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

                                    FORM 10-K

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 [FEE REQUIRED]
         
                  For the fiscal year ended March 31, 1997
                                                              
                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT   OF 1934 [NO FEE REQUIRED]
       
         For the transition period from                          to

                         Commission file number 0-23370

                             PERMANENT BANCORP, INC.
             (Exact name of registrant as specified in its charter)

               Delaware                                    35-1908797
    (State or other jurisdiction of                     (I.R.S. Employer
    incorporation  or organization)                     Identification No.)
   

   101 Southeast Third Street, Evansville, Indiana             47708
      (Address of principal executive offices)              (Zip Code)
                                

       Registrant's telephone number, including area code: (812) 428-6800

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of class)

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

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

         The aggregate  market value of the voting stock held by  non-affiliates
of the  registrant,  computed by reference to the closing price of such stock on
the  NASDAQ  National  Market  System  as of June 24,  1997,  was  $24.25.  (The
exclusion from such amount of the market value of the shares owned by any person
shall  not be deemed  an  admission  by the  registrant  that such  person is an
affiliate of the registrant.)

         As of June 24, 1997, there were issued and outstanding 2,097,140 shares
of the Registrant's Common Stock.
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE 

         Parts I, II and IV of Form  10-K -  Portions  of the  Annual  Report to
Stockholders for the fiscal year ended March 31, 1997.

         Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.
<PAGE>
                                     PART I

Item 1.  Business

General

         Permanent Bancorp, Inc. (the "Company"),  a Delaware  corporation,  was
organized in December  1993 as a savings and loan holding  company for Permanent
Federal Savings Bank ("Permanent  Federal" or the "Bank") in connection with the
Bank's  conversion  from mutual to stock form which was  completed  on March 31,
1994  (the  "Conversion").  Permanent  Federal,  the  predecessor  of which  was
originally   organized  in  1885,   is  a  federally   chartered   savings  bank
headquartered in Evansville,  Indiana. The Bank's deposits are insured up to the
maximum  allowable  amount by the Federal  Deposit  Insurance  Corporation  (the
"FDIC").  Through its main office and network of ten branch offices, the Company
serves  Vanderburgh,  Gibson,  Warrick,  Posey and Dubois Counties,  Indiana. At
March 31,  1997,  the Company had total  assets of $423.7  million,  deposits of
$280.8 million,  and total stockholders'  equity of $39.1 million (9.2% of total
assets).

         Permanent   Federal  has  been,  and  intends  to  continue  to  be,  a
community-oriented   financial  institution  offering  a  variety  of  financial
services  to meet the needs of the  communities  it  serves.  The Bank  attracts
deposits  from  the  general  public  and uses  these  deposits,  together  with
borrowings  and  other  funds,   primarily  to  originate  one-  to  four-family
residential  mortgage  loans  as well  as  loans  secured  by  multi-family  and
commercial real estate, automobile and other consumer loans. To a lesser extent,
the Bank  also  originates  a  limited  number of  construction  and  commercial
business loans. The Bank also invests in  mortgage-backed  and other securities.
See "Lending Activities" and "Investment Activities."

         Through its service  corporation,  Perma Service  Corp.,  the Bank also
offers various types of insurance products and provides brokerage services.  See
"Service Corporation Activities."

         The executive  office of the Company is located at 101 Southeast  Third
Street, Evansville, Indiana 47708. Its telephone number at that address is (812)
428-6800.

Lending Activities

         General.   Historically,   the  Bank  originated   fixed-rate,   one-to
four-family mortgage loans. In the early 1980s,  however, the Bank began to also
originate, subject to market conditions,  adjustable-rate mortgage ("ARM") loans
for  retention in its  portfolio.  At March 31,  1997,  69.6% of the Bank's loan
portfolio   was   fixed-rate   and  30.4%  was   adjustable-rate.   The   Bank's
adjustable-rate  loan  portfolio as a percentage of the total loan portfolio has
decreased  from 42.9% at March 31,  1992 to 30.4% at March 31,  1997 as consumer
demand for fixed-rate loans  increased.  See also  "Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations  --  Asset/Liability
Management" in the Company's  Annual Report to Stockholders  for the fiscal year
ended March 31, 1997, attached hereto as Exhibit 13 (the "Annual Report").
<PAGE>
         The Bank focuses its lending  activities  on the  origination  of loans
secured by first mortgages on owner-occupied,  one-to four-family  residences as
well as  multi-family  and  commercial  real estate loans,  automobile and other
consumer loans. To a lesser extent, the Bank also originates a limited number of
construction and commercial  business loans. At March 31, 1997, the Bank's total
loan portfolio,  including  commercial paper,  totaled $212.6 million,  of which
$152.7 million,  or 71.8%, were one- to four-family  mortgage loans. At the same
date,  consumer loans (including  indirect and direct  automobile loans) totaled
$44.9 million,  or 21.1%,  multi-family and commercial real estate loans totaled
$12.1 million,  or 5.7%,  construction loans totaled $1.9 million,  or 1.0%, and
there  was $1.0  million  of  commercial  paper,  representing  0.5% of the loan
portfolio.  Total loans and loans held for sale,  net, as a percentage  of total
assets equaled 49.6% at March 31, 1997.

