TABLE OF CONTENTS


President's Letter .................................................           2

Selected Consolidated Financial Data ...............................           3

Quarterly Results of Operations ....................................           5

Management's Discussion and Analysis of
  Financial Condition and Results of Operations ....................           6

Independent Auditors' Report .......................................          19

  Consolidated Statements of Financial Condition ...................          20

  Consolidated Statements of Income ................................          21

  Consolidated Statements of Stockholders' Equity ..................          22

  Consolidated Statements of Cash Flows ............................          23

  Notes to Consolidated Financial Statements .......................          25

Officers and Directors .............................................          46

Corporate Information ..............................................          47






                                                                               1
<PAGE>
                                                                Permanent
                                                                   Bancorp, Inc.
LETTER TO STOCKHOLDERS

To Our Stockholders:

         Permanent  Bancorp,  Inc. completed its fourth year as a public company
on March 31, 1998 and earned $2.64 million for the year. This amount  represents
a 103%  increase  from 1997 net  income  of $1.30  million.  Included  in 1997's
earnings is a $1.77  million  (pretax)  industry-wide  assessment by the Savings
Association   Insurance   Fund  ("SAIF")  of  the  Federal   Deposit   Insurance
Corporation.  Earnings for the year ended March 31, 1998  compared to prior year
earnings before the SAIF assessment increased by 11.4%. Basic earnings per share
were  $0.65 in  fiscal  1998  compared  to $0.31 in the prior  year and  diluted
earnings per share increased to $0.62 from $0.30 in the prior year.

         The market price of the Company's  stock reached  record highs in March
1998 and the Board of Directors  authorized a stock split,  effected in the form
of a 100% stock dividend, which was completed in April.

         The  Company has  recently  adopted a dividend  reinvestment  and stock
purchase  plan.  This  enables   stockholders   the  convenience  of  purchasing
additional stock without  incurring any brokerage  commissions or administrative
fees.

         The Board of Directors of the Company has elected a new director to its
board. In March 1998 Mr. Daniel L. Schenk,  President of IVY Tech State College,
Evansville  Region,  joined the Board. Mr. Schenk was also elected a director of
the subsidiary Bank.

         At the subsidiary level the Bank continues to increase its net interest
income and non-interest income while reducing  classified assets.  These trends,
coupled with a robust economy in the Evansville area, bodes well for the future.

         In addition, in April 1998 the Company announced that it had reached an
agreement to acquire four branch  locations from NBD Bank. This acquisition will
significantly  increase the Company's presence in the Evansville area and afford
it  marketing  and  other  operating  efficiencies.  This  acquisition  will add
approximately  $85 million to the Company's  deposit base and we look forward to
having the NBD personnel join the Permanent family.

         More recently Mr. Robert A. Cern has joined the management  team as our
Chief Financial Officer and Corporate Secretary.  Mr. Cern comes to us with many
years experience in financial and accounting management.

         The  banking  environment  is  changing  rapidly and the recent wave of
mega-mergers and  technological  advances will continue to reshape the financial
services  industry.  Permanent  continues to explore  growth  opportunities  and
profit  improvement  strategies.  In the near  future,  the Company will offer a
telephone  based bill paying  service and personal  computer  based home banking
service.

         We appreciate the continued  support of our customers and  shareholders
and look forward to another year of earnings improvement.





                                                         /s/Donald P. Weinzapfel
                                                         -----------------------
                                                         Donald P. Weinzapfel
                                                         Chairman of the Board
                                                         President and
                                                         Chief Executive Officer

2
<PAGE>
                                                                Permanent
                                                                   Bancorp, Inc.


SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands)
                                                                              At March 31,
----------------------------------------------------------------------------------------------------------------------
                                                     1998           1997          1996           1995          1994
----------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data:
<S>                                                <C>           <C>            <C>            <C>            <C>     
Total assets                                       $439,115      $423,698       $395,903       $342,678       $365,184
Loans, net                                          225,349       210,189        206,910        195,483        189,240
Cash and interest-bearing deposits                    6,083         6,364          4,916          5,573         36,235
Mortgage-backed securities available
  for sale                                           62,652        74,052         61,953            981
Mortgage-backed securities held
  to maturity                                        18,861        27,181         32,154         76,262         76,027
Securities available for sale                       105,619        85,180         73,171            992
Securities held to maturity                                            25             25         48,076         48,247
Goodwill                                                453           326            545            769          1,015
Deposits                                            282,942       280,753        280,008        267,520        285,180
Total borrowings                                     99,353       100,278         70,985         28,114         34,823
Stockholders' equity                                 42,683        39,095         41,494         43,488         41,747
<CAPTION>

                                                                          Year Ended March 31,
---------------------------------------------------------------------------------------------------------------------
                                                     1998           1997          1996           1995          1994
---------------------------------------------------------------------------------------------------------------------
Selected Operations Data:
<S>                                                 <C>           <C>            <C>            <C>           <C>    
Interest income                                     $30,521       $29,689        $25,892        $22,705       $21,785
Interest expense                                     19,342        18,724         16,354         13,352        13,616
---------------------------------------------------------------------------------------------------------------------
  Net interest income                                11,179        10,965          9,538          9,353         8,169
Provision for loan losses                               177           113            207            410           350
---------------------------------------------------------------------------------------------------------------------
  Net interest income after provision
    for loan losses                                  11,002        10,852          9,331          8,943         7,819
---------------------------------------------------------------------------------------------------------------------
Other income:
  Service charges                                       985           841            628            619           817
  Gain (loss) on sale of loans                           92            23             18            (16)          228
  Gain (loss) on sale of investment and
    mortgage-backed securities                           43           (56)            (6)             5            36
  Other                                                 972           816            797          1,085           544
---------------------------------------------------------------------------------------------------------------------
  Total other income                                  2,092         1,624          1,437          1,693         1,625
---------------------------------------------------------------------------------------------------------------------
</TABLE>    
<PAGE>
<TABLE>
<CAPTION>
<S>                                                 <C>           <C>            <C>            <C>           <C>    
Other expense:
  Salaries and employee benefits                      4,519         4,295          4,427          4,397         3,768
  Deposit insurance assessment                          276         2,351            711            738           776
  Occupancy                                             821           809            819            769           704
  Other                                               3,015         2,714          2,900          2,614         2,449
---------------------------------------------------------------------------------------------------------------------
  Total other expense                                 8,631        10,169          8,857          8,518         7,697
---------------------------------------------------------------------------------------------------------------------
Income before income taxes                            4,463         2,307          1,911          2,118         1,747
Income tax provision                                  1,818         1,003            662            874           721
---------------------------------------------------------------------------------------------------------------------
Net income                                          $ 2,645       $ 1,304        $ 1,249        $ 1,244       $ 1,026
=====================================================================================================================
</TABLE>
                                                                               3

<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                       At or For the Year Ended March 31,
---------------------------------------------------------------------------------------------------------------------------
                                                       1998           1997             1996           1995            1994
--------------------------------------------------------------------------------------------------------------------------- 
<S>                                            <C>            <C>             <C>             <C>             <C>                
Performance Ratios:
  Return on average assets (ratio of net
    income to average total assets)                    0.62%           0.31%           0.34%           0.36%          0.31%
  Interest rate spread information:
      Average during year                              2.41            2.40            2.28            2.41           2.40
      End of year                                      2.40            2.41            2.33            2.28           2.27
  Net interest margin (1)                              2.74            2.76            2.72            2.83           2.58
  Ratio of operating expense to average
    total assets                                       2.03            2.44            2.41            2.37           2.39
  Return on average stockholders' equity
    (ratio of net income to average
    stockholders' equity)                              6.45            3.25            2.95            2.92           4.90
  Ratio of average interest-earning
    assets to average interest-bearing
    liabilities                                      106.97          107.63          109.42          110.51          04.19

Asset Quality Ratios:
  Non-performing assets to total assets at
    end of year (2)                                    0.25            1.11            1.75            2.43           2.83
  Allowance for loan and real estate
    owned losses to non-performing
    assets                                           180.51           44.73           32.22           25.33          21.75
  Allowance for loan losses to total loans             0.87            1.00            1.07            1.06           1.11

Capital Ratios:
  Stockholders' equity to total assets at
    end of year                                        9.72            9.23           10.48           12.69          11.43
  Average stockholders' equity to average
    assets                                             9.63            9.63           11.54           12.29           6.34
Number of full-service offices                           11              11              11              11             11
Number of deposit accounts                           33,884          35,426          36,452          35,075         38,644
Book value per share (3)                       $      10.41   $        9.52   $        9.72   $        9.36   $       8.47
Dividend payout ratio                                 30.6%           46.7%           27.9%             N/A            N/A

</TABLE>

(1)  Net interest income divided by average interest-earning assets.
(2)  Non-performing assets consist of non-accruing loans, including in-substance
     foreclosures,  accruing  loans  past  due 90 or more  days,  troubled  debt
     restructurings and real estate owned.
(3)  Amounts reflect a stock split in the form of a 100% stock dividend on April
     14, 1998.

4
<PAGE>
                                                                Permanent
                                                                   Bancorp, Inc.

QUARTERLY RESULTS OF OPERATIONS

         The following table presents certain  selected  unaudited data relating
to  results  of  operations  for the  three  month  periods  ending on the dates
indicated.
<TABLE>
<CAPTION>
                                                                             Three Months Ended
--------------------------------------------------------------------------------------------------------------------
                                                       June 30,        September 30,    December 31,       March 31,
                                                         1997              1997             1997             1998
--------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>              <C>              <C>       
Fiscal 1998
Total interest income                                  $7,653,837       $7,784,083       $7,587,707       $7,495,779
Total interest expense                                  4,850,898        5,001,278        4,817,298        4,673,037
--------------------------------------------------------------------------------------------------------------------
Net interest income                                     2,802,939        2,782,805        2,770,409        2,822,742
Provision for loan losses                                  77,386           75,164             (500)          25,000
--------------------------------------------------------------------------------------------------------------------
Net interest income after
  provision for loan losses                             2,725,553        2,707,641        2,770,909        2,797,742
Other income                                              497,035          529,984          591,674          473,300
Other expense                                           2,123,438        2,140,755        2,196,172        2,170,962
--------------------------------------------------------------------------------------------------------------------
Income before income taxes                              1,099,150        1,096,870        1,166,411        1,100,080
Income tax provision                                      461,228          451,966          461,303          442,847
--------------------------------------------------------------------------------------------------------------------
Net income                                              $ 637,922        $ 644,904        $ 705,108        $ 657,233
====================================================================================================================
<CAPTION>
                                                                             Three Months Ended
--------------------------------------------------------------------------------------------------------------------
                                                       June 30,        September 30,    December 31,       March 31,
                                                         1996              1996             1996             1997
--------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>              <C>              <C>       
Fiscal 1997
Total interest income                                  $7,226,117       $7,436,240       $7,532,390       $7,493,878
Total interest expense                                  4,571,382        4,711,195        4,752,329        4,689,090
--------------------------------------------------------------------------------------------------------------------
Net interest income                                     2,654,735        2,725,045        2,780,061        2,804,788
Provision for loan losses                                  60,000           88,486         (132,040)          96,810
--------------------------------------------------------------------------------------------------------------------
Net interest income after
  provision for loan losses                             2,594,735        2,636,559        2,912,101        2,707,978
Other income                                              353,983          442,397          513,793          313,740
Other expense                                           2,037,515        3,915,272        2,135,720        2,080,249
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                         911,203         (836,316)       1,290,174          941,469
Income tax provision (benefit)                            406,800         (275,822)         573,492          298,516
--------------------------------------------------------------------------------------------------------------------
Net income (loss)                                      $  504,403       $ (560,494)       $ 716,682        $ 642,953
====================================================================================================================
</TABLE>
                                                                               5
<PAGE>
                                                                Permanent
                                                                   Bancorp, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General

         At March 31, 1998, Permanent Bancorp, Inc. (the "Company") successfully
completed  its fourth year as a publicly  owned  entity.  All  references to the
Company  before  March  31,  1994  refer  to the  operations  of  the  Company's
subsidiary,  Permanent Federal Savings Bank ("Permanent Federal" or the "Bank").
The principal  business of the Company consists of attracting  deposits from the
general  public and using these  deposits,  together with  borrowings  and other
funds, primarily to originate one- to four-family  residential mortgage loans as
well as multi-family  and commercial real estate,  automobile and other consumer
loans. The Company also originates  construction  and commercial  business loans
and invests in mortgage-backed  and other investment  securities.  The Company's
results of operations are primarily dependent on its interest rate spread, which
is the  difference  ("spread")  between  the average  yield on  interest-earning
assets, such as loans,  mortgage-backed and investment securities and short-term
interest  bearing  deposits  and  the  average  rate  paid  on  interest-bearing
liabilities,  such as  deposits  and  borrowings.  The  interest  rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. In addition to credit risk, the Company is
subject to  interest  rate risk to the degree that its  interest-earning  assets
mature  or  reprice  at  different  times,  or on a  different  basis,  than its
interest-bearing liabilities.

         The  Company's  results of  operations  also depend  upon,  among other
things, the level of fee income,  gains or losses on the sale of loans and other
assets,  provisions  for possible loan losses,  income  derived from  subsidiary
activities,  operating  expenses  and  income  taxes.  The  Company's  operating
expenses  principally consist of employee  compensation and benefits,  occupancy
expenses,   federal   deposit   insurance   premiums   and  other   general  and
administrative expenses.

         Permanent  Federal is  significantly  affected by  prevailing  economic
conditions,  including  federal  monetary  and  fiscal  policies,  as well as by
federal regulation of financial institutions. Deposit balances are influenced by
a number  of  factors,  including  interest  rates  paid on  competing  personal
investments   and  the  level  of  personal   income  and  savings   within  the
institution's  market area. In addition,  deposit balances are influenced by the
perceptions  of customers  regarding the stability of the financial  markets and
financial services industry.  Management expects to retain a significant portion
of existing  deposit  balances by offering  competitive  rates on such deposits.
Permanent  Federal has adopted a strategy of employing Federal Home Loan Bank of
Indianapolis (FHLB) advances to supplement deposits.  FHLB advances are expected
to augment the liquidity  necessary to fund lending  operations  and  investment
opportunities.  Lending  activities  are  influenced  by the demand for housing,
consumer  and  commercial  loans  as  well as  competition  from  other  lending
institutions.  The  primary  sources  of funds for  lending  activities  include
deposits,  loan  payments,  borrowings,  the sale of loans and other  assets and
funds provided from operations.
<PAGE>
Forward-looking Statements

         Certain  statements  in this report that relate to Permanent  Bancorp's
plans,  objectives  or future  performance  may be deemed to be  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  Such statements are based on Management's  current  expectations.  Actual
strategies  and  results  in future  periods  may differ  materially  from those
currently  expected  because  of  various  risks and  uncertainties.  Additional
discussion of factors affecting  Permanent  Bancorp's  business and prospects is
contained in the Company's  periodic  filings with the  Securities  and Exchange
Commission.

Information Systems and the Year 2000

         As is the case with  most  other  companies  using  computers  in their
operations,  the Company is in the process of addressing  the Year 2000 problem.
The Company is currently  engaged in a  comprehensive  project to ascertain that
the 

6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


computer programs it utilizes,  both internally  generated and those provided by
outside sources, will consistently and properly recognize the Year 2000. Many of
the Company's  significant  systems used to generate  both internal  reports and
external  documents  (such as account  statement  and  year-end tax reports) are
generated  by  an  outside  provider  of  data  processing  services  which  has
represented these systems will be Year 2000 compliant. The Company has initiated
contingency processing plans should this supplier not become Year 2000 compliant
in a timely manner.  The Company is in the process of obtaining  assurances from
vendors  that  timely  updates  will be made  available  to make  all  remaining
purchased software Year 2000 compliant.

         The Company  will  utilize  both  internal  and  external  resources to
reprogram or replace and test all of its software for Year 2000  compliance  and
the Company  expects to complete the project in early  calendar  year 1999.  The
estimated cost for this project is being funded through operating cash flows. No
assurance can be given by the Company that either it or its vendors will be Year
2000 compliant and failure by the Company and/or significant vendors to complete
Year 2000  compliance  work in a timely  manner  could have a  material  adverse
effect on certain of the Company's operations. 

FINANCIAL CONDITION

March 31, 1998 Compared to March 31, 1997

         The Company's  total assets at March 31, 1998 were $439.1  million,  an
increase  of $15.4  million,  or 3.6% from  $423.7  million  at March 31,  1997.
Investment and  mortgage-backed  securities  amounted to $187.1 million at March
31, 1998,  an increase of $694,000  from $186.4  million at March 31, 1997.  Net
loans  increased  by $15.2  million or 7.2% to $225.3  million at March 31, 1998
compared to $210.2  million at March 31,  1997.  Total  liabilities  were $396.4
million at March 31,  1998,  up $11.8  million,  or 3.1% from $384.6  million at
March 31,  1997.  Deposits of $282.9  million  were up $2.1 million or 0.8% from
$280.8  million  at March 31,  1997.  Federal  Home Loan  Bank  (FHLB)  advances
increased by $869,000 to $99.4  million at March 31, 1998 from $98.5  million at
March 31, 1997.  Total  stockholders'  equity increased by $3.6 million to $42.7
million at March 31, 1998. The Company earned $2.64 million and paid $809,000 of
dividends to its shareholders. The Company purchased $994,000 of treasury shares
and  received  $183,000  from the  issuance  of its  stock.  The  fair  value of
securities  increased by  approximately  $1.82 million and $509,000 of stock was
earned or became  vested under the  Company's  ESOP and  restricted  stock award
programs.

