UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K
                                   (Mark One)

[X]  Annual report  pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 For the fiscal year ended June 30, 1997

                                       or

[ ]  Transition  report  pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange    Act    of    1934    For    the    transition    period    from
     _______________to__________________

                        Commission File Number : 0-17915

                                   1ST BANCORP
             (Exact name of registrant as specified in its charter)

          Indiana                                          35-1775411
(State or other jurisdiction                              (IRS Employer
of incorporation or organization)                      Identification Number)

                             101 North Third Street
                            Vincennes, Indiana 47591
               (Address of Principal executive offices) (Zip Code)

        Registrant's telephone number, including area code: (812)885-2255

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

           Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock ($1.00 par value)
                                 Title of Class

Indicate by check mark whether the registrant (1) has filed all reports required
by  Section  13 or 15(d)  of the  Securities  Exchange  Act of 1934  during  the
preceding 12 months 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 Regulations S-K (Para.  229.405 of this chapter) 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. |__|

State the aggregate  market value of the voting stock held by  nonaffiliates  of
the registrant: $17,022,704 as of September 9, 1997.

Number of shares of Common Stock outstanding as of September 9, 1997:  691,460

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Annual Report to  Shareholders  for the year ended June
30, 1997 are incorporated  into Part II. Portions of the Proxy Statement for the
1997 Annual Meeting of Stockholders are incorporated into Part I and Part III.


<PAGE>

                                   1ST BANCORP

                                    FORM 10-K

                                      INDEX

                                                                        Page No.

Forward Looking Statement..............................................     3

Part I
Item  1.  Business.....................................................     3

Item  2.  Properties...................................................    37

Item  3.  Proceedings..................................................    37

Item  4.  Submission of Matters to a Vote of Security Holders..........    37

Item  4.5 Executive Officers of the Corporation........................    37

Part II

Item  5.   Market for Registrant's Common Equity and Related
             Shareholder Matters.......................................    38

Item  6.   Selected Financial Data.....................................    38

Item  7.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations.......................    38

Item 7A.   Quantitative and Qualitative Disclosures 
               about Market Risks......................................    38

Item  8.   Financial Statements and Supplementary Data.................    40

Item  9.   Changes in and Disagreements with Accountants on 
               Accounting and Financial Disclosures....................    40

Part III

Item 10.   Directors and Executive Officers of the Registrant..........    41

Item 11.   Executive Compensation......................................    41

Item 12.   Security Ownership of Certain Beneficial 
               Ownership and Management................................    41

Item 13.   Certain Relationships and Related Transactions..............    41

Part IV

Item 14.   Exhibits, Financial Statement Schedules and 
               Reports on Form 8-K.....................................    41

Signatures.............................................................    43



                                       2
<PAGE>
                           FORWARD LOOKING STATEMENTS

        This Annual Report on Form 10-K ("Form 10-K") contains  statements which
constitute  forward  looking  statements  within  the  meaning  of  the  Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include  statements  regarding the intent,  belief,
outlook,  estimate or expectations  of the  Corporation (as defined below),  its
directors or its officers primarily with respect to future events and the future
financial  performance  of the  Corporation.  Readers  of  this  Form  10-K  are
cautioned that any such forward looking  statements are not guarantees of future
events or  performance  and  involve  risks and  uncertainties,  and that actual
results may differ materially from those in the forward looking  statements as a
result of various factors. The accompanying  information  contained in this Form
10-K  identifies  important  factors  that could cause such  differences.  These
factors include  changes in interest rates;  loss of deposits and loan demand to
other  savings and  financial  institutions;  substantial  changes in  financial
markets;  changes in real estate values and the real estate  market;  regulatory
changes;  or the  deterioration in the financial  strength of the  Corporation's
loan customers.

                                     PART I

Item 1.  Business

General

        1ST  BANCORP,   an  Indiana   Corporation  (the  "Corporation"  or  "1ST
BANCORP"),  is a nondiversified,  unitary savings and loan holding company.  The
principal  asset of the  Corporation is the  outstanding  stock of First Federal
Bank, A Federal  Savings  Bank,  ("First  Federal" or the "Bank") and the Bank's
subsidiary,   Financial   Services  of  Southern  Indiana   Corporation.   Other
subsidiaries of the Corporation  include First Financial  Insurance Agency, Inc.
("First  Financial"),  a full service insurance agency,  and First Title Company
("First Title"),  a currently  inactive company  incorporated for the purpose of
providing title search services for mortgage lenders.

        First  Federal  is a  federally-chartered  stock  savings  bank that was
converted to the stock form of ownership  and to a federal  savings bank in May,
1987.  The Bank is primarily  engaged in  attracting  deposits  from the general
public and applying these funds, together with borrowings, to the origination of
residential mortgage loans and consumer loans.

        First Federal's  revenue is primarily derived from interest on, and fees
received  in  connection  with,  real  estate  and  other  loans.  The Bank also
experienced  gains on the sale of its mortgage  loans as part of its  continuing
operations and asset/liability management efforts. The Bank's principal expenses
are interest on deposits and borrowings and general and administrative expenses.

        The principal  sources of funds for First Federal's  lending  activities
are its deposits,  amortization and prepayments of outstanding  loans,  sales of
mortgage  loans and borrowings  from the Federal Home Loan Bank of  Indianapolis
("FHLB" or "FHLB of Indianapolis").

        The  Bank's  deposits  are  insured  by the full faith and credit of the
United States government by the Federal Deposit Insurance Corporation's ("FDIC")
Savings Association  Insurance Fund ("SAIF").  Deposit accounts in First Federal
are  generally  insured by the SAIF to a maximum of  $100,000  for each  insured
depositor.  The Bank is a member of the FHLB of  Indianapolis  and is subject to
comprehensive regulation,  examination,  and supervision by the Office of Thrift
Supervision ("OTS") and the FDIC.



                                       3
<PAGE>

        First Federal  offers a full range of banking  services  through its two
banking offices located in Vincennes, Indiana.  Additionally,  the Bank operates
one loan origination office in Evansville Indiana.  During the fourth quarter of
fiscal  year 1997,  the Bank closed loan  origination  offices in  Indianapolis,
Indiana,  Louisville,  Kentucky, and suburbs of Cincinnati and Dayton, Ohio. One
additional loan  origination  office located in a suburb of Cleveland,  Ohio was
closed  earlier in fiscal year 1997.  The office  closures  were  undertaken  to
centralize all administrative loan functions in the Vincennes offices, to afford
more standardized  procedures and controls, and to decrease overhead expenses in
the nonconforming loan operations.

        The Bank's principal  market area is Knox County in Indiana.  The Bank's
deposits are obtained  primarily  from persons who are  residents of its primary
market area. However,  to supplement local deposits,  the Bank also makes use of
brokered  deposits which range in original maturity from one to three years with
rates ranging from 5.5% to 6.4%. The program serves as an alternative  source of
funds to compliment the borrowing program and retail savings programs offered in
the Bank's local market. The brokered funds enable the Bank to manage maturities
of its deposits in its effort to manage interest rate risk.

        During fiscal 1997, First Financial purchased the book of business of an
existing independent  insurance agency. The book of business was merged with the
existing customer base of First Financial. As a result of the acquisition, First
Financial  opened a full  service  insurance  office in  Princeton,  Indiana  in
addition to its existing full service office in Vincennes, Indiana.

Lending Activities

        General

        First Federal has traditionally  concentrated its lending  activities on
conventional first mortgage loans secured by residential property.  Conventional
loans are neither  insured by the  Federal  Housing  Administration  ("FHA") nor
partially guaranteed by the Veteran's  Administration  ("VA"). At June 30, 1997,
First Federal's net loan portfolio aggregated $146.8 million, representing 54.3%
of total assets at that date.  This compares to the Bank's net loan portfolio of
$150.7 million at June 30, 1996 representing 57.2% of total assets.

        The Bank has  historically  concentrated on the origination and purchase
of conforming conventional mortgage lending. This market is represented by loans
conforming to documentation and underwriting  standards  dictated by the Federal
Home Loan  Mortgage  Corporation  ("Freddie  Mac" or  "FHLMC")  and the  Federal
National Mortgage  Association  ("Fannie Mae" or "FNMA").  The Bank continues to
originate  conforming  loan  product  but in the past two fiscal  years has also
concentrated on the origination of nonconforming  mortgage loans.  Nonconforming
loans meet alternative documentation and underwriting requirements dictated by a
secondary  market made up of companies other than FHLMC and FNMA. Such loans are
made  to  a  broader   customer   base  and  are   graded   "A"   through   "D."
Creditworthiness,  collateral,  equity,  and other  factors  are  weighed in the
grading of the  nonconforming  loans and interest rates charged are commensurate
with risk.



                                       4
<PAGE>
        The Bank offers both fixed rate  mortgage and  adjustable  rate mortgage
("AML") loans. In addition to residential  real estate  lending,  as part of its
asset and liability  management  strategy,  First Federal  continues its lending
activities  in other  shorter-term  interest  rate  sensitive  loans,  including
consumer loans, which accounted for 8.7% of the total loan portfolio at June 30,
1997 as compared to 6.6% of the total loan portfolio at June 30, 1996.

        The following  table (which  excludes the loans held for sale portfolio)
sets forth the  composition  of the Bank's loan portfolio by type of loan at the
dates indicated:

<TABLE>
<CAPTION>
                                                                  At June 30,
-----------------------------------------------------------------------------------------------------------------
                                          1997            1996            1995            1994            1993
                                     ----------------------------------------------------------------------------
                                                                 (in thousands)
<S>                                     <C>             <C>             <C>             <C>             <C>     
Real estate loans:
     Mortgage                           $135,189        $141,247        $181,676        $153,251        $140,140
     Construction                          2,038           2,171           7,364          12,460           4,862
Consumer loans                             7,277           5,839          10,203           9,285           8,765
Other Loans                                5,471           4,171           6,859           6,775           4,889
                                     ----------------------------------------------------------------------------
                                         149,975         153,428         206,102         181,771         158,656
                                     ----------------------------------------------------------------------------

Undisbursed loans funds                   (1,536)         (1,297)         (3,038)         (7,707)         (1,495)
Deferred loan fees and unamortized
     premiums and discounts, net            (441)           (486)           (367)           (430)           (488)
Allowance for loan losses                 (1,158)           (896)           (878)           (817)           (892)
                                     ----------------------------------------------------------------------------
                                          (3,135)         (2,679)         (4,283)         (8,954)         (2,875)
                                     ----------------------------------------------------------------------------

Net loans receivable                    $146,840        $150,749        $201,819        $172,817        $155,781
                                     ============================================================================
</TABLE>

        Contractual Maturities of Loans

        The  following  table  summarizes  the  contractual  maturities of First
Federal's  loan  portfolio due for the fiscal  periods  indicated as of June 30,
1997 by type of loan:

                  Fiscal Periods Indicated as of June 30, 1997
<TABLE>
<CAPTION>
                            Balance
                          Outstanding                  More        More       More       More       More
                               at                     than 1      than 2     than 3     than 5     than 10
                            June 30,     One Year     Year to    Years to   Years to   Years to   Years to     More than
                              1997        or less     2 Years     3 Years    5 Years   10 Years   15 Years     15 Years
                          --------------------------------------------------------------------------------------------------
<S>                         <C>          <C>          <C>         <C>        <C>       <C>         <C>          <C>    
Real estate loans:
         Mortgage           $135,189     $1,813       $1,974      $2,148     $4,884    $16,531     $25,258      $82,581
         Construction          2,038      2,038            -           -         -           -           -            -
Consumer and Other Loans      12,748      1,429        1,570       1,726      3,981      4,042           -            -
                          ---------------------------------------------------------------------------------------------------

         Total              $149,975     $5,280       $3,544      $3,874     $8,865    $20,573    $25,258       $82,581
                          ===================================================================================================
</TABLE>


                                       5
<PAGE>

        Contractual  maturities  of loans do not reflect the average life of the
Bank's loan portfolio.  The average life of mortgage loans is substantially less
than their  contractual  terms  because of loan  prepayments  and  refinancings.
Scheduled  principal  amortization also reduces the average maturity of the loan
portfolio.  The average life of mortgage loans tends to increase,  however, when
current mortgage rates substantially exceed rates on existing mortgages.

        Adjustable- and Fixed-Rate Loans

        The  following  table  sets  forth by type of loan the  amount  of First
Federal's  fixed-rate  loans and adjustable rate mortgage loans ("AML") included
in its gross loans receivable:

<TABLE>
<CAPTION>
                                                                      At June 30,
-----------------------------------------------------------------------------------------------------------------
                                          1997            1996            1995            1994            1993
                                     ----------------------------------------------------------------------------
                                                               (in thousands)
<S>                                      <C>             <C>             <C>             <C>             <C>    
One-to-Four Family 
 Residential Mortgage Loans
     Fixed Rates                         $67,310         $54,212         $71,772         $64,294         $44,963
     Adjustable Rates                     60,767          81,051         107,849          92,492          90,957
                                     ----------------------------------------------------------------------------
                             Total      $128,077        $135,263        $179,621        $156,786        $135,920

Commercial Real Estate Loans
     Fixed Rates                           5,901           3,511           2,996           4,062           4,468
     Adjustable Rates                      3,249           4,644           6,423           4,863           4,614
                                     ----------------------------------------------------------------------------
                             Total        $9,150          $8,155          $9,419          $8,925          $9,082

Total Real Estate Loans
     Fixed Rates                          73,211          57,723          74,768          68,356          49,431
     Adjustable Rates                     64,016          85,695         114,272          97,355          95,571
                                     ----------------------------------------------------------------------------
                             Total      $137,227        $143,418        $189,040        $165,711        $145,002

Consumer & Other Loans
     Fixed Rates                           8,168           6,671          11,438          10,011           8,841
     Adjustable Rates                      4,580           3,339           5,624           6,049           4,813
                                     ----------------------------------------------------------------------------
                             Total       $12,748         $10,010         $17,062         $16,060         $13,654

Total Loans Receivable
     Fixed Rates                          81,379          64,394          86,206          78,367          58,272
     Adjustable Rates                     68,596          89,034         119,896         103,404         100,384
                                     ----------------------------------------------------------------------------
                             Total      $149,975        $153,428        $206,102        $181,771        $158,656
</TABLE>


        Residential Mortgage Loans

        To the  extent  deemed  appropriate,  in view of  market  forces,  First
Federal  intends to continue to originate  AMLs in order to reduce the impact of
rapid  increases  in market rates of interest on its  operations  and the market
value  of its  equity.  Although  critical  to  maintaining  an  asset/liability
matching  program and a reasonable  interest rate risk posture,  adjustable-rate
loans generally do not adjust as rapidly as changes in the Bank's cost of funds.