         The Bank also invests in mortgage-backed securities. At March 31, 1997,
mortgage-backed  securities,  net,  totaled  $101.2  million,  or 23.9% of total
assets. See "Investment Activities -- Mortgage-Backed Securities."

         Loan  applications  are initially  underwritten and approved at various
levels  of  authority,  depending  on  the  type  and  amount  of the  loan,  as
established by the Board of Directors.  Residential loans in excess of $250,000,
commercial real estate loans in excess of $200,000 and commercial business loans
in excess of $100,000  require the  approval  of the Board of  Directors  or the
Senior Loan Committee  consisting of three Bank officers and three  non-employee
directors.

         Prior to the enactment of the Financial Institutions Reform,  Recovery,
and Enforcement Act of 1989  ("FIRREA"),  the aggregate amount of loans that the
Bank was  permitted  to make under  applicable  federal  regulations  to any one
borrower,  including  related  entities,  or the aggregate  amount that the Bank
could  have  invested  in  any  one  real  estate  project,  was,  with  certain
exceptions,  limited to the lesser of 10% of the Bank's  deposits or 100% of its
regulatory capital.  Effective August 9, 1989, the Bank's  loans-to-one-borrower
limit was reduced in accordance with FIRREA,  generally to the greater of 15% of
unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation
of Savings  Associations."  At March 31, 1997, the maximum amount which the Bank
could have lent to any one  borrower  and the  borrower's  related  entities was
approximately  $5.5  million.  At March  31,  1997,  the Bank had no loans  with
aggregate outstanding balances in excess of this amount.

         Management  reserves the right to change its emphasis on the amount, or
type of lending in which it engages to adjust to market or other factors.
<PAGE>
         Portfolio  Composition.  The following table sets forth the composition
of the Bank's loan and mortgage-backed  securities  portfolios  (including loans
held for sale) in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
                                                                                      At March 31,
                                                               1993                      1994                          1995         
                                                     ----------------------      ---------------------       -----------------------
                                                       Amount      Percent        Amount     Percent          Amount        Percent
                                                      --------      ------        -------      ------        --------        ------ 
                                                                                (Dollars in Thousands)
<S>                                                   <C>           <C>          <C>           <C>           <C>             <C>
Real Estate Loans:
 One- to four-family...........................       $126,275       70.58%      $127,958       66.62%       $133,864         67.62%
 Multi-family..................................         13,753        7.69         17,775        9.25          15,712          7.94 
 Commercial real estate........................          7,339        4.10          6,733        3.50           5,052          2.55 
 Construction or development...................          1,961        1.10          1,814        0.94           2,406          1.22 
                                                      --------      ------        -------      ------        --------        ------ 
     Total real estate loans...................        149,328       83.47        154,280       80.31         157,034         79.33 
                                                      --------      ------        -------      ------        --------        ------ 
Other Loans:
 Consumer Loans:
  Deposit account..............................          1,136        0.63            850        0.45           1,011          0.51 
  Student......................................            ---         ---            ---         ---             ---           --- 
  Automobile...................................         17,126        9.57         26,086       13.58          28,005         14.14 
  Home improvement.............................            746        0.42            945        0.49           1,201          0.61 
  Retail mobile home loans.....................          2,938        1.64          2,410        1.25           1,984          1.00 
  Home equity and other........................          7,181        4.01          7,361        3.83           8,137          4.11 
                                                      --------      ------       --------      ------        --------        ------ 
     Total consumer loans......................         29,127       16.27         37,652       19.60          40,338         20.37 
 Commercial business loans.....................            468        0.26            174        0.09              96          0.05 
 Term federal funds(1).........................            ---         ---            ---         ---             ---           --- 
 Bankers' acceptances..........................            ---         ---            ---         ---             489          0.25 
 Commercial paper..............................            ---         ---            ---         ---             ---           --- 
     Total other loans.........................         29,595       16.53         37,826       19.69          40,923         20.67 
                                                      --------      ------       --------      ------        --------        ------ 
     Total loans...............................       $178,923      100.00%      $192,106      100.00%       $197,957        100.00%
                                                      ========      ======       ========      ======        ========        ====== 
Less:
 Loans in process..............................            133                        107                          62               
 Deferred fees and discounts...................            847                        649                         319               
 Allowance for losses..........................          2,077                      2,110                       2,093               
                                                      --------                   --------                    --------               
 Total loans and loans held for sales, net.....       $175,866                   $189,240                    $195,483               
                                                      ========                   ========                    ========               
Mortgage-Backed Securities:
 FNMA..........................................       $ 10,045       12.87%      $ 13,500       17.83%       $ 16,684         21.61%
 GNMA..........................................         36,721       47.04         38,791       51.23          35,692         46.24 
 FHLMC.........................................         31,297       40.09         23,428       30.94          24,812         32.14 
                                                      --------      ------       --------      ------        --------        ------ 
    Total mortgage-backed
      securities...............................         78,063      100.00%        75,719      100.00%         77,188        100.00%
                                                                    ======                     ======                        ====== 
Net premiums and discounts.....................            632                        308                          55               
                                                      --------                   --------                    --------               
Net mortgage-backed securities.................       $ 78,695                   $ 76,027                    $ 77,243               
                                                      ========                   ========                    ========  
-------------------
(1) Represents short-term loans to other financial institutions.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                    At March 31,
                                                  --------------------------------------------------
                                                          1996                        1997 
                                                  ---------------------       ----------------------  
                                                   Amount      Percent         Amount       Percent   
                                                  --------      ------        --------        ----- 
                                                                (Dollars in Thousands)
<S>                                               <C>           <C>           <C>            <C>         
Real Estate Loans:                                
 One- to four-family...........................   $144,155       68.85%       $152,655        71.82%    
 Multi-family..................................     11,823        5.65           8,041         3.78     
 Commercial real estate........................      4,787        2.29           4,034         1.90     
 Construction or development...................      2,700        1.29           1,888          .89     
                                                  --------      ------        --------        -----     
     Total real estate loans...................   $163,465       78.08        $166,618        78.39     
                                                  --------      ------        --------       ------     
Other Loans:                                                                                             
 Consumer Loans:                                                                                         
  Deposit account..............................      1,148        0.55             940          .44     
  Student......................................        ---         ---             ---          ---        
  Automobile...................................     31,056       14.83          31,394        14.77     
  Home improvement.............................      1,088        0.52           1,084          .51     
  Retail mobile home loans.....................      1,595        0.76           1,240          .58     
  Home equity and other........................      8,666        4.14          10,269         4.83     
                                                  --------      ------        --------       ------     
     Total consumer loans......................     43,553       20.80          44,927        21.13     
 Commercial business loans.....................         57        0.03              52          .02     
 Term federal funds(1).........................        ---         ---             ---          ---        
 Bankers' acceptances..........................        299        0.14             ---          ---        
 Commercial paper..............................      1,997        0.95             979          .46        
     Total other loans.........................     45,906       21.92          45,958        21.61     
                                                  --------      ------        --------       ------     
     Total loans...............................   $209,371      100.00%       $212,576       100.00%    
                                                  ========      ======        ========       ======     
Less:                                                                                                    
 Loans in process..............................         67                         (24)                     
 Deferred fees and discounts...................        156                         284                     
 Allowance for losses..........................      2,238                       2,126                     
                                                    ------                    --------                     
 Total loans and loans held for sale, net......   $206,910                    $210,190                     
                                                  ========                    ========                     
                                                                                                         