         One to four family first mortgage  loans  increased by $6.2 million and
consumer  loans  decreased by $1.3 million.  Commercial  and  multi-family  real
estate loans  increased by $611,000,  land and  construction  loans increased by
$1.6 million and commercial  paper increased by $8.1 million.  The allowance for
loan losses  decreased  by $153,000 as  non-performing  loans  decreased by $3.7
million from March 31, 1997 to March 31, 1998. 
<PAGE>
RESULTS OF OPERATIONS

Comparison of Operating Results for the Years Ended March 31, 1998 and March 31,
1997.

         General.  The Company's  net income of $2.64 million  during the fiscal
year ended  March 31,  1998 was $1.34  million  greater  than the $1.30  million
earned  during the fiscal year ended March 31, 1997.  The results of  operations
for the year ended March 31, 1997 include a $1.77 million  (pretax) payment of a
special assessment to recapitalize the Savings Association Insurance Fund (SAIF)
of the Federal Deposit  Insurance  Corporation  (FDIC).  The after tax impact 


                                                                               7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

of this assessment on earnings was $1.07 million.  Net income for the year ended
March 31, 1998  compared to prior year  earnings  before the special  assessment
increased $275,000 or 11.4%.

         Net Interest  Income.  The Company's net interest  income  increased by
$214,000 to $11.2  million  for the year ended March 31, 1998  compared to $11.0
million  for  the  year  ended  March  31,  1997.  The  increase  was  primarily
attributable  to  an  increase  in  average   interest  earning  assets  and  an
improvement in the interest rate spread of 0.01%.

         Interest  Income.  Interest  income for the year ended  March 31,  1998
increased  $833,000  to $30.5  million  compared  to $29.7  million for the same
period in 1997. With the exception of investment securities, interest income was
higher for all major  earning  asset  categories  including  increased  interest
income on loans of $713,000 (a 4.2% increase) and mortgage-backed  securities of
$269,000 (a 4.4%  increase).  Due to  decreased  holdings  of  interest  bearing
securities, investment security income decreased $199,000 or 3.2% from the prior
year. Due to increased holdings and an improved yield, dividends on Federal Home
Loan Bank stock were up by  $49,000.  Interest  income on loans  increased  as a
result of growth in average  loans  outstanding  of $ 5.6  million  for the year
ended March 31, 1998.  The weighted  average yield on loans was 8.14% during the
fiscal year ended March 31, 1998  compared to 8.02% during the fiscal year ended
March 31, 1997.  Interest  income on  mortgage-backed  securities also increased
primarily as a result of higher outstanding balances. Mortgage-backed securities
balances  averaged  $97.7  million  during fiscal 1998 compared to $91.4 million
during fiscal 1997.  Interest  bearing  securities and FHLB stock averaged $93.2
million  during fiscal 1998,  compared to $95.2 million  during fiscal 1997. The
weighted  average  yields on  mortgage-backed  securities  and interest  bearing
securities and FHLB stock were 6.52% and 7.01%, respectively during fiscal 1998,
compared to 6.67% and 7.02%, respectively,  during fiscal 1997. During 1998, the
Company made  investments of $500,000 in a limited  partnership  that invests in
the stock of other financial institutions. The fair value of this investment was
$614,000 at March 31, 1998.

         Interest  Expense.  Interest  expense  increased  by  $619,000 to $19.3
million  during the fiscal year ended March 31, 1998  compared to $18.7  million
during  fiscal 1997.  Interest  paid on deposits  increased by $99,000 due to an
increase of $2.8  million in average  deposit  balance  which more than offset a
decrease  in the rate paid from 4.84% to 4.83%.  Interest  on Federal  Home Loan
Bank advances increased by $545,000 as average balances outstanding increased by
$9.1 million and the average  rate paid on advances  also  increased  from 5.74%
during fiscal 1997 to 5.77% during fiscal year 1998.

         Provision for Loan Losses.  The Bank establishes its provision for loan
losses and  evaluates  the  adequacy of its  allowance  for loan losses based on
management's  evaluation of the risk inherent in its loan  portfolio and changes
in the nature and volume of its loan activity. Such evaluation, which includes a
review of all loans for which full collectibility may not be reasonably assured,
considers,  among other  matters,  the  estimated  fair value of the  underlying
collateral,   economic   conditions,   historical  loan  loss  experience,   the
composition of its loan portfolio and other factors that warrant  recognition in
providing for an adequate loan loss allowance.  This methodology is performed on
a periodic  basis,  generally  monthly,  and is designed to ensure that  matters
<PAGE>
affecting  loan  collectibility  will  be  identified  in a  timely  manner  and
evaluated by management in determining the necessary  reserves and the provision
for loan losses. The amounts actually reported in each period will vary with the
outcome of this detailed review.

         During the year ended March 31, 1998, the Company  recorded a provision
for loan  losses of $177,050  compared to $113,256  for the year ended March 31,
1997.  Net charge  offs  amounted  to $330,000  during  fiscal 1998  compared to
$225,000 during fiscal 1997. Asset quality, as measured by non-performing  loans
to total  loans,  improved  significantly  for the year  ended  March  31,  1998
compared to the prior year.  The ratios of  non-performing  loans to total loans
was  0.40% at March  31,  1998 and 2.16% at March  31,  1997  respectively.  The
allowance  for losses,  as a ratio to total  loans,  was 0.87% at March 31, 1998
compared to 1.00% at March 31, 1997.  At March 31, 1998 and 1997,  the

8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

allowance  for loan losses as a percentage of  non-performing  loans was 216.58%
and 46.31%, respectively.  It is management's belief that the allowance for loan
losses  reflects  an  adequate  reserve  against  potential  losses  in the loan
portfolio.  Future additions to the Company's  allowance for loan losses and any
change  in the  related  ratio to  nonperforming  loans are  dependent  upon the
performance of the Company's loan portfolio, the economy, inflation,  changes in
real estate and other  collateral  values and interest rates as well as the view
of  regulatory  authorities  toward  adequate  reserve  levels.  See also "Asset
Quality."

         Other Income.  Other income increased by $468,000 to $2,092,000  during
the fiscal year ended March 31, 1998.  This represents an increase of 28.8% over
the prior year.  Service  charges  increased  by $144,000  and profit on sale of
loans,  securities and real estate owned  increased by $193,000.  Commissions on
the sale of investment  and insurance  products  increased by $68,000.  Earnings
from other sources were up by $63,000 during fiscal 1998.

         Other Expense.  The Company's other expense  decreased by $1.54 million
from fiscal 1997 to fiscal 1998. The decrease is primarily  attributable  to the
aforementioned  $1.77 million SAIF  assessment.  Salaries and employee  benefits
increased  $224,000 or 5.2%.  The majority of this increase is  attributable  to
increased expense associated with the Company's ESOP and restricted stock awards
programs.

         Income Tax Provision.  The Company's income tax provision  increased by
$814,000  from  fiscal 1997 to fiscal 1998  primarily  as a result of  increased
pretax earnings.

RESULTS OF OPERATIONS

Comparison of Operating Results for the Years Ended March 31, 1997 and March 31,
1996.

         General.  The Company's net income of $1.30 million for the fiscal year
ended March 31, 1997 was slightly  improved from the $1.25 million earned during
the fiscal year ended March 31, 1996. The earnings  improvement occurred despite
the  payment  of a  special  assessment  in  the  amount  of  $1.77  million  to
recapitalize  the  Savings  Association  Insurance  Fund  (SAIF) of the  Federal
Deposit Insurance Corporation (FDIC). The after tax impact of this assessment on
earnings was $1.07 million.

         Net Interest  Income.  The Company's net interest  income  increased by
$1.5 million to $11.0 million for the year ended March 31, 1997 compared to $9.5
million  for  the  year  ended  March  31,  1996.  The  increase  was  primarily
attributable to an increase in interest earning assets and an improvement in the
interest rate spread.

         Interest  Income.  Interest  income for the year ended  March 31,  1997
increased  $3.8 million to $29.7 million  compared to $25.9 million for the same
period  in  1996.  Interest  income  was  higher  for all  major  earning  asset
categories   including   increased   interest   income  on  loans  of  $458,000,
mortgage-backed securities of $341,000, and investment securities of $2,851,000.
Due to increased  holdings,  dividends on Federal Home Loan Bank stock were also
up by  $166,000.  Income  on  interest  bearing  deposits  was  down by a modest
$19,000.  Interest  income on loans  increased  as a result of growth in average
<PAGE>
loans  outstanding  of $3.9  million  for the year  ended  March 31,  1997.  The
weighted average yield on loans was 8.02% during the fiscal year ended March 31,
1997  compared to 8.13%  during the fiscal year ended March 31,  1996.  Interest
income on mortgage-backed and investment  securities also increased primarily as
a result of higher outstanding  balances.  Mortgage-backed  securities  averaged
$91.4 million  during fiscal 1997 compared to $87.6 million  during fiscal 1996.
Securities  and FHLB stock averaged $95.2 million during fiscal 1997 compared to
$60.3 million during fiscal 1996. The weighted average yields on mortgage-backed
and investment  securities were 6.67% and 7.02% respectively during fiscal 1997,
compared to 6.58% and 6.09% during fiscal 1996.


                                                                               9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         Interest  Expense.  Interest expense increased by $2.3 million to $18.7
million  during the fiscal year ended March 31, 1997  compared to $16.4  million
during fiscal 1996.  Interest  paid on deposits  decreased by $109,000 due to an
decrease  in the average  rate paid to 4.84% from 4.93%,  which more than offset
the decrease of $2.8 million in average  deposit  balances.  Interest on Federal
Home  Loan  Bank  advances   increased  by  $2.5  million  as  average  balances
outstanding  increased by $46.3  million.  The average rate paid on advances was
5.74% during fiscal 1997 compared to 6.17% during fiscal year 1996.

         Provision  for Loan Losses.  During the year ended March 31, 1997,  the
Company  recorded a provision  for loan losses of $113,000  compared to $207,000
for the year ended March 31,  1996.  During the period  ended March 31, 1997 the
bank  reduced the loan loss  provision  by $232,000  relating to the reversal of
specific reserves on a previously  impaired loan. This decrease in the provision
is partially offset by increases of $119,000 reflecting increased charge offs on
consumer loans. Net recoveries  amounted to $225,000 during fiscal 1997 compared
to $62,000  during fiscal 1996.  Asset  quality,  as measured by  non-performing
loans to total loans, improved for the year ended March 31, 1997 compared to the
same period a year ago. The ratios of non-performing  loans to total assets were
1.11% at March 31, 1997 and 1.75% at March 31, 1996, respectively. The allowance
for losses,  as a ratio to total loans,  was 1.00% at March 31, 1997 compared to
1.07% at March 31, 1996.

         Other Income.  Other income increased by $187,000 to $1,624,000  during
the fiscal year ended March 31,  1997.  Service  charges  increased by $213,000,
profit on sale of loans by $5,000,  and gains on real  estate  owned by $10,000.
Commissions on investment and insurance products decreased by $20,000. A loss of
$56,000 was realized on the sale of investment  and  mortgage-backed  securities
compared to a loss of $6,000  during  fiscal 1996.  Earnings  from other sources
were up by $29,000 during fiscal 1997.

         Other Expense.  The Company's other expenses  increased $1.3 million to
$10.2  million for the year ended March 31,  1997,  compared to $8.9 million for
the year ended March 31, 1996, primarily because of the inclusion of the special
FDIC-SAIF special  assessment in the amount of $1.77 million mentioned under the
"general"  heading above.  Salaries and employee  benefits were $133,000 or 3.0%
lower  during  fiscal 1997 than during  fiscal 1996,  while most other  expenses
remained relatively stable.

         Income Tax Provision. The Company's income tax provision increased from
$661,000  for the year ended  March 31,  1996 to  $1,003,000  for the year ended
March 31,  1997.  The  increase  was  primarily  because the Company was able to
recognize a greater loan loss  deduction  for tax purposes due to growth in loan
balances during fiscal 1996.

10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         Average  Balance  Sheet.  The following  table presents for the periods
indicated the average balance of  interest-earning  assets and  interest-bearing
liabilities,  the amount of interest  income and the interest  expense,  and the
average  yield on assets and the average  cost of  liabilities.  Such yields and
costs are derived by dividing  interest income or expense by the average balance
of assets or liabilities, respectively, for the periods shown. No tax equivalent
adjustments  were made.  Non-accruing  loans have been  included in the table as
loans carrying a zero yield.
<TABLE>
<CAPTION>
(Dollars in Thousands)                      1998                             1997                              1996
--------------------------------------------------------------------------------------------------------------------------------
                                Average   Interest  Average      Average   Interest   Average       Average   Interest   Average
                              Outstanding  Earned/  Yield/     Outstanding  Earned/   Yield/      Outstanding  Earned/   Yield/
                                Balance     Paid     Rate        Balance     Paid      Rate         Balance     Paid      Rate
--------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>        <C>         <C>         <C>        <C>         <C>  
Interest-earning assets:
 Loans                          $214,982   $17,509    8.14%      $209,420   $16,796     8.02%       $200,940   $16,338     8.13%
 Mortgage-backed securities       97,668     6,370    6.52         91,431     6,101     6.67          87,551     5,761     6.58 
 Securities and FHLB stock        93,210     6,536    7.01         95,212     6,686     7.02          60,268     3,669     6.09 
 Other                             1,416       106    7.49          1,869       106     5.67           1,854       124     6.69 
--------------------------------------------------------------------------------------------------------------------------------
  Total interest-earning                                                                                                        
   assets (1)                   $407,276   $30,521    7.49%      $397,932   $29,689     7.46        $350,613   $25,892     7.38 
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                
Interest-bearing liabilities:                                                                                                   
 Deposits                       $278,181   $13,431    4.83%      $275,407   $13,333     4.84        $272,568   $13,442     4.93 
 FHLB advances                   101,704     5,866    5.77         92,604     5,320     5.74          46,308     2,856     6.17 
 Other borrowings                    845        46    5.44          1,693        71     4.19           1,541        56     3.63 
--------------------------------------------------------------------------------------------------------------------------------
  Total interest-bearing                                                                                                        
   liabilities                  $380,730   $19,343    5.08%      $369,704   $18,724     5.06        $320,417   $16,354     5.10 
--------------------------------------------------------------------------------------------------------------------------------

Net interest income                        $11,178                          $10,965                            $ 9,538
--------------------------------------------------------------------------------------------------------------------------------

Net interest rate spread                              2.41%                             2.40%                              2.28%
--------------------------------------------------------------------------------------------------------------------------------

Net earning assets              $ 26,546                         $ 28,228                           $ 30,196
--------------------------------------------------------------------------------------------------------------------------------

Net interest margin(2)                               2.74%                              2.76%                              2.72%
--------------------------------------------------------------------------------------------------------------------------------

Average interest-earning
 assets to average interest-
 bearing liabilities              106.97%                          107.64%                            109.42%
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated net of deferred loan fees, loan  discounts,  loans in process and
loss reserves. (2) Net interest margin represents net interest income divided by
average interest-earning assets.

