangible assets
for which no market exists. Limited exceptions to the deduction of intangible
assets are provided for purchased mortgage servicing rights and qualifying
supervisory goodwill. Tangible capital is given the same definition as core
capital but does not include qualifying supervisory goodwill and is reduced by
the amount of all the savings institution's intangible assets with only a
limited exception for purchased mortgage servicing rights. Both core and
tangible capital are further reduced by an amount equal to the savings
institution's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks, unless the subsidiaries are engaged in
activities undertaken as agent for customers or in mortgage banking activities,
or the subsidiaries are depository institutions or holding companies therefor.

         Adjusted total assets are a savings institution's consolidated total
assets, as determined under generally accepted accounting principles, adjusted
for certain goodwill amounts, 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
deduction of its debt and equity investments. Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings institution's investments in subsidiaries that must be netted against
capital under the capital rules and, for purposes of the core capital
requirement, by qualifying supervisory goodwill.

         In determining compliance with the risk-based capital requirement, a
savings institution is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
saving 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
loss allowances. Total core and supplementary capital are reduced by the amount
of certain high loan-to-value ratio land loans and non-residential construction
loans, and equity investments other than those deducted from core and tangible
capital.

         The risk-based capital requirement is measured against the amount of
risk-weighted assets which equals the sum of the amount of each asset and
credit-equivalent amount of each off-balance sheet item after such asset or item
is multiplied by an assigned risk weight. Under the OTS risk-weighting system,
cash and securities backed by the

                                      35
<PAGE>
 
full faith and credit of the U.S. government are given a 0% risk weight.
Mortgage-backed securities that qualify under the Secondary Mortgage Enhancement
Act, including those issued, or fully guaranteed as to principal and interest,
by the Federal National Mortgage Association or the 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 pre-sold to home purchasers are assigned a risk weight of
50%. Consumer loans and residential construction loans are assigned a risk
weight of 100%.

         In determining compliance with the regulatory capital standards, all of
a savings institution's investments in and extensions of credit to any
subsidiary engaged in activities not permissible for a national bank are to be
deducted from the savings institution's capital. Certain subsidiaries are
exempted from this treatment, including any subsidiary engaged in impermissible
activities solely as agent for its customers (unless the FDIC determines
otherwise), subsidiaries engaged solely in mortgage banking, and subsidiary
depository institutions and holding companies therefor that were acquired prior
to May 1, 1989. At December 31, 1996, the Bank had $3.2 million, or 9% of its
total regulatory capital, invested in or lent to its subsidiary, AFS, which is
indirectly engaged in insurance underwriting activities not permissible to
national banks. Due to the relatively small percentage of the Bank's capital
invested in or lent to its subsidiary, the Bank does not anticipate that the
required deductions described above will have a material effect on the Bank's
capital or that the subsidiary will cease its insurance agency activities.

                                      36
<PAGE>
 
         The table below represents the Institutions' historical capital
position relative to their various minimum regulatory capital requirements at
December 31, 1996.

<TABLE> 
<CAPTION> 
                                                       The Bank                         The Association
                                                  -------------------                 -------------------
                                                              Percent                              Percent
                                                                 of                                   of
                                              Amount          Assets(1)            Amount          Assets(1)
                                              ------          ---------            ------          ---------
                                                                   (Dollars in thousands)
<S>                                           <C>             <C>                  <C>             <C>    
Tangible Capital...........................   $  35,828         11.0%              $   5,295           7.3%
Tangible Capital Requirement...............       4,857          1.5                   1,088           1.5
                                              ---------        -----               ---------        ------
  Excess...................................   $  30,971          9.5%              $   4,207           5.8%
                                              =========        =====               =========        ======

Core Capital...............................   $  35,828         11.0%              $   5,295           7.3%
Core Capital Requirement...................       9,715          3.0                   2,176           3.0
                                              ---------        -----               ---------        ------
  Excess...................................   $  26,113          8.0%              $   3,119           4.3%
                                              =========        =====               =========        ======

Total Capital (i.e., Core and

  Supplementary Capital)...................   $  36,237         20.0%              $   5,475          16.0%
Risk-Based Capital Requirement.............      14,482          8.0                   2,743           8.0
                                              ---------        -----               ---------        ------
  Excess...................................   $  21,755         12.0%              $   2,732           8.0%
                                              =========        =====               =========        ======

</TABLE> 
-------------------------
(1)      Based on adjusted total assets for purposes of the tangible capital and
         core capital requirements, and risk-weighted assets for purposes of the
         risk-based capital requirement.