Mortgage-Backed Securities:                                                                              
 FNMA..........................................   $ 21,286       22.62%      $  31,793        31.55%    
 GNMA..........................................     31,949       33.96          27,160        26.95     
 FHLMC.........................................     40,852       43.42          41,832        41.50     
                                                    ------      ------        --------       ------     
    Total mortgage-backed                                                                                
      securities...............................     94,087      100.00%        100,785       100.00%    
                                                                ======                       ======     
Net premiums and discounts.....................         20                         448                     
                                                   -------                    --------                     
Net mortgage-backed securities.................    $94,107                    $101,233                     
                                                   =======                    ======== 
-------------------
(1) Represents short-term loans to other financial institutions.
</TABLE>
<PAGE>                                           
      The  following  table  sets  forth  the  composition  of the  Bank's  loan
portfolio  (including  loans held for sale) by fixed and adjustable rates at the
dates indicated.
<TABLE>
<CAPTION>
                                                        1993                    1994                    1995           
                                             ----------------------     --------------------    --------------------   
                                                  Amount   Percent       Amount    Percent        Amount    Percent    
Fixed-Rate Loans:                                                     (Dollars in Thousands)
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>
 Real estate:
  One- to four-family.......................     $79,776     44.58%     $ 91,744     47.75%     $ 96,379     48.67%   
  Multi-family..............................       7,638      4.27         8,792      4.58         7,029      3.55    
  Commercial real estate....................       2,679      1.50         4,791      2.49         3,803      1.92    
  Construction or development...............       1,930      1.08         1,800      0.94         2,392      1.21    
                                                --------    ------      --------    ------      --------    ------    
    Total real estate loans.................      92,023     51.43       107,127     55.76       109,603     55.35    

  Consumer..................................      26,229     14.66        35,246     18.35        38,343     19.37    
  Commercial business.......................         286      0.16            93       .05            74      0.04    
  Term federal funds........................         ---       ---           ---       ---           ---       ---    
  Bankers' acceptances......................         ---       ---           ---       ---           489      0.25    
  Commercial paper..........................         ---       ---           ---       ---           ---       ---    
                                                 -------     -----       -------     -----       -------     -----    
    Total fixed-rate loans..................     118,538     66.25       142,466     74.16       148,509     75.01    