                                                                              11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


         Rate/Volume Analysis.  The following table presents the extent to which
changes in interest rates and changes in the volume of  interest-earning  assets
and interest-bearing liabilities have affected the Company's interest income and
interest   expense   during  the  years   indicated.   For  each   category   of
interest-earning  assets  and  interest-bearing   liabilities,   information  is
provided for changes  attributable  to (i) changes in volume  (i.e.,  changes in
volume multiplied by prior rate) and (ii) changes in rate (i.e., changes in rate
multiplied by prior volume).  Changes  attributable to both rate and volume have
been allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
                                                                         Year Ended March 31,
---------------------------------------------------------------------------------------------------------------------
(In Thousands)                                            1998 vs. 1997                       1997 vs. 1996
---------------------------------------------------------------------------------------------------------------------
                                                 Increase (Decrease)      Total      Increase (Decrease)      Total
                                                       Due to           Increase           Due to           Increase
                                                Volume        Rate     (Decrease)    Volume       Rate     (Decrease)
---------------------------------------------------------------------------------------------------------------------
<S>                                               <C>        <C>         <C>         <C>          <C>         <C>   
Interest-earning assets:
 Loans receivable                                 $ 451      $  263      $  714      $  676       $ (218)     $  458
 Mortgage-backed securities                         402        (133)        269         258           82         340
 Securities and FHLB stock                         (140)        (10)       (150)      2,386          631       3,017
 Other                                                                                    1          (19)        (18)
---------------------------------------------------------------------------------------------------------------------
   Total interest-earning assets                  $ 713      $  120      $  833      $3,321       $  476      $3,797
---------------------------------------------------------------------------------------------------------------------

Interest-bearing liabilities:
 Deposits                                         $ 134      $  (36)     $   98      $  143       $ (252)     $ (109)
 FHLB advances                                      525          21         546       2,645         (181)      2,464
 Other borrowings                                   (62)         37         (25)          6            9          15
---------------------------------------------------------------------------------------------------------------------
   Total interest-bearing liabilities             $ 597      $   22      $  619      $2,794       $ (424)     $2,370
=====================================================================================================================

Net change in interest income                                            $  214                               $1,427
=====================================================================================================================
</TABLE>
<PAGE>
         The  following  table  presents the weighted  average  yields on loans,
investments and other  interest-earning  assets,  the weighted  average rates on
savings  deposits and borrowings and the resultant  interest rate spreads at the
dates indicated:
<TABLE>
<CAPTION>
                                                                        At March 31,
                                                   1998                    1997                     1996
--------------------------------------------------------------------------------------------------------- 
<S>                                                <C>                     <C>                      <C>  
Weighted average yield on:
 Loans, net                                        7.91%                   8.02%                    8.01%
 Mortgage-backed securities                        6.80                    6.71                     6.87
 Securities                                        6.84                    7.05                     6.40
 Other                                             6.06                    6.69                     5.35
  Combined weighted average yield on
   interest-earning assets                         7.42                    7.47                     7.39
Weighted average rate paid on:
 Savings deposits                                  3.77                    3.87                     3.90
 Demand and NOW deposits                           1.79                    2.06                     2.20
 Time deposits                                     5.78                    5.67                     5.74
 FHLB Advances                                     5.39                    5.65                     5.77
 Other Borrowings                                                          5.19                     4.76
  Combined weighted average rate paid
   on interest-bearing liabilities                 5.02                    5.05                     5.06
Spread                                             2.40                    2.41                     2.33
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset Quality

         In  accordance  with the  Company's  classification  of assets  policy,
management periodically evaluates the loan and investment portfolios to identify
substandard  assets  that may  contain  the  potential  for loss.  In  addition,
management evaluates the adequacy of its allowance for possible loan losses.

         Non-Performing  Assets.  The following table sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio.  For the years
presented,  the Bank had no accruing loans  delinquent  more than 90 days.  Real
estate owned includes loans classified as in-substance foreclosures and property
acquired in  settlement  of  foreclosed  loans which are carried at the lower of
cost or estimated fair value less  estimated cost to sell.  Other assets include
other repossessed assets.
<TABLE>
<CAPTION>

                                                                          Year Ended March 31,
--------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)                                1998           1997          1996          1995          1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>           <C>         <C>    
Non-accruing loans:
  One- to four-family                                 $ 822         $1,131        $  695        $1,219      $ 1,911
  Multi-family                                                       1,062         3,654         3,696        3,912
  Commercial real estate                                                                                        646
  Construction or development                            12            171           171                         57
  Consumer                                               77             99           185            78           93
--------------------------------------------------------------------------------------------------------------------
    Total                                               911          2,463         4,705         4,993        6,619
--------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings                                         2,128         2,165         3,293        3,341
--------------------------------------------------------------------------------------------------------------------
Total non-performing loans                            $ 911         $4,591        $6,870        $8,286      $ 9,960
Real estate and other assets owned:
  One- to four-family                                    93             41            22             7           46
  Construction or development                                                                       26          342
  Consumer                                               89             53            54            25
--------------------------------------------------------------------------------------------------------------------
    Total                                               182             94            76            58          388
--------------------------------------------------------------------------------------------------------------------
Total non-performing assets                          $1,093         $4,685        $6,946        $8,344      $10,348
====================================================================================================================

Total as a percentage of total assets                  0.25%          1.11%         1.75%         2.43%        2.83%
====================================================================================================================
</TABLE>

         At  March  31,  1998  the Bank  had one  non-performing  asset  with an
outstanding balance in excess of $100,000.  This compares to four non-performing
assets at March 31, 1997 that had balances in excess of $100,000.
<PAGE>

         Non-accruing Loans. As of March 31, 1998, the Bank had $911,000 in book
value of  non-accruing  loans compared to $2.5 million as of March 31, 1997. For
the year ended  March 31,  1998,  gross  interest  income  which would have been
recorded had the Bank's non-accruing loans been current in accordance with their
original  terms  amounted to $73,000.  The amount that was  included in interest
income on such loans was $39,000 for the year ended March 31, 1998.

         Real Estate Owned.  At March 31, 1998, the Bank's real estate  acquired
through foreclosure totaled $93,000.

         Other Loans of Concern.  In addition to the  non-performing  assets set
forth in the table above,  as of March 31, 1998,  there was an aggregate of $3.2
million in net book value of loans which  management is closely  monitoring  for
the  borrowers'  ability to comply  with  current  repayment  terms.  Management
believes it has taken a  conservative  approach in  evaluating  under-performing
credits.

                                                                              13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


         Delinquent  Loans.  The  following  table sets  forth the  Bank's  loan
delinquencies by type, amount and percentage at March 31, 1998.
<TABLE>
<CAPTION>
                                                                   Loan Delinquent For:
------------------------------------------------------------------------------------------------------------------------
                                       30-59 Days                    60-89 Days                   90 Days and Over
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)          Number   Amount  Percentage   Number   Amount  Percentage   Number   Amount   Percentage
------------------------------------------------------------------------------------------------------------------------
<S>                               <C>    <C>        <C>        <C>   <C>       <C>           <C>   <C>         <C>    
Real Estate:
  One- to four-family             111    $3,161     81.65%     52    $1,598    96.32%        24    $   822     90.23% 
  Construction or                                                                                                     
    development                     1         1      0.03%                                    1         12      1.32% 
  Consumer                        107       709     18.32%     14        61     3.68%        14         77      8.45% 
----------------------------------------------------------------------------------------------------------------------
       Total                      219    $3,871    100.00%     66    $1,659    100.00%       39     $  911    100.00%
======================================================================================================================
</TABLE>
         Allowance for Loan Losses. The allowance for loan losses is established
through a provision  for loan losses based upon  management's  evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of it's
loan activity.

         The following  table sets forth an analysis of the Bank's  allowance at
the years indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands)                                                         At March 31,
--------------------------------------------------------------------------------------------------------------------
                                                      1998          1997           1996         1995           1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>            <C>          <C>           <C>   
Balance at beginning of year                         $2,126        $2,238         $2,093       $2,110        $2,077
Charge-offs:
  One- to four-family                                    56                           11           20             5
  Multi-family                                           72                                        86            97
  Consumer                                              276           354             93           63            57
  Commercial business                                                  17                         414           183
--------------------------------------------------------------------------------------------------------------------
                                                        404           371            104          583           342
--------------------------------------------------------------------------------------------------------------------
Recoveries:
  One- to four-family                                                   2             11          134
  Multi-family & commercial                                            98              4
  Consumer                                               74            46             27           22            25
--------------------------------------------------------------------------------------------------------------------
                                                         74           146             42          156            25
--------------------------------------------------------------------------------------------------------------------
Net charge-offs                                         330           225             62          427           317
Provision for loan losses charged
  to operations                                         177           113            207          410           350
--------------------------------------------------------------------------------------------------------------------
Balance at end of year                               $1,973        $2,126         $2,238       $2,093        $2,110
====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                  <C>           <C>            <C>          <C>           <C>   
Ratio of net charge-offs during the period to
  average loans outstanding during the year            0.15%         0.11%          0.03%        0.22%         0.17%
====================================================================================================================
Ratio of net charge-offs during the period to
  ending non-performing assets                        30.19%         4.80%          0.89%        5.12%         3.06%
====================================================================================================================
Ratio of provision for loan losses
  to total loans                                       0.08%         0.05%          0.10%        0.21%         0.19%
====================================================================================================================
Ratio of allowance for loan losses
  to non-performing loans                            216.58%        46.31%         32.58%       25.26%        21.18%
====================================================================================================================
Ratio of allowance for loan losses
  to total loans                                       0.87%         1.00%          1.07%        1.06%         1.11%
====================================================================================================================
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset/Liability Management

         The  measurement and analysis of the exposure of the Bank to changes in
the interest rate environment is referred to as asset/liability  management. One
method used to analyze the Bank's sensitivity to changes in interest rates is to
measure the difference between the amount of  interest-earning  assets which are
anticipated  to mature or reprice  within a given period of time compared to the
amount of  interest-bearing  liabilities which are expected to mature or reprice
within  the  same  period.  This  difference  is  known  as  the  interest  rate
sensitivity "gap." A gap is considered positive when the amount of interest rate
sensitive assets anticipated to reprice or mature exceeds the amount of interest
rate sensitive liabilities anticipated to reprice or mature in a given period. A
gap  is  considered   negative  when  the  amount  of  interest  rate  sensitive
liabilities anticipated to reprice or mature exceeds the amount of interest rate
sensitive assets anticipated to reprice or mature in a given period.

         At March 31, 1998,  the Company's  total  interest-bearing  liabilities
maturing or repricing  within one year exceeded  total  interest-earning  assets
maturing  or  repricing  in the same  period by $56.9  million,  representing  a
negative  cumulative  one-year gap ratio of 12.95% of total assets.  The Company
relies  on  certain  assumptions,   such  as  the  amount  and  timing  of  loan
prepayments,  among others,  in the measurement of the interest rate sensitivity
gap.  In  light  of  the  Company's  negative  cumulative  one-year  gap  ratio,
management believes that an increase in interest rates will adversely effect its
net interest income.

         The Company focuses lending efforts toward the origination and purchase
of  competitively  priced  adjustable-rate  loan  products and  fixed-rate  loan
products with  relatively  short terms to maturity,  generally  fifteen years or
less.  This allows the  Company to  maintain a portfolio  of loans which will be
sensitive to changes in the level of interest rates while providing a reasonable
spread to the cost of liabilities used to fund the loans.

         The effect of these  assumptions  is to quantify  the dollar  amount of
items that are  interest-sensitive  and which can be repriced within each of the
periods  specified.  Such repricing can occur in one of three ways: (i) the rate
of interest to be paid on an asset or liability may adjust  periodically  on the
basis of an interest rate index,  (ii) an asset or liability  such as a mortgage
loan may amortize,  permitting reinvestment of cash flows at the then-prevailing
interest  rate,  or (iii) an asset or  liability  may mature,  at which time the
proceeds can be reinvested at the current market rates.

         The  following  table sets forth the interest rate  sensitivity  of the
Company's  assets  and  liabilities  at  March  31,  1998  on the  basis  of the
above-described assumptions, and sets forth the repricing dates of the Company's
interest-earning  assets and interest-bearing  liabilities at March 31, 1998 and
the  Company's   interest  rate  sensitivity  "gap"  percentages  at  the  dates
indicated.  Information presented is based on estimated prepayment rates ranging
from 9% to 50% for  loans and  mortgage-backed  securities,  depending  on their
maturity and yield.  Passbook  savings and NOW account balances assume a 17% and
37% annual decay rate,  respectively,  and money market demand  amounts assume a
79% annual decay rate.

                                                                              15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                  Maturing or Repricing
------------------------------------------------------------------------------------------------------------------ 
                                         Less than         6-12           Over 1-3       Over 3-5          Over
                                         6 Months         Months           Years          Years          5 Years
------------------------------------------------------------------------------------------------------------------ 
<S>                                      <C>             <C>             <C>             <C>             <C>      
Fixed-rate one- to four-
  family, multi-family (including
  mortgage-backed securities),
  commercial real estate and
  construction loans                     $  16,284       $  10,009       $  30,186       $  21,630       $  40,648
Adjustable rate one- to four-
  family, multi-family (including
  mortgage-backed securities)
  commercial real estate and
  construction loans                        55,831          17,921          30,255          12,971          12,137
Consumer loans                              10,256           7,183          21,444           9,244           4,008
Investment securities and other             10,942                           7,001          21,849          77,186
                                         ---------       ---------       ---------       ---------       ---------
  Total interest-earning assets             93,313          35,113          88,886          65,694         133,979
                                         ---------       ---------       ---------       ---------       ---------
Savings deposits                             2,368           4,024          11,789           5,700          28,169
Demand and NOW deposits                      9,830           6,277           9,600           2,761           5,540
Certificates                                89,494          37,412          37,291          15,837          14,987
FHLB advances                               18,340          17,553          17,107           5,365          40,993
                                         ---------       ---------       ---------       ---------       ---------
  Total interest-bearing liabilities       120,032          65,266          75,787          29,663          89,689
                                         ---------       ---------       ---------       ---------       ---------
Interest-earning assets less
  interest-bearing liabilities           $ (26,719)      $ (30,153)      $  13,099       $  36,031       $  44,290
                                         =========       =========       =========       =========       =========

Cumulative interest-rate
  sensitivity gap                        $ (26,719)      $ (56,872)      $ (43,773)      $  (7,742)      $  36,548
                                         =========       =========       =========       =========       =========

Cumulative interest-rate
  gap as a percentage of assets              (6.08)%        (12.95)%         (9.97)%         (1.76)%          8.34%
                                         =========       =========       =========       =========       =========
</TABLE>

         In  evaluating  the Company's  exposure to interest rate risk,  certain
shortcomings  inherent  in the method of  analysis  presented  in the  foregoing
tables must be considered.  For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market
interest  rates,  while  interest rates on other types may lag behind changes in
market rates.  Additionally,  certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate  significantly  from
<PAGE>
those assumed in calculating the table. For example,  projected passbook,  money
market and NOW account maturities may materially change if interest rates change
significantly or if alternative  savings/investment  products become attractive.
The ability of many borrowers to service their debt may decrease in the event of
an  interest  rate  increase.  The  Company  considers  all of these  factors in
monitoring its exposure to interest rate risk.

         In addition,  the  foregoing  table does not  necessarily  indicate the
impact of general  interest rate movements on the Company's net interest  income
because the repricing of certain categories of assets and liabilities is subject
to competitive and other pressures  beyond the Company's  control.  As a result,
certain  assets and  liabilities  indicated as maturing or  otherwise  repricing
within a stated period may, in fact, mature or reprice at different times and at
different volumes.


16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The Office of Thrift Supervision ("OTS") requires the Bank to calculate
the  estimated   change  in  its  net  portfolio   value  ("NPV")   assuming  an
instantaneous,  parallel  shift in the Treasury  yield curve of 100 to 400 basis
points ("bp")  either up or down.  NPV  represents  the sum of future cash flows
discounted to present  value.  The OTS permits the Bank to utilize the OTS model
to  determine  the impact of parallel and  instantaneous  shifts in the Treasury
yields  curve.  While the OTS model uses data  submitted by the Bank to the OTS,
many of the assumptions imbedded in the model, such as loan prepayment rates and
deposit decay rates,  are determined by the OTS. The following  table sets forth
the Bank's  interest rate  sensitivity of NPV as of March 31, 1998 as calculated
by the OTS (dollars in 000's):
<TABLE>
<CAPTION>
                                      Net portfolio value                             NPV as % of PV of Assets
-----------------------------------------------------------------------------------------------------------------
   Change in
     rates               $ Amount         $ Change         % Change                NPV Ratio              Change
-----------------------------------------------------------------------------------------------------------------
<S>                        <C>             <C>               <C>                    <C>                  <C>     
    +400 bp                26,039          (26,434)          (50%)                   6.55%               (535 bp)
    +300 bp                33,181          (19,292)          (37%)                   8.12%               (378 bp)
    +200 bp                40,138          (12,335)          (24%)                   9.57%               (234 bp)
    +100 bp                46,707           (5,766)          (11%)                  10.85%               (105 bp)
       0 bp                52,473                                                   11.90%
    (100 bp)               57,316            4,843             9%                   12.72%               + 82 bp
    (200 bp)               60,845            8,373            16%                   13.25%               +134 bp
    (300 bp)               64,458           11,985            23%                   13.76%               +186 bp
    (400 bp)               69,635           17,162            33%                   14.52%               +262 bp
</TABLE>

Liquidity and Capital Resources

         The OTS  requires  minimum  levels of liquid  assets.  OTS  regulations
presently require the Bank to maintain an average daily balance of liquid assets
(United States Treasury, federal agency and other investments) equal to at least
4.0%  of the  sum of its  average  daily  balance  of net  withdrawable  deposit
accounts and borrowings  payable in one year or less. Such  requirements  may be
changed from time to time by the OTS to reflect  changing  economic  conditions.
Such  investments  are intended to provide a source of  relatively  liquid funds
upon which Permanent Federal may rely, if necessary, to fund deposit withdrawals
and other short-term  funding needs.  The Bank has  historically  maintained its
liquidity ratio in excess of that required. At March 31, 1998, the amount of the
Bank's liquidity was $192.7 million, resulting in a liquidity ratio of 65.55%.