        The Bank also  continues  to be an  originator  of fixed  rate  mortgage
loans. Fixed rate conforming  residential  mortgages currently originated by the
Bank generally are made with 15 and 30 year amortization  schedules.  Fixed rate
nonconforming  residential  mortgages currently originated by the Bank generally
are made with 15 year or less amortization  schedules.  The Bank also originates
fixed-rate residential mortgages with balloon payments, with the balloon payment
being due generally in five or seven years for conforming loans and 15 years for
nonconforming loans.



                                       6
<PAGE>

        A portion of the conforming  fixed rate and adjustable rate  residential
mortgage  loans  currently  being  originated by First Federal is sold to FHLMC.
These loans are typically sold with the servicing rights retained by the Bank. A
portion  of the  fixed  rate  nonconforming  mortgage  loans  is also  sold on a
non-recourse  basis in the  nonconforming  secondary  market.  The nonconforming
loans are  typically  sold with the  servicing  rights  released.  However,  the
highest quality  nonconforming loans are being retained in portfolio in order to
enhance the net interest margin.  Adjustable rate  nonconforming  mortgage loans
are currently  originated  and placed in the held for sale  portfolio.  Sales of
adjustable rate nonconforming loans was limited during fiscal year 1997.

        Of the $115.0  million  loans  originated  in fiscal  year  1997,  $70.2
million were  nonconforming  mortgage  loan  originations.  This compares to the
origination of $65.9 million of nonconforming mortgage loans of the total $144.9
million loan  originations  during  fiscal year 1996.  At June 30,  1997,  $66.5
million  nonconforming  loans were included in the loan portfolio as compared to
$23.3  million  in  portfolio  at  June  30,  1996.   The  increased   level  of
nonconforming  loans in portfolio is an integral part of the Bank's  strategy to
expand the net interest margin in an orderly manner.

        The Bank also originates second mortgages,  the majority of which are on
real  estate in which it also holds the first  mortgage.  The loans have  either
adjustable  rate or fixed rate  features  with terms  similar to first  mortgage
loans.  The  second  mortgage,  when  combined  with the  balance  of the  first
mortgage,  normally does not exceed 80% of the value of the real estate.  During
fiscal year 1997, the Bank  discontinued a program of granting  second  mortgage
loans up to 100% of appraised  value.  The program was  discontinued  due to the
inherent credit risk associated with that type of lending.  The Bank offers 100%
financing  programs  with  the  first  mortgage  retained  by  the  Bank,  and a
concurrent  second  mortgage  being  closed and  retained  at another  financial
institution.

        First Federal offers residential  construction loans to both individuals
and builders. Such loans accounted for approximately 3.2% of the total amount of
loans  originated by the Bank in fiscal year 1997.  The  construction  loans are
generally  for a period of 6 to 12  months,  and the Bank may  receive  personal
guarantees  from the  principals.  An independent  appraiser  inspects all sites
prior to origination of the loans as required by OTS regulations.

        The Bank also provides the permanent financing on construction  projects
for  residential  housing.  The Bank normally  grants a commitment for permanent
financing  concurrent  with  the  origination  of the  construction  loan.  Such
commitments  are generally  market rate  commitments and require the borrower to
satisfy the Bank's  normal  underwriting  criteria at the time the loan is made.
Terms are similar to those established for other first mortgage loans.  Interest
rates are generally adjustable and are set at the time of the origination of the
construction loan. In the case of an AML, the construction period is included in
the time frame upon which the interest rate adjustment is based.

        In many  instances,  construction  loans have a commitment for permanent
financing either from the Bank or another financial institution prior to closing
the construction  loan. In other cases,  the Bank does grant "spec"  residential
construction loans to builders on a limited basis. The number of "spec" loans to
each  builder is limited by the amount and number of projects  that such builder
has in  process at any one time.  These  limits are  established  and  regularly
monitored by the Board of Directors.

        Under policies adopted by the Bank's Board of Directors, the Bank limits
the  loan-to-value  ratio  to 100%  on  residential  mortgage  loans.  The  Bank
generally requires all conventional loans with loan-to-value ratios in excess of
80% to carry private  mortgage  insurance  which  insures First Federal  against
default on a portion of the principal amount of the loan. Nonconforming mortgage
loans  generally  may not  exceed  85% of the  value  of the  secured  property.
Commercial  real estate loans  generally  may not exceed 75% of the value of the
secured property.  Construction  loans generally may not exceed 80% of the value
of the secured  property and generally are made for 80% or less of the appraised
value of the property upon completion.



                                       7
<PAGE>

        It is the Bank's policy to obtain title insurance policies insuring that
First  Federal has a valid lien on mortgaged  real estate.  Borrowers  also must
obtain  hazard  insurance  policies  prior to closing and,  when required by the
Department of Housing and Urban Development, flood insurance policies.

        Commercial Real Estate Loans

        At June 30, 1997, First Federal's  commercial real estate loan portfolio
(including  loans secured by  nonresidential  property,  land,  and five or more
dwelling units)  aggregated  $9.2 million,  or 6.1% of the total loan portfolio.
During the early  1980s,  First  Federal  originated  and  purchased a number of
commercial  real estate  loans.  Such activity has been very limited in the past
several years.  Land development loans are generally limited to less than 75% of
the market  value of the  improved  land and are granted as  revolving  lines of
credit.  Interest rates generally are 2% above the prime rate, recalculated on a
monthly basis. As lot sales occur,  the Bank generally  requires a payment equal
to 75% of the gross sale proceeds.  The land development loans have been granted
in communities currently or previously served by various First Federal offices.

        Consumer Lending

        The Bank also originates  consumer loans,  which include savings account
loans, student loans,  automobile loans, property improvement loans, home equity
loans,  mobile home loans,  credit card loans,  and other  secured and unsecured
consumer loans.  Applicable laws and regulations permit the Bank to make secured
and unsecured  consumer loans up to 35% of the  institution's  total assets.  At
June 30, 1997, such loans constituted  $12.7 million,  or 8.7% of the total loan
portfolio.

         The maximum term of automobile loans is generally five years,  with the
rate and term dependent  upon whether the vehicle is new or used.  During fiscal
year 1997,  the Bank  initiated  an  indirect  auto  lending  program  through a
selected number of new and used  automobile  dealers in its primary market area.
The indirect  auto lending  program will serve to augment the  traditional  auto
lending program of the Bank.  Terms are similar for the traditional and indirect
auto programs.  Home equity loans are variable rate and are treated as revolving
lines of credit.  At June 30, 1997,  home equity loans  aggregated $4.2 million,
available balances averaged $10,271,  and approved credit line balances averaged
$20,255.  Savings  account  loans  generally  do not exceed  90% of the  savings
account  balance  which  collateralizes  the loan and  demand an  interest  rate
generally equal to 2.0% above the rate paid on the savings account.



                                       8
<PAGE>

        Origination, Purchase and Sale of Loans and Participations

        As a federally-chartered savings institution,  First Federal has general
authority to make real estate loans secured by properties located throughout the
United States.  Through its loan origination office network,  the Bank's lending
market was expanded beyond its traditional areas.  However,  at June 30, 1997, a
majority of First Federal's  total loans  receivable were secured by real estate
located in central and southern Indiana and southern Illinois.

        During  the  mid-1980s,  First  Federal  purchased  a limited  number of
participations  in loans  originated by other  financial  institutions.  In such
instances,  First Federal purchased a portion of a loan from a lead lender which
services  the loan and remits to the Bank its  pro-rata  share of  interest  and
principal  payments  received from the  borrower.  First Federal pays a fee from
 .25% to .50% of the interest earned on the loan to the lead lender for servicing
the loan. This operating strategy was undertaken because of an inadequate supply
of loans in the Bank's primary lending area. Since that time, few participations
have been  purchased.  The Bank has  expanded  its  origination  and  purchasing
operations for mortgage  loans and currently has an adequate  supply of loans in
its market  areas.  The Bank is  continually  looking for new market  areas into
which it can expand.

        Historically, conforming mortgage loans have been originated by the Bank
primarily  through  referrals  from real estate  brokers,  builders  and walk-in
customers,  as well as through  refinancing  for  existing  customers.  The Bank
carefully  monitors  interest  rates in its market areas and believes that it is
competitive in such areas. First Federal continues to obtain its market share of
loans  in its  primary  market  area.  In  addition,  through  mortgage  banking
services,  additional  loans are  granted  in other  communities.  The  mortgage
banking   services  for  the  past  three  fiscal  years  have  been   primarily
concentrated in the nonconforming loan markets.

        During fiscal 1997,  the Bank  originated  $104.7 million of residential
real estate loans (including  construction  loans) as compared to $132.2 million
of residential  real estate loans in 1996 and $95.3 million of residential  real
estate  loans in 1995.  The  decreased  volume of  residential  real estate loan
originations  during fiscal 1997 resulted from reduced  retail  conforming  loan
originations.   The  decreased   conforming  loan   originations   were  largely
attributable  to the sale of two retail  banking  branches in Tipton and Kokomo,
Indiana during December 1995 (the "Branch Sales"). In addition,  the decline was
attributable to the general economic conditions which depressed loan activity in
the Bank's primary lending area during fiscal 1997. However,  nonconforming loan
originations  increased  slightly during fiscal year 1997.  Volume  increased in
fiscal  1996  as  compared  with  fiscal  1995  primarily  due to the  increased
production  of  nonconforming  loans from the  Bank's  loan  origination  office
network .

         Conforming loans purchased  through a wholesale  correspondent  network
decreased to $2.0 million during fiscal 1997 as compared to $27.6 million during
1996  and  $13.7  million   during  fiscal  1995.   The   conforming   wholesale
correspondent  loan program was  discontinued  during fiscal 1997 due to pricing
constraints.  The increase in loan purchases  during 1996 was  attributable to a
program  designed to replace the loan  production  from the branches sold during
the year.  Additionally,  the Bank  originated  and sold FHA and VA loans in the
secondary mortgage market.

        During 1997, the Bank sold $32.1 million in conforming loans to FHLMC as
compared to the sale of $67.6 million in loans to FHLMC in fiscal year 1996. The
Bank  continues  to service  most of the loans sold in fiscal 1997 and retains a
portion of the interest received (.250% to .375%) as a servicing fee. A total of
$6.4 million in FHA/VA loans were sold to private  investors  during fiscal year
1997.  These loans were sold  servicing  released.  During  fiscal  1996,  $28.4
million  in loans  were  sold in  conjunction  with the  Branch  Sales and $37.5
million in conforming loans and FHA/VA loans were sold to private investors.  An
aggregate of $37.7 million in nonconforming loans were sold to various investors
during fiscal 1997 as compared to $27.9 million in  nonconforming  loan sales in
fiscal 1996. These loans are generally sold servicing released.



                                       9
<PAGE>

        The following table shows total loan originations,  purchases, sales and
repayment  activities  (including  loans  held for sale) of the Bank  during the
periods indicated:

<TABLE>
<CAPTION>
                                                             Years Ended June 30,
                                                ------------------------------------------------
                                                       1997            1996          1995
                                                ------------------------------------------------
                                                                 (in thousands)
<S>                                                 <C>            <C>            <C>      
Loans Originated
         Real estate loans
                 Construction (1)                    $   3,623      $  15,466      $  14,169
                 Land                                       --             --            740
                 Loans for purchase or refinance
                   of existing property:
                     One-to-four units                 101,047        116,783         81,117
                     Over four units                        --             --            143
                 Commercial                                383            215            313
         Consumer loans (2)                              9,926         12,394         14,537
                                                     ---------      ---------      ---------
                 Total loans originated              $ 114,979      $ 144,858      $ 111,019


Participations and whole loans purchased             $   2,042      $  27,583      $  13,695

Participations and whole loans sold                  ($ 76,202)     ($161,421)     ($ 32,835)
Loan principal repayments                              (35,093)       (50,208)       (56,854)
                                                     ---------      ---------      ---------
Change in loan portfolio                             $   5,726      ($ 39,188)     $  35,025
</TABLE>
-------------------

(1)  Construction loans originated are residential.

(2)  Consumer  loans  consist   primarily  of  home  equity,   savings  account,
     signature, automobile, and property improvement loans.


        Income from Lending Activities

        Interest  rates charged by First Federal on mortgage loans are primarily
determined by competitive loan rates offered in its market areas.  Mortgage loan
rates reflect factors such as general interest rate levels,  the supply of money
available to the savings  industry and the demand for such loans.  These factors
are, in turn, affected by general economic conditions,  the monetary policies of
the federal government, (including the Board of Governors of the Federal Reserve
Board),  the  general  supply  of  money  in  the  economy,   tax  policies  and
governmental budget matters.

        In addition to interest earned on loans and the income from servicing of
loans,  the Bank receives  income through fees in connection with late payments,
changes of property  ownership  and for  miscellaneous  services  related to its
loans. Income from these activities varies from period to period with the volume
and type of loans  originated,  modified,  sold or  purchased,  which in turn is
dependent on prevailing  mortgage  interest rates and their effect on the demand
for loans in markets serviced by the Bank.

        In its  lending,  the Bank may charge  loan  origination  fees which are
calculated as a percentage of the amount  borrowed.  Loan  origination  fees and
certain related direct loan  origination  costs are offset and the resulting net
amount is  deferred  and  amortized  over the lives of the  related  loans as an
adjustment to the yield of such related loans. However, in the event the related
loan is sold,  any net deferred loan fees  remaining  with respect to such loans
are taken into income.  In addition,  commitment fees are offset against related
direct costs and recognized  over the life of the related loans as an adjustment
of  yield,  if the  commitment  is  exercised,  or,  if the  commitment  expires
unexercised, the commitment fees are recognized in income upon expiration of the
commitment.



                                       10
<PAGE>

        The  following  table sets forth  certain  information  concerning  loan
origination  and commitment  fees and deferred loan  origination  and commitment
fees on First Federal's mortgage loan portfolio for each of the periods or as of
the dates indicated.