Adjustable-Rate Loans:
 Real estate:
  One- to four-family.......................      46,499     25.99        36,214     18.85        37,485     18.94    
  Multi-family..............................       6,115      3.42         8,983      4.68         8,683      4.39    
  Commercial real estate....................       4,660      2.60         1,942      1.01         1,249      0.63    
  Construction or development...............          31      0.02            14      0.01            14      0.01    
                                                --------    ------      --------    ------      --------    ------    
    Total real estate loans.................      57,305     32.03        47,153     24.55        43,431     23.97    
 Consumer...................................       2,898      1.62         2,406      1.25         1,995      1.01    
 Commercial business........................         182      0.10            81       .04            22      0.01    
                                                --------    ------      --------    ------      --------    ------    
     Total adjustable-rate
      loans.................................      60,385     33.75        49,640     25.84        49,448     24.99    
                                                --------    ------      --------    ------      --------    ------    
    Total loans.............................     178,923    100.00%      192,106    100.00%      197,957    100.00%   
                                                            ======                  ======                  ======    
Less:
 Loans in process...........................         133                     107                      62              
 Deferred fees and discounts................         847                     649                     319              
 Allowance for loan losses..................       2,077                   2,110                   2,093              
                                                --------                --------                --------              
    Total loans and loans held for sale, net    $175,866                $189,240                $195,483              
                                                ========                ========                ========              

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                            1996                       1997               
                                                 -----------------------    ---------------------         
                                                   Amount       Percent        Amount     Percent 
                                                  -------         -----     --------       -----      
<S>                                              <C>             <C>        <C>           <C>  
Fixed-Rate Loans:                                 
 Real estate:                                
  One- to four-family.......................     $ 99,568         47.56%    $ 94,842       44.45%     
  Multi-family..............................        3,271          1.56        2,687        1.26      
  Commercial real estate....................        3,634          1.74        3,357        1.58      
  Construction or development...............        2,686          1.28        1,855         .87      
                                                  -------         -----     --------       -----      
     Total real estate loans................      109,159         52.14      102,741       48.16      
                                                                                                      
  Consumer..................................       43,405         20.73       44,450       20.91      
  Commercial business.......................           57          0.03           52         .02      
  Term federal funds........................          ---           ---          ---         ---      
  Bankers' acceptances......................          299          0.14          ---         ---      
  Commercial paper..........................        1,997          0.95          979         .46      
                                                  -------         -----     --------       -----      
     Total fixed-rate loans.................      154,917         73.99      148,222       69.55      
                                                                                                      
Adjustable-Rate Loans:                                                                                
 Real estate:                                                                                         
  One- to four-family.......................       44,588         21.30       57,813       27.36      
  Multi-family..............................        8,552          4.08        5,354        2.52      
  Commercial real estate....................        1,153          0.55          677         .32      
  Construction or development...............           13          0.01           33         .02      
                                                   ------         -----      -------       -----      
     Total real estate loans................       54,306         25.94       63,877       30.22      
 Consumer...................................          148          0.07          477         .23      
 Commercial business........................          ---           ---          ---         ---      
                                                   ------         -----      -------       -----      
     Total adjustable-rate                                                                            
      loans.................................      54,454         26.01        64,354       30.45      
                                                  ------         -----       -------       -----      
     Total loans............................      209,371       100.00%      212,576      100.00%     
                                                                ======                    ======      
Less:                                                                                                 
 Loans in process...........................           67                        (24)                 
 Deferred fees and discounts................          156                        284                  
 Allowance for loan losses..................        2,238                      2,126                  
                                                 --------                   --------                  
     Total loans and loans held for sale, net    $206,910                   $210,190                  
                                                 ========                   ========                  
</TABLE>
<PAGE>
            The  following  table sets forth the  maturities  of the Bank's loan
portfolio  (excluding  commercial  paper) at March  31,  1997.  Loans  that have
adjustable or  renegotiable  interest  rates are shown as maturing in the period
during  which the  contract  is due.  The  table  reflects  scheduled  principal
amortization,  but does not  reflect  possible  prepayments  or  enforcement  of
due-on-sale clauses.
<TABLE>
<CAPTION>
                                                          Real Estate
                       ---------------------------------------------------------------------------- 
                                                          Multi-family
                                                             and
                                                          Commercial               Construction                                     
                         One- to four-family             Real Estate              or Development                 Consumer           
                                      Weighted                  Weighted                   Weighted                    Weighted    
                                      Average                    Average                    Average                     Average     
                       Amount          Rate         Amount        Rate         Amount        Rate          Amount        Rate       
                       -----------------------      ------ --------------      -------------------        ----------------------    
                                                                 (Dollars in Thousands)
  Due During
 Years Ending
   March 31,
<S>                    <C>              <C>           <C>          <C>          <C>           <C>           <C>            <C>
1998(1).........       28,400           8.18%         4,553        8.67%        1,832         8.56%          1,957         10.60%   
1999 to 2002...         4,773           8.18          1,909        9.78            36         8.34          36,491          8.75    
2003 to 2007...        49,948           7.62            590        9.69             7         8.50           5,670          9.62    
2008 to 2017...        67,606           7.46          3,185        7.86            13         8.38             809         11.46    
2017 and
 following.....         1,928           8.39          1,838        8.59           ---          ---             ---           ---    