         Liquidity  management is both a daily and long-term  responsibility  of
management.  The Bank  adjusts  its  investments  in liquid  assets  based  upon
management's  assessment  of (i) expected  loan demand,  (ii)  expected  deposit
flows,  (iii)  yields  available  on  interest-bearing  deposits  and  (iv)  the
objectives of its asset/liability management program. Excess liquidity generally
is  invested  in  interest-bearing   overnight  deposits  and  other  short-term
government and agency obligations. If the Bank requires additional funds, beyond
its internal ability to generate,  it has additional borrowing capacity with the
FHLB and collateral eligible for repurchase agreements.
<PAGE>
         The Bank  principally  uses its  liquidity  resources  to meet  ongoing
commitments,  to fund maturing  certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments,  to maintain liquidity,
and to meet operating  expenses.  At March 31, 1998, the Bank had  approximately
$4.9 million of loan  commitments  and an additional $5.5 million of undisbursed
loans in  process.  The Bank  anticipates  that it will  have  sufficient  funds
available to meet current loan commitments.

         Certificates of deposit  scheduled to mature in a year or less at March
31, 1998  totalled  $124 million.  Based on  historical  experience,  management
believes that a significant  portion of such deposits will remain with the Bank,
however, there can be no assurance that the Bank can retain all such deposits.


                                                                              17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         Management  believes  that loan  repayments  and other sources of funds
will be adequate to meet and exceed the Bank's  foreseeable short- and long-term
liquidity needs.

         The primary  investing  activities  of the Bank  include  investing  in
loans, mortgage-backed securities, U.S. Treasury and agency securities and other
investment  securities.  At March 31, 1998,  these assets accounted for 94.2% of
the  Company's  total  assets.  The  purchases  are funded  primarily  from loan
repayments,  maturities of  securities,  FHLB advances and increases in deposits
and net income.

         At March 31, 1998, the Bank had outstanding borrowings of $99.4 million
from the FHLB and had the capacity to borrow up to a total of approximately $203
million.

         Under the Financial Institutions Reform,  Recovery, and Enforcement Act
of  1989  ("FIRREA"),   the  capital  requirements  applicable  to  all  savings
institutions,  including the Bank, have been substantially  increased.  However,
the Bank is in compliance with the fully  phased-in  capital  requirements.  See
Note 10 to the  Consolidated  Financial  Statements for a further  discussion of
regulatory capital requirements.

         Dividends are subject to determination  and declaration by the Board of
Directors,  which will take into account the  Company's  consolidated  financial
condition  and results of  operations  as well as other  relevant  factors.  The
Company's  ability to pay  dividends is subject to federal  regulations  and its
continued compliance with regulatory capital  requirements.  The Company is also
subject to the requirements of Delaware law, which generally limits dividends to
an amount in excess of a company's net assets over paid-in-capital, or, if there
is no such excess, to its net profits for the current and immediately  preceding
fiscal year. See Note 10 to the Consolidated  Financial Statements for a further
discussion.

Impact of Inflation and Changing Prices

         The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted  accounting  principles
which require the measurement of financial position and results of operations in
terms  of  historical  dollars  without  considering  changes  in  the  relative
purchasing power of money over time because of inflation.

         Unlike  most  industrial  companies,  virtually  all of the  assets and
liabilities of Permanent Federal are monetary in nature.  As a result,  interest
rates  have a more  significant  impact on the  Company's  performance  than the
effects of general levels of inflation.  Interest rates do not necessarily  move
in the same  direction  or in the same  magnitude  as the  prices  of goods  and
services.  In the present  interest rate  environment,  the liquidity,  maturity
structure  and  quality  of  Permanent  Federal's  assets  and  liabilities  are
important factors in the maintenance of acceptable performance levels.

Recent Accounting Pronouncements

         The Financial  Accounting Standards Board has issued Statements 130 and
131 that the Company will be required to adopt in future periods.  See Note 1 to
the  Consolidated  Financial  Statements  for a  description  of the  statements
requirements.


18
<PAGE>
INDEPENDENT AUDITORS' REPORT


To the Stockholders and the Board of Directors of
    Permanent Bancorp, Inc.:

         We have audited the accompanying  consolidated  statements of financial
condition of Permanent  Bancorp,  Inc. and its subsidiary  (the "Company") as of
March 31, 1998 and 1997 and the consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period  ended March 31,
1998.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, such consolidated  financial statements present fairly,
in all material respects,  the financial position of Permanent Bancorp, Inc. and
its  subsidiary  as of  March  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.












/s/DELOITTE & TOUCHE L L P
--------------------------
DELOITTE & TOUCHE L L P

May 11, 1998
Indianapolis, Indiana

                                                                              19
<PAGE>
Consolidated Statements of                                      Permanent 
Financial Condition                                                Bancorp, Inc.
<TABLE>                                 
<CAPTION>
                                                                                                 March 31,
---------------------------------------------------------------------------------------------------------------------
                                                                                          1998               1997
---------------------------------------------------------------------------------------------------------------------
                                     ASSETS:
<S>                                                                                  <C>                <C>         
Cash                                                                                $   4,274,700      $   3,211,091
Interest-bearing deposits                                                               1,808,159          3,153,385
Total cash and cash equivalents                                                         6,082,859          6,364,476
Securities available for sale - at fair value
  (amortized cost - $105,529,613 and $87,020,254) (Notes 2, 8)                        105,618,621         85,180,313
Mortgage-backed securities available for sale - at fair value
  (amortized cost - $62,368,921 and $74,846,178) (Note 3)                              62,652,286         74,052,253
Securities held to maturity (Note 2)                                                                          25,000
Mortgage-backed securities held to maturity (fair value -
  $19,119,093 and $27,197,070) (Note 3)                                                18,861,416         27,180,891
Other investments                                                                       1,100,826          1,056,036
Loans (net of allowance for loan losses of $1,973,410 and
  $2,126,225) (Notes 4,13)                                                            225,349,258        210,189,422
Interest receivable, net                                                                3,270,173          3,539,085
Office properties and equipment, net (Note 5)                                           7,533,251          6,968,587
Real estate owned                                                                          93,182             40,653
Deferred income tax (Note 9)                                                              180,456          1,374,109
Federal Home Loan Bank stock (Note 7)                                                   5,466,000          5,192,600
Cash surrender value of life insurance (Note 12)                                        1,625,253          1,552,875
Goodwill (net of accumulated amortization of $1,909,003 and
  $1,741,967)                                                                             452,912            326,198
Other                                                                                     828,007            655,833
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                         $439,114,500       $423,698,331
=====================================================================================================================

                      LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits (Notes 6)                                                                   $282,942,123       $280,753,353
Federal Home Loan Bank advances (Note 7)                                               99,352,678         98,483,986
Advance payments by borrowers for taxes and insurance                                     979,859          1,014,598
Other borrowed funds (Note 8)                                                                              1,793,967
Interest payable                                                                        2,193,548          2,049,727
Other                                                                                  10,963,033            508,073
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                                     396,431,241        384,603,704
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                  <C>                <C>         
Commitments  and  contingencies   (Notes  4,13)  
STOCKHOLDERS' EQUITY (Notes 10,11,12):
Serial Preferred Stock ($.01 par value) Authorized and unissued
  - 1,000,000 shares
Common Stock ($.01 par value)  Authorized - 9,000,000  shares 
Issued - 4,927,000 and 4,917,964 Outstanding - 4,102,094
  and 4,104,150                                                                            49,241             49,180
Additional paid-in capital                                                             24,525,662         24,020,823
Treasury Stock - 682,674 and 635,786 shares - at cost                                  (6,255,083)        (5,547,823)
Retained Earnings - substantially restricted                                           25,127,127         23,393,701
Unrealized gains (losses) on securities available for sale, net
  of deferred tax of $147,127 and $(1,043,275)                                            225,247         (1,590,591)
ESOP borrowing                                                                           (714,150)          (952,200)
Unearned compensation - restricted stock awards                                          (274,785)          (278,463)
---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY                                                             42,683,259         39,094,627
---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                           $439,114,500       $423,698,331
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.

20
<PAGE>
Consolidated Statements of Income                               Permanent
                                                                   Bancorp, Inc.
<TABLE>
<CAPTION>
                                                                                    Years Ended March 31,
---------------------------------------------------------------------------------------------------------------------
                                                                              1998            1997           1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>             <C>            <C>      
INTEREST INCOME:
   Loans                                                                  $17,509,318     $16,796,387    $16,338,109
   Mortgage-backed securities and mortgage-backed securities
     held for sale                                                          6,370,350       6,101,478      5,760,962
   Investment securities and securities held for sale                       6,102,461       6,301,581      3,450,724
   Deposits                                                                   106,454         105,488        124,465
   Dividends on Federal Home Loan Bank stock                                  432,823         383,691        217,652
---------------------------------------------------------------------------------------------------------------------
                                                                           30,521,406      29,688,625     25,891,912
---------------------------------------------------------------------------------------------------------------------

INTEREST EXPENSE:
   Deposits (Note 6)                                                       13,431,142      13,332,587     13,441,629
   Federal Home Loan Bank advances (Note 7)                                 5,865,542       5,320,326      2,856,167
   Short-term borrowings (Note 8)                                              45,827          71,083         56,444
---------------------------------------------------------------------------------------------------------------------
                                                                           19,342,511      18,723,996     16,354,240
---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME                                                        11,178,895      10,964,629      9,537,672
PROVISION FOR LOAN LOSSES (Note 4)                                            177,050         113,256        206,923
---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION                              11,001,845      10,851,373      9,330,749
---------------------------------------------------------------------------------------------------------------------

OTHER INCOME:
   Service charges                                                            984,668         840,520        627,917
   Gain on sale of loans                                                       91,866          22,771         18,233
   Commissions                                                                607,806         539,487        559,593
   Gain (loss) on sale of securities and mortgage-backed
     securities                                                                42,643         (55,897)        (6,307)
   Gain on sale of real estate owned                                           41,966          16,811          6,400
   Other                                                                      323,044         260,221        231,133
---------------------------------------------------------------------------------------------------------------------
                                                                            2,091,993       1,623,913      1,436,969
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                         <C>             <C>            <C>      
OTHER EXPENSE:
   Salaries and employee benefits (Note 12)                                 4,519,290       4,294,824      4,427,347
   Deposit insurance assessment                                               275,986       2,350,715        710,909
   Occupancy (Note 13)                                                        821,412         809,138        818,544
   Equipment (Note 13)                                                        608,472         566,098        592,033
   Computer service                                                           537,903         494,374        484,652
   Advertising                                                                354,370         326,211        304,593
   Postage and office supplies                                                285,906         273,474        320,030
   Other                                                                    1,227,988       1,053,922      1,198,859
---------------------------------------------------------------------------------------------------------------------
                                                                            8,631,327      10,168,756      8,856,967
---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES                                                  4,462,511       2,306,530      1,910,751
INCOME TAX PROVISION (Note 9)                                               1,817,344       1,002,986        661,446
---------------------------------------------------------------------------------------------------------------------
NET INCOME                                                               $  2,645,167    $  1,303,544   $  1,249,305
=====================================================================================================================

EARNINGS PER SHARE OF COMMON STOCK
   Basic                                                                    $    0.65       $    0.31      $    0.28
   Diluted                                                                       0.62            0.30           0.27 
</TABLE>

See notes to consolidated financial statements.

                                                                              21
<PAGE>
Consolidated Statements of                                      Permanent
Stockholders' Equity                                               Bancorp, Inc.
                                    


         For the Years Ended March 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                 Additional                                                         
                                             Common Stock         Paid-in        Treasury         Retained       Unrealized        
                                         Shares      Amount       Capital          Stock          Earnings       Gain (Loss)       
---------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>        <C>                            <C>                 <C>        
BALANCES, APRIL 1, 1995                 4,926,104    $49,261    $23,586,140                    $21,847,208         $6,571     
Net income                                                                                       1,249,305                    
Unrealized loss on
 securities available for sale                                                                                   (104,942)    
ESOP shares earned                                                  265,528                                                   
Vesting of restricted stock awards                                                                                            
Cancellation of restricted
 stock awards                              (5,712)       (57)       (28,503)                                                  
Purchase of Treasury Stock               (436,744)                               (3,465,463)                                  
Issuance of restricted stock awards         6,000                     1,733          47,580                                   
Exercise of stock options                   7,138                                    56,604        (20,915)                   
Payment of dividends                                                                              (347,996)                   
---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996                4,496,786     49,204     23,824,898      (3,361,279)    22,727,602        (98,371)    

Net income                                                                                       1,303,544                    
Unrealized loss on
 securities available for sale                                                                                 (1,492,220)    
ESOP shares earned                                                  205,471                                                   
Vesting of restricted stock awards                                                                                            
Cancellation of restricted
 stock awards                              (2,428)       (24)       (12,116)                                                  
Purchase of Treasury Stock               (224,838)                               (2,286,925)                                  
Issuance of restricted stock awards         1,000                     2,570           7,930                                   
Exercise of stock options                  11,658                                    92,451        (28,806)                   
Payment of dividends                                                                              (608,639)                   
---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997                4,282,178      49,180    24,020,823      (5,547,823)    23,393,701     (1,590,591)    

Net income                                                                                       2,645,167                    
Unrealized gain on
 securities available for sale                                                                                  1,815,838     
ESOP shares earned                                                  383,336                                                   
Vesting of restricted stock awards                                                                                            
Cancellation of restricted
 stock awards                              (2,856)        (29)      (14,251)                                                  
Purchase of Treasury Stock                (92,000)                                 (993,628)                                  
Issuance of restricted stock awards         9,000          90       135,754                                                   
Exercise of stock options                  36,112                                   286,368       (103,131)                   
Payment of dividends                                                                              (808,610)                   
---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998                4,232,434      $49,241  $24,525,662     ($6,255,083)   $25,127,127       $225,247     
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                  Restricted       Total              
                                                      ESOP          Stock      Stockholders'   
                                                   Borrowing        Awards         Equity   
--------------------------------------------------------------------------------------------
<S>                                               <C>             <C>           <C>                            
BALANCES, APRIL 1, 1995                           ($1,428,300)    ($573,160)    $43,487,720                    
Net income                                                                        1,249,305                          
Unrealized loss on                                                                          
 securities available for sale                                                     (104,942)                   
ESOP shares earned                                    238,050                       503,578               
Vesting of restricted stock awards                                  135,740         135,740                    
Cancellation of restricted                                                                  
 stock awards                                                        28,560                                     
Purchase of Treasury Stock                                                       (3,465,463)                             
Issuance of restricted stock awards                                 (49,313)                             
Exercise of stock options                                                            35,689                          
Payment of dividends                                                               (347,996)                         
-------------------------------------------------------------------------------------------- 
BALANCES, MARCH 31, 1996                           (1,190,250)     (458,173)     41,493,631      
                                                                                            
Net income                                                                        1,303,544                          
Unrealized loss on                                                                          
 securities available for sale                                                   (1,492,220)                    
ESOP shares earned                                    238,050                       443,521              
Vesting of restricted stock awards                                  178,070         178,070                         
Cancellation of restricted                                                                  
 stock awards                                                        12,140                           
Purchase of Treasury Stock                                                       (2,286,925)                             
Issuance of restricted stock awards                                 (10,500)                                  
Exercise of stock options                                                            63,645                          
Payment of dividends                                                               (608,639)                         
--------------------------------------------------------------------------------------------                  
BALANCES, MARCH 31, 1997                             (952,200)     (278,463)     39,094,627              
                                                                                            
Net income                                                                        2,645,167                          
Unrealized gain on                                                                          
 securities available for sale                                                    1,815,838                    
ESOP shares earned                                    238,050                       621,386         
Vesting of restricted stock awards                                  125,242         125,242                    
Cancellation of restricted                                                                  
 stock awards                                                        14,280                                 
Purchase of Treasury Stock                                                         (993,628)                             
Issuance of restricted stock awards                                (135,844)                             
Exercise of stock options                                                           183,237                          
Payment of dividends                                                               (808,610)                         
--------------------------------------------------------------------------------------------                       
BALANCES, MARCH 31, 1998                            ($714,150)    ($274,785)    $42,683,259      
============================================================================================ 
</TABLE>
See notes to consolidated financial statements.