                                             1997      1996       1995
                                           ----------------------------
                                                  (in thousands)

Loan origination, commitment
         fees and service fees earned
         during the year ended June 30       $137      $140        $780

Net deferred loan origination and
         commitment fees on mortgage
         loans at end of year                $476      $611        $360

Purchased and originated mortgage
         servicing rights at end of year     $819      $591      $1,432


Asset Quality

        Collection Practices

        When a  borrower  fails to make a required  payment on a loan,  the Bank
attempts to cause the  deficiency  to be cured by  contacting  the  borrower and
seeking  payment.  Contacts are  generally  made after a payment is more than 16
days past due and a late charge is assessed at such time for conforming mortgage
loans. In the case of  nonconforming  mortgage loans,  contact is generally made
after a  payment  is five  days  past  due.  For  nonconforming  loans,  as with
conforming loans, late charges are assessed at which time a payment is more than
16 days past due. If the  delinquency  exceeds 120 days and is not cured through
the Bank's  normal  collection  procedures,  the Bank will  generally  institute
measures to remedy the default,  including  commencing a  foreclosure  action or
accepting from the mortgagor a voluntary deed of the secured property in lieu of
foreclosure.  If a  foreclosure  action  is  instituted  and  the  loan  is  not
reinstated,  paid in full,  or  refinanced,  the  property  is sold  pursuant to
statutory  requirements  after  obtaining  a judgment  of  foreclosure  from the
appropriate  court.  The  property is then  included in the Bank's  "real estate
owned" account until it is sold. The Bank is permitted by federal regulations to
finance the sales of these  properties by loans or contracts to  facilitate  the
sale of real estate  owned,  which involve a lower down payment or a longer term
than would be generally allowed by the Bank's underwriting standards.



                                       11
<PAGE>

         Nonaccrual Loans and Real Estate Owned

        At June 30, 1997,  nonaccrual  loans and real estate owned  totaled $2.7
million, or 1.01% of total assets. The increased  delinquencies are attributable
to several factors  including  general economic  conditions and the abundance of
consumer bankruptcies being experienced throughout the Bank's lending areas. The
upward trend in nonaccrual loans is largely  attributable to one-to-four  family
mortgage  loans  becoming  more than 90 days past due.  The upward trend in loan
delinquencies relates to both conforming and nonconforming  mortgage loans. Loan
quality  continues to be of major  importance to the Bank and strong efforts are
being made to ensure loan quality. In an effort to mitigate potential losses and
reduce  non-performing  assets  mortgage  loan  collection  personnel  have been
expanded, more stringent collection practices have been implemented, and certain
higher risk lending  programs  have been  discontinued.  In addition,  loan loss
allowances  have been  increased to prepare for  potential  future losses in the
loan portfolio.

        Two commercial  mortgage loans with  outstanding  principal  balances of
$975,000  at June 30,  1994 and  $1,000,000  at June 30,  1993 in which the Bank
purchased participating interests became non-performing in fiscal year 1993, and
are included in the schedule  below for 1994 and 1993. The  participation  loans
were disposed of during fiscal year 1995 at no loss to the Bank.


                                       12
<PAGE>

        The table below sets forth the amounts and categories of First Federal's
nonaccrual loans and real estate owned for the last five years. It is the policy
of the Bank to review loans regularly and loans are placed on nonaccrual  status
when the loans become contractually past due more than 90 days.

<TABLE>
<CAPTION>
                                                                       At June 30,
                                                --------------------------------------------------------
                                                  1997        1996        1995        1994       1993
                                                --------------------------------------------------------
                                                                (Dollars in thousands)
<S>                                             <C>         <C>         <C>         <C>         <C>   
Nonaccrual loans and real estate owned:
Non-accrual loans(1)                             $2,330      $  846      $  400      $1,635      $1,647
Real estate owned(2)                                397         177         145         160         168
Restructured loans                                   --          --          --          --          --
                                                 ------------------------------------------------------

Total nonaccrual loans and real estate owned     $2,727      $1,023      $  545      $1,795      $1,815
Nonaccrual loans and real estate owned to
   total assets                                    1.01%       0.39%       0.17%       0.71%       0.79%
</TABLE>
---------------------

(1)  Approximately $200,000 in gross interest income would have been recorded in
     the year ended June 30,  1997 if the loans had been  current in  accordance
     with their original terms and had been outstanding  throughout the year, or
     since origination if held for part of the period.  Approximately $99,000 in
     interest income was actually recognized in the year.

(2)  Troubled loans acquired through  foreclosure or deed-in-lieu of foreclosure
     are included in the Statement of Financial Condition as real estate owned.

        Loss and Delinquency Experience

        During the year ended June 30, 1997,  the Bank realized net  charge-offs
on loans  aggregating  $111,000.  At June  30,  1997,  1.04% of the  outstanding
principal balance of loans in the Bank's portfolio was delinquent between 61 and
90 days and 1.63% was delinquent 91 days or more. The Bank's loss  experience on
its loan portfolio for the years shown is summarized in the following tables:

                                       Year Ended June 30,
                            ---------------------------------------------
                              1997            1996            1995
                             --------------------------------------------
                                     (Dollars in thousands)
Loans receivable, net        $146,840        $150,749        $201,819
Net losses (charge-offs)         $111             $65             $39
Percent delinquent 61 days
   or more at end of year        2.67%           1.76%           1.14%
Total dollar amount
   foreclosed                    $686            $180            $691
Percent foreclosed               0.47%           0.12%           0.34%


                    Analysis of the Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                           Year Ended June 30,
                                         ---------------------------------------------------------
                                            1997        1996       1995      1994      1993
                                         ---------------------------------------------------------
                                                           (Dollars in thousands)
<S>                                          <C>         <C>        <C>       <C>       <C> 
Balance at beginning of year                 $896        $878       $817      $892      $808

Charge-offs
   Loans
      Real estate mortgages                    81          30         15       138        85
      Consumer loans                           38          52         32        23        30

Recoveries
   Loans
      Real estate mortgages                     1          13         -          1        73
      Consumer loans                            7           4          8        10        11
                                         ----------------------------------------------------

Net charge-offs                               111          65         39       150        31

Provisions charged to operations              373          83        100        75       115
                                         ----------------------------------------------------

Balance at end of year                     $1,158        $896       $878      $817      $892
                                         ====================================================

Ratio of net charge-offs during the
year to average loans outstanding
during the year                              0.07%       0.04%      0.04%     0.09%     0.03%
</TABLE>




                                       13
<PAGE>

        Additional  information  regarding  the  allowance for loan losses is as
follows:

<TABLE>
<CAPTION>
                                                           At June 30, 1997
                                   ------------------------------------------------------------------
                                                   % of Loans in                       Allowance as a
                                     Amount of   Each Category to     Allowance as a     % of Loans
         Type of Loan                Allowance   Loans Receivable     % of Loan Type     Receivable
         ------------                ---------   ----------------     --------------     ----------
                                                     (Dollars in thousands)
<S>                                   <C>            <C>                    <C>             <C>  
One-to-Four Family Mortgage Loans     $  520         85.31%                 0.41%           0.35%
Commercial Real Estate Loans             508          6.19%                 5.47%           0.34%
Consumer & Other Loans                   130          8.50%                 1.02%           0.09%
                                      ------        ------                                  ---- 
                                      $1,158        100.00%                                 0.78%
</TABLE>

<TABLE>
<CAPTION>
                                                           At June 30, 1996
                                   ------------------------------------------------------------------
                                                   % of Loans in                       Allowance as a
                                     Amount of   Each Category to     Allowance as a     % of Loans
         Type of Loan                Allowance   Loans Receivable     % of Loan Type     Receivable
         ------------                ---------   ----------------     --------------     ----------
                                                     (Dollars in thousands)
<S>                                     <C>            <C>                  <C>              <C>  
One-to-Four Family Mortgage Loans       $267           88.16%               0.20%            0.17%
Commercial Real Estate Loans             536            5.32%               6.57%            0.35%
Consumer & Other Loans                    93            6.52%               0.93%            0.06%
                                        ----          ------                                 ---- 
                                        $896          100.00%                                0.58%
</TABLE>

<TABLE>
<CAPTION>
                                                          At June 30, 1995
                                   ------------------------------------------------------------------
                                                   % of Loans in                       Allowance as a
                                     Amount of   Each Category to     Allowance as a     % of Loans
         Type of Loan                Allowance   Loans Receivable     % of Loan Type     Receivable
         ------------                ---------   ----------------     --------------     ----------
                                                     (Dollars in thousands)
<S>                                     <C>            <C>                  <C>             <C>  
One-to-Four Family Mortgage Loans       $214           87.29%               0.12%           0.10%
Commercial Real Estate Loans             559            4.52%               5.93%           0.27%
Consumer & Other Loans                   105            8.19%               0.62%           0.05%
                                        ----          ------                                ---- 
                                        $878          100.00%                               0.42%
</TABLE>

<TABLE>
<CAPTION>
                                                           At June 30, 1994
                                   ------------------------------------------------------------------
                                                   % of Loans in                       Allowance as a
                                     Amount of   Each Category to     Allowance as a     % of Loans
         Type of Loan                Allowance   Loans Receivable     % of Loan Type     Receivable
         ------------                ---------   ----------------     --------------     ----------
                                                     (Dollars in thousands)
<S>                                    <C>            <C>                  <C>             <C>  
One-to-Four Family Mortgage Loans       $228           86.25%               0.15%           0.13%
Commercial Real Estate Loans             566            4.91%               6.34%           0.31%
Consumer & Other Loans                    23            8.84%               0.14%           0.01%
                                        ----          ------                                ---- 
                                        $817          100.00%                               0.45%
</TABLE> 
    
<TABLE>
<CAPTION>
                                                           At June 30, 1993
                                   ------------------------------------------------------------------
                                                   % of Loans in                       Allowance as a
                                     Amount of   Each Category to     Allowance as a     % of Loans
         Type of Loan                Allowance   Loans Receivable     % of Loan Type     Receivable
         ------------                ---------   ----------------     --------------     ----------
                                                     (Dollars in thousands)
<S>                                     <C>            <C>                <C>               <C>  
One-to-Four Family Mortgage Loans       $227           85.67%             0.17%             0.14%
Commercial Real Estate Loans             642            5.72%             7.07%             0.40%
Consumer & Other Loans                    23            8.61%             0.17%             0.02%
                                        ----          ------                                ---- 
                                        $892          100.00%                               0.56%
</TABLE>


                                       14
<PAGE>

        First Federal regularly  reviews the status of non-performing  assets to
evaluate the adequacy of the  allowances  for loan and real estate owned losses.
The  allowance  for loan losses is  maintained  through the  provision  for loan
losses, which is charged to earnings.

        In addition  to the  general  loan loss  allowance,  specific  valuation
allowances have been established for loans and contracts. An asset would warrant
such an  allowance  because  the loan  balance  exceeds the  appraised  value or
because of other  reasons  to  anticipate  a loss.  At June 30,  1997,  specific
valuation  allowance  balances were $508,000 of which  approximately 95% was for
one real estate contract acquired in a merger with United Savings Association of
Central  Indiana,  F.A.,  in 1989.  The loan  balance at June 30,  1997 was $1.3
million.  This specific valuation allowance was established at the time the loan
was acquired;  the loan is current in its payments and as the loan  continues to
pay down the specific  valuation  allowance is  released.  The  remainder of the
specific valuation  allowances are for single family residential  mortgage loans
in which the Bank anticipates losses to be realized in the future.

Investment Activities

        The Bank is required  under  federal  regulations  to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and the Bank is also  permitted to make certain  other  securities  investments.
Investment  decisions  are made by authorized  officers of First Federal  within
policies established by First Federal's Board of Directors.

        At June  30,  1997,  First  Federal's  investment  securities  portfolio
aggregated $44.1 million, consisting exclusively of U.S. agency obligations. See
Note 3 of the Notes to the Consolidated  Financial  Statements for a description
of investment  securities  owned at June 30, 1997. At June 30, 1997,  the Bank's
investment  securities  available for sale portfolio  aggregated  $11.6 million,
consisting of U.S. Treasury and agency  obligations.  See Note 2 of the Notes to
the Consolidated Financial Statements for a description of investment securities
available for sale owned at June 30, 1997.

        The  current  investment  policy  of the Bank  includes  the use of both
long-term and short-term U.S. government obligations to protect against interest
rate fluctuations.  The short-term  portfolio is managed by the Bank to maximize
the earnings on investable  funds while also  maintaining  an adequate  level of
liquidity. The Bank has the ability and intention to hold its current investment
portfolio to maturity.

                                       15
<PAGE>



     The following  tables set forth the values of the investment  securities as
of the dates  indicated.  Maturities  of each  category of  securities  are also
indicated.

Investment Securities Portfolio

<TABLE>
<CAPTION>

                                                                         At June 30,                   At June 30,   At June 30,
                                                            1997                                           1996          1995
                                                        --------------------------------------------  -------------- ------------
                                                          Amortized      Market         Wtd. Ave.       Amortized     Amortized
Investment Type (1)                         Maturity        Cost          Value             Yield          Cost          Cost
--------------------------------- ------------------------------------------------------------------  -------------- -----------
                                                              (Dollars in thousands)
<S>                               <C>                      <C>             <C>         <C>            <C>            <C>
U.S. Treasury and
  agency obligations              less than 1 year                                          -                 -             -
  including mortgage-             1 - 5 years                24,215          23,912      5.58%
  backed securities               5 - 10 years               11,351          11,159      6.77%
                                  more than 10 years          8,499           8,485      7.73%
                                                        -------------------------------
                                                            $44,065         $43,556      6.30%          $43,624       $72,005

Federal Home Loan Bank
  stock                           N/A                         4,941           4,941      7.85%            4,864         3,876

                                                        -------------------------------               ---------    ----------
     Total Investment Securities                            $49,006         $48,497      6.46%          $48,488       $75,881
                                                        ===============================               =========    ==========

----------------------------------
</TABLE>

(1) There are no tax-exempt securities included in the above totals.