         The OTS has proposed an amendment to its capital regulations
establishing a minimum core capital ratio of 3% for savings institutions rated
composite 1 under the OTS rating system. For all other savings institutions, the
minimum core capital ratio will be from 4% to 5%. In determining the amount of
additional core capital, the OTS will assess both the quality of risk management
systems and the level of overall risk in each individual savings institution
through the supervisory process on a case-by-case basis. As a result, while the
exact effect on the Institutions cannot be predicted at this time, based on the
OTS proposal, it is anticipated that the Bank's and Association's core capital
requirements could increase to between 4% and 5%.

         The OTS requires savings institutions with more than a "normal" level
of interest rate risk to maintain additional total capital. A savings
institution's interest rate risk is 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

                                      37
<PAGE>
 
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
two percent of the current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is 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 calculates 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. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS will require any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. Based upon the
Institutions' current level of interest rate risk exposure, neither is subject
to additional capital requirements.

         In addition to requiring generally applicable capital standards for
savings institutions, the Director of 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 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 an order may be enforced in the same manner as
an order issued by the FDIC.

         Loans-to-One-Borrower Limitations.  Savings institutions generally are 
subject to the lending limits applicable to national banks.  With certain 
limited exceptions, an institution's loans and extensions of credit

                                      38
<PAGE>
 
outstanding at one time to a person and not fully secured shall not exceed 15%
of the unimpaired capital and surplus of the savings institution on an unsecured
basis. Loans and extensions of credit fully secured by certain readily
marketable collateral may represent an additional 10% of unimpaired capital and
surplus. Savings institutions are additionally authorized to make loans to one
borrower, for any purpose, in an amount not to exceed $500,000 or, by order of
the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30%
of unimpaired capital and surplus to develop residential housing, provided: (i)
the purchase price of each single-family dwelling in the development does not
exceed $500,000; (ii) the savings institution is in compliance with the fully
phased-in regulatory capital standards; (iii) the loans comply with applicable
loan-to-value requirements; and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus. A savings
institution is also authorized to make loans to one borrower to finance the sale
of real property acquired in satisfaction of debts in an amount up to 50% of
unimpaired capital and surplus. The lending limits generally do not apply to
purchase money mortgage notes taken from the purchaser of real estate acquired
by the institution in satisfaction of debts previously contracted if no new
funds are advanced to the borrower and the savings institution is not placed in
a more detrimental position as a result of the sale. Certain types of loans are
exempted from the lending limits, including loans secured by savings deposits.

         Management does not believe the foregoing loans-to-one-borrower limits
will have a substantial impact on the Institutions, except in the event of the
extension of lines of credit to borrowers who are in excess of the loans-to-
one-borrower limits. As to such borrowers, the Institutions would be obliged to
sell existing loans, enter into participation agreements, or not enter into any
additional loans pending reduction of outstanding loan balances with such
borrowers, before extending additional lines of credit. At December 31, 1996,
the maximum amounts the Bank and Association could lend to one borrower under
the 15% standard were $5.4 million and $800,000, respectively. At that date, the
Bank's and Association's largest loans to one borrower were $1.6 million and
$600,000, respectively.

         Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves equal to 3% of
the first $49.3 million of transaction accounts, plus 10% of the remainder.
These percentages are subject to adjustment by the Federal Reserve Board.
Because required reserves

                                      39
<PAGE>
 
must be maintained in the form of vault cash or in a noninterest-bearing 
account at a Federal Reserve Bank, theeffect of the reserve requirement is to 
reduce the amount of the institution's interest-earning assets.  At December
31, 1996, the Institutions met their respective reserve requirements.