22
<PAGE>
Consolidated Statements of                                      Permanent 
Cash Flows                                                         Bancorp, Inc.
<TABLE>                                                         
<CAPTION>
                                                                                      Years Ended March 31,
----------------------------------------------------------------------------------------------------------------------
                                                                              1998            1997           1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>             <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                               $  2,645,167    $  1,303,544   $  1,249,305
Adjustments to reconcile net income to net cash
  provided by operating activities:
   Depreciation                                                               556,598         488,930        478,535
   Amortization and accretion                                                 258,006         (49,563)       (43,445)
   Vesting of restricted stock awards                                         125,243         178,070        135,740
   Provisions for loan and real estate owned losses                          (152,815)       (142,153)       257,689
   (Gain) Loss on sale of securities and mortgage-backed securities           (42,643)         51,120          5,808
   (Gain) on sale of loans                                                    (91,866)        (22,771)       (18,233)
   (Gain) Loss on sale of building and improvements                           (13,886)         61,766
   Gain on sale of real estate owned                                          (60,422)        (13,289)       (34,014)
   ESOP shares earned                                                         383,336         205,471        265,528
Changes in assets and liabilities:
   Proceeds from the sales of loans held for sale                           5,169,926         984,756      3,268,671
   Origination of loans for resale                                         (5,078,060)       (961,985)    (2,984,456)
   Other investments                                                          (51,135)       (422,734)
   Interest receivable                                                        268,912        (664,723)      (971,623)
   Deferred income taxes                                                       (1,430)       (113,861)       169,691
   Other assets                                                              (172,174)         79,790        241,695
   Interest payable                                                           143,821         127,092        206,775
   Other liabilities                                                        1,456,933          36,942       (226,637)
----------------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                          5,343,511       1,126,402      2,001,029
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Cash acquired through branch purchase                                      4,578,736
 Loans originated                                                         (71,094,339)    (61,791,343)   (61,639,620)
 Loan principal repayments                                                 73,116,431      76,390,492     55,018,039
 Proceeds from:
   Maturities of:
      Securities available for sale                                        60,991,550      18,000,000      9,000,000
      Securities held to maturity                                              25,000                     15,626,930
   Sales of:
      Securities and mortgage-backed securities available for sale         24,072,258      36,573,836
      Securities and mortgage-backed securities held to maturity                                           7,729,484
      Fixed assets                                                            187,596
      Real estate owned                                                       135,578          27,224        132,629
   Purchases of:
      Securities and mortgage-backed securities available for sale        (97,993,517)    (91,445,439)   (43,952,634)
      Securities and mortgage-backed securities held to maturity                                         (42,104,045)
      Loans                                                               (17,257,140)    (17,741,292)    (5,260,316)
      FHLB stock                                                             (273,400)     (1,689,000)      (932,300)
      Office properties and equipment                                        (457,064)       (305,595)      (482,009)
 Payments on mortgage-backed securities                                    24,282,962      15,416,207     12,594,721
 Increase in cash surrender value of life insurance                           (72,378)       (599,676)      (121,812)
 Other                                                                         16,517          49,499         33,534
----------------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                                258,790     (27,115,087)   (54,357,399)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
                            (Continued on next page)
                                                                              23
<PAGE>
Consolidated Statements of                                      Permanent 
Cash Flows                                                         Bancorp, Inc.
<TABLE>
<CAPTION>
                                                                                     Years Ended March 31,
----------------------------------------------------------------------------------------------------------------------
                                                                              1998           1997            1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>             <C>            <C>          
CASH FLOWS FROM FINANCING ACTIVITIES:
 Dividends paid                                                              (808,610)       (608,639)      (347,996)
 Purchase of treasury stock                                                  (993,628)     (2,286,925)    (3,465,463)
 Net change in deposits                                                    (3,542,954)        745,291     12,488,154
 Proceeds from FHLB advances                                              274,500,000     142,900,000     76,731,824
 Payments on FHLB advances                                               (273,631,307)   (112,719,231)   (34,117,384)
 Principal repayments of ESOP borrowing                                       238,050         238,050        238,050
 Advance payments by borrowers for taxes and insurance                        (34,739)         (7,665)      (120,411)
 Net change in other borrowed funds                                        (1,793,967)       (887,786)       256,985
 Net proceeds from issuance of common stock                                   183,237          63,645         35,689
----------------------------------------------------------------------------------------------------------------------
         Net cash provided by (used in) financing activities               (5,883,918)     27,436,740     51,699,448
----------------------------------------------------------------------------------------------------------------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                         (281,617)      1,448,055       (656,922)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            6,364,476       4,916,421      5,573,343
----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $   6,082,859   $   6,364,476  $   4,916,421
----------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid during the year for:
   Interest                                                             $  19,198,690   $  18,596,904   $ 16,147,465
   Income taxes                                                             1,588,000       1,097,000        547,508
 Noncash transactions:
   Transfers from loans to real estate owned                                  151,339          39,307        123,151
   Liability for purchase of available for sale securities                  8,995,000

</TABLE>

24
<PAGE>
                                                                 Permanent
                                                                   Bancorp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Organization  - Permanent  Bancorp,  Inc. (the  "Company"),  a Delaware
Corporation,  commenced  operations  on  March  31,  1994  upon  acquisition  of
Permanent Federal Savings Bank (the "Bank") in a transaction  accounted for as a
pooling  of  interests.  The  Company  was  initially  capitalized  and the Bank
acquired by the issuance of 4,761,000  shares of common stock which  resulted in
net proceeds to the Company of $22,809,881.

         Business of the Company - Permanent Bancorp, Inc. is a savings and loan
holding  company  incorporated  to hold all of the  outstanding  common stock of
Bank, with its principal offices in Evansville,  Indiana and branch locations in
Fort Branch, Jasper, Newburgh and Oakland City, Indiana.

         Basis of Presentation - The consolidated  financial  statements include
the accounts of the Company and the Bank which is wholly owned.  All significant
intercompany balances and transactions have been eliminated.

         Use  of  Estimates  -  The  preparation  of  financial   statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Actual results could differ from those estimates.
Estimates most  susceptible to change in the near term include the allowance for
loan losses and the fair value of securities.

         Cash and cash  equivalents  - All  highly  liquid  investments  with an
original maturity of three months or less are considered to be cash equivalents.

         Securities  Available  for  Sale  and  Securities  Held to  Maturity  -
Securities are classified and accounted for as follows:

         o Debt  securities that the Company has the positive intent and ability
to hold to maturity are classified as "held to maturity securities" and reported
at  amortized  cost.  Debt  securities  classified  as held to maturity and sold
within  three  months of their  expected  maturity or call dates are  considered
maturities  of the  securities.  Similarly,  the sale of held to  maturity  debt
securities  occurring  after  the  Company  has  collected  at least  85% of the
principal originally acquired is considered a maturity of the security.

         o Debt and equity securities that are acquired and held principally for
the  purpose  of  selling  them in the near  term  are  classified  as  "trading
securities" and reported at fair value with unrealized gains and losses included
in earnings.  The Company has not held trading securities during the three years
ended March 31, 1998.

         o Debt and equity  securities not classified as either held to maturity
or trading  securities  are classified as "available  for sale  securities"  and
reported at fair value with unrealized gains and losses, after applicable taxes,
excluded  from  earnings and reported as a separate  component of  stockholders'
equity.
<PAGE>
         Premiums and discounts are amortized over the contractual  lives of the
related  securities  using the level yield  method.  Gains or losses on sales of
securities are based on the specific identification method.

         Other Investments - The Bank,  through a subsidiary,  has an investment
in an insurance company  partnership which underwrites various types of life and
disability insurance and annuity programs.  The investment is recorded using the
equity method.

         Loans - Loans are reported at their  outstanding  principal balance net
of the  allowance  for loan losses and any deferred  fees or costs on originated
loans.  Deferred loan fees and origination costs are amortized and recognized as
an adjustment of yield over the life of the loan.


                                                                              25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The  Company  adopted  SFAS 122,  "Accounting  for  Mortgage  Servicing
Rights" (MSRs),  on April 1, 1996. SFAS 122 requires that the Company  recognize
as separate  assets rights to service  mortgage  loans for others that have been
acquired  through either the purchase or  origination  of a loan.  Additionally,
SFAS 122  requires  that  MSRs be  reported  on the  consolidated  statement  of
financial  condition at the lower of cost or fair value.  These  servicing costs
are initially capitalized and subsequently  amortized in proportion to, and over
the period of estimated net loan servicing income.

         The Bank originates  loans for portfolio  investment or for sale in the
secondary market.  During the loan origination  period,  loans are designated as
held for sale or  portfolio  investment.  Loans held for sale are carried at the
lower of cost or market, determined on an individual loan basis.

         Allowance for Losses - The balance in the allowance for loan losses and
the amount in the provision for loan losses are  judgmentally  determined  based
upon a number of factors.  The  allowance is maintained by management at a level
considered  adequate to cover  possible  losses that are  currently  anticipated
based on past loss experience,  general economic  conditions,  information about
specific  borrower  situations,  collateral  values  and  other  factors.  While
management  endeavors  to use the  best  information  available  in  making  the
evaluations,  future  allowance  adjustments  may be necessary.  Management  may
periodically  allocate  portions of the  allowance  for  specific  problem  loan
situations  although the entire  allowance is available for any loan charge-offs
which occur. Increases to the allowance are recorded by a provision for possible
loan losses  charged to expense.  A loan is charged off by  management as a loss
when deemed  uncollectible,  although  collection  efforts  continue  and future
recoveries may occur.

         Loan  Servicing - The Company  services  mortgage  loans for  permanent
investors  under servicing  contracts.  Fees earned for servicing loans owned by
investors  are based on the  outstanding  principal  balances of the loans being
serviced and are  recognized  as income when the related  mortgage  payments are
received. Loan servicing costs are charged to expense as incurred.

         Office  Properties  and Equipment are carried at cost less  accumulated
depreciation.  Depreciation  is computed on the  straight-line  and  accelerated
methods over estimated useful lives that range from three to thirty-five years.

         Real Estate Owned - When  property is  acquired,  it is recorded at the
lower  of cost or  estimated  fair  value at the  date of  acquisition  less any
estimated  selling  costs and any  write-down  resulting  therefrom  is  charged
against the  allowance  for loan losses.  Any  subsequent  deterioration  of the
property is charged  directly to real estate  owned  expense.  Loans  secured by
property  for which there is an  indication  that the  borrower has little or no
equity in the collateral based upon the current fair value of the collateral, no
longer has the ability to repay the loan and it is doubtful  that equity will be
rebuilt in the foreseeable  future are classified as in-substance  foreclosures.
Costs  relating to the  development  and  improvement  of real estate  owned are
capitalized,  whereas costs relating to holding and maintaining the property are
charged to expense.

         Goodwill  represents the fair market value of  liabilities  assumed and
cash consideration paid over the fair market value of assets acquired.  Goodwill
is amortized the life of the underlying net assets or liabilities that give rise
<PAGE>
to it but not more than  fifteen  years.  Impairment  of  goodwill  results in a
charge to  expense  and/or a change  in the  amortization  period.  Amortization
expense  for the years  ended  March 31,  1998,  1997 and 1996 was  $167,036,  $
218,603 and $218,603 respectively.

         Uncollected  Interest - The Bank  provides an allowance for the loss of
uncollected  interest  on  loans  which  are more  than 90 days  past  due.  The
allowance is  established  by a charge to interest  income equal to all interest
previously accrued and income is subsequently recognized only to the extent that
cash payments are received  until,  in  management's  judgment,  the  borrower's
ability to make periodic  interest and principal  payments returns to normal, in
which case the loan is returned to accrual status.


26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Federal  Income  Taxes - Deferred  income  tax  assets and  liabilities
reflect  the  impact of  temporary  differences  between  amounts  of assets and
liabilities  for  financial  reporting  purposes  and basis of such  assets  and
liabilities  as measured by tax laws and  regulations.  The Company and the Bank
file consolidated income tax returns.

         New Accounting  Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130,  "Reporting  Comprehensive  Income,"
which is effective  for fiscal years  beginning  after  December 15, 1997.  This
statement  establishes  standards  for  reporting  and display of  comprehensive
income  and its  components.  Comprehensive  income is  defined as the change in
equity of a business  enterprise  during a period  from  transactions  and other
events or circumstances from nonowner sources.

         In June 1997, the FASB also issued No. 131, "Disclosures about Segments
of an  Enterprise  and Related  Information,"  which is effective  for financial
statements  for periods  beginning  after  December  15,  1997.  This  statement
establishes the way that public business  enterprises  report  information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information about operating  segments in financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures about products and services, geographic areas, and major customers.

         The provisions of both of these  statements are of a disclosure  nature
only and will not have an effect on the  Company's  financial  condition  or net
income.

         Earnings per Share - In 1998 the Company adopted SFAS 128 "Earnings per
Share"  and has  retroactively  restated  1997 and 1996 per share  amounts.  The
difference  between basic and diluted earnings per share represents the dilutive
impact  of  the  Company's   outstanding  stock  options.  The  following  is  a
reconciliation  of the weighted  average common shares for the basic and diluted
earnings per share computations:


                                                Years Ended March 31,
--------------------------------------------------------------------------------
                                         1998           1997            1996
--------------------------------------------------------------------------------
Basic average common shares           4,048,150        4,226,304      4,413,420
Dilutive effect of stock options        251,216          182,534        156,560
--------------------------------------------------------------------------------
Diluted average common shares         4,299,366        4,408,838      4,569,980
--------------------------------------------------------------------------------


         Acquisition  - On May 19,  1997,  the  Company  acquired  in a purchase
transaction a branch location in Newburgh,  Indiana.  The Company  acquired $4.6
million of cash,  $838,000 of office  properties  and  equipment  and $30,000 of
other assets and assumed approximately $5.7 million of deposit liabilities.  The
transaction created approximately $294,000 of goodwill.

         Changes In  Presentation - Certain items appearing in the 1997 and 1996
financial statements have been reclassified to conform to the 1998 presentation.
<PAGE>
         Subsequent  Events - In April, 1998 the Company announced a two-for-one
stock split  effected in the form of a 100% stock  dividend.  All equity amounts
and per share data  presented have been  retroactively  restated to reflect this
dividend.

         Also in  April,  1998,  the  Company  announced  that it had  reached a
definitive  agreement  to acquire four branch  offices  from NBD Bank,  N.A. The
acquisition,  which is expected to be completed at the end of the first  quarter
of fiscal 1999, will increase the Company's  deposit base by  approximately  $85
million.  The Company  will acquire  approximately  $40 million of loans in this
transaction.


                                                                              27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. SECURITIES

          The carrying values and estimated fair values of securities  available
for sale and securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>

                                                                 March 31, 1998
-----------------------------------------------------------------------------------------------------
                                            Amortized          Gross       Unrealized        Fair
                                              Cost             Gains          Losses        Value
-----------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>           <C>          <C>          
Securities available for sale:
  U.S. Treasury                          $   3,995,076       $ 38,049                   $  4,033,125
  U.S. Agency                              101,028,193        178,044     $   234,772    100,971,465
  Other                                        506,344        107,687                        614,031
-----------------------------------------------------------------------------------------------------
                                          $105,529,613       $323,780     $  234,772    $105,618,621
-----------------------------------------------------------------------------------------------------
<CAPTION>
                                                                 March 31, 1997
-----------------------------------------------------------------------------------------------------
                                            Amortized           Gross Unrealized            Fair
                                              Cost             Gains        Losses         Value
-----------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>           <C>          <C>          
Securities held to maturity:
  Other                                   $     25,000                                  $     25,000
-----------------------------------------------------------------------------------------------------

Securities available for sale:
  U.S. Treasury                            $ 7,029,449      $   9,691     $   30,390    $  7,008,750
  U.S. Agency                               79,990,805          4,723      1,823,965      78,171,563
-----------------------------------------------------------------------------------------------------
                                          $ 87,020,254      $  14,414     $1,854,355   $  85,180,313
-----------------------------------------------------------------------------------------------------
</TABLE>

         The  amortized  cost and  estimated  fair value of  available  for sale
securities at March 31, 1998 by contractual maturity are as follows:
<TABLE>
<CAPTION>
                                                     Amortized          Fair
                                                       Cost             Value
--------------------------------------------------------------------------------
<S>                                                <C>              <C>         
Due within 1 year                                  $    506,344     $    614,031
Due after 1 year through 5 years                     27,849,752       27,895,672
Due after 5 years through 10 years                   73,344,492       73,345,673
Due after 10 years through 15 years                   3,829,025        3,763,245
--------------------------------------------------------------------------------
                                                   $105,529,613     $105,618,621
================================================================================
</TABLE>
<PAGE>
         Activities  related  to the  sales  of  securities  are  summarized  as
follows:
<TABLE>
<CAPTION>

                                                  Years Ended March 31,
-------------------------------------------------------------------------------- 
                                           1998          1997          1996
-------------------------------------------------------------------------------- 
<S>                                     <C>          <C>            <C>       
Proceeds from sales                     $8,989,174   $25,430,978    $6,988,301
Gross gains on sales                        22,530        77,581         1,971
Gross losses on sales                        7,500       128,794        10,227
</TABLE>

28
<PAGE>
3.   MORTGAGE-BACKED SECURITIES

         The  carrying  values  and  estimated  fair  values of  mortgage-backed
securities held to maturity and  mortgage-backed  securities  available for sale
are summarized as follows:
<TABLE>
<CAPTION>

                                                                                  March 31, 1998
---------------------------------------------------------------------------------------------------------------------
                                                             Amortized           Gross     Unrealized        Fair
                                                               Cost             Gains        Losses          Value
---------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>           <C>          <C>        
Mortgage-backed securities held to maturity:
  FHLMC certificates                                      $     938,942       $  3,378                    $  942,320
  FNMA certificates                                           4,003,242         47,147      $  26,415      4,023,974
  GNMA certificates                                          13,919,232        271,158         37,591     14,152,799
---------------------------------------------------------------------------------------------------------------------
                                                            $18,861,416       $321,683      $  64,006    $19,119,093
=====================================================================================================================

Mortgage-backed securities available for sale:
  FHLMC certificates                                        $27,355,375       $171,134     $  131,638    $27,394,871
  FNMA certificates                                          21,871,532        111,670         58,909     21,924,293
  GNMA certificates                                          13,142,014        206,137         15,029     13,333,122
---------------------------------------------------------------------------------------------------------------------
                                                            $62,368,921       $488,941     $  205,576    $62,652,286
=====================================================================================================================

<CAPTION>
                                                                                  March 31, 1997
---------------------------------------------------------------------------------------------------------------------
                                                             Amortized           Gross     Unrealized        Fair
                                                               Cost             Gains        Losses          Value
---------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>          <C>           <C>        
Mortgage-backed securities held to maturity:
  FHLMC certificates                                       $  5,390,009                   $    83,862    $ 5,306,147
  FNMA certificates                                           4,787,009      $  14,782         63,052      4,738,739
  GNMA certificates                                          17,003,873        228,213         79,902     17,152,184
---------------------------------------------------------------------------------------------------------------------
                                                            $27,180,891       $242,995     $  226,816    $27,197,070
=====================================================================================================================

Mortgage-backed securities available for sale:
  FHLMC certificates                                        $37,269,433       $ 43,186     $  739,907    $36,572,712
  FNMA certificates                                          27,483,089          3,919        251,080     27,235,928
  GNMA certificates                                          10,093,656        164,711         14,754     10,243,613
---------------------------------------------------------------------------------------------------------------------
                                                            $74,846,178       $211,816     $1,005,741    $74,052,253
=====================================================================================================================
</TABLE>
         The  amortized  cost  and  estimated  fair  values  of  mortgage-backed
securities at March 31, 1998 by contractural  maturity are shown below. Expected
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.