Available for Sale Portfolio

<TABLE>
<CAPTION>
                                                                             At June 30,                 At June 30,     At June 30,
                                                                   1997                                      1996            1995
                                                                 ----------------------------------- ------------------------------
                                                                 Amortized      Market    Wtd. Ave.      Amortized       Amortized
Investment Type (1)                                  Maturity      Cost          Value      Yield            Cost            Cost
-------------------------------------      --------------------------------------------------------- -------------------------------
                                                                             (Dollars in thousands)
<S>                                       <C>                  <C>             <C>         <C>           <C>             <C>  
U.S. Treasury and
  agency obligations                       less than 1 year             -            -           -
  including mortgage-                      1 - 5 years              1,005          994        6.25%
  backed securities                        5 - 10 years             4,560        4,491        7.20%
                                           more than 10 years       6,204        6,103        7.07%
                                                                 ----------------------
                                                                  $11,769      $11,588        7.05%        $10,907               -

                                                                 ----------------------                    -------        --------
     Total Available for Sale Securities                          $11,769      $11,588        6.23%        $10,907               -
                                                                 ======================                    =======        ========

----------------
</TABLE>

(1) There are no tax-exempt securities included in the above totals.



                                       16
<PAGE>

     The following  table sets forth certain  information  regarding  changes in
interest income and interest expense of the Bank for the periods indicated.  For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information is provided on changes  attributable to (i) changes in rates (change
in rate  multiplied  by old volume),  (ii)  changes in volume  (change in volume
multiplied by old rate), and (iii) changes in rate/volume.

<TABLE>
<CAPTION>
                                                                    Year Ended June 30,
                                         --------------------------------------------------------------------------
                                                                       1996 vs. 1997
                                                                      (in thousands)
                                                                                     Rate/
                                               Rate              Volume             Volume              Total
                                         -----------------   ----------------   ----------------   ----------------

Interest earning assets:                 
<S>                                           <C>             <C>                    <C>              <C>   
  Loan portfolio (1)(2)(3)                      $211            ($1,086)               ($5)             ($880)
  Investment securities,                 
    trading account investments          
    and other short-term                 
    deposits (4)                                (132)              (169)              (301)                 -
                                         -----------      -------------        -----------       ------------
                     Total                       $79            ($1,255)               ($5)           ($1,181)

Interest-bearing liabilities:            ------------     -------------        -----------       ------------
  Savings accounts                              ($65)           ($1,326)               ($4)           ($1,395)
  Short-term borrowings                           31               (132)                 -               (101)
  Advances from FHLB and other                  
    borrowings                                  (302)               565                  5                268
                     Total                     ($336)             ($893)                $1            ($1,228)
                                                
Net change in interest 
  income (expense)                              $415              ($362)               ($6)               $47       
                                         ===========       ============        ===========       ============
</TABLE>

<TABLE>
<CAPTION>
                                                                      Year Ended June 30,
                                         --------------------------------------------------------------------------
                                                                       1995 vs. 1996
                                                                      (in thousands)
                                                                                     Rate/
                                               Rate              Volume             Volume              Total
                                         -----------------   ----------------   ----------------   ----------------
                                         
Interest earning assets:                 
<S>                                      <C>                 <C>                 <C>                <C> 
  Loan portfolio (1)(2)(3)                   $1,062              ($100)              ($27)              $935
  Investment securities,                 
    trading account investments          
    and other short-term                 
    deposits (4)                                346               (300)                (8)                38
                                         -----------      -------------        -----------       ------------
                     Total                   $1,408              ($400)              ($35)              $973
                                         -----------      -------------        -----------       ------------
Interest-bearing liabilities:                
  Savings accounts                           $1,626            ($1,527)               ($3)               $96
  Short-term borrowings                         (96)              (129)                 -               (225)
  Advances from FHLB and other                   77              1,156                 (3)             1,230
    borrowings                                  
                     Total                   $1,607              ($500)               ($6)            $1,101
                                         -----------      -------------        -----------       ------------
Net change in interest                       
  income (expense)                            ($199)              $100               ($29)             ($128)
                                         ===========       ============        ===========       ============
</TABLE>

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

(1)  The  effect  of  nonaccrual  loans on net  interest-earning  assets  is not
     material.
(2)  Out-of-period items and adjustments excluded are not material.
(3)  Loan fees included in interest income are not material.
(4)  All taxable (no tax-exempt investments held).

                                       17
<PAGE>

Yields Earned and Rates Paid; Certain Ratios

        The following  table sets forth for First  Federal the weighted  average
yields earned on its interest-earning  assets,  average cost of interest-bearing
liabilities  and the spread  between yields earned and rates paid as of June 30,
1997 and for each of the years  ended June 30,  1997,  1996,  and 1995.  Average
balances are based on quarter-end balances.

<TABLE>
<CAPTION>
                                           As of June 30,             Year Ended June 30,
                                        ------------------   --------------------------------------
                                                1997            1997         1996         1995
                                        ------------------   --------------------------------------
<S>                                            <C>              <C>         <C>          <C>  
Weighted average yield on
         loan portfolio                        8.53%            8.47%       8.36%        7.82%

Weighted average yield on
         investment securities, trading
         account investments, and
         other short-term deposits             6.36%            6.08%       6.25%        5.83%

Weighted average yield on all
         interest-earning assets               7.86%            7.77%       7.75%        7.22%

Weighted average rate paid on
         savings accounts                      5.49%            5.50%       5.54%        4.69%

Weighted average rate paid on
         FHLB advances and other
         borrowings                            5.67%            5.60%       5.89%        5.86%

Weighted average rate on all
         interest-bearing liabilities          5.57%            5.54%       5.67%        5.02%

Net interest margin                            2.58%            2.52%       2.36%        2.35%
</TABLE>


Sources of Funds

        General

        Savings accounts and other types of deposits have traditionally been the
principal  source of the Bank's  funds for use in lending and for other  general
business  purposes.  In addition to deposits,  the Bank derives  funds from loan
repayments,  loan  sales,  FHLB  advances,  and reverse  repurchase  agreements.
Borrowings may be used on a short-term basis to compensate for seasonal or other
reductions in deposits or inflows at less than projected levels, as well as on a
longer-term basis to support expanded lending activities.



                                       18
<PAGE>

        Deposits

        The Bank has a wide variety of deposit programs designed to attract both
short-term  and  long-term  deposits  from the  general  public.  These  deposit
accounts  include  passbook  accounts,  NOW accounts,  and money market accounts
(Super  NOW  accounts),  as well as  fixed-rate  certificates  and money  market
accounts.

        The  following  table  sets  forth  information  regarding  the types of
deposit accounts offered by First Federal at June 30, 1997 in its primary market
area:

<TABLE>
<CAPTION>
                                                   Interest Rates
       Type of Deposit Accounts                   at June 30, 1997               Compounding                      Minimum
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                           <C>                    <C>     
NOW                                                 2.90 - 3.29%                    Simple                Varies by type of account
MMDA                                                2.70 - 5.37%                    Simple                Varies by type of account
Passbook/Statement Savings                          2.70 - 4.00%                    Daily                 Varies by type of account
Certificates of Deposit:
     91 days                                           4.00%                        Simple                          1,000
     182 days                                          4.85%                        Simple                            500
     7-11 months                                       5.75%                        Simple                          1,000
     1 year                                            5.00%                        Daily                             500
     1 1/2 years                                       5.10%                        Daily                             500
     1 1/2 year stepped-rate                           6.09%                        Simple                          1,000
     2  years                                          5.25%                        Simple                          1,000
     2 1/2 years                                       5.35%                        Daily                             500
     3 year stepped-rate                               6.00%                        Simple                          1,000
     3 1/2 years                                       5.50%                        Simple                            500
     5 years                                           5.75%                        Simple                            500
     10 years                                          6.00%                        Simple                            500
IRA Certificates:                               
     1 1/2 years                                       5.25%                        Daily                             100
     2 1/2 years                                       5.40%                        Daily                             100
     3  1/2 years                                      5.65%                        Simple                            100
     5 years                                           6.00%                        Simple                            100
Negotiable Certificates:                        
     Jumbos generally,                              4.25 - 6.25%                    Simple                        100,000
     normal rate + .25%
</TABLE>

        The large variety of savings  accounts offered by the Bank has increased
the  Bank's  ability to retain  retail  deposits  and has  allowed it to be more
competitive  in obtaining new funds;  but, it has not  eliminated  the threat of
disintermediation  (the flow of funds away from savings institutions into direct
investment vehicles, such as government and corporate securities).  As customers
have become more rate  conscious and willing to move funds into higher  yielding
accounts,  the  ability of the Bank to attract  and  maintain  deposits  and the
Bank's cost of funds have been, and will continue to be, significantly  affected
by money market conditions.



                                       19
<PAGE>



         The following table shows the distribution and weighted average rate of
First Federal's deposits by type of deposits as of the dates indicated.
                 
<TABLE>
<CAPTION>
                                                                       June 30,
                                    -----------------------------------------------------------------------------------
                                                    1997                                       1996                    
                                    ---------------------------------------  ------------------------------------------
                                                    % of        Wtd. Avg.                      % of        Wtd. Avg.   
                                     Balance      Deposits        Rate          Balance      Deposits        Rate      
                                    ---------------------------------------  ------------------------------------------
                                              (Dollars in thousands)                  (Dollars in thousands)           
<S>                                   <C>           <C>          <C>         <C>            <C>            <C>       
Type of account:
Passbook/NOW/Super NOW
   Variable Rate Savings Accounts(1)    $20,193       14.0%        3.8%        $17,170        12.5%          3.2%      
MMDAs                                     3,015        2.1%        4.1%          3,089         2.3%          3.9%      
Certificates of Deposit(2)              121,108       83.9%        5.8%        116,889        85.2%          5.8%      
                                    ---------------------                  ----------------------                      
                                                                                                                       
                     Total             $144,316      100.0%        5.5%       $137,148       100.0%          5.5%      
                                    =====================                  ======================                      

</TABLE>

<TABLE>
<CAPTION>
  
                                                       June 30, 1995                      
                                         ------------------------------------------  
                                                           % of        Wtd. Avg.     
                                            Balance      Deposits        Rate        
                                         ------------------------------------------  
                                                  (Dollars in thousands)             
<S>                                       <C>                <C>            <C>   
Type of account:                                                                     
Passbook/NOW/Super NOW                                                               
   Variable Rate Savings Accounts(1)         $38,712            18.5%          2.9%  
MMDAs                                         11,120             5.3%          3.0%  
Certificates of Deposit(2)                   159,973            76.2%          5.8%  
                                       ----------------------------                  
                                                                                     
                     Total                  $209,805           100.0%          5.1%  
                                       ============================                  
</TABLE>
----------

(1) Includes noninterest-bearing accounts.
(2) Includes negotiated rate certificates of deposit and IRAs.



         The following  table shows the average amount of, and average rate paid
on, First Federal's deposits by type of deposit for the periods indicated.

<TABLE>
<CAPTION>
                                                                        Years Ended June 30,
                                       ---------------------------------------------------------------------------------------------
                                                         1997                                           1996                        
                                       ------------------------------------------     ------------------------------------------    
                                          Average        % of        Wtd. Avg.           Average        % of        Wtd. Avg.       
                                          Balance        Total         Rate              Balance        Total         Rate          
                                       ------------------------------------------     ------------------------------------------    
                                                (Dollars in thousands)                         (Dollars in thousands)               
<S>                                        <C>           <C>          <C>           <C>               <C>            <C>      
Type of account:
Passbook/NOW/Super NOW
   Variable Rate Savings Accounts(1)          17,627        12.5%        3.7%          26,636            16.2%          2.9%  
MMDAs                                          3,172         2.3%        4.0%           4,098             2.5%          3.1%  
Certificates of Deposit(2)                   118,875        84.5%        5.8%         133,059            80.9%          6.2%  
Accrued Interest                               1,039         0.7%          -              769             0.4%       -        
                                       ------------------------                      ------------------------                  

                     Total                  $140,713       100.0%        5.5%        $164,562           100.0%          5.5%  
                                       ========================                      ========================                  
</TABLE>

                                                Years Ended June 30,       
                                     ------------------------------------------
                                                       1995                    
                                     ------------------------------------------
                                        Average        % of        Wtd. Avg.   
                                        Balance        Total         Rate   
                                     ------------------------------------------
                                              (Dollars in thousands)  
Type of account:                         
Passbook/NOW/Super NOW        
   Variable Rate Savings Accounts(1)       $47,455        24.7%          3.1% 
MMDAs                                        5,406         2.8%          2.8% 
Certificates of Deposit(2)                 138,489        72.2%          5.3% 
Accrued Interest                               504         0.3%            -  
                                     ------------------------         
                                                                       
                     Total                $191,854       100.0%          4.7% 
                                     ========================  
--------------------------

(1) Includes noninterest-bearing accounts.
(2) Includes negotiated rate certificates of deposit and IRAs.

                                       20
<PAGE>


        The  following  table  sets  forth  information  relating  to the Bank's
deposit flows during the years indicated.

<TABLE>
<CAPTION>
                                                      Year Ended June 30,
                                    ---------------------------------------------------------
                                         1997                1996                 1995
                                    ---------------------------------------------------------
                                                         (in thousands)
<S>                                       <C>               <C>                   <C>    
Increase (decrease) in deposits
         before interest credited         $2,734            ($77,909)             $31,318

Interest credited                          4,434               5,252                5,696
                                    -------------    ----------------     ----------------

Net increase (decrease)
         in deposits                      $7,168            ($72,657)             $37,014
                                    -------------    ----------------     ----------------

Total deposits at end
         of period                      $144,316            $137,148             $209,805
                                    =============    ================     ================
</TABLE>

        The principal  methods used by First Federal to attract deposits include
the offering of a wide variety of services and  accounts,  competitive  interest
rates, and convenient office locations and service hours. In an effort to better
serve its primary market area and expand and retain its retail deposit base, the
Bank opened a new branch office during  fiscal 1997 in Vincennes,  Indiana.  The
primary  focus of the new branch  office is to better  serve the  Bank's  retail
deposit  customers.  The Bank uses traditional  marketing methods to attract new
customers and deposits,  including mass media  advertising and direct  mailings.
The  development  of new deposit  accounts and services  within the past several
years has enhanced the Bank's ability to attract deposits.