         Savings and Loan Holding Companies. Since its acquisition of all of the
Bank's stock in March 1990, the Company has been a savings and loan holding
company within the meaning of the Home Owners' Loan Act. As such, the Company is
registered with the OTS and is subject to regulation, examination, supervision
and reporting requirements. Upon its acquisition of the Association in August
1992, the Company became a multiple savings and loan holding company subject to
additional regulatory requirements. As subsidiaries of the Company, the
Institutions are subject to certain restrictions in their dealings with the
Company and its affiliates.

         The Home Owners' Loan Act generally prohibits a savings and loan
holding company, without prior approval of the Director of the OTS, from (i)
acquiring control of any other savings institution or savings and loan holding
company or acquiring all or substantially all of the assets thereof, or (ii)
acquiring or retaining more than 5% of the voting shares of a savings
institution or holding company thereof which is not a subsidiary. A savings and
loan holding company may not acquire as a separate subsidiary savings
institution which has principal offices outside of the state where the principal
office of its subsidiary institution is located, except (i) in the case of
certain emergency acquisitions approved by the FDIC, (ii) if the holding company
controlled (as defined) such institutions as of March 5, 1987, or (iii) when the
statutes of the state where an institution to be acquired is located
specifically authorize such an acquisition. Under certain circumstances a
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15% of previously unissued voting shares of an
undercapitalized savings institution for cash without that savings institution
being deemed controlled by the holding company. Except with the prior approval
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary of such holding company, or any other savings and loan holding
company.

         A bank holding company, upon receipt of appropriate approvals from the
Federal Reserve Board and the Director of the OTS, is authorized to acquire
control of any savings institution or holding company thereof wherever

                                      40
<PAGE>
 
located. Similarly, a savings and loan holding company may acquire control of a
bank. A savings institution acquired by a bank holding company (i) may, so long
as the thrift continues to meet the qualified thrift lender test, continue to
branch to the same extent as permitted to other non-affiliated savings
institutions similarly chartered in the state, and (ii) cannot continue any
non-banking activities not authorized for bank holding companies. Savings
institutions acquired by a bank holding company may, if located in a state where
the bank holding company is legally authorized to acquire a bank, be converted
to the status of a bank but deposit insurance assessments and payments continue
to be paid by the institution to the SAIF. A savings institution so converted to
a bank becomes subject to the branching restrictions applicable to banks. Under
certain circumstances, a savings institution acquired by a bank holding company
may be merged with an existing bank subsidiary of the holding company (deposit
insurance assessments and payments attributable to the merged savings
institution will continue to be those of and paid to SAIF pursuant to a
prescribed formula).

         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 and any companies
(including other savings institutions) 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 other types of transactions. In addition to the
restrictions imposed by Section 23A and 23B, no savings institution may (i) loan
or otherwise extend credit to an affiliate, except for an 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

                                      41
<PAGE>
 
savings institution. The Director of the OTS is granted the authority to impose
more stringent restrictions when appropriate for reasons of safety and
soundness.

         Extensions of credit by savings institutions to executive officers,
directors and principal shareholders are subject to the restrictions set forth
in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder. Under Section 22(h), loans to an executive officer and
to holders of more than 10% of any class of a savings institution's voting
stock, and certain affiliated entities of either, may not exceed together with
all other outstanding loans to such person and affiliated entities the
institution's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and holders
of more than 10% of any class of a savings institution's voting stock, and their
respective affiliates, unless such is approved in advance by a majority of the
board of directors of the institution with an "interested" director not
participating in the voting. The Federal Reserve Board has prescribed 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)
and Regulation O require that loans to directors, executive officers and
principal shareholders be made on terms substantially the same as offered in
comparable transactions to other persons. Section 22(h) also generally prohibits
a savings 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 on loans to executive
officers (as implemented by the Federal Reserve Board's Regulation O) 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 that loans to executive officers or depository institutions not be made
on terms more favorable than those afforded than other borrowers, requires
approval by the board of directors of a depository institution for extensions 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 prohibits a depository institution from
extending credit to or offering any other services, or fixing or varying the

                                      42
<PAGE>
 
consideration for such extensions 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. Section 1972 also 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.