                                                                              29
<PAGE>
<TABLE>
<CAPTION>
                                                    Available for Sale          Held to Maturity
------------------------------------------------------------------------------------------------------
                                                Amortized         Fair       Amortized         Fair
                                                  Cost            Value        Cost            Value
------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>           <C>            <C>       
Due in less than one year:
 FHLMC certificates                            $ 2,168,371  $  2,107,499
Due after one year through five years:
 FHLMC certificates                              3,356,915     3,402,638
Due five through ten years:
 FHLMC certificates                                325,162       328,450
 FNMA certificates                                                         $  1,500,540  $  1,540,833
Due after ten years:
 FHLMC certificates                             21,504,927     21,556,283       938,943       942,320
 FNMA certificates                              21,871,532     21,924,294     2,502,704     2,483,141
 GNMA certificates                              13,142,014     13,333,122    13,919,229    14,152,799
------------------------------------------------------------------------------------------------------
                                               $62,368,921    $62,652,286   $18,861,416    19,119,093
======================================================================================================
</TABLE>
         Activities  related  to the  sale  of  mortgage-backed  securities  are
summarized as follows:
<TABLE>
<CAPTION>
                                                   Years Ended March 31,
-------------------------------------------------------------------------------- 
                                           1998           1997          1996
-------------------------------------------------------------------------------- 
<S>                                     <C>           <C>            <C>      
Proceeds from sales                     $15,083,084   $11,142,858    $ 744,220
Gross gains on sales                         29,246        47,318        5,952
Gross losses on sales                         1,635        47,225        3,504
</TABLE>

4.   LOANS

         Approximately  92% of the Bank's  loans are to  customers  in  Indiana,
although  certain  mortgage-banking  and commercial  lending  activities  extend
outside Indiana. The portfolio of loans consists of residential, commercial real
estate, commercial construction, consumer and other loans.

30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                             March 31,
-------------------------------------------------------------------------------- 
                                                     1998               1997
-------------------------------------------------------------------------------- 
<S>                                            <C>                <C>          
First mortgage:
  Secured by one-to-four family residences     $ 158,721,706      $ 152,480,578
  Secured by other properties                      8,886,895         12,075,643
  Construction loans                               3,409,383          1,832,266
  Land                                                25,455             56,064
Automobile                                        31,436,243         31,394,332
Consumer                                           9,212,727          9,692,035
Commercial                                         3,799,904
Mobile home                                          935,365          1,239,973
Loans on savings accounts                            891,516            940,324
Credit card                                          565,538            623,196
Second mortgage                                       24,661            195,195
Home improvement                                     838,893          1,083,982
Loan contracts                                        24,135             28,211
FHA improvement                                                           4,270
Commercial paper                                   9,116,180            978,922
                                               -------------      -------------
Subtotal                                         227,888,601        212,624,991

Allowance for loan losses                         (1,973,410)        (2,126,225)
Deferred loan fees, net                             (397,765)          (284,028)
Undisbursed loan proceeds                           (148,567)            24,213
Unearned interest and unearned discounts             (19,601)           (49,529)
                                               -------------      -------------
Loans, net                                     $ 225,349,258      $ 210,189,422
                                               =============      =============
</TABLE>
         The  principal   balance  of  loans  on  nonaccrual   status   totalled
approximately $911,000 and $2,463,000 at March 31, 1998 and 1997,  respectively.
For the years ended March 31, 1998 and 1997,  gross interest  income which would
have been  recorded  had the Bank's  non-accruing  loans been current with their
original  terms  amounted  to $73,277  and  $240,756  respectively.  The amounts
included in interest  income on such loans were  $39,338  and  $105,038  for the
years ended March 31, 1998 and 1997, respectively.

         The Bank  originates  commercial  real estate  loans.  Such loans had a
carrying value of approximately $9 million and $12 million at March 31, 1998 and
1997,  respectively.  These loans are considered by management to be of somewhat
greater  risk of  uncollectibility  than other  loans due to the  dependency  on
income  production.  Of the  commercial  real  estate  loans,  $4 million and $8
million are  collateralized  by multi-family  residential  property at March 31,
1998 and 1997,  respectively;  and $5 million, and $4 million by hotel and other
property at March 31, 1998 and 1997, respectively.

         The Bank had  commitments to make loans,  approximating  $4,886,000 and
$1,550,000 excluding  undisbursed portions of loans in-process at March 31, 1998
and 1997, respectively.  The undisbursed portion of loans in process amounted to
$5,546,000 and $3,452,000 at March 31, 1998 and 1997, respectively.

                                                                              31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The Bank originates both adjustable and fixed interest rate loans.  The
composition of these loans was as follows:
<TABLE>
<CAPTION>

                       Fixed Rate                                                           Adjustable Rate                       
----------------------------------------------------------        -----------------------------------------------------------
                               Book Value                                                               Book Value           
----------------------------------------------------------        -----------------------------------------------------------
 Term to              March 31,             March 31,                   Term to Rate           March 31,            March 31,
 Maturity                1998                 1997                       Adjustment              1998                 1997   
----------------------------------------------------------        -----------------------------------------------------------
<S>                 <C>                 <C>                              <C>                  <C>                <C>         
1mo.-1yr            $ 17,079,000        $   6,095,000                    1mo.-1yr.            $20,329,000        $31,629,000 
1yr.-3yr.             12,125,000           12,657,000                    1yr.-3yr.              3,533,000          1,355,000 
3yr.-5yr.             30,023,000           29,882,000                    3yr.-5yr.              5,487,000            453,000 
5yr.-10yr.            28,317,000           25,755,000                    5yr.-10yr.            38,578,000         29,420,000 
10yr.-20yr.           68,512,000           70,494,000                    10yr.-20yr.            1,817,000          1,119,000 
Over 20 years          1,884,000            3,339,000                    over 20 yrs              205,000            427,000 
----------------------------------------------------------        -----------------------------------------------------------
                    $157,940,000         $148,222,000                                         $69,949,000        $64,403,000 
==========================================================        ===========================================================
</TABLE>                   
         The adjustable rate loans have interest rate adjustment limitations and
are  generally  indexed on a weekly  average yield of U.S.  Treasury  securities
adjusted to a constant  maturity of one year.  Future market  factors may affect
the  correlation of the interest rate adjustment with the rates the Bank pays on
the short-term deposits that have been primarily utilized to fund these loans.

         Aggregate loans to officers and directors totaled $630,613 and $676,855
at March 31, 1998 and 1997, respectively. For the years ended March 31, 1998 and
1997 loans of $202,444 and $124,899 respectively, were disbursed to officers and
directors  and  repayments  of principal of $248,686 and $181,150  respectively,
were received from officers and directors.

         The  amount  of  loans  serviced  for  others  totalled   approximately
$32,468,000 and $34,298,000 at March 31, 1998 and 1997, respectively.  Servicing
loans for others generally consists of collecting mortgage payments, maintaining
escrow amounts,  disbursing payments to investors and foreclosure processing. In
connection  with loans  serviced  for others,  the Bank held  borrower's  escrow
balances  of  approximately  $233,216  and  $249,000 at March 31, 1998 and 1997,
respectively.  The Bank is obligated  to  repurchase  certain  loans sold to and
serviced  for  others  which  become   delinquent  as  defined  by  the  various
agreements.  At March 31,  1998 and 1997,  these  obligations  were  limited  to
approximately $443,000 and $610,000 respectively.

         Loan servicing fee income for the years ended March 31, 1998,  1997 and
1996 was $84,274, $100,824 and $104,184, respectively.

         There were no  restructured  loans in the Bank's loan  portfolio  as of
March 31, 1998. The principal  balance at March 31, 1997 of  restructured  loans
totalled  approximately   $2,127,700.   Modifications  included  forgiveness  of
interest,  reduced  interest  rates and/or  extensions of the loan term. For the
year ended March 31, 1997,  gross interest income which would have been recorded
had the Bank's  modified  loans been current in accordance  with their  original
terms  amounted to  $165,000.  The amount that was  included in interest  income
during 1997 on such loans was $151,000.

32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
                                                            Years Ended March 31,
--------------------------------------------------------------------------------------------
                                                    1998            1997             1996
--------------------------------------------------------------------------------------------
<S>                                             <C>              <C>             <C>       
Beginning balance                               $2,126,225       $2,237,804      $2,093,492
Provision for losses charged to operations         177,050          113,256         206,923
Charge-offs                                       (403,896)        (370,519)       (104,335)
Recoveries                                          74,031          145,684          41,724
--------------------------------------------------------------------------------------------
Ending balance                                  $1,973,410       $2,126,225      $2,237,804
============================================================================================
</TABLE>
         The recorded  investment in loans considered impaired at March 31, 1998
was $116,778 for which no specific  valuation reserve has been established.  For
the year ended March 31, 1998, the average recorded investment in impaired loans
was approximately  $1,215,012.  Cash received for interest on impaired loans was
$108,989 and $294,091 for the years ended March 31, 1998 and 1997, respectively.

         As a federally-chartered savings bank, aggregate commercial real estate
loans may not exceed 400% of capital as determined  under the capital  standards
provisions of FIRREA.  This limitation was  approximately  $154 million and $134
million as of March 31, 1998, and 1997, respectively.

         Also,  under   applicable   regulations,   the  loans-to-one   borrower
limitation is defined and is generally 15% of unimpaired  capital which, for the
Bank, was approximately $5.7 million at March 31, 1998 and $5.2 million at March
31,1997.  At March  31,  1998  and  1997  there  were no  loans  exceeding  this
limitation.

5.   OFFICE PROPERTIES AND EQUIPMENT

         Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
                                                              March 31,
--------------------------------------------------------------------------------
                                                      1998                1997
--------------------------------------------------------------------------------
<S>                                                <C>               <C>        
Land                                               $ 1,841,659       $ 1,726,939
Office buildings                                     7,379,489         7,166,672
Furniture and equipment                              3,560,222         3,102,854
Leasehold improvements                                 375,184           365,201
Automobiles                                             52,728            52,728
--------------------------------------------------------------------------------
       Total                                        13,209,282        12,414,394
Less accumulated depreciation                        5,676,031         5,445,807
--------------------------------------------------------------------------------
Office properties and equipment, net               $ 7,533,251       $ 6,968,587
================================================================================
</TABLE>
         Depreciation  expense  included  in  operations  during the years ended
March  31,  1998,  1997 and  1996  totalled  $556,598,  $488,930  and  $478,535,
respectively.

                                                                              33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   DEPOSITS

         Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
                                                                          March 31,
--------------------------------------------------------------------------------------------------------
                                                             1998                           1997
--------------------------------------------------------------------------------------------------------
                                                                  Weighted                     Weighted
                                                                   Average                      Average
                                                     Amount         Rate           Amount        Rate
--------------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>         <C>             <C>
Noninterest-bearing                                $  1,755,251                  $   902,835
NOW and MMDA's                                       34,010,142      2.0%         35,588,164     2.2%
Passbook savings                                     52,050,522      3.7%         54,244,569     3.8%
--------------------------------------------------------------------------------------------------------
Total                                                87,815,915                   90,735,568
--------------------------------------------------------------------------------------------------------
Certificates of deposit:
  1.50 - 3.49%                                           66,459      2.9%            157,572     2.9%
  3.50 - 5.49%                                       61,522,709      5.0%         81,947,155     5.0%
  5.50 - 7.49%                                      130,864,156      6.0%        104,618,045     6.1%
  7.50 - 9.49%                                        2,672,884      7.8%          3,295,013     8.0%
--------------------------------------------------------------------------------------------------------
Total certificates of deposit                       195,126,208                  190,017,785
--------------------------------------------------------------------------------------------------------
Total                                              $282,942,123                 $280,753,353
========================================================================================================
</TABLE>
         Certificates  of  deposit  in the  amount  of  $100,000  or more  total
approximately $21 million at March 31, 1998 and 1997.

         A summary of certificate  accounts by scheduled maturities at March 31,
1998 is as follows:
<TABLE>
<CAPTION>
                        1999             2000             2001             2002             2003        Thereafter          Total
------------------------------------------------------------------------------------------------------------------------------------
<S>               <C>              <C>              <C>              <C>              <C>              <C>              <C>       
Less than 3.49%   $     64,051     $      2,408                                                                         $     66,459
   3.50 - 5.49%     45,817,668       10,242,121     $  3,308,413     $    781,223     $  1,047,369          325,914       61,522,708
   5.50 - 7.49%     78,046,368       18,069,142        7,608,128        2,892,043        9,729,966       14,518,510      130,864,157
   7.50 - 9.49%         30,474           45,000        1,259,632        1,337,778                                          2,672,884
                  ------------     ------------     ------------     ------------     ------------     ------------     ------------
                  $123,958,561     $ 28,358,671     $ 12,176,173     $  5,011,044     $ 10,777,335     $ 14,844,424     $195,126,208
                  ============     ============     ============     ============     ============     ============     ============
</TABLE>
<PAGE>

         Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
                                                   Years Ended March 31,
-------------------------------------------------------------------------------
                                            1998          1997           1996
-------------------------------------------------------------------------------
<S>                                       <C>         <C>           <C>        
NOW and MMDA's                            $  716,098  $    780,027  $   968,605
Passbook savings                           1,951,908     2,056,077    1,567,719
Certificates of deposit                   10,763,136    10,496,483   10,905,305
-------------------------------------------------------------------------------
                                         $13,431,142   $13,332,587  $13,441,629
================================================================================
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   FEDERAL HOME LOAN BANK ADVANCES

         Advances from the Federal Home Loan Bank of Indianapolis  (FHLB) are as
follows:
<TABLE>
<CAPTION>
                                                   Average Rate                           March 31,
------------------------------------------------------------------------------------------------------------
                Fiscal Year                  1998          1997               1998                1997
------------------------------------------------------------------------------------------------------------
<S>          <C>                             <C>           <C>               <C>                 <C>    
Fixed Rate:
                   1998                                    5.67%                                 $35,950,000
                   1999                      5.55%         5.51              $19,494,333          17,500,000
                   2000                      5.59          5.51                2,026,678           2,286,958
                   2001                      5.61          5.68                3,770,924           1,478,037
                After 2002                   5.21          6.91               34,310,743           2,518,991
------------------------------------------------------------------------------------------------------------
             Total FHLB fixed rate                                            59,602,678          59,733,986
------------------------------------------------------------------------------------------------------------

Variable Rate:
                   1998                                    5.61                                   38,750,000
                   1999                      5.88                             15,750,000
                   2001                      5.47                             11,000,000
                After 2002                   4.92                             13,000,000
------------------------------------------------------------------------------------------------------------
            Total variable rate                                               39,750,000          38,750,000
------------------------------------------------------------------------------------------------------------
             Total advances                                                  $99,352,678         $98,483,986
============================================================================================================
</TABLE>

         The Bank  does not have any  advances  scheduled  to mature in the year
ending March 31, 2002.