        During the  fiscal  year ended June 30,  1997,  the Bank  increased  its
brokered  deposits to $45.1  million from $34.1  million.  The brokered  deposit
program  serves as an  alternative  source of funds to compliment  the borrowing
programs and retail  savings  programs  offered in the Bank's local market.  The
brokered  funds  enable the Bank to manage  maturities  of its  deposits  in its
effort to manage interest rate risk.

        The following table presents,  by various interest rate categories,  the
contractual maturity of certificates of deposits as of June 30, 1997.

<TABLE>
<CAPTION>
                                              Maturing in the 12 months ending June 30:
                                      Balances at
                                    June 30, 1997      1998          1999           2000    Thereafter
                                 ---------------------------------------------------------------------------
                                                               (in thousands)
Certificates of deposit:
<S>                                  <C>           <C>            <C>            <C>           <C>   
Less than 4.00%                       $     19      $    184       $     6        $     1       $    -
4.00% to 4.99%                           4,435         4,410               -           25            -
5.00% to 5.99%                          77,581        67,292          7,360         1,754        1,175
6.00% to 6.99%                          25,478        12,924          7,029         2,918        2,607
7.00% to 7.99%                          12,228         6,355          2,172         2,274        1,427
8.00% to 9.99%                           1,055           458            560            24           13
10.00% or more                             140             -              -             -          140
                                 --------------------------------------------------------------------------
                                                                                              
Total certificates of deposit         $121,108       $91,623     $  17,127        $ 6,996        5,362
                                 ==========================================================================
                                                                                           
</TABLE>
         As of June 30, 1997,  First  Federal had $8.8 million of time  deposits
with balances over $100,000. Maturity of these deposits is as follows:


                                       21
<PAGE>


                                                         (in thousands)

3 months or less                                                  $2,568
Over 3 months through 6 months                                       322
Over 6 months through 12 months                                    3,370
Over 12 months                                                     2,568
                                                         ----------------

Total                                                             $8,828
                                                         ================


        Borrowings

        First  Federal   obtains   advances   from  the  FHLB  of   Indianapolis
collateralized  by the security of mortgage loans and  investment  securities it
owns. Such advances are made pursuant to several different credit programs, each
of which has its own interest  rate and range of  maturities.  Advances from the
FHLB are generally available to member institutions to meet seasonal withdrawals
and other  withdrawals of savings accounts and to expand lending,  as well as to
aid the  efforts of member  institutions  to  establish  better  asset/liability
management  strategies.  The Bank had $98.8 million in outstanding advances from
the FHLB at June 30, 1997.

        1ST BANCORP had a $1.5 million loan outstanding from Ambank,  Vincennes,
Indiana at June 30, 1997. 1ST BANCORP originally  borrowed $1.5 million in June,
1991, of which, $1.0 million was used as a capital infusion to First Federal. An
additional $1.0 million was borrowed in December, 1994, all of which was used as
a capital infusion to First Federal.

        First  Federal  also  obtains   short-term   financing  through  reverse
repurchase  agreements.   These  obligations  provide  another  source  to  meet
short-term demands for additional funds.  However,  at June 30, 1997, there were
no reverse repurchase agreements outstanding.


                                       22
<PAGE>

The following table sets forth certain  information  regarding advances from the
FHLB and other  borrowings,  excluding  reverse  repurchase  agreements,  by the
Corporation at the end of and during the years indicated.

                                                   At June 30,
                                 -----------------------------------------------
                                      1997            1996            1995
                                 -----------------------------------------------

Weighted average rate on
      advances from the Federal
      Home Loan Bank and other
      borrowings                     5.67%           5.56%           6.01%


                                           Year Ended June 30,
                             ------------------------------------------------
                                  1997            1996            1995
                             ------------------------------------------------
                                         (Dollars in thousands)
Maximum amount of advances
      from the Federal Home
      Loan Bank and other
      borrowings outstanding
      at any month end              $100,346         $99,054         $91,617

Approximate average advances
      from the Federal Home
      Loan Bank and other
      borrowings outstanding         $99,218         $89,103         $69,645

Approximate weighted average
      rate paid on advances
      from the Federal Home
      Loan Bank and other
      borrowings                        5.60%           5.94%           5.83%



        The weighted average rates in the previous table were computed using the
average balance based upon quarter end balances and total interest expense.

Effects of Inflation

        The primary assets and liabilities of savings institutions such as First
Federal  are  monetary  in  nature.  As a  result,  interest  rates  have a more
significant  impact on First Federal's  performance  than the effects of general
levels of inflation.  Interest rates,  however,  do not necessarily  move in the
same  direction or with the same  magnitude as the price of goods and  services,
since such  prices are  affected  by  inflation.  In a period of rapidly  rising
interest rates, the liquidity and maturity  structures of First Federal's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.

        The principal  effect of inflation,  as distinct from levels of interest
rates, on First Federal's earnings is in the area of other expense. Such expense
items as employee  compensation,  employee benefits, and occupancy and equipment
costs may be subject to increases as a result of inflation. An additional effect
of  inflation is the  possible  increase in the dollar  value of the  collateral
securing loans made by First  Federal.  First Federal is unable to determine the
extent,  if any, to which the properties  securing its loans have appreciated in
dollar value due to inflation.



                                       23
<PAGE>

Regulation

        General

        First Federal,  as a federally chartered stock savings bank, is a member
of the Federal  Home Loan Bank System (the "FHLB  System")  and its deposits are
insured  by  the  Savings   Association   Insurance  Fund  ("SAIF"),   which  is
administered  by the FDIC.  First Federal is subject to extensive  regulation by
the OTS.  Federal  associations may not enter into certain  transactions  unless
certain regulatory tests are met or they obtain prior governmental  approval and
the associations must file reports with these governmental  agencies about their
activities and their financial  condition.  Periodic compliance  examinations of
the Bank are  conducted  by the OTS which has, in  conjunction  with the FDIC in
certain  situations,  enforcement  powers.  This  supervision  and regulation is
intended  primarily  for  the  protection  of  depositors  and  federal  deposit
insurance funds.  First Federal is also subject to certain reserve  requirements
under the Board of Governors of the Federal  Reserve  System  ("FRB" or "Federal
Reserve Board") regulations.

        Congress  is  considering  legislation  that would  require  all federal
savings  associations,  such as First  Federal,  either to convert to a national
bank  or a  state-chartered  bank  by a  specified  date  to be  determined.  In
addition,  under the  legislation,  the  Corporation  likely  would no longer be
regulated  as a savings and loan holding  company,  but rather as a bank holding
company.  This  proposed  legislation  would  abolish the OTS and  transfer  its
functions  among the other federal  banking  regulators.  It cannot be predicted
with certainty whether or in what form the legislation will be enacted.

        An OTS regulation establishes a schedule for the assessment of fees upon
all savings  associations to fund the operations of the OTS. The regulation also
establishes a schedule of fees for the various types of applications and filings
made by savings associations with the OTS. The general assessment, to be paid on
a  semi-annual  basis,  is based upon the savings  association's  total  assets,
including  consolidated  subsidiaries,  as reported in a recent quarterly thrift
financial report.  Currently,  the quarterly assessment rates range from .01164%
of assets for  associations  with $67  million in assets or less to .00308%  for
associations  with  assets in excess of $35  billion.  First  Federal's  current
semi-annual  assessment,  based upon its March 31,  1997 total  assets of $273.2
million, was $36,660.

        The Bank is also  subject to  federal  and state  regulation  as to such
matters as loans to officers,  directors,  or principal  shareholders,  required
reserves,  limitations as to the nature and amount of its loans and investments,
regulatory  approval of any merger or consolidation,  issuance or retirements of
its own securities, and limitations upon other aspects of banking operations. In
addition,  the  activities and operations of the Bank are subject to a number of
additional  detailed,  complex and sometimes  overlapping federal and state laws
and regulations.  These include state usury and consumer credit laws, state laws
relating to fiduciaries,  the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act,  anti-redlining  legislation and anti-trust
laws.



                                       24
<PAGE>

        Federal Home Loan Bank System

        First  Federal  is a member of the FHLB  System,  which  consists  of 12
regional  banks.  The Federal  Housing  Finance Board  ("FHFB"),  an independent
agency, controls the FHLB System,  including the FHLB of Indianapolis.  The FHLB
System  provides  a  central  credit  facility   primarily  for  member  savings
associations  and savings banks and other member financial  institutions.  First
Federal is required to hold shares of capital stock in the FHLB of  Indianapolis
in an amount at least  equal to the  greater  of 1% of the  aggregate  principal
amount of its unpaid  residential  mortgage loans,  home purchase  contracts and
similar  obligations at the end of each calendar year, .3% of its assets or 1/20
(or such  greater  fraction  established  by the  FHLBank) of  outstanding  FHLB
advances,  commitments,  lines of credit and letters of credit. First Federal is
currently in compliance with this requirement. At June 30, 1997, First Federal's
investment in FHLB of Indianapolis stock was $4,941,000.

        In past years,  First Federal  received  dividends on its FHLBank stock.
Certain  provisions  of  The  Financial   Institution  Reform,   Recovery,   and
Enforcement  Act of 1989,  as amended  ("FIRREA"),  require  all 12  FHLBanks to
provide  funds  for the  resolution  of  troubled  savings  associations  and to
establish affordable housing programs through direct loans or interest subsidies
on advances to members to be used for lending at subsidized  interest  rates for
low-and-moderate-income,  owner-occupied  housing  projects,  affordable  rental
housing,   and  certain  other  community  projects.   These  contributions  and
obligations  have reduced the level of FHLB dividends  paid and could  adversely
affect the value of FHLB stock in the future.  For the year ended June 30, 1997,
dividends paid to First Federal totaled $382,000,  for an annual rate of 7.8%. A
reduction  in value of such stock may  result in a  corresponding  reduction  in
First Federal's capital.

        The FHLB of Indianapolis  serves as a reserve or central bank for member
institutions  within its assigned  region.  It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB system.  It makes
advances to members in accordance  with policies and  procedures  established by
the FHLB and the Board of Directors of the FHLB of Indianapolis.

        All FHLB  advances  must be fully  secured by  sufficient  collateral as
determined by the FHLB. FIRREA prescribes  eligible collateral as first mortgage
loans less than 90 days delinquent or securities  evidencing  interests therein,
securities (including mortgage-backed  securities) issued, insured or guaranteed
by the federal government or any agency thereof, FHLB deposits and, to a limited
extent,  real  estate  with  readily  ascertainable  value in which a  perfected
security interest may be obtained.  Other forms of collateral may be accepted as
overcollateralization  or, under certain  circumstances,  to renew advances. All
long-term  advances are required to provide funds for residential home financing
and the FHLB has  established  standards of community  service that members must
meet to maintain access to long-term advances. Currently First Federal has $87.5
million of mortgage loans and $41.3 million of investment  securities pledged as
collateral for FHLB advances.

        Interest rates charged for advances vary  depending  upon maturity,  the
cost of funds to the FHLB of  Indianapolis  and the  purpose  of the  borrowing.
Under  current law,  savings  associations  which cease to be  Qualified  Thrift
Lenders are ineligible to receive advances from their FHLB.



                                       25
<PAGE>

        Liquidity

        For each  calendar  month,  First  Federal is  required  to  maintain an
average daily balance of liquid assets (cash,  certain time  deposits,  bankers'
acceptances,  specified  United  States  Government,  state  or  federal  agency
obligations,   shares  of  certain  mutual  funds  and  certain  corporate  debt
securities  and  commercial  paper) equal to an amount not less than a specified
percentage of its net withdrawable  deposit accounts plus short-term  borrowings
during the preceding  calendar month. This liquidity  requirement may be changed
from  time to  time  by the OTS to any  amount  within  the  range  of 4% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5% although the OTS has proposed a reduction of the  percentage
to 4%. OTS regulations also require each member savings  association to maintain
an average daily balance of short-term  liquid assets at a specified  percentage
(currently  1%) of the  total  of its  net  withdrawable  deposit  accounts  and
short-term  borrowings during the preceding calendar month. The OTS has proposed
abolishing  this  latter  requirement.  Monetary  penalties  may be imposed  for
failure to meet these liquidity  requirements.  The monthly average liquidity of
First  Federal for June,  1997 was 10.44% and its average  short-term  liquidity
ratio at June 30,  1997 was  6.95%.  First  Federal  has never  been  subject to
monetary penalties for failure to meet its liquidity requirements.

        Real Estate Lending Standards

        OTS regulations  require savings  associations to establish and maintain
written  internal  real estate  lending  policies.  Each  association's  lending
policies  must  be  consistent  with  safe  and  sound  banking   practices  and
appropriate  to the size of the  association  and the  nature  and  scope of its
operations.   The  policies  must  establish   loan  portfolio   diversification
standards;  establish prudent underwriting  standards,  including  loan-to-value
limits, that are clear and measurable;  establish loan administration procedures
for the  association's  real  estate  portfolio;  and  establish  documentation,
approval,   and  reporting   requirements   to  monitor   compliance   with  the
associations's real estate lending policies.

        The Bank's  written real estate  lending  policies  must be reviewed and
approved by the  associations's  board of directors at least annually.  Further,
each Bank is expected to monitor  conditions in its real estate market to ensure
that  its  lending  policies  continue  to be  appropriate  for  current  market
conditions.

        Safety and Soundness Standards

        On February 2, 1995, the federal banking  agencies  adopted final safety
and soundness standards for all insured depository institutions.  The standards,
which were issued in the form of guidelines rather than  regulations,  relate to
internal   controls,   information   systems,   internal  audit  systems,   loan
underwriting  and  documentation,  compensation  and interest rate exposure.  In
general,  the standards are designed to assist the federal  banking  agencies in
identifying and addressing  problems at insured depository  institutions  before
capital becomes impaired.  If an institution fails to meet these standards,  the
appropriate  federal  banking  agency may  require the  institution  to submit a
compliance  plan.  Failure to submit a compliance plan may result in enforcement
proceedings.  On August 27,  1996,  the  federal  banking  agencies  added asset
quality and earnings standards to the safety and soundness guidelines.