         Prior to its acquisition of the Association in August 1992, the Company
operated as a unitary savings and loan holding company. There generally were no
restrictions on the business activities of the Company as a unitary savings and
loan holding company, or those of the Company's nonbanking subsidiaries. Upon
the Company's acquisition of the Association, the Company became a multiple
savings and loan holding company. As a result, the activities of the Company and
any of its subsidiaries (other than the Bank and Association) have thereafter
been subject to certain restrictions. The Home Owners' Loan Act limits the
business activities of multiple savings and loan holding companies and their
nonbanking subsidiaries to (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 previously directly authorized by the
former Federal Savings and Loan Insurance Corporation by regulation as of March
6, 1987 to be engaged in by multiple savings and loan holding companies or (vii)
subject to prior approval of the OTS, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the OTS
prohibits or limits such activities for savings and loan holding companies. The
activities authorized by the OTS for multiple savings and loan holding companies
as of March 6, 1987 include a variety of activities including, among other
things, the origination, purchase, sale and servicing of various loans, the
provision of clerical services primarily for affiliates, the provision of
certain other management services to affiliates and other multiple holding
companies and the underwriting or reinsuring of credit life insurance in
connection with extensions of credit by a savings association subsidiary or
another savings and loan holding company or subsidiary thereof. The OTS

                                      43
<PAGE>
 
has also approved various real estate-related activities for multiple holding
companies including the acquisition of unimproved lots or the acquisition of
unimproved real estate for prompt development and subdivision, the development,
subdivision and construction of improvement of acquired real estate for sale or
rental, the acquisition of improved real estate and mobile homes to be held for
rental or sale, the acquisition of improved real estate for remodeling,
rehabilitation, modernization, renovation or demolition or rebuilding for sale
or rental and the maintenance and management of improved real estate. In the
event any savings association subsidiary of a multiple savings and loan holding
company fails to satisfy the Qualified Thrift Lender test and does not requalify
within one year, however, the holding company would be required to register as a
bank holding company and become subject to the more stringent activity
limitations applicable to bank holding companies.

         In addition to the foregoing restrictions, if the Director of 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
institutions, the Director of the OTS may impose such restrictions as deemed
necessary to address such risk, including limiting (i) payment of dividends by
the savings institution(s), (ii) transactions between the savings institution(s)
and their affiliates, and (iii) any activities of the savings institution(s)
that might create a serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution. 

Federal and State Taxation

         The Company and its subsidiaries file a consolidated federal income tax
return on a calendar year end. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur. Any income of the Company and its other subsidiaries would
not be subject to the bad debt deductions allowed to the Institutions, whether
or not consolidated tax returns are filed. The Institutions, however, must
reduce their taxable incomes for purposes of computing their bad debt reserve
deductions under the percentage of taxable income method by their allocable
shares of loss attributable to the activities of non-thrift members of the
consolidated group if those members' activities are functionally related to the
activities of the Institutions.

                                      44
<PAGE>
 
         Federal Taxation. Thrift institutions are subject to the provisions of
the Internal Revenue Code of 1986 (the "Code") in the same general manner as
other corporations. However, institutions such as the Bank and the Association
which meet certain definitional tests and other conditions prescribed by the
Code may benefit from certain favorable provisions regarding their deductions
from taxable income for annual additions to their bad debt reserve. For purposes
of the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. For tax years beginning before January 1, 1996, the amount of
the bad debt reserve deduction with respect to qualifying real property loans
may be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method"). The Bank and the Association
historically used whichever method resulted in the highest bad debt reserve
deduction in any given year.

         Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank and the Association will no longer be
allowed to use the percentage of taxable income method for tax loan loss
provisions, but would be allowed to use the experience method of accounting for
bad debts. There will be no future effect on net income from the recapture
because the taxes on these bad debts reserves has already been accrued as a
deferred tax liability.