<CAPTION>
                             Commercial                                                
                             Business                      Total                        
                                    Weighted                     Weighted                
                                     Average                     Average                
                        Amount         Rate          Amount        Rate                   
                        ----------------------      --------------------- 
  Due During     
 Years Ending    
   March 31,     
<S>                      <C>           <C>           <C>           <C>                 
1998(1).........            3           9.75%        36,745        8.40%  
1999 to 2002...            49          10.44         43,258        8.73   
2003 to 2007...           ---            ---         56,215        7.84   
2008 to 2017...           ---            ---         71,613        7.52   
2017 and                                                                  
 following.....           ---            ---          3,766        8.49   
                                                                          
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
<PAGE>
         At March 31,  1997,  the total amount of loans due after March 31, 1998
which had fixed  interest  rates was $155.0  million,  while the total amount of
loans due after such date which had floating or  adjustable  interest  rates was
$64.4 million.

         One- to Four-Family  Residential  Mortgage Lending.  The Bank's primary
lending activity consists of the origination of one- to four-family  residential
mortgage  loans  secured  primarily  by property  located in the Bank's  primary
market area.  At March 31, 1997,  the Bank had $152.7  million,  or 71.8% of its
loan portfolio invested in these loans.

         The Bank  presently  offers  fixed-rate  conventional  mortgage  loans,
Federal Housing Administration  ("FHA"),  Veterans  Administration ("VA") loans,
and ARM loans. During fiscal 1995, the Bank introduced a 10-year adjustable-rate
loan which features an initial  10-year  fixed-rate  that converts to a one-year
adjustable-rate  loan upon  expiration  of the initial  fixed-rate  period.  The
Bank's  origination  of  fixed-rate  mortgage  loans as compared to ARM loans is
determined on an on-going basis and is based on changes in market interest rates
and consumer  preference.  Many  borrowers  have selected  shorter-term  15-year
fixed-rate  mortgages  recently,  as a higher interest rate  environment  during
fiscal  1995,  1996 and 1997  resulted  in a  decrease  in  traditional  30-year
fixed-rate  loans.  The higher market rates  resulted in increased  activity for
adjustable-rate,  and decreased  activity for  fixed-rate,  one- to  four-family
residential loans.  Interest rates charged on fixed-rate loans are competitively
priced  according to local market  conditions.  The Bank's  current policy is to
sell all newly originated  fixed-rate loans with terms of more than 20 years, as
well as ARM loans converted to a fixed rate with a remaining term to maturity in
excess of 20 years,  and all FHA and VA loans.  The Bank's  prior  policy was to
sell the noted  fixed-rate  loans  with  terms in  excess  of 15  years.  See "-
Originations,  Purchases,  Sales  and  Servicing  of Loans  and  Mortgage-Backed
Securities."

         The  Bank  currently   makes   adjustable-rate,   one-  to  four-family
residential  mortgage  loans in amounts of up to 97% of the  appraised  value or
selling  price of the  security  property,  whichever  is less.  For loans  with
loan-to-value  ratios of greater than 80%, the Bank typically  requires  private
mortgage  insurance to reduce the Bank's  exposure to 75% of the appraised value
or selling price of the security property.  Adjustable-rate loans generally have
interest rate adjustment  limitations consisting of 2% annual adjustments and 6%
lifetime  adjustments,  and are generally indexed to the weekly average yield of
U. S. Treasury securities adjusted to a constant maturity of one year.

         The retention of ARM loans in the Bank's loan portfolio  helps the Bank
to manage its exposure to changes in the  interest  rates.  There are,  however,
unquantifiable  credit risks relating to such loans resulting from the potential
of  increased  costs  due to  changed  rates to be paid by the  customer.  It is
possible that during periods of rising  interest  rates,  the risk of default on
ARM loans may increase as a result of repricing and the  increased  costs to the
borrower.  Furthermore,  the ARM loans originated by the Bank generally provide,
as a marketing  incentive,  for initial rates of interest  below the rates which
would   apply   were  the   adjustment   index   used  for   pricing   initially
("discounting").  These  loans are  subject  to  increased  risk of  default  or
delinquency due to this discounting.  In addition,  although ARM loans allow the
Bank to increase the sensitivity of its asset base to changes in interest rates,
the extent of this  interest  rate  sensitivity  is limited by the  periodic and
lifetime  interest rate  adjustment  limits,  and by the ability of borrowers to
refinance their loans if they perceive that the interest rate they are paying is
too high.  Accordingly,  there can be no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds.
<PAGE>
         In underwriting  residential real estate loans, the Bank evaluates both
the borrower's  ability to make monthly  payments,  employment  history,  credit
history and the value of the property securing the loan. Potential borrowers are
qualified  for  fixed-rate  loans  based upon the  initial or stated rate of the
loan.  Borrowers on adjustable-rate  loans are currently qualified at an 8% rate
or the fully-indexed rate after one year, whichever is higher.