                                       26
<PAGE>

        Insurance of Deposits

        Deposit  Insurance.  The  FDIC is an  independent  federal  agency  that
insures the deposits,  up to prescribed  statutory  limits, of banks and thrifts
and  safeguards  the safety and soundness of the banking and thrift  industries.
The FDIC  administers two separate  insurance fund, the BIF for commercial banks
and state savings banks,  and the SAIF for savings  associations  and banks that
have  acquired  deposits  from  savings  associations.  The FDIC is  required to
maintain  designated  levels of reserves in each fund. As of September 30, 1996,
the reserves of the SAIF were below the level required by law, primarily because
of a significant portion of the assessments paid into the SAIF have been used to
pay the cost of prior  thrift  failures,  while the  reserves of the BIF met the
levels required by law in May, 1995. However, on September 30, 1996,  provisions
designed to recapitalize  the SAIF and eliminate the premium  disparity  between
the BIF and the SAIF were signed into law. See "--Assessments" below.

        Assessments.  The  FDIC  is  authorized  to  establish  separate  annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF.  The FDIC may  increase  assessment  rates for either fund if necessary to
restore the fund's  ratio of reserves  to insured  deposits to the target  level
within a reasonable  time and may  decrease  these rates if the target level has
been met. The FDIC has established a risk-based  assessment system for both SAIF
and BIF members.  Under this system,  assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's  risk level is
determined  based on its  capital  level  and the  FDIC's  level of  supervisory
concern about the institution.

        On September 30, 1996,  President  Clinton  signed into law  legislation
which included  provisions  designed to recapitalize  the SAIF and eliminate the
significant premium disparity between the BIF and SAIF. Under the new law, First
Federal was charged a one-time  special  assessment  equal to $0.657 per $100 in
assessable  deposits at March 31, 1995.  First Federal  recognized this one-time
assessment as a non-recurring  operating expense of $1,330,000 before tax during
the  three-month  period ending  September 30, 1996,  and First Federal paid the
assessment on November 27, 1996. The  assessment  was fully  deductible for both
federal  and state  income  tax  purposes.  Beginning  January  1,  1997,  First
Federal's  annual deposit  insurance  premium was reduced from .23% to .0644% of
total  assessable   deposits.   BIF  institutions  pay  lower  assessments  than
comparable SAIF  institutions  because BIF institutions pay only 20% of the rate
paid by SAIF  institutions on their deposits with respect to obligations  issued
by the  federally-chartered  corporation which provided some of the financing to
resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for
the merger of the SAIF and the BIF by 1999,  but not until such time as bank and
thrift  charters  are  combined.  Until  the  charters  are  combined,   savings
associations  with SAIF  deposits may not transfer  deposits into the BIF system
without  paying  various  exit and entrance  fees,  and SAIF  institutions  will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution  converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance  assessments to
the SAIF, and as long as certain other conditions are met.



                                       27
<PAGE>

        Regulatory Capital

        Currently,  savings  associations  are subject to three separate minimum
capital-to-assets  requirements:  (i) a leverage limit,  (ii) a tangible capital
requirement,  and (iii) a risk-based  capital  requirement.  The leverage  limit
requires that savings  associations  maintain  "core  capital" of at least 3% of
total assets. Core capital is generally defined as common  stockholders'  equity
(including retained income), noncumulative perpetual preferred stock and related
surplus,   certain  minority  equity   interests  in  subsidiaries,   qualifying
supervisory goodwill,  purchased mortgage servicing rights, and purchased credit
card   relationships   (subject  to  certain   limitations)  less  nonqualifying
intangibles.  Under the tangible capital requirement, a savings association must
maintain  tangible  capital  (core  capital less all  intangible  assets  except
purchased  mortgage  servicing  rights  which may be included  after  making the
above-noted adjustments in an amount up to 100% of tangible capital) of at least
1.5% of total  assets.  Under the  risk-based  capital  requirements,  a minimum
amount of capital must be maintained by a savings association to account for the
relative  risks  inherent  in the type and  amount of assets  held by the saving
association.  The risk-based capital requirement  requires a savings association
to maintain capital  (defined  generally for these purposes as core capital plus
general valuation  allowances and permanent or maturing capital instruments such
as preferred  stock and  subordinated  debt less assets required to be deducted)
equal to 8.0% of  risk-weighted  assets.  Assets are ranked as to risk in one of
four categories (0-100%) with a credit risk-free asset such as cash requiring no
risk-based  capital  and an  asset  with a  significant  credit  risk  such as a
delinquent  commercial  loan being  assigned a factor of 100%. At June 30, 1997,
based on the capital  standards then in effect,  First Federal was in compliance
with the fully phased-in capital requirements.

        The OTS has  delayed  implementation  of a rule  which  sets  forth  the
methodology  for  calculating an interest rate risk component to be incorporated
into the OTS regulatory capital rule. Under the rule, only savings  associations
with "above normal"  interest rate risk  (institutions  whose  portfolio  equity
would decline in value by more than 2% of assets in the event of a  hypothetical
200 basis point move in interest rates) will be required to maintain  additional
capital for interest rate risk under the risk-based capital framework. A savings
association  with an "above  normal"  level of  exposure  will have to  maintain
additional  capital  equal to  one-half  the  difference  between  its  measured
interest rate risk (the most adverse change in the market value of its portfolio
resulting from a 200 basis point move in interest rates divided by the estimated
market  value of its  assets)  and 2%,  multiplied  by the  market  value of its
assets. That dollar amount of capital is in addition to a savings  association's
existing risk-based capital  requirement.  Although the OTS has decided to delay
implementation  of this rule, it will  continue to monitor  closely the level of
interest  rate  risk at  individual  savings  associations  and it  retains  the
authority,  on a case-by-case  basis, to impose additional capital  requirements
for individual savings associations with significant interest rate risk.

        In periods of rapidly changing  interest rates, the Bank's balance sheet
is subject to  significant  fluctuations  in market  value  (interest  rate risk
exposure).  However, as the delayed interest rate risk rules proposed by the OTS
currently  read,  the Bank at June 30, 1997,  would have no  additional  capital
requirement.  The Bank's management  remains cognizant of the proposed rules and
continues to monitor its interest rate risk position.



                                       28
<PAGE>

        The  following is a summary of First  Federal's  regulatory  capital and
capital requirements at June, 30 1997:

                                    Tangible           Core        Risk-based
                                    Capital          Capital        Capital
                                 ---------------  --------------   -----------
                                              (Dollars in thousands)

Regulatory Capital                    $22,436          $22,436      $23,086
Minimum capital requirement             4,059            8,117       11,555
                                 ------------------------------------------
Excess capital                        $18,377          $14,319      $11,531

Regulatory capital ratio                  8.3%             8.3%        16.0%

Minimum capital ratio                     1.5%             3.0%         8.0%

        If an  association is not in compliance  with its capital  requirements,
the OTS is required to prohibit  asset growth and to impose a capital  directive
that may restrict,  among other  things,  the payment of dividends and officers'
compensation.  In addition,  the OTS and FDIC  generally are  authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements,  which actions may include  restrictions on operations and banking
activities,  the  imposition of a capital  directive,  a cease and desist order,
civil  monetary  penalties  or harsher  measures  such as the  appointment  of a
receiver or conservator or a forced merger into another institution.

        Prompt Corrective Action

        The  Federal  Deposit  Insurance  Corporation  Improvement  Act of  1991
("FedICIA") requires, among other things, federal bank regulatory authorities to
take "prompt  corrective  action" with respect to institutions  that do not meet
minimum capital  requirements.  For these  purposes,  FedICIA  establishes  five
capital  tiers:  well  capitalized,  adequately  capitalized,  undercapitalized,
significantly  undercapitalized,  and critically  undercapitalized.  At June 30,
1997,  the Bank was  categorized as "well  capitalized"  meaning that the Bank's
total  risk-based  capital  ratio  exceeded  10%,  its Tier I  risk-based  ratio
exceeded 6%, and its leverage ratio exceeded 5%, and the Bank was not subject to
a  regulatory  order,  agreement  or  directive  to meet and maintain a specific
capital level for any capital measure.

        Capital Distribution Regulations

        An OTS regulation imposes  limitations upon all "capital  distributions"
by  savings  associations,  including  cash  dividends,  payments  by a  savings
association  to  repurchase  or  otherwise  acquire  its  shares,   payments  to
shareholders   of  another   institution   in  a  cash-  out  merger  and  other
distributions charged against capital. The regulation establishes a three-tiered
system  of  regulation,   with  the  greatest   flexibility  being  afforded  to
well-capitalized  institutions.  A savings  association  which has total capital
(immediately prior to and after giving effect to the capital  distribution) that
is at least equal to its fully phased-in capital  requirements would be a Tier 1
institution.  A savings association that has total capital at least equal to its
minimum  capital  requirements,  but  less  than  its  fully  phased-in  capital
requirements,  would be a Tier 2 institution. A savings association having total
capital  that is less than its minimum  capital  requirements  would be a Tier 3
institution.  However, a savings association which otherwise qualifies as a Tier
1 institution  may be designated by the OTS as a Tier 2 or Tier 3 institution if
the OTS determines that the savings  association is "in need of more than normal
supervision." First Federal is currently a Tier 1 institution.



                                       29
<PAGE>

        A Tier 1 Institution  could, after prior notice but without the approval
of the OTS, make capital  distributions during a calendar year up to 100% of its
net income to date during the calendar  year plus an amount that would reduce by
one-half  its  "surplus  capital  ratio" (the  excess  over its fully  phased-in
capital  requirements)  at the beginning of the calendar  year.  Any  additional
amount of capital distributions would require prior regulatory approval.

        The OTS has proposed  revisions to these  regulations which would permit
savings  associations  to declare  dividends in amounts  which would assure that
they remain adequately  capitalized following the dividend declaration.  Savings
associations  in a holding company system which are rated Camel 1 or 2 and which
are not in  troubled  condition  would need to file a prior  notice with the OTS
concerning such dividend declaration.

        Federal Reserve System

        Under FRB  regulations,  First Federal is required to maintain  reserves
against its  transaction  accounts  (primarily  checking and NOW accounts),  and
non-personal  money  market  deposit  accounts.  The  effect  of  these  reserve
requirements is to increase First  Federal's cost of funds.  First Federal is in
compliance with its reserve  requirements.  A federal savings association,  like
other depository  institutions  maintaining reservable accounts, may borrow from
the Federal Reserve Bank "discount  window," but the FRB's  regulations  require
the  savings  association  to  exhaust  other  reasonable  alternative  sources,
including  borrowing from its regional FHLB,  before  borrowing from the Federal
Reserve  Bank.   FedICIA   imposes   certain   limitations  on  the  ability  of
undercapitalized depository institutions to borrow from Federal Reserve Banks.

        Holding Company Regulations

        The Corporation is a savings and loan holding company within the meaning
of the Home Owners' Loan Act, as amended ("HOLA"),  and is subject to regulatory
oversight of the Director of the OTS. As such,  the  Corporation  is  registered
with the OTS and is subject to OTS  regulations,  examinations,  supervision and
reporting  requirements.  As a subsidiary of a savings and loan holding company,
First  Federal  is  subject to certain  restrictions  in its  dealings  with the
Corporation and with other companies affiliated with the Corporation.

        The HOLA 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 association or savings and loan holding company or controlling the
assets  thereof or (ii) acquiring or retaining more than 5 percent of the voting
shares  of a savings  association  or  holding  company  thereof  which is not a
subsidiary.  Additionally,  under  certain  circumstances,  a  savings  and loan
holding  company is permitted  to acquire,  with the approval of the Director of
OTS,   up  to  15  percent  of   previously   unissued   voting   shares  of  an
under-capitalized  savings association for cash without that savings association
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 association,  other
than a subsidiary association, or any other savings and loan holding company.



                                       30
<PAGE>

        The Corporation currently is a unitary savings and loan holding company,
and there are generally no  restrictions  on the activities of a unitary savings
and loan holding  company.  However,  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  association,  the
Director of the OTS may impose such  restrictions as deemed necessary to address
such risk and limiting (i) payment of dividends by the savings association, (ii)
transactions  between the savings association and its affiliates,  and (iii) any
activities of the savings  association that might create a serious risk that the
liabilities  of the  holding  company and its  affiliates  may be imposed on the
savings association.

        Notwithstanding the above rules as to permissible business activities of
unitary  savings  and  loan  holding  companies,   if  the  savings  association
subsidiary of such a holding  company fails to meet the Qualified  Thrift Lender
("QTL") test,  then such unitary  holding  company shall also  presently  become
subject to the activities restrictions applicable to multiple holding companies.
(Additional  restrictions  on securing  advances from the Federal Home Loan Bank
also apply.) See "-- Qualified Thrift Lender." At June 30, 1997, First Federal's
asset  composition  was in excess of that required to qualify First Federal as a
Qualified Thrift Lender.

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

        The Director of the OTS may also approve  acquisitions  resulting in the
formation of a multiple  savings and loan holding company which controls savings
associations  in more than one state,  if the multiple  savings and loan holding
company involved controls a savings  association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the  laws of the  state in which  the  association  to be  acquired  is  located
specifically permit associations to be acquired by state-chartered  associations
or savings and loan holding  companies  located in the state where the acquiring
entity is located (or by a holding  company that controls  such  state-chartered
savings associations).  Also, the Director of the OTS may approve an acquisition
resulting in a multiple  savings and loan holding  company  controlling  savings
associations  in more than one  state in the case of  certain  emergency  thrift
acquisitions.



                                       31
<PAGE>

        No subsidiary savings  association of a savings and loan holding company
may declare or pay dividends on its permanent or nonwithdrawable stock unless it
first gives the Director of OTS thirty days advance  notice of such  declaration
and payment.  Any dividend declared during such period, or without the giving of
such notice, shall be invalid.


        Federal Securities Law

        The shares of Common Stock of the  Corporation  are registered  with the
Securities  and  Exchange  Commission  (the  "SEC")  under  the  1934  Act.  The
Corporation is therefore subject to the information, proxy solicitation, insider
trading  restrictions  and other  requirements of the SEC under the 1934 Act and
the rules of the SEC thereunder.

        Shares  of  Common  Stock  held by  persons  who are  affiliates  of the
Corporation may not be resold without  registration or unless sold in accordance
with the resale  restrictions of Rule 144 under the 1933 Act. If the Corporation
meets the current public information requirements under Rule 144, each affiliate
of the Corporation who complies with the other conditions of Rule 144 (including
a one-year holding period and conditions that require the affiliate's sale to be
aggregated  with those of certain  other  persons)  would be able to sell in the
public market,  without  registration,  a number of shares not to exceed, in any
three-month  period,  the  greater  of (i) 1% of the  outstanding  shares of the
Corporation  or (ii) the average  weekly  volume of trading in such share during
the preceding four calendar weeks.