         The legislation provides for a suspension of this recapture if the
institution meets the "residential loan requirement." This requirement is met if
the principal amount of residential loans that the institution originates during
its first taxable year after December 31, 1995, exceeds the average of the
principal amounts of residential loans made by the institution during the six
most recent taxable years beginning before January 1, 1996. If the requirement
is met, the recapture is suspended until a taxable year beginning December 31,
1997, or until the residential loan requirement is not met in a subsequent year.
The Bank and the Association expect to meet this requirement for the taxable
year ended December 31, 1996.

                                      45
<PAGE>
 
         Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans was computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments, effective for taxable years beginning after 1986. The
allowable deduction under the percentage of taxable income method (the
"percentage bad debt deduction") for taxable years beginning before 1987 was
scaled downward in the event that less than 82% of the total dollar amount of
the assets of an association were within certain designated categories. When the
percentage method bad debt deduction was lowered to 8%, the 82% qualifying
assets requirement was lowered to 60%. For all taxable years, there is no
deduction in the event that less than 60% of the total dollar amount of the
assets of an association falls within such categories. Moreover, in such case,
the Bank could be required to recapture, generally over a period of up to four
years, their existing bad debt reserve. As of December 31, 1996, more than the
required amount of the Bank's total assets fell within such category.

         The bad debt deduction under the percentage of taxable income method
was subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not have exceeded the amount
necessary to increase the balance of such reserve at the close of the taxable
year to 6% of such loans outstanding at the end of the taxable year. Further,
the addition to the reserve for losses on qualifying real property loans could
not have exceeded the amount which, when added to that year's addition to the
bad debt reserve for losses on nonqualifying loans, equaled the amount by which
12% of total deposits or withdrawable accounts of depositors at year-end
exceeded the sum of surplus, undivided profits and reserves at the beginning of
the year. Finally, the percentage bad debt deduction under the percentage of
taxable income method was reduced by the deduction for losses on nonqualifying
loans.

         Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.

         The Company's federal income tax returns have been audited through
1988.

                                      46
<PAGE>
 
         State Taxation. The State of Indiana imposes a franchise tax which is
assessed on qualifying financial institutions, such as the Bank. The tax is
based upon federal taxable income before net operating loss carryforward
deductions (adjusted for certain Indiana modifications) and is levied at a rate
of 8.5% of adjusted taxable income. The Association is subject to an Ohio
franchise tax based on its net worth plus certain reserve amounts. Total net
worth for this purpose is reduced by certain exempt assets. The resulting net
taxable value is taxed at a rate of 1.5%.

         The Company's Indiana income tax returns have been audited through
1989, and its Ohio franchise tax returns have not been audited during the past
five years. For additional information, see Note 10 of the Consolidated
Financial Statements in Part II of this Report.

Employees

         As of December 31, 1996, the Company and subsidiaries had approximately
141 full-time and 21 part-time employees. The employees are not represented by a
collective bargaining agreement. Management believes the Company and its
subsidiaries enjoy good relations with their personnel. 

Executive Officers

<TABLE> 
<CAPTION> 

                                    Age at
Name                           December 31, 1996             Principal Position
----                           -----------------             ------------------
<S>                            <C>                      <C> 
Harry J. Bailey                       54                President and Chief Executive
                                                        Officer of the Bank

Ronald M. Holloway                    47                Senior Vice President and Chief
                                                        Lending Officer of the Bank

Ralph E. Kerwin                       60                Senior Vice President, Deposit
                                                        Services of the Bank

Michael C. Olson                      47                President and Chief Executive
                                                        Officer of the Association

Howard J. Pruim                       52                Senior Vice President - Secretary/Treasurer
                                                        and Chief Financial Officer of the Bank

Nancy A. Rogers                       54                Senior Vice President - Marketing Services
                                                        of the Bank

Edward J. Wooton                      43                Senior Vice President - Subsidiaries
                                                        of the Bank

Jan F. Wright                         53                Senior Vice President - Branch Operations
                                                        of the Bank
</TABLE> 


                                      47
<PAGE>
 
         Unless otherwise noted, all officers have held the position described
below for at least the past five years.

         Harry J. Bailey has been President of the Company and the Bank since
May 1990 and was appointed Chief Executive Officer in December 1990. Mr. Bailey
had been the Executive Vice President and Chief Operating Officer of the Company
since its formation in 1989 and of the Bank since February 1984. He has been a
director of the Bank since 1987 and a director of the Company since its
formation.