         The Bank has pledged  mortgage  loans and FHLB stock as  collateral  on
these  advances.  The Bank may receive  advances  from the FHLB up to 50% of the
Bank's adjusted assets which was approximately $203 million at March 31, 1998.

8.   OTHER BORROWED FUNDS

         The Company had no other borrowed funds at March 31, 1998. At March 31,
1997, other borrowed funds consisted of:


Federal Home Loan Bank, funds due April 1, 1997                       $1,186,818
Securities sold under agreement to repurchase                            607,149
--------------------------------------------------------------------------------
        Total                                                         $1,793,967
================================================================================
 
         The FHLB  funds  represent  checks  written  by the Bank on its  demand
account at the FHLB of  Indianapolis.  U.S Agency  Securities  with an amortized
cost of $4,079,341  ($3,910,000 fair value) were pledged for the securities sold
under agreement to repurchase at March 31, 1997.

                                                                              35

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         An analysis of  securities  sold under  agreements  to repurchase is as
follows:
<TABLE>
<CAPTION>

                                                                              March 31,
-------------------------------------------------------------------------------------------------- 
                                                                 1998          1997          1996
-------------------------------------------------------------------------------------------------- 
<S>                                                            <C>          <C>           <C>     
Highest month-end balance                                      $444,636     $3,955,494    $982,868
Average balance                                                $103,260     $1,484,957    $530,189
Weighted average interest rate at end of period                                 5.2%          4.8%
Weighted average interest rate during the period                 5.1%           4.8%          4.8%

</TABLE>

9.   INCOME TAXES

         An analysis of the income tax provision is as follows:
<TABLE>
<CAPTION>
                                                     Years Ended March 31,
--------------------------------------------------------------------------------
                                               1998          1997          1996
--------------------------------------------------------------------------------
<S>                                         <C>           <C>           <C>     
Current:
  Federal                                   $1,366,610    $ 862,572     $437,317
  State                                        447,482      254,275      123,341
Deferred                                         3,252     (113,861)     100,788
--------------------------------------------------------------------------------
                                            $1,817,344   $1,002,986     $661,446
================================================================================
</TABLE>

         The difference  between the financial  statement  provision and amounts
computed by using the statutory rate of 34% is reconciled as follows:
<TABLE>
<CAPTION>
                                                                  Year Ended March 31,
----------------------------------------------------------------------------------------------
                                                            1998          1997          1996
----------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>           <C>     
Income tax provision at federal statutory rate           $1,517,254    $ 784,221     $649,655
State tax, net of federal tax benefit                       295,338      167,822      127,056
Nondeductible expenses                                      188,734       50,347      135,248
Other                                                      (183,982)         596     (250,513)
----------------------------------------------------------------------------------------------
Total income tax provision                               $1,817,344   $1,002,986     $661,446
==============================================================================================
</TABLE>
<PAGE>
The Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>

                                                                 March 31,
-------------------------------------------------------------------------------
                                                            1998          1997
-------------------------------------------------------------------------------
<S>                                                     <C>          <C>       
Deferred tax assets:
  Bad debt reserves                                     $  628,648   $  635,090
  Unrealized loss on securities available for sale                    1,043,274
  Accrued employee benefits                                113,198      107,624
  Other                                                     32,786       64,317
-------------------------------------------------------------------------------
                                                           774,632    1,850,305
-------------------------------------------------------------------------------
Deferred tax liabilities:
  Depreciation                                             107,547      119,405
  Deferred loan fees                                       258,986      277,883
  Restricted stock awards                                   39,598       78,908
  Unrealized gain on securities available for sale         147,127
  Other                                                     40,918
-------------------------------------------------------------------------------
                                                           594,176      476,196
-------------------------------------------------------------------------------
Deferred income tax, net                                $  180,456   $1,374,109
================================================================================

</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Retained earnings at March 31, 1998 and 1997 includes  approximately $6
million of income that has not been subject to tax because of deductions for bad
debts allowed for Federal  income tax purposes.  Deferred  income taxes have not
been provided on such bad debt  deductions  since the Company does not intend to
use the  accumulated  bad debt deductions for purposes other than to absorb loan
losses.  If, in the future,  this  portion of retained  earnings is used for any
purpose  other  than to absorb  bad debt  losses,  federal  income  taxes may be
imposed on such amounts at the then current corporate income tax rate.

         In August 1996,  the "Small  Business Job  Protection  Act of 1996" was
passed into law.  One  provision of the act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the IRC.
The provision  requires thrifts to recapture any reserve  accumulated after 1987
but  forgives  taxes  owed  on  reserves   accumulated  prior  to  1988.  Thrift
institutions  will be given  six  years to  account  for the  recaptured  excess
reserves,  beginning  with  the  first  taxable  year  after  1995,  and will be
permitted to delay the timing of this recapture for one or two years, subject to
whether they meet certain  residential loan test  requirements. 

 10.  REGULATORY CAPITAL REQUIREMENTS

         The  Bank  is  subject  to  various  regulatory  capital   requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements  can  initiate  certain  mandatory  and  discretionary  actions  by
regulators that could have a direct  material effect on the Company's  financial
position and results of  operations.  The  regulations  require the Bank to meet
specific capital adequacy guidelines that involve  quantitative  measures of the
Bank's assets,  liabilities,  and certain  off-balance-sheet items as calculated
under regulatory  accounting practices.  The Bank's capital  classifications are
also subject to qualitative judgements by the regulators.

         Quantitative  measures  established  by  regulation  to ensure  capital
adequacy require the Bank to maintain minimum amounts and ratios as set forth in
the following tables of core and total  risk-based  capital.  Prompt  Corrective
Action  provisions  contained  in  the  Federal  Deposit  Insurance  Corporation
Improvement Act of 1991 (FDICIA) require specific supervisory actions as capital
levels  decrease.  To  be  considered   well-capitalized  under  the  regulatory
framework for Prompt Corrective  Action  Provisions under FDICIA,  the Bank must
maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital
ratios as set forth in the following tables. At March 31, 1998 and 1997 the Bank
exceeded the minimum requirements for the well-capitalized category.
<PAGE>
         The  following  presents  the  Bank's  minimum  and  "well-capitalized"
regulatory capital levels.
<TABLE>
<CAPTION>
                                                        As of March 31, 1998
------------------------------------------------------------------------------------------------
                                         Actual Capital                      Required Capital
------------------------------------------------------------------------------------------------
                                      Amount         Ratio                  Amount        Ratio
------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>                 <C>              <C>  
OTS capital adequacy
   Core capital                     $38,178,423       8.76%              $17,440,197       4.00%
   Risk-based capital                40,097,017      21.05                15,239,127       8.00
FDICIA regulations to be
  classified well-capitalized
   Tier 1 leverage capital           38,178,423       8.76                21,800,246       5.00
   Tier 1 risk-based capital         38,178,423      20.04                11,429,346       6.00
   Total risk-based capital          40,097,017      21.05                19,048,909      10.00
</TABLE>
                                                                              37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          As of March 31, 1997
----------------------------------------------------------------------------------------------------------------
                                                          Actual Capital                      Required Capital
----------------------------------------------------------------------------------------------------------------
                                                       Amount         Ratio                 Amount         Ratio
----------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>                 <C>              <C>  
OTS capital adequacy
   Core capital                                      $34,701,101       8.27%              $12,583,846       3.00%
   Risk-based capital                                 36,480,827      20.80                14,034,819       8.00
FDICIA regulations to be
  classified well-capitalized
   Tier 1 leverage capital                            34,701,101       8.27                20,980,109       5.00
   Tier 1 risk-based capital                          34,701,101      19.78                10,526,117       6.00
   Total risk-based capital                           36,480,827      20.80                17,538,859      10.00
</TABLE>

11.  STOCKHOLDERS' EQUITY AND REGULATORY MATTERS

         Dividend  Restrictions  - Under  current  regulations,  the Bank is not
permitted to pay dividends on its stock if its regulatory  capital would thereby
reduce  below  (i)  the  amount  then  required  for  the  liquidation   account
established  at the time  the Bank  converted  from a  mutual  to stock  form of
ownership  or (ii) the Bank's  regulatory  capital  requirements.  As a "Tier 1"
institution  (an  institution  with  capital  in excess  of its fully  phased-in
capital requirements,  both immediately before the proposed capital distribution
and on a pro forma basis after giving effect to such distribution), the Bank may
make capital distributions after prior notice to the OTS in any calendar year up
to 100% of its net  earnings to date during such  calendar  year plus the amount
that would reduce by one-half its capital surplus ratio at the beginning of such
calendar  year.  Any additional  amount of capital  distributions  would require
prior regulatory approval. The Company has regulatory approval to pay $4,000,000
in dividends at March 31, 1998.

         Preferred Stock - The Company is authorized to issue  1,000,000  shares
of preferred stock,  $.01 par value which remains unissued at March 31, 1998. In
the event any preferred shares are issued,  the Board of Directors is authorized
to fix and state the voting powers, designations,  preferences and rights of the
shares of each such series and the  qualifications,  limitations and restriction
thereof.

         Recapitalization  of SAIF - On September 30, 1996, the President signed
into law an omnibus appropriations act for fiscal year 1997 that included, among
other things, the  recapitalization  of the Savings  Association  Insurance Fund
(SAIF) in a section  entitled  "The  Deposit  Insurance  Funds Act of 1996" (the
Act).  The Act included a provision  where all insured  depository  institutions
would be charged a one-time special assessment on their SAIF assessable deposits
as of March 31, 1995. The Company recorded a pre-tax charge of $1,766,185 during
the year ended March 31, 1997, which  represented 65.7 basis points of the March
31, 1995, assessable deposits.
<PAGE>
12. EMPLOYEE BENEFIT PLANS

         Multi-employer   Pension   Plan   -   The   Bank   participates   in  a
noncontributory  multi-employer  pension plan covering all qualified  employees.
The  plan  is  administered  by  the  trustees  of the  Financial  Institutions'
Retirement  Fund.  There  is no  separate  valuation  of the plan  benefits  nor
segregation  of plan  assets  specifically  for the Bank  because  the plan is a
multi-employer plan and separate actuarial  valuations are not made with respect
to each employer.

         Pension  expense  amounted to $40,000 and  $142,028 for the years ended
March 31, 1997 and 1996, respectively. There was no pension expense in 1998.

38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Employee  Stock  Ownership  Plan - The Company  has an  Employee  Stock
Ownership Plan (ESOP) which owns 333,270  shares of the Company's  common stock.
The ESOP  purchase  of the stock was  funded  by a loan from the  Company  (loan
balance of $714,150 and $952,200 at March 31, 1998 and 1997, respectively) which
will be  repaid  by  contributions  to the ESOP by the  Company  in the  future.
Pursuant to the ESOP,  the shares are to be allocated to  participants  annually
over an 8 year period.  The ESOP covers  substantially  all employees and shares
are allocated  based upon  employee  compensation  levels during the year.  ESOP
expense  is based on the fair  value of  shares  earned  and  totaled  $639,317,
$479,046  and  $503,579  during 1998 and 1997,  and 1996,  respectively.  During
fiscal years ended March 31, 1998, 1997 and 1996,  47,688 shares,  49,728 shares
and 51,780 shares were earned by participants. At March 31, 1998, 130,340 shares
with a fair value of approximately $2,273,000 were held in suspense by the ESOP.
These shares are not considered to be  outstanding  for the purpose of computing
earning per share.

         Recognition  and  Retention  Plan - The Company has a  Recognition  and
Retention  Plan (RRP) which  provides  executive  officers and employees  with a
proprietary  interest in the  Company in a manner  designed  to  encourage  such
individuals to remain with the Bank.  Restricted  stock awards covering up to 4%
of the common stock issued may be awarded under the RRP.  Awarded stock vests at
a rate of 20% per year. During the fiscal year ended March 31, 1998, and 1997 an
additional  9,000 and 1,000  shares were  awarded.  The cost of the RRP is being
reflected as compensation  expense as vesting occurs. This amounted to $125,242,
$178,070  and $135,740  during the fiscal  years ended March 31, 1998,  1997 and
1996.  Termination  of employees  resulted in 2,856  shares,  2,428 shares 5,712
shares being  cancelled  during the fiscal years ended March 31, 1998,  1997 and
1996 respectively.

         Stock Option and Incentive Plan - The Company has granted stock options
to existing stockholders,  officers,  directors and other affiliated individuals
to purchase shares of the Company's stock. Awarded options vest at a rate of 25%
per year and are exercisable in the ten years  immediately  following the grant.
During the fiscal  years ended  March 31, 1997 and 1996,  options to purchase an
additional 9,522 and 32,000 shares were awarded. No options were issued in 1998.
Employee terminations resulted in options to purchase of 3,572, 5,952 and 10,712
shares being  cancelled  during fiscal years ended March 31, 1998, 1997 and 1996
respectively.
<PAGE>
         The  following is an analysis of stock option  activity for each of the
three  years  in the  period  ending  March  31,  1998  and  the  stock  options
outstanding at the end of the respective years:
<TABLE>
<CAPTION>
                                                                                  Weighted
                                                                                   Average
         Options                                                  Shares            Price
-------------------------------------------------------------------------------------------
<S>                                                               <C>                <C> 
         Outstanding April 1, 1995                                435,610            5.03
         Granted                                                   32,000            8.22
         Exercised                                                 (7,138)           5.00
         Forfeited or expired                                     (10,712)           5.00
-------------------------------------------------------------------------------------------
         Outstanding March 31, 1996                               449,760            5.26
         Granted                                                    9,522            8.13
         Exercised                                                (11,658)           5.46
         Fortified or expired                                      (5,952)           5.00
-------------------------------------------------------------------------------------------
         Outstanding March 31, 1997                               441,672            5.32
         Exercised                                                (36,112)           5.07
         Fortified or expired                                      (3,572)           5.00
-------------------------------------------------------------------------------------------
         Balance at March 31, 1998                                401,988            5.34
===========================================================================================
</TABLE>
                                                                              39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The number of vested shares  exercisable  at March 31, 1998,  1997, and
1996 were: 376,465, 296,272 and 196,384, respectively and had a weighted average
exercise price of $5.16,  $5.09 and $5.01,  respectively.  The weighted  average
remaining contractual life of the options outstanding at March 31, 1998 and 1997
was  6.3  years  and  7.2  years,  respectively.  Exercise  prices  for  options
outstanding at March 31, 1998 ranged from $5.00 to $8.22.

         The Company applies APB opinion No. 25 ("Accounting for Stock Issued to
Employees")  and  related   interpretations  in  accounting  for  the  plan.  No
compensation  cost has been  recognized  for the plan  because the stock  option
price is equal to the fair value at the grant date.  Had  compensation  cost for
the plan been  determined  based on the fair value at the grant dates for awards
under  the  plan  consistent  with  the  fair  value  method  of  SFAS  No.  123
("Accounting for Stock-Based  Compensation"),  the Company's proforma net income
per share would be as follows:
<TABLE>
<CAPTION>
                                                  Year Ended March 31,
------------------------------------------------------------------------------
                                           1998          1998          1997
------------------------------------------------------------------------------
<S>                                    <C>             <C>          <C>       
Net income :
  As reported                          $2,645,167      $1,303,544   $1,249,305
  Proforma                              2,631,973       1,293,311    1,246,344
Basic :
Net income per share:
  As reported                              $ 0.65          $ 0.31       $ 0.28
  Proforma                                   0.65            0.31         0.28
Diluted Net income per share:
  As reported                              $ 0.62          $ 0.30       $ 0.27
  Proforma                                   0.61            0.29         0.27
</TABLE>

         The fair  value of option  grants  are  estimated  on the date of grant
using an option pricing model with the following assumptions: dividend yields of
0.96% to 1.7%,  risk-free interest rates of 5.75% to 6.74%,  expected volatility
of 18%  and an  expected  life of  five  years.  The  proforma  amounts  are not
representative of the effects on reported net income for future years.

         Deferred  Compensation  (401K)  Plan  - The  Company  has  an  Employee
Deferred   Compensation   (401K)  Plan   administered   through  the   financial
institution's  retirement  fund.  Each  employee  may  contribute  up  to  6% of
compensation.  Employee contributions of up to 4% of compensation are matched by
the Company at a rate of $.25 per dollar of employee  contribution.  The Company
matching expense was $21,450,  $19,203 and $19,386 during the fiscal years ended
March 31, 1998, 1997 and 1996, respectively.

         Directors  Deferred  Compensation  Plan - The  Bank  has  entered  into
deferred  compensation  agreements with certain directors.  Benefits under these
agreements are paid over a ten year period upon retirement. The present value of
the  benefit  to be paid is  accrued  over the active  period of  employment  of
individual participants and is funded by life insurance policies.

40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  COMMITMENTS

         Lease  commitments - The Company has future minimum rental  commitments
for noncancelable operating leases as follows:

                    Fiscal year ended March 31:
                    --------------------------- 

                       1999            $81,156
                       2000             69,582
                       2001             65,724
                       2002             25,431
                       2003              7,000

         Rental  expense for the years ended March 31,  1998,  1997 and 1996 was
$79,036, $70,265 and $57,851, respectively.