         An appraisal of the security property from  Board-approved  independent
fee appraisers is obtained prior to mortgage loan approvals.  In connection with
origination of residential real estate loans,  the Bank currently  requires that
the  borrower  obtain  title  insurance,  and fire,  flood (if  applicable)  and
casualty insurance to protect the Bank's interest.

         The Bank's residential  mortgage loans customarily  include due-on-sale
clauses  giving  the Bank the  right to  declare  the loan  immediately  due and
payable in the event,  among  other  things,  the  borrower  sells or  otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank on occasion has enforced due-on-sale clauses in its mortgage contracts.

         From  1991 to 1993,  Permanent  Federal  increased  its  investment  in
mortgage-backed  securities,  while in fiscal 1994 and 1995,  the amount of such
securities  remained  relatively constant and again increased during fiscal 1996
and 1997.  Although such securities are generally held for investment,  they can
serve as collateral for borrowings.  For information  regarding the carrying and
market values of Permanent Federal's  mortgage-backed  securities portfolio, see
Note 3 of the Notes to Consolidated  Financial  Statements in the Annual Report.
See also "Investment Activities - Mortgage-Backed Securities."

         Consumer  Lending.  The Bank  considers  consumer  lending an  integral
component of its lending operations. Consumer loans generally have shorter terms
to maturity (thus reducing  Permanent  Federal's exposure to changes in interest
rates) and  historically  have carried  higher rates of interest than do one- to
four-family residential mortgage loans, although that is not currently the case.
In addition,  management  believes  that the offering of consumer  loan products
helps to expand  and  create  stronger  ties to its  existing  customer  base by
increasing the number of customer  relationships  and providing  cross-marketing
opportunities.  At March 31, 1997, the Bank's  consumer loan  portfolio  totaled
$44.9 million, or 21.1% of its loan portfolio. The chief component of such loans
consists of indirect and direct automobile paper,  accounting for $31.4 million,
or 69.9%,  of the consumer loan  portfolio at March 31, 1997.  Under  applicable
federal  law,  the Bank is  authorized  to  invest  up to 35% of its  assets  in
consumer loans.

         Permanent Federal offers a variety of secured consumer loans, including
automobile,  boat,  home  equity,  home  improvement,  mobile home loans,  loans
secured by savings deposits and other consumer collateral.  The Bank also offers
a limited  amount of unsecured  loans.  The Bank generally  originates  consumer
loans in its market area.  Although it has not done so in recent years, the Bank
may also purchase  consumer loans,  generally  within its market area.  Consumer
loan terms vary according to the type of collateral and length of contract.  The
Bank's consumer loans generally have fixed rates of interest.
<PAGE>
         The  Bank  is  actively   engaged  in  indirect  dealer   financing  of
automobiles.  Such  indirect  dealer  loans are  originated  through  automobile
dealers  located in, or in counties  contiguous  to, the Bank's  market area and
underwritten  by the Bank's lending staff in accordance  with the Bank's general
standards for underwriting  consumer loans.  These loans are originated at fixed
interest  rates and are  typically  for terms of up to five years.  At March 31,
1997,  indirect  dealer loans totaled  $22.4  million,  or 50.0%,  of the Bank's
consumer loan portfolio.

         At March 31, 1997,  $9.2 million of the Bank's consumer loans consisted
of home equity  loans.  The home equity loans are  typically  collateralized  by
second mortgages on owner-occupied, single-family mortgage loans.

         From 1987 to 1990,  the Bank also  purchased  loans  secured  by mobile
homes.  Such  loans  were  originated  through  a  subsidiary  of  the  Bank  in
association with two other savings institutions. The subsidiary created pools of
mobile  home  loans  it  originated,   and  Permanent   Federal  and  the  other
participating  lenders  each  purchased a one-third  interest in the pools.  The
Bank's mobile home loan portfolio as of March 31, 1997 was $1.2 million,  or .6%
of the Bank's loan  portfolio.  Mobile home loans are  typically  made at higher
yields and for a shorter maturity than one- to four-family  residential mortgage
loans.  The Bank's mobile home loans were  typically  made for terms of up to 15
years and all were one-year  ARMs. At March 31, 1997,  $50,116,  or 4.0%, of the
Bank's mobile home loan portfolio was non-performing.

         The  underwriting  standards  employed by the Bank for  consumer  loans
include a determination of the applicant's payment history on other debts and an
assessment  of the  ability to meet  existing  obligations  and  payments on the
proposed loan. In addition, the stability of the applicant's monthly income from
primary  employment  is considered  during the  underwriting  process.  Although
creditworthiness of the applicant is a primary  consideration,  the underwriting
process also  includes a  comparison  of the value of the  security,  if any, in
relation to the proposed loan amount.