        Qualified Thrift Lender

        Savings  associations  must  meet a QTL test  which  requires  a savings
association to have at least 65% of its portfolio  assets invested in "qualified
thrift  investments"  on a  monthly  average  basis in nine out of every  twelve
months.  Qualified thrift investments under the QTL test include: (i) loans made
to  purchase,  refinance,  construct,  improve  or repair  domestic  residential
housing or manufactured  housing;  (ii) home equity loans; (iii) mortgage-backed
securities;  (iv) direct or indirect existing  obligations of either the FDIC or
the FSLIC for ten years from the date of  issuance,  if issued  prior to July 1,
1989; (v)  obligations  of the FDIC,  FSLIC  Resolution  Fund and the Resolution
Trust Corporation for a five year period from July 1, 1989, if issued after such
date;  (vi) FHLB stock;  (vii) 50% of the dollar amount of residential  mortgage
loans originated and sold within 90 days or origination;  (viii)  investments in
service  corporations  that  derive at least 80% of their  gross  revenues  from
activities directly related to purchasing, refinancing,  constructing, improving
or repairing  domestic  residential real estate or manufacturing  housing;  (ix)
200% of the dollar amount of loans and investments made to acquire,  develop and
construct one-to  four-family  residences that are valued at no more than 60% of
the median value of homes constructed in the area; (x) 200% of the dollar amount
of loans for the  acquisition  or  improvement  of  residential  real  property,
churches,  schools,  and nursing homes located within, and loans for any purpose
to any small business located within,  an area where credit needs of its low and
moderate  income  residents are determined not to have been adequately met; (xi)
loans  for the  purchase,  construction,  improvement  or  upkeep  of  churches,
schools, nursing homes and hospitals not qualified under (x); (xii) up to 10% of
portfolio assets held in consumer loans or loans for educational  purposes;  and
(xiii) FHLMC and FNMA stock.  However,  the aggregate  amount of  investments in
categories  (vii)-(xiii)  which may be taken  into  account  for the  purpose of
whether an institution meets the QTL test cannot exceed 15% of portfolio assets.
Portfolio assets under the QTL test include all of an association's  assets less
(i)  goodwill  and other  intangibles,  (ii) the value of  property  used by the
association to conduct its business,  and (iii) its liquid assets as required to
be maintained under law up to 20% of total assets.

        A  savings  association  that  fails to meet the QTL  test  must  either
convert to a bank (although its deposit  insurance  assessments will continue to
be those of, and payments  will  continue to be made to, the SAIF) or be subject
to the following  penalties:  (i) it may not enter into any new activity  except
for those  permissible for a national bank and for a savings  association;  (ii)
its branching  activities shall be limited to those of a national bank; (iii) it
shall not be eligible for any new FHLB  advances;  and (iv) it shall be bound by
regulations applicable to national banks respecting payment of dividends.  Three
years  after  failing  the QTL test the  association  must  (i)  dispose  of any
investment  or  activity  not  permissible  for a  national  bank and a  savings
association  and (ii) repay all  outstanding  FHLB  advances.  If such a savings
association  is  controlled  by a savings  and loan  holding  company,  then the
holding company must within a prescribed time period become registered as a bank
holding  company and become subject to all rules and  regulations  applicable to
bank holding  companies  (including  restrictions as to the scope of permissible
business activities).

                                       32
<PAGE>

        A savings  association  failing to meet the QTL test may  requalify as a
QTL if it thereafter  meets the QTL test. In the event of such  requalification,
it shall not be subject to the penalties  described above. A savings association
which  subsequently  again  fails to  qualify  under the QTL test  shall  become
subject to all of the described  penalties  without  application  of any waiting
period.

        At June 30, 1997, 76.2% of First Federal's  portfolio assets (as defined
on that date) were invested in qualified thrift  investments (as defined on that
date),  and therefore First  Federal's  asset  composition was in excess of that
required to qualify  First  Federal as a QTL.  First  Federal does not expect to
change  significantly  its lending or investment  activities in the near future;
and, therefore it expects to continue to qualify as a QTL, although there can be
no such assurance.


        Community Reinvestment Act Matters

        Under  current  law,  ratings  of  depository   institutions  under  the
Community  Reinvestment  Act of 1977 ("CRA") must be disclosed.  The  disclosure
will  include  both a  four-unit  descriptive  rating  -  using  terms  such  as
satisfactory and unsatisfactory - and a written evaluation of each institution's
performance.   Each  FHLB  is  required  to  establish  standards  of  community
investment  or service that its members must  maintain for  continued  access to
long-term  advances from the FHLBs.  The standards  take into account a member's
performance  under the Community  Reinvestment  Act and its record of lending to
first-time  home  buyers.  The FHLBs have  established  an  "Affordable  Housing
Program" to  subsidize  the  interest  rate of  advances to member  associations
engaged in lending for long-term,  low- and moderate-income,  owner-occupied and
affordable rental housing at subsidized rates. First Federal has participated in
such  programs  in the past and has  plans to  participate  in the  future.  The
examiners  have  determined  that First  Federal  has a  satisfactory  record of
meeting community credit needs.



                                       33
<PAGE>

Taxation

        Federal Taxation

        Historically,  savings  associations,  such as First Federal,  have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method.  However,  for years beginning after
December  31,  1995,  the Bank is no  longer  be able to use the  percentage  of
taxable  income method of computing its  allocable tax bad debt  deduction.  The
Bank is required to compute its allocable deduction using the experience method.
As a result of the repeal of the percentage of taxable  income method,  reserves
taken after 1987 using the percentage of taxable income method generally must be
included in future  taxable income over a six-year  period,  although a two-year
delay may be permitted  for  institutions  meeting a  residential  mortgage loan
origination test. First Federal will recapture approximately $440,000 over a six
year period  beginning in fiscal 1997.  In addition,  the pre-1988  reserve,  in
which no deferred taxes have been recorded,  will not have to be recaptured into
income unless (i) the Bank no longer qualifies as a bank under the Code, or (ii)
excess dividends are paid out by the Bank.

        Depending  on the  composition  of its items of income  and  expense,  a
savings  institution  may be subject to the  alternative  minimum tax. A savings
institution must pay an alternative  minimum tax equal to the amount (if any) by
which 20% of  alternative  minimum  taxable  income  ("AMTI"),  as reduced by an
exemption  varying with AMTI,  exceeds the regular tax due. AMTI equals  regular
taxable  income   increased  or  decreased  by  certain  tax   preferences   and
adjustments,  including depreciation  deductions in excess of that allowable for
alternative  minimum tax purposes,  tax-exempt interest on most private activity
bonds  issued  after  August 7, 1986  (reduced by any related  interest  expense
disallowed  for  regular  tax  purposes),  the  amount  of the bad debt  reserve
deduction  claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss).  AMTI may be reduced only up
to 90% by net operating loss carryovers,  but alternative  minimum tax paid that
is  attributable  to most  preferences  (although  not to  post-August  7,  1986
tax-exempt interest) can be credited against regular tax due in later years.

        The Corporation and its subsidiaries file a consolidated  federal income
tax  return,  which has the effect of  eliminating  intercompany  distributions,
including dividends,  in the computation of consolidated taxable income.  Income
of the Corporation  generally would not be taken into account in determining the
bad  debt  deduction   allowed  to  First  Federal,   regardless  of  whether  a
consolidated tax return is filed. However, certain "functionally related" losses
of the Corporation would be required to be taken into account in determining the
permitted bad debt deduction.

        The  Corporation's  federal  income tax returns have not been audited in
the last five years.



                                       34
<PAGE>

        State Taxation

        For its taxable year  beginning  January 1, 1990,  First Federal  became
subject to Indiana's Financial  Institutions Tax ("FIT"),  which is imposed at a
flat rate of 8.5% on  "adjusted  gross  income."  "Adjusted  gross  income," for
purposes  of FIT,  begins  with  taxable  income as defined by Section 63 of the
Internal Revenue Code and, thus, incorporates federal tax law to the extent that
it affects the  computation of taxable  income.  Federal  taxable income is then
adjusted by several Indiana modifications.  Other applicable state taxes include
generally applicable sales and use taxes plus real and personal property taxes.

Competition

        The Bank's  primary  market area  consists of Knox  County,  Indiana.  A
majority of the Bank's  savings  deposits  are  received  from  residents of its
primary  market area,  and a majority of its loans are secured by  properties in
this area.

        First Federal faces  substantial  competition  both in the attraction of
deposits  and in the making of mortgage  and other  loans in its primary  market
area.  Competition  for the origination of real estate loans  principally  comes
from  other  savings  institutions,   commercial  banks,  and  mortgage  banking
companies located in its primary market area.

        Under   current  law,  bank  holding   companies  may  acquire   savings
associations.  Savings associations may also acquire banks under federal law. To
date, several bank holding company  acquisitions of healthy savings associations
in Indiana have been completed.  Affiliations  between banks and healthy savings
associations  based in Indiana may also  increase the  competition  faced by the
Bank and the Corporation.

        In addition, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the  "Riegle-Neal  Act") permits bank holding  companies to acquire
banks  in  other  states  and,   with  state  consent  and  subject  to  certain
limitations,  allows banks to acquire  out-of-  state  branches  either  through
merger  or  de  novo  expansion.   The  State  of  Indiana  enacted  legislation
establishing  interstate  branching provisions for Indiana state chartered banks
consistent with those established by the Riegle-Neal Act (the "Indiana Branching
Law"). The Indiana  Branching Law authorizes  Indiana banks to branch interstate
by merger or de novo expansion and authorizes out-of-state banks meeting certain
requirements to branch into Indiana by merger or de novo expansion.  The Indiana
Branching Law became  effective  March 15, 1996.  This new  legislation may also
result in increased competition for the Corporation and the Bank.



                                       35
<PAGE>

        The primary  factors  influencing  competition for deposits are interest
rates,  service and convenience of office locations.  The Bank competes for loan
originations  primarily  through  the  efficiency  and  quality of  services  it
provides  borrowers  and  through  interest  rates  and  loan  fees it  charges.
Competition  is affected by, among other  things,  the general  availability  of
lendable funds,  general and local economic  conditions,  current  interest rate
levels, and other factors that are not readily predictable.

Current Accounting Issues

        In February  1997,  the FASB issued SFAS No. 128,  "Earnings  Per Share"
("SFAS  128").  SFAS 128  provides  computation,  presentation,  and  disclosure
requirements  for earnings per share.  The  requirements for the presentation of
primary and fully  diluted  earnings  per share will be replaced  with basic and
diluted  earnings  per share.  SFAS 128  Statement is  effective  for  financial
statements  for both interim and annual  periods ending after December 15, 1997,
and earlier  application  is not  permitted.  Due to the  Corporation's  current
capital  structure and limited  common stock  equivalents,  the Statement is not
expected to have a material  impact on the  financial  statements  or results of
operations of the Corporation.

        In  February  1997,  the  FASB  issued  SFAS  No.  129,  "Disclosure  of
Information  about  Capital  Structure"  ("SFAS  129").  SFAS 129 was  issued in
connection  with SFAS 128 and establishes  standards for disclosing  information
about an entity's  capital  structure.  SFAS 129 is effective for periods ending
after  December 15,  1997.  The adoption of SFAS 129 is not expected to have any
impact on the financial statements or results of operations of the Corporation.

        In June 1997,  the FASB  issued  SFAS No. 130  "Reporting  Comprehensive
Income" ("SFAS 130"),  which establishes  standards for reporting and displaying
comprehensive   income  and  its   components  in  the   financial   statements.
Comprehensive  income is the total of net  income  and all  nonowner  changes in
shareholders'  equity.  SFAS 130 is effective for fiscal years  beginning  after
December 15, 1997,  with  earlier  application  permitted.  The  Statement  will
require  new  disclosures  by the  Corporation,  but is not  expected  to have a
material  impact on the  financial  statements  or results of  operations of the
Corporation.

        In June 1997, The FASB issued SFAS No. 131,  "Disclosures About Segments
of an Enterprise and Related  Information"  ("SFAS 131"),  which  introduces new
guidance on segment reporting.  SFAS 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application  encouraged.  The Statement is
not expected to have a material impact on the financial statements or results of
operations of the Corporation.

Employees

        As of  September  9,  1997,  1ST  BANCORP  and its  subsidiaries  had 81
full-time and 6 part-time employees. None of these employees is represented by a
collective bargaining agreement or union, and the Corporation believes it enjoys
harmonious relations with its personnel.



                                       36
<PAGE>


Item 2.  Properties.

        At June 30, 1997, 1ST BANCORP and First Federal conducted their business
and  operations  from  the  main  office  located  at 101  North  Third  Street,
Vincennes, Indiana; a drive-up branch facility at 1700 Willow Street, Vincennes,
Indiana; and its office annex at 102 North Fifth Street, Vincennes, Indiana. The
property  and  buildings  are  owned by the Bank  with a net book  value of $2.0
million at June 30, 1997. First Financial conducted its business from its office
located at 626 Veterans Drive,  Vincennes,  Indiana.  This property and building
are owned by First  Financial  and had a net book value of  $412,000 at June 30,
1997.  A portion of the First  Financial  building  is leased to an  independent
third party.

Item 3.  Legal Proceedings.

        Neither 1ST BANCORP,  First Federal,  nor First Financial is involved in
any legal proceedings,  other than routine proceedings occurring in the ordinary
course of its business.

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

        No matter was  submitted to the  Corporation's  shareholders  during the
quarter ended June 30, 1997.

Item 4.5  Executive Officers of the Corporation.

        Presented below is certain information  regarding the executive officers
of the Corporation or the Corporation's  wholly owned subsidiary,  First Federal
Bank, A Federal Savings Bank:

        Frank  Baracani  (age  55)  has  been  President  and  Director  of  the
Corporation and First Federal during the past five years.

        Donald  G. Bell (age 67) has been Vice  President  and  Director  of the
Corporation;  Director of First Federal;  and Partner with the law firm of Hart,
Bell, Cummings, Ewing & Stuckey, Vincennes, Indiana during the last five years.