         Rental  income from  noncancelable  subleases for the years ended March
31, 1998, 1997 and 1996 was $119,306, $103,306, and $93,883, respectively.

         Financial Instruments with Off-Balance Sheet Risk - The Bank is a party
to  financial  instruments  with  off-balance-sheet  risk of loss as part of its
normal  business  operations  to meet the  financing  needs of its  customers by
providing  commitments to extend credit.  These instruments  involve, to varying
degrees,  elements  of credit  and  interest  rate risk in excess of the  amount
recognized  in the  balance  sheet.  The  contract  amount of these  instruments
reflects  the extent of  involvement  the Company has in this class of financial
instruments.

         Exposure  to credit  loss in the event of  nonperformance  by the other
party  to  the  financial   instrument  for  commitments  to  extend  credit  is
represented by the contract  amount of those  instruments.  The Company uses the
same  credit  policies  in making  commitments  as it does for  on-balance-sheet
instruments.  Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk.

         Commitments  to extend  credit  are  agreements  to lend to a  customer
provided  there is no violation of any  condition  established  in the contract.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Some  commitments  will expire without a loan
disbursement;  thus, the total commitment does not necessarily  represent future
cash  requirements.  The Bank evaluates each  customer's  creditworthiness  on a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. See also Note 4.

         The collateral  consists  predominantly  of  residential  family units,
commercial residential or non-residential real estate, and personal property.
<PAGE>
         Employment   agreement  -  The  Company  has  entered  into  employment
agreements with two executive officers.  Under certain circumstances provided in
the agreement, the Company may be obligated to continue the officer's salary for
a period of three years.

         Standby  letters of Credit - Standby  letters of credit are conditional
commitments  issued by the Bank to guarantee the  performance of a customer to a
third party. Standby letters of credit amounted to $53,000 at March 31, 1998.

                                                                              41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  PERMANENT BANCORP, INC. FINANCIAL INFORMATION
         (PARENT COMPANY ONLY)

         The following  condensed  statement of financial  condition as of March
31, 1998 and 1997 and condensed  statement of operations  and cash flows for the
three years ended March 31, 1998 for Permanent  Bancorp,  Inc. should be read in
conjunction with the consolidated financial statements and notes thereto.

CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

                                                               March 31,
-------------------------------------------------------------------------------- 
                                                         1998            1997
-------------------------------------------------------------------------------- 
<S>                                                  <C>             <C>        
Cash                                                 $ 1,519,171     $   328,249
Securities available for sale                          2,614,031       2,979,375
Loans                                                                    978,922
Loans receivable from ESOP                               714,150         952,200
Fixed assets                                             460,282         467,441
Interest receivable                                       11,353          65,200
Other assets                                               8,746           4,687
Investment in subsidiary                              38,514,563      33,448,734
                                                     -----------     -----------
  Total assets                                       $43,842,296     $39,224,808
                                                     ===========     ===========

Deferred income taxes                                $   111,341     $    63,867
Accrued expenses                                       1,047,696          66,314
                                                     -----------     -----------
  Total liabilities                                    1,159,037         130,181
                                                     -----------     -----------
  Total stockholder's equity - net                    42,683,259      39,094,627
                                                     -----------     -----------
      Total liabilities and stockholder's equity     $43,842,296     $39,224,808
                                                     ===========     ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                      Year Ended March 31,
-------------------------------------------------------------------------------------------------------------------
                                                                               1998            1997           1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>             <C>              <C>    
CONDENSED STATEMENTS OF INCOME
INCOME:
  Interest income from securities held to maturity and available for sale  $  145,162      $  293,929       438,368
  Interest on loans                                                            52,510          66,991        81,681
  Other income                                                                 92,656          81,094        77,771
-------------------------------------------------------------------------------------------------------------------
      Total income                                                            290,328         442,014       597,820
-------------------------------------------------------------------------------------------------------------------
EXPENSES:
  Salaries and benefits                                                       172,019         223,192       200,118
  Legal and professional fees                                                 130,957          67,433        94,590
  Other expenses                                                               86,646          79,418        80,436
-------------------------------------------------------------------------------------------------------------------
      Total expenses                                                          389,622         370,043       375,144
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS                         (99,294)         71,971       222,676
INCOME TAX PROVISION                                                          (38,426)         21,296        67,170
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY                              2,706,035       1,252,869     1,093,799
-------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                 $2,645,167      $1,303,544    $1,249,305
===================================================================================================================
</TABLE>


42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                         MARCH 31,
---------------------------------------------------------------------------------------------------- 
                                                          1998             1997             1996
---------------------------------------------------------------------------------------------------- 
<S>                                                   <C>              <C>              <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                           $ 2,645,167      $ 1,303,544      $ 1,249,305
 Equity in undistributed earnings of subsidiary        (2,706,035)      (1,252,869)      (1,093,799)
  Adjustments to reconcile net income to net cash
    provided by operating activities
  Vesting of restricted stock awards                      125,243          178,070          135,740
  Amortization and accretion                                 (246)          28,238          (38,296)
  (Gain) Loss on sale of investments                       (5,198)          (5,790)          (1,015)
 Changes in assets and liabilities:
  Interest receivable                                      53,847           16,838           34,054
  Deferred income tax                                      (7,422)         (46,817)         (59,786)
  Other assets                                             (4,059)
  Other liabilities                                       (18,519)          20,848           40,575
---------------------------------------------------------------------------------------------------- 
    Net cash provided by operating activities              82,778          242,062          266,778
---------------------------------------------------------------------------------------------------- 

CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from:
  Maturities of:
  Securities held to maturity                                                               600,000
  Securities available for sale                         1,997,500        2,974,688        2,000,000
  Commercial Paper                                      1,500,000        5,500,000
  Principal repayments on loans                           238,050          238,050          238,050
 Sale of:
  Securities held to maturity                                                             2,979,063
  Securities available for sale                         1,986,510        2,934,384
 Purchase of:
  Loans                                                  (497,415)      (6,438,563)
  Securities held to maturity                                           (3,995,625)      (1,000,000)
  Securities available for sale                        (2,497,500)
---------------------------------------------------------------------------------------------------- 
    Net cash provided by investing activities           2,727,145        1,212,934        4,817,113
---------------------------------------------------------------------------------------------------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
 Dividends paid                                          (808,610)        (608,737)        (347,996)
 Purchase of treasury stock                              (993,628)      (2,286,926)      (3,465,463)
 Sale of common stock                                     183,237           63,645           35,689
---------------------------------------------------------------------------------------------------- 
    Net cash used in financing activities              (1,619,001)      (2,832,018)      (3,777,770)
---------------------------------------------------------------------------------------------------- 
NET INCREASE IN CASH                                    1,190,922       (1,377,022)       1,306,121
CASH AT BEGINNING OF PERIOD                               328,249        1,705,271          399,150
---------------------------------------------------------------------------------------------------- 
CASH AT END OF PERIOD                                 $ 1,519,171      $   328,249      $ 1,705,271
                                                      ===========      ===========      ===========
</TABLE>
                                                                              43
                                      
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  following  disclosure  of the  estimated  fair value of  financial
instruments  is made  in  accordance  with  the  requirements  of  Statement  of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value
of Financial Instruments":
<TABLE>
<CAPTION>
                                                               March 31, 1998                    March 31, 1997
-------------------------------------------------------------------------------------------------------------------- 
                                                        Carrying           Fair           Carrying           Fair
                                                          Value            Value            Value            Value
-------------------------------------------------------------------------------------------------------------------- 
<S>                                                     <C>              <C>              <C>             <C>       
Assets:
 Cash                                                  $  4,274,700     $  4,274,700    $  3,211,091    $  3,211,091
 Interest-bearing deposits                                1,808,159        1,808,159       3,153,385       3,153,385
 Securities available for sale                          105,618,621      105,618,621      85,180,313      85,180,313
 Mortgage-backed securities
 available for sale                                      62,652,286       62,652,286      74,052,253      74,052,253
 Securities held to maturity                                                                  25,000          25,000
 Mortgage-backed securities held to maturity             18,861,416       19,119,093      27,180,891      27,197,070
 Loans, net                                             225,349,258      226,008,379     210,189,422     206,062,560
 Interest receivable                                      3,270,173        3,270,173       3,539,085       3,539,085
 Federal Home Loan Bank stock                             5,466,000        5,466,000       5,192,600       5,192,600
 Cash surrender value of life insurance                   1,625,253        1,625,253       1,552,875       1,552,875
Liabilities:
 Deposits                                               282,942,123      287,384,759     280,753,353     275,017,173
 Federal Home Loan Bank advances                         99,352,678       98,824,254      98,483,986      98,084,186
 Advance payments by borrowers
 for taxes and insurance                                    979,859          979,859       1,014,598       1,014,598
 Other borrowed funds                                                                      1,793,967       1,793,967
 Interest payable                                         2,193,548        2,193,548       2,049,727       2,049,727
Off balance sheet: commitments
 to extend credit                                                         10,485,000                       5,002,000
</TABLE>

         The estimated fair value amounts are  determined by the Company,  using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment is required  in  interpreting  market data to develop the
estimates of fair value.  Accordingly,  the estimates  presented  herein are not
necessarily  indicative  of the amounts the Company  could  realize in a current
market  exchange.  The use of different  market  assumptions  and/or  estimation
methodologies may have a material effect on the estimated fair value amounts.

         Cash, interest-bearing deposits, Federal Home Loan Bank stock, interest
receivable  and payable,  advance  payments by borrowers for taxes and insurance
and other borrowed funds - The carrying  amounts of these items are a reasonable
estimate of their fair value.

         Investment securities and mortgage-backed  securities - Fair values are
based on prices obtained from independent pricing services.
<PAGE>
         Loans - The fair value of mortgage loans is estimated  using  published
loan buy rates for similar loans and quoted  market  prices for  mortgage-backed
securities  backed by loans  with  similar  characteristics.  The fair  value of
non-mortgage  loans is estimated by discounting  the future cash flows using the
current rates for loans of similar credit risk and maturities.


44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Deposits  - The fair value of demand  deposits,  savings  accounts  and
money market  deposit  accounts is the amount payable on demand at the reporting
date. The fair value of  fixed-maturity  certificates of deposit is estimated by
discounting  future  cash flows using rates  offered on the  reporting  date for
deposits of similar remaining maturities.

         Federal  Home Loan  Bank  advances  - The fair  value is  estimated  by
discounting  future cash flows using rates  currently  available to the bank for
advances of similar maturities.

         Commitments  - The  commitments  to originate  and purchase  loans have
terms that are consistent with current market conditions.  Accordingly, the Bank
estimated  that the face  amounts  of these  commitments  approximates  carrying
value.

         The fair value  estimates  presented  herein  are based on  information
available to  management as of March 31, 1998 and 1997.  Although  management is
not aware of any factors  that would  significantly  affect the  estimated  fair
value amounts, such amounts have not been comprehensively  revalued for purposes
of these  consolidated  financial  statements  since that date,  and  therefore,
current  estimates  of fair  value  may  differ  significantly  from the  amount
presented herein.

                                                                              45
<PAGE>
BOARD OF DIRECTORS AND                                          Permanent       
EXECUTIVE OFFICERS                                                 Bancorp, Inc.
         


PERMANENT BANCORP INC.

BOARD OF DIRECTORS

Donald P. Weinzapfel                                             John W. Forster
James W. Vogel                                             James A. McCarty, Jr.
Jack H. Kinkel                                                    Daniel F. Korb
Robert L. Northerner                                               John R. Stone
James D. Butterfield                                             Murray J. Brown
Daniel L. Schenk




EXECUTIVE OFFICERS

Donald P. Weinzapfel
   Chairman of the Board, President and
   Chief Executive Officer
Murray J. Brown
   Executive Vice President and
   Chief Operating Officer
Robert A. Cern
   Chief Financial Officer and Secretary



PERMANENT FEDERAL SAVINGS BANK

BOARD OF DIRECTORS

Donald P. Weinzapfel                                             John W. Forster
James W. Vogel                                             James A. McCarty, Jr.
Jack H. Kinkel                                                    Daniel F. Korb
Robert L. Northerner                                               John R. Stone
James D. Butterfield                                             Murray J. Brown
Daniel L.Schenk

Louis H. Boink, Jr. (Director Emeritus)
Carl F. Bernhardt   (Director Emeritus)
Kenneth F. Allen    (Director Emeritus)



JASPER ADVISORY BOARD

Stephen A. Habig                                                  Roger W. Brown
G. Earl Metzger
<PAGE>

WHOLLY OWNED SUBSIDIARY

PERMA SERVICE CORP.


Perma Service Corp.  provides brokerage  services,  on an agency basis,  through
INVEST(R),  and a full line of insurance  products through  PERMANENT  INSURANCE
AGENCY, INC.


EXECUTIVE OFFICERS

Donald P. Weinzapfel
   Chairman of the Board, President &Chief Executive Officer
Murray J. Brown
   Executive Vice President &
   Chief Operating Officer
Robert A. Cern
   Senior Vice President,
   Chief Financial Officer
   & Secretary
Seth P. Allen
   Senior Vice President




George E. Orr
   Senior Vice President
Richard A. Condi
   Vice President
Glenna J. Kirsch
   Vice President
Robert E. Whitfield Jr.
   Vice President

For information about enrolling in the Company's Dividend Reinvestment and Stock
Purchase  Plan,  please  write  Registrar  and  Transfer  Company,  Shareholders
Investment  Services,  10 Commerce Drive,  Cranford,  NJ 07016 or use their toll
free number at 1-800-368-5948.


                                                                              46
<PAGE>
CORPORATE INFORMATION                                           Permanent       
                                                                   Bancorp, Inc.


        ANNUAL MEETING

         The annual meeting of shareholders will be held Tuesday,  July 28, 1998
         at 4:00 p.m.  Central  Daylight Time at the Company's Main office,  101
         S.E. Third Street., Evansville, Indiana


        CORPORATE OFFICE

        Permanent Bancorp, Inc.
        101 S.E. Third Street
        Evansville, IN 47708

        BRANCH OFFICES

        University Heights
        4615 University Drive
        Evansville, Indiana

        Town Center
        201 Diamond Avenue
        Evansville, Indiana

        Green River Road
        123 South Green River Road
        Evansville, Indiana

        North Brook
        3820 First Avenue
        Evansville, Indiana

        West Franklin Street
        2131 West Franklin Street
        Evansville, Indiana

        Ross Center
        2521 Washington Avenue
        Evansville, Indiana

        Fort Branch
        810 East Locust Street
        Fort Branch, Indiana

        Jasper
        771 West Second Street
        Jasper, Indiana

        Newburgh
        8533 Bell Oaks Drive
        Newburgh, Indiana

        Oakland City
        410 West Morton Street
        Oakland City, Indiana
<PAGE>

FORM 10-K

The  Company's  Annual  Report on Form 10-K,  as  required  to be filed with the
Securities and Exchange Commission,  is available,  without charge, upon written
request to:

    Robert A. Cern
    Chief Financial Officer & Secretary
    Permanent Bancorp, Inc.
    101 S.E. Third St., Evansville,  IN  47708

STOCK INFORMATION

The stock of the  Company  is traded  over-the-counter  on the  NASDAQ  National
Market System under the symbol PERM. At March 31, 1998, the Company's  stock was
held by approximately 1,132 holders of record. The stock transfer agent is:

    REGISTRAR AND TRANSFER COMPANY
    10 Commerce Drive
    Cranford, New Jersey 07016

The Company's stock began trading on April 4, 1994.

STOCK TRADING AND DIVIDEND DATA
                                                   Volume       Dividend
Quarter Ended                  High       Low      (000's)        Paid
-------------------------------------------------------------------------
June 30, 1997                 $13.00    $10.38      652.2        $.0375  
September 30, 1997             13.25     11.38      210.1           .05  
December 31, 1997              15.56     12.03      312.6           .05  
March 31, 1998                 18.75     13.38      356.7          .055  
                                                                         
June 30, 1996                  $8.25     $7.13      374.0         $.025  
September 30, 1996              8.56      7.88      320.6         .0375  
December 31, 1996              10.50      6.25      577.6         .0375  
March 31, 1997                 11.38     10.13      411.8         .0375  


47
<PAGE>
CORPORATE INFORMATION                                           Permanent       
                                                                   Bancorp, Inc.



REGISTERED MARKET MAKERS

The following firms make a market in Permanent Bancorp Inc.'s stock:
Capital Resources, Inc.
Herzog, Heine, Geduld, Inc.
J.J. B. Hilliard, W.L. Lyons
NatCity Investments, Inc.
Sandler, O'Neill & Partners
Friedman Billings Ramsey & Co.

GENERAL BANK COUNSEL

Bowers, Harrison, Kent and Miller,LLP
25 Northwest Riverside Drive
Evansville, IN 47708

SPECIAL COUNSEL

Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005

INDEPENDENT AUDITORS

Deloitte & Touche LLP
Suite 3000
Market Tower
10 West Market Street
Indianapolis, IN  46204-2985



48