         Ronald M. Holloway has been employed by the Bank since 1973 and was
elected Senior Vice President and Chief Lending Officer in December 1995. Mr.
Holloway previously was responsible for the loan servicing department of the
Bank.

         Ralph E. Kerwin has been employed by the Bank since 1964 and heads the
funds acquisition function as Senior Vice President - Deposit Services.

         Michael C. Olson was elected to the position of President and Chief
Executive Officer of the Association in March 1995. He was formerly Senior Vice
President - Branch Operations and Marketing of the Bank and the Chief Executive
Officer of Citizens Federal prior to its merger with the Bank in 1988. He has
been employed in the thrift industry since 1974.

         Howard J. Pruim, a certified public accountant, has been Senior Vice
President - Treasurer and Chief Financial Officer of the Bank since 1973 and was
elected Corporate Secretary in 1991. He also directs the accounting, data
processing and personnel functions. For the previous seven years, he was with
Ernst and Young as an auditor.

         Nancy A. Rogers was elected as Senior Vice President - Marketing
Services in March 1995. She has been employed at the Bank since 1964 and most
recently served as Vice President and Director of Advertising and Public
Relations.

         Edward J. Wooton joined the staff of the Bank in August 1985 as Senior
Vice President - Subsidiaries and directs diversified operations of the Bank. He
came to the Bank from the Management Advisory Services Group of Deloitte and
Touche, and prior to that he was an operations officer of a thrift institution
in the Chicago area.

         Jan F. Wright was elected as Senior Vice President - Branch Operations
in March 1995 and has been employed by the Bank since 1972. He previously held
the position of Vice President and Director of Loan Origination and Processing.

                                      48
<PAGE>
 
Item 2.  Properties
-------------------

Offices and Other Material Properties

         The following table sets forth the location of the Company's office
facilities at December 31, 1996 and certain other information relating to these
properties at that date.

<TABLE> 
<CAPTION> 
                                         Year           Total             Net          Owned/          Square
                                       Acquired      Investment       Book Value       Leased           Feet
                                       --------      ----------       ----------       ------          ------
<S>                                    <C>          <C>               <C>              <C>             <C> 
The Bank:

  Main Office
  2118 Bundy Avenue
  New Castle, Indiana.............       1958       $  2,995,796      $     960,798     Owned           20,500

  1311 Broad Street
  New Castle, Indiana.............       1890          1,402,372            505,433     Owned           18,000

  956 North Beechwood Street
  Middletown, Indiana.............       1971            448,559            136,311     Owned            5,500

  22 North Jefferson
  Knightstown, Indiana............       1979            578,580            223,462     Owned            3,400

  1810 North State Street
  Greenfield, Indiana.............       1995          1,530,657          1,337,824     Owned            5,800

  99 Dan Jones Road
  Avon, Indiana...................       1995          1,351,586          1,341,425     Owned           12,600

  1754 East 53rd Street
  Anderson, Indiana...............       1993            400,417            338,797     Owned            1,500

The Association:

  7200 Blue Ash Road
  Cincinnati, Ohio................       1992            853,284            661,960     Owned            9,100

  1171 East Kemper Road
  Cincinnati, Ohio
  (Loan production office)........       1996             23,712             21,624    Leased            2,600

Ameriana Insurance Agency
  2020 S. Memorial Drive
  New Castle, Indiana.............       1987            197,969             93,111    Leased            1,200

  812 Central Avenue
  Anderson, Indiana...............       1995                838                587    Leased              800
                                                    ------------       ------------

        Total.....................                  $  9,783,770       $  5,621,332
                                                    ============       ============
</TABLE> 


                                                        49
<PAGE>
 
         The Institutions use on-line processing terminals. Most of the data
processing is done by an in-house data processing center. At December 31, 1996,
the total net book value of the Company's offices and equipment (including
leasehold improvements) was $5.6 million. 