        C. James  McCormick  (72) has been  Chairman of the Board,  Director and
Chief  Executive  Officer  of the  Corporation,  and  Chairman  of the Board and
Director of First Federal during the last five years.



                                       37
<PAGE>

        Mary Lynn  Stenftenagel (43) has been Director and Secretary - Treasurer
of the  Corporation  and Director and Chief  Financial  Officer of First Federal
during the last five years.  Ms.  Stenftenagel has been Executive Vice President
and Secretary of First Federal  since  October,  1993 and for one year prior she
served as Senior Vice President of First Federal.

        John J. Summers (67) has been Vice Chairman of the Board and Director of
the  Corporation  and Vice  Chairman of the Board and Director of First  Federal
during the last five years.

                                     PART II

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

         The  information  required  herein is  incorporated  by reference  from
"Market  Information"  on  page  40 of  1ST  BANCORP's  1997  Annual  Report  to
Shareholders (the "Annual Report to Shareholders").


Item 6.  Selected Financial Data.

         The  information  required  herein is  incorporated  by reference  from
"Selected Financial Highlights" on page 3 of the Annual Report to Shareholders.


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

         The information required herein is incorporated by reference from pages
7 to 14 of the Annual Report to Shareholders.


Item 7A.  Quantitative and Qualitative Disclosures about Market Risks

         Because the majority of the  Corporation's  balance  sheet  consists of
interest  earning  assets and  interest  bearing  liabilities,  it is exposed to
interest  rate  risk.  Therefore,   additional  information  is  being  provided
regarding the exposure to this interest rate risk.

         The OTS requires all  regulated  thrift  institutions  to calculate the
estimated  change in the  institution's  net portfolio  value  ("NPV")  assuming
instantaneous,  parallel  shifts in the Treasury yield curve of 100 to 400 basis
points, either up or down, and in 100 basis point increments. The NPV is defined
as the  present  value of  expected  cash flows from  existing  assets  less the
present value of expected cash flows from existing  liabilities plus the present
value of net expected cash inflows from existing off-balance sheet contracts.


                                       38
<PAGE>

         The OTS provides  all  institutions  that file a schedule  entitled the
Consolidated  Maturity  & Rate  schedule  ("CMR")  as a part of their  quarterly
Thrift Financial Report with an interest rate sensitivity report of NPV. The OTS
simulation  model  uses a  discounted  cash flow  analysis  and an  option-based
pricing  approach to measuring  the interest  rate  sensitivity  of NPV. The OTS
model  estimates  the  economic  value of each  type of  asset,  liability,  and
off-balance  sheet contract  under the assumption  that the Treasury yield curve
shifts  instantaneous  and  parallel up and down 100 to 400 basis  points in 100
basis  point  increments.  The OTS allows  thrifts  under $500  million in total
assets to use the results of their  interest rate  sensitivity  model,  which is
based on information provided by the institution, to estimate the sensitivity of
NPV.

         The OTS model utilizes an option-based pricing approach to estimate the
sensitivity of mortgage  loans.  The most  significant  embedded option in these
types of assets is the prepayment  option of the  borrowers.  The OTS model uses
various price indications and prepayment  assumptions to estimate sensitivity of
mortgage  loans.  At June 30, 1997, the price  indications  for adjustable  rate
mortgage loans ranged from 87% to 108% of the underlying mortgage balances.  The
price  indications for fixed rate mortgage loans  securities  varied from 69% to
120% of the underlying  mortgage  balances.  Prepayment rates for mortgage loans
ranged from 4% to 76% Constant Prepayment Rate ("CPR") as of June 30, 1997.

         The  NPV  sensitivity  of  the  structured  securities  segment  of the
investment  securities  portfolio  is provided by the Bank to the OTS and is not
simulated  by the OTS model.  The  sensitivity  to interest  rate changes of the
Bank's  structured  securities is obtained by simulation  analysis  performed by
independent third party investment brokers. The remaining investment  securities
are valued by the OTS model based upon a  discounted  cash flow  approach  which
assumes semi-annual  interest cash flows with principal repaid at maturity.  The
cash flows are  discounted  based upon  Treasury  security  yields with  similar
maturities.

         In the OTS model,  the value of deposit  accounts  appears on the asset
and liability side of the NPV analysis.  In estimating the value of certificates
of deposit ("CD")  accounts,  the liability  portion of the CD is represented by
the implied  value when  comparing the  difference  between the CD face rate and
available  wholesale  CD rates.  On the asset side of the NPV  calculation,  the
value of the "customer  relationship"  due to the rollover of retail CD deposits
represents an intangible asset in the NPV calculation.

                                       39
<PAGE>

         Other  deposit  accounts  such as  transaction  accounts,  money market
deposit accounts,  passbook accounts,  and noninterest bearing accounts also are
included  on the  asset and  liability  side of the NPV  calculation  in the OTS
model.  These accounts are valued at 100% of the respective  account balances on
the  liability  side.  On the  asset  side of the  analysis,  the  value  of the
"customer relationship" of the various types of deposit accounts is reflected as
a deposit intangible.

         The NPV  sensitivity  of borrowed  funds is  estimated by the OTS model
based on a discounted cash flow approach.  The cash flows are assumed to consist
of monthly or  semi-annual  interest  payments with  principal  paid at maturity
(dependent  upon the type of borrowing).  These cash flows are discounted  based
upon London Interbank Offered Rates ("LIBOR").

         The OTS model is based only on the Bank level  balance  sheet.  Various
asset and liability  categories were adjusted to reflect the consolidated NPV of
the  Corporation.  These  adjustments  were not  material  to the outcome of the
simulation  analysis of NPV. The  following  table sets forth the  Corporation's
interest rate sensitivity of NPV as of June 30, 1997.

<TABLE>
<CAPTION>

                                           Net Portfolio Value
                            Net Portfolio                       as a % of Present Value
                                Value                                  of Assets
            ----------------------------------------------------------------------------------
                                 (Dollars in thousands)
  Change
in Rates       $ Amount        $ Change        % Change       NPV Ratio           Change
---------   ----------------------------------------------------------------------------------
<S>               <C>           <C>                 <C>              <C>        <C>    
+400 bp           9,894         (20,683)           -68%              3.98%      (705)bp
+300 bp          15,536         (15,041)           -49%              6.06%      (496)bp
+200 bp          21,103          (9,474)           -31%              8.00%      (302)bp
+100 bp          26,342          (4,235)           -14%              9.72%      (131)bp
   0 bp          30,577                                             11.03%
-100 bp          33,701           3,124             10%             11.92%        90 bp
-200 bp          35,986           5,409             18%             12.53%       151 bp
-300 bp          38,593           8,016             26%             13.22%       219 bp
-400 bp          41,940          11,363             37%             14.09%       306 bp

</TABLE>


         Various  strategies are in place to control the Corporation's  exposure
to interest rate risk. The Corporation has an Asset/Liability Committee ("ALCO")
comprised of senior  management  personnel  which is primarily  responsible  for
management  of the  Corporation's  exposure  to  interest  rate  risk.  The ALCO
actively  monitors the interest  rate risk  position and develops  strategies to
minimize  its  potential   negative  effects  on  the  Corporation's   financial
condition.  As its primary strategy to control the potential negative effects of
the Corporation's  market risk exposure,  the ALCO actively adjusts its interest
earning asset and interest bearing liability composition and pricing.

Item 8.  Financial Statements and Supplementary Data.

         The information required herein is incorporated by reference from pages
16 to 37 of the Annual Report to Shareholders.


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

         There were no such  changes  or  disagreements  during  the  applicable
period.



                                       40
<PAGE>


                                    PART III


Item 10.  Directors and Executive Officers of the Registrant.

         The   information   required   herein  with  respect  to  directors  is
incorporated  by reference from the definitive  proxy  statement of 1ST BANCORP,
dated September 26, 1997 (the "Proxy Statement") under "Proposal I - Election of
Directors" on pages 4 to 5 of the Proxy Statement.  Information  required herein
pursuant  to Item 405 of  Regulation  S-K  (Para.  229.405 of this  chapter)  is
incorporated  by  reference  from  page 10 of the Proxy  Statement.  Information
concerning the Corporation's  executive officers is included in Item 4.5 in Part
I of this report.


Item 11.  Executive Compensation.

         The information required herein is incorporated by reference from pages
7 to 9 of the Proxy Statement.


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

         The information required herein is incorporated by reference from pages
3 to 6 of the Proxy Statement.


Item 13.  Certain Relationships and Related Transactions.

         The information  required herein is incorporated by reference from page
10 of the Proxy Statement.

                                    PART IV.

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

         (a)  Documents Filed as Part of this Report

The following  financial  statements are  incorporated by reference (see Exhibit
13):

                                                                Page in the
                                                                1997 Annual 
                                                                 Report to
Financial Statements                                            Shareholders

Independent Auditors' Report                                         15

Consolidated Statements of Financial Condition
as of June 30, 1997, and 1996.                                       16

Consolidated Statements of Earnings for the
Years Ended June 30, 1997, 1996, and 1995.                           17

Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1997,
1996, and 1995.                                                      18

Consolidated Statements of Cash Flows for the
Years Ended June 30, 1997, 1996, and 1995.                           19

Notes to Consolidated Financial Statements.                          20

         (b) There were no reports on Form 8-K filed  during the  quarter  ended
         June 30, 1997.

         (c) The exhibits filed herewith or incorporated by reference herein are
         set forth on the Exhibit Index on page 43.

         (d) All schedules are omitted as the required information either is not
         applicable or is included in the Consolidated  Financial  Statements or
         related notes.



                                       41
<PAGE>


                                   SIGNATURES

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

                                             1ST BANCORP

Date:  September 24, 1997            By:/s/ C. James McCormick
                                        ---------------------------------
                                        C. James McCormick
                                        Chief Executive Officer

Date:  September 24, 1997            By:/s/ Frank D. Baracani
                                        ---------------------------------
                                        Frank D. Baracani
                                        Director and President

         Each person whose individual  signature appears below hereby authorizes
Frank D. Baracani as attorney-in-fact with full power of substitution to execute
in the name and on  behalf of each  person,  individually  and in each  capacity
stated below, and to file any and all amendments to this Form 10-K.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report  has been  signed  below by the  following  person on behalf of the
Registrant and in the capacities and on the dates set forth below:


/s/ C. James McCormick                            Date:  September 24, 1997
------------------------------------------        
C. James McCormick, Chairman of the Board         
and Chief Executive Officer                       
                                                  
/s/ John J. Summers                               Date:  September 24, 1997
------------------------------------------        
John J. Summers, Vice Chairman of the Board       
                                                  
/s/ Frank D. Baracani                             Date:  September 24, 1997
------------------------------------------        
Frank D. Baracani, Director, President            
                                                  
/s/ Donald G. Bell                                Date:  September 24, 1997
------------------------------------------        
Donald G. Bell, Director, Vice President          
                                                  
/s/ Mary Lynn Stenftenagel                        Date:  September 24, 1997
------------------------------------------        
Mary Lynn Stenftenagel, Director,                 
Secretary/Treasurer (Principal Accounting         
and Financial Officer)                            
                                                  
/s/ R. William Ballard                            Date:  September 24, 1997
------------------------------------------        
R. William Ballard, Director                      
                                                  
/s/ Rahmi Soyugenc                                Date:  September 24, 1997
------------------------------------------        
Rahmi Soyugenc, Director                          
                                                  
/s/ Ruth Mix Carnahan                             Date:  September 24, 1997
------------------------------------------        
Ruth Mix Carnahan, Director                       
                                                  
/s/ James W. Bobe                                 Date:  September 24, 1997
------------------------------------------        
James W. Bobe, Director                    

<PAGE>



                                  EXHIBIT INDEX

         No.          Exhibits
Page

         3a       Certificate of Incorporation (incorporated
                  by reference to Exhibit 3.1 to Registrant's
                  Registration Statement on Form S-4,
                  Registration No. 33-24587, filed September
                  28, 1988 (the "Registration Statement")                   *

         3b       Restated By-Laws of 1ST BANCORP (incorporated
                  by reference to Exhibit 3b to the
                  Registrant's Form 10-K for the year
                  ended June 30, 1994).                                     *

         10a      Incentive Stock Option Plan (incorporated
                  by reference from Exhibit 10a-1 to the
                  Registrant's Form 10-K for the year
                  ended June 30, 1991).                                     *

         10b      1ST BANCORP Stock Option Plan (incorporated
                   by reference from Exhibit 10b-1 to the
                   Registrant's Form 10-K for the year
                   ended June 30, 1991).                                    *

         10c       First Federal Management Incentive Plan 
                   for Fiscal Year 1994 (incorporated by reference 
                   to Exhibit 10c to the Registrant's Form 10-K 
                   for the year ended June 30, 1994).                       *

         10d       Form of Director Deferred Compensation
                   Agreement, dated July 1, 1993,  between
                   First Federal and each of C. James
                   McCormick, John J.  Summers, Frank D.
                   Baracani, Mary Lynn Stenftenagel, Robert W.
                   Ballard, Ruth Mix Carnahan, Donald G. Bell,
                   Rahmi Soyugenc, and James W. Bobe
                   (incorporated by reference to Exhibit 10d
                   to the Registrant's Form 10-K for the year
                   ended June 30, 1994).                                    *

         10e       Form of Executive Supplemental Retirement
                   Income Agreement, dated July 1, 1993,
                   between First Federal and each of C. James
                   McCormick, Frank D. Baracani, Mary Lynn
                   Stenftenagel, Robert W. Ballard, Carroll C.
                   Hamner, Wayne P. Kaufman, and Ronald E.
                   McGill (incorporated by reference to
                   Exhibit 10d to the Registrant's Form 10-K
                   for the year ended June 30, 1994).                       *

          10f      1ST BANCORP 1997 Employee Stock Purchase Plan
                   (incorporated by reference to Exhibit A to the
                   Registrant's 1996 Proxy Statement).

         13        Annual Report to Shareholders                            __

         21        Subsidiaries of the Registrant                           __

         23.1      Independent Auditors' Consent                            __

         23.2      Independent Auditors' Consent                            __

         23.3      Independent Auditors' Consent                            __

         27        Financial Data Schedule 
                   (to be filed electronically)


 (*) Previously filed with the SEC and by this reference  incorporated into this
Annual Report.