         Consumer  loans may  entail  greater  credit  risk than do  residential
mortgage loans,  particularly in the case of consumer loans which are unsecured,
such as checking  account  overdraft  privilege loans, or are secured by rapidly
depreciable assets, such as automobiles, mobile homes and recreational vehicles.
In such cases, any repossessed  collateral for a defaulted consumer loan may not
provide an adequate  source of  repayment of the  outstanding  loan balance as a
result of the greater likelihood of damage,  loss or depreciation.  In addition,
consumer loan collections are dependent on the borrower's  continuing  financial
stability  and  thus  are  more  likely  to  be  affected  by  adverse  personal
circumstances.  Furthermore,  the application of various federal and state laws,
including  bankruptcy  and  insolvency  laws,  may limit the amount which can be
recovered on such loans.

         Multi-Family   and  Commercial  Real  Estate  Lending.   The  Bank  has
originated  multi-family  and commercial  real estate loans in its lending area,
and has  purchased  whole loan and  participation  interests in loans from other
financial  institutions  in Indiana,  and to a lesser  extent,  in Kentucky  and
Tennessee.  At March 31, 1997, the Bank had  multi-family  and  commercial  real
estate loans totaling $12.1 million, representing 5.7% of its loan portfolio.
<PAGE>
         The  majority of the Bank's  multi-family  and  commercial  real estate
loans are secured by  apartment  buildings,  as well as other types of property,
including nursing homes, office buildings,  motels and shopping centers. Some of
the areas in which the security  properties are located have experienced adverse
economic  conditions,  including a general  softening in the real estate markets
and local economies,  which resulted in increased  delinquencies and loan losses
during prior years, as described below. See "-- Cardinal  Industries,  Inc." and
"Asset Quality."

         The table  below sets  forth by type of  security  property  the Bank's
multi-family  and  commercial  real estate  (including  land) loans at March 31,
1997.
<TABLE>
<CAPTION>
                                                                                Amount of
                                                          Outstanding        Non-Performing
                                           Number of       Principal         or Of Concern
                                             Loans          Balance               Loans
                                             -----          -------               -----
                                                      (Dollars in Thousands)
<S>                                          <C>           <C>                  <C>
Apartment buildings.......................    16           $ 8,041              $3,023
Motels....................................     1             1,000                 ---
Small business facilities and office
  buildings...............................    14             2,552                 ---
Shopping centers..........................     1               482                 ---
                                             ---            ------              ------

  Total commercial and multi-family
   real estate loans......................    32           $12,075              $3,023
                                             ===           =======              ======
</TABLE>
         At March  31,  1997,  the Bank  had a total  of four  multi-family  and
commercial real estate loans with an outstanding principal balances in excess of
$1.0 million.  With the exception of certain loans  discussed under "-- Cardinal
Industries,  Inc." below,  each of these loans was performing in accordance with
its terms at March 31, 1997.

         Multi-family  and commercial  real estate loans  originated by the Bank
generally have terms ranging from ten to 20 years and up to 30 year amortization
schedules.  Rates on such loans generally  either (i) adjust  (subject,  in some
cases, to specified  interest rate caps) at one, three or five year intervals to
specified  spreads  over an  index,  (ii)  float  (subject,  in some  cases,  to
specified  interest  rate caps) with changes in a specified  prime rate or (iii)
carry fixed  rates.  Under the Bank's  current  loan  policy,  multi-family  and
commercial  real estate  loans (other than loans to  facilitate)  are written in
amounts of up to 80% of the appraised value of the properties.

         Appraisals on properties  securing  multi-family  and  commercial  real
estate  property  loans  originated by the Bank are performed by an  independent
appraiser  approved  by the  Bank  prior  to the  time  the  loan is  made.  All
appraisals on multi-family  and commercial real estate loans are reviewed by the
Bank's management.  In addition,  the Bank's underwriting  procedures  generally
require  verification  of the borrower's  credit  history,  income and financial
statements,  banking  relationships  and income  projections  for the  property.
<PAGE>
Historically,  personal  guarantees  were not generally  obtained for the Bank's
multi-family  and  commercial  real estate  loans.  While the Bank  continues to
monitor  multi-family  and commercial real estate loans on a regular basis after
origination,  updated  appraisals are not normally obtained after closing unless
the Bank believes that there are questions regarding the progress of the loan or
the value of the collateral.

         Multi-family  and  commercial  real estate  loans  generally  present a
higher  level  of  credit  risk  than  loans  secured  by  one-  to  four-family
residences.  This  greater  risk  is  due  to  several  factors,  including  the
concentration  of  principal  in a limited  number of loans and  borrowers,  the
effect of general  economic  conditions on  income-producing  properties and the
increased  difficulty  of  evaluating  and  monitoring  these  types  of  loans.
Furthermore,  the repayment of loans secured by multi-family and commercial real
estate is typically dependent upon the successful  operation of the related real
estate  project.  If the cash flow from the project is reduced (for example,  if
leases are not obtained or renewed, or a bankruptcy court modifies a lease term,
or a major tenant is unable to fulfill its lease  obligations),  the  borrower's
ability to repay the loan may be impaired.