Item 3. Legal Proceedings
-------------------------

         The Company and its subsidiaries are not a party to any material
pending legal proceedings. See Note 2 to the Consolidated Financial Statements
in Part II of this Report.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

                                    PART II

Item 5.  Market for the Registrant's Common Stock and Related Security Holder
-----------------------------------------------------------------------------
Matters
-------

         The information set forth (i) in Note 16 of the Notes to Consolidated
Financial Statements under "Item 7. Financial Statements" and (ii) under the
section titled "Market Information" in the Annual Report, which section is
included in the information furnished as Exhibit 13 hereof, is incorporated
herein by reference.

Item 6.  Selected Financial Data
--------------------------------

         The information set forth under the section titled "Selected Financial
Data" in the Annual Report, which section is included in the information
furnished as Exhibit 13 hereof, is incorporated herein by reference.

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

         The information set forth under the section titled "Management's
Discussion and Analysis" in the Annual Report, which section is included in the
information furnished as Exhibit 13 hereof, is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data
----------------------------------------------------

         The Independent Auditor's Report and related consolidated financial
statements and notes in the Annual Report, which report, statements and notes
are included in the information furnished as Exhibit 13 hereof, are incorporated
herein by reference.

                                      50
<PAGE>
 
Item 9.  Changes in and Disagreements with Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

         Not applicable.

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant
------------------------------------------------------------

         For information concerning the directors of the Company, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Proxy Statement is incorporated herein by reference. For
information concerning the executive officers of the Company, see "Item 1.
Business -- Executive Officers" under Part I of the Report, which is
incorporated herein by reference.

Item 11.  Executive Compensation
--------------------------------

         The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         (a)      Security Ownership of Certain Beneficial Owners

                  Information required by this item is incorporated herein by
                  reference to the section captioned "Voting Securities and
                  Security Ownership" in the Proxy Statement.

         (b)      Security Ownership of Management

                  Information required by this item is incorporated herein by
                  reference to the section captioned "Voting Securities and
                  Security Ownership" in the Proxy Statement.

         (c)      Changes In Control

                  The Company is not aware of any arrangements, including any
                  pledge by any person of securities of the Company, the
                  operation of which may at a subsequent date result in a change
                  in control of the Company.

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The information required by this item is incorporated herein by
reference to the section captioned "Transactions with Management" in the Proxy
Statement.

                                      51
<PAGE>
 
                                    PART IV

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

         1.       Report of Independent Auditor

         2.       Financial Statements

                  (a)        Consolidated Statements of Condition at December
                             31, 1996 and 1995

                  (b)        Consolidated Statements of Income for Each of the
                             Three Years in the Period Ended December 31, 1996

                  (c)        Consolidated Statements of Shareholders' Equity for
                             Each of the Three Years in the Period Ended
                             December 31, 1996

                  (d)        Consolidated Statements of Cash Flows for Each of
                             the Three Years in the Period Ended December 31,
                             1996

                  (e)        Notes to Consolidated Financial Statements

                  All schedules for which provision is made in the applicable
                  accounting regulations are either not required under the
                  related instructions or are inapplicable, and therefore have
                  been omitted.

         3.       Exhibits

                  3          Ameriana Bancorp Articles of Incorporation and
                             Bylaws -- incorporated herein by reference to the
                             Company's Registration Statement on Form S-4 filed
                             with the SEC on September 18, 1989

                  10.1       Ameriana Bancorp stock option plans and other
                             option agreements -- 1987 Stock Option Plan
                             incorporated herein by reference to the Company's
                             Registration Statement on Form S-8 filed with the
                             SEC on March 30, 1990; 1996 Stock Option and
                             Incentive Plan incorporated herein by reference to
                             the Company's Registration Statement on Form S-8
                             filed with the SEC on May 17, 1996; other option
                             agreements with Charles M. Drackett, Jr., Michael
                             E. Kent and Ronald R. Pritzke incorporated herein
                             by reference to the Company's Registration
                             Statement on Form S-8 filed with the SEC on May 17,
                             1996.

                                      52
<PAGE>
 
                  10.2       Ameriana Bank, F.S.B. Employment Agreements with
                             Harry J. Bailey, Howard J. Pruim and Edward J.
                             Wooton -- agreements with Messrs. Bailey and Pruim
                             incorporated herein by reference to the Company's
                             Annual Report on Form 10-K filed with the SEC on
                             March 25, 1994; agreement with Mr. Wooton
                             incorporated herein by reference to the Company's
                             Annual Report on Form 10-K filed with the SEC on
                             March 28, 1995

                  10.3       Ameriana Bancorp Consulting Agreement with Paul W.
                             Prior -- incorporated herein by reference to the
                             Company's Annual Report on Form 10-K filed with the
                             SEC on March 28, 1991.

                  11         Statement re Computation of Earnings Per Share

                  13         Portions of Annual Report

                  21         Subsidiaries

                  23         Consent of Geo. S. Olive & Co. LLC

                  27         Financial Data Schedule

         4.       Reports on Form 8-K

         The Company did not file a current report on Form 8-K during the fourth
quarter of the fiscal year covered by this report.

                                      53
<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, as of the date set
forth below.

                                       AMERIANA BANCORP

Date: March 20, 1997                By: /s/ Harry J. Bailey
                                       ------------------------------------
                                       Harry J. Bailey
                                       President and
                                       Chief Executive Officer
                                       (Duly Authorized Representative)

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant in
the capacities indicated as of the date set forth above.


By: /s/ Paul W. Prior                      By: /s/ Harry J. Bailey
   ----------------------------               --------------------------------
   Paul W. Prior                              Harry J. Bailey
   Chairman of the Board                      President, Chief Executive
                                              Officer and a Director
                                              (Principal Executive Officer)


By: /s/ Howard J. Pruim                    By: /s/ Donald C. Danielson
   -------------------------------            --------------------------------
   Howard J. Pruim                            Donald C. Danielson
   Senior Vice President and                  Director
   Chief Financial Officer
   (Principal Financial and
   Accounting Officer)


By: /s/ Charles M. Drackett, Jr.           By: /s/ R. Scott Hayes
   -------------------------------            --------------------------------
   Charles M. Drackett, Jr.                   R. Scott Hayes
   Director                                   Director


By: /s/ Michael E. Kent                    By: /s/ Ronald R. Pritzke
   -------------------------------            --------------------------------
   Michael E. Kent                            Ronald R. Pritzke
   Director                                   Director
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 

Exhibit
-------

  <S>                  <C> 
  3                    Ameriana Bancorp Articles of Incorporation and Bylaws --
                       incorporated herein by reference to the Company's
                       Registration Statement on Form S-4 filed with the SEC on
                       September 18, 1989

  10.1                 Ameriana Bancorp stock option plans and other option
                       agreements -- 1987 Stock Option Plan incorporated herein
                       by reference to the Company's Registration Statement on
                       Form S-8 filed with the SEC on March 30, 1990; 1996 Stock
                       Option and Incentive Plan incorporated herein by
                       reference to the Company's Registration Statement on 
                       Form S-8 filed with the SEC on May 17, 1996; other option
                       agreements with Charles M. Drackett, Jr., Michael E. Kent
                       and Ronald R. Pritzke incorporated herein by reference to
                       the Company's Registration Statement on Form S-8 filed
                       with the SEC on May 17, 1996

  10.2                 Ameriana Bank, F.S.B. Employment Agreements with Harry J.
                       Bailey, Howard J. Pruim and Edward J. Wooton --
                       agreements with Messrs. Bailey and Pruim incorporated
                       herein by reference to the Company's Annual Report on
                       Form 10-K filed with the SEC on March 25, 1994; agreement
                       with Mr. Wooton incorporated herein by reference to the
                       Company's Annual Report on Form 10-K filed with the SEC
                       on March 28, 1995

  10.3                 Ameriana Bancorp Consulting Agreement with Paul W. 
                       Prior -- incorporated by reference to the Company's
                       Annual Report on Form 10-K filed with the SEC on 
                       March 28, 1991.

  11                   Computation of Earnings Per Share

  13                   Portions of Annual Report

  21                   Subsidiaries

  23                   Consent of Geo. S. Olive & Co. LLC

  27                   Financial Data Schedule
</TABLE>