         Cardinal Industries,  Inc. The Bank has a group of three loans totaling
approximately  $3.6  million in net book value to  separate  syndicated  limited
partnerships on three  apartment  complexes  located in Indiana.  The loans were
originated from 1983 through 1988. Two of the loans are  wholly-owned and one is
a 50%  participation  with  another  Indiana  savings  institution.  The general
partner of these  partnerships  is Cardinal  Industries,  Inc.  ("Cardinal")  of
Columbus,  Ohio. On May 15, 1989, Cardinal,  which is a general partner in these
properties and not the borrower,  filed for  bankruptcy  under Chapter 11 of the
U.S.  Bankruptcy  Code. As a result of Cardinal's  financial  difficulties,  the
terms of two of the  three  loans  were  restructured  as of July 1,  1991.  For
accounting  purposes,  the two modified  loans are  considered  "non-performing"
assets,  including one which is classified as a "troubled  debt  restructuring."
Cardinal has since emerged from bankruptcy protection as a publicly held company
and engages primarily in managing its apartment projects.

         Construction or Development Lending. The Bank makes a limited number of
construction loans to individuals for the construction of their residences.  The
Bank generally  requires that the customer have a general  contractor.  The Bank
also  makes  loans  to  builders  for  presold  and  speculative   single-family
construction  purposes  and a limited  number  of  multi-family  and  commercial
construction  loans. At March 31, 1997, the Bank's  construction  loan portfolio
totaled  $1.9  million  (including  a  $264,000  loan  on a  low-income  housing
project),  or 1.0% of its total loan  portfolio.  As of that date,  all of these
loans were secured by property located within the Bank's market area.

         Construction  terms to  individuals  are  generally  made under the ARM
program,  although at a rate higher  than that for a  permanent  ARM loan,  with
provisions  for  converting  to  a  fixed-rate   loan  upon  completion  of  the
construction.  Fixed-rate  loans for  construction  purposes  are  limited  to a
maximum term of 15 years.  During the  construction  phase,  the  borrower  pays
interest  only.  Residential   construction  loans  are  generally  underwritten
pursuant to the same guidelines used for originating permanent residential loans
except that the record of the builder is also considered.
<PAGE>
         Construction loans to builders are written for a term of 18 months at a
fixed  rate of  interest.  Construction  loans are  obtained  primarily  through
continued business from builders who have previously  borrowed from the Bank, as
well as referrals from existing  customers.  The application  process includes a
submission  of  accurate  plans,  specifications  and costs of the project to be
constructed.  These items are also used as a basis for determining the appraised
value of the  subject  property.  Loans are based on the  lesser of the  current
appraised value or the cost of construction  (land plus building).  From time to
time,  the Bank has lent  funds for the  development  and  subdivision  of lots,
although the Bank had no such loans in its portfolio at March 31, 1997.

         Commercial Business Lending.  Federally chartered savings institutions,
such as Permanent Federal, are authorized to make secured or unsecured loans and
issue letters of credit for  commercial,  corporate,  business and  agricultural
purposes and to engage in commercial leasing activities,  up to a maximum of 10%
of total assets.

         At March 31, 1997, Permanent Federal had $52,000 in commercial business
loans  outstanding  (representing  .02% of the Bank's total loan portfolio).  At
March 31, 1997, Permanent Federal had no letters of credit outstanding.

Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities

         The Bank originates real estate loans through  marketing  efforts,  the
Bank's  customer  base,  walk-in  customers  and  referrals  from  realtors  and
builders.  The Bank originates both  adjustable-rate  and fixed-rate  loans. Its
ability to originate  loans is dependent upon the relative demand for fixed-rate
or ARM loans in the origination market,  which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition.

         During  fiscal 1997,  the Bank  originated a total of $62.8  million in
loans,  of which total $37.3  million  were  fixed-rate  and $25.5  million were
adjustable-rate.  Of the  fixed-rate  loans  originated  during the year,  $11.3
million were one- to four-family real estate loans,  $23.8 million were consumer
loans and $2.2 million were  construction  loans. Of the  adjustable-rate  loans
originated  during the year,  $20.7 million were one- to four-family real estate
loans and $3.9 million were construction loans.

         The Bank's current policy is to sell all fixed-rate  conventional loans
that are originated or converted with terms of more than 20 years. Likewise, all
FHA and VA loans are sold,  irrespective  of term.  In contrast,  all ARM loans,
regardless  of the term,  are retained and other loans with terms of 20 years or
less are also  retained in the Bank's  portfolio.  Servicing  is retained on all
loan sales, except for FHA and VA mortgage loans.

During fiscal 1995, 1996 and 1997, the Bank sold $1.5 million,  $3.3 million and
$1.0 million of loans, respectively.

         With respect to the loans that the Bank sells,  it is the policy of the
Bank to sell  current  production  of such  loans as  quickly  as the  loans are
originated,  unless it is determined to temporarily  hold these loans until more
favorable rates are available. However, it is the Bank's policy that in no event
shall a loan  continue  to be held for sale if the price to be  received on that
loan drops below net 98 (98 cents on the  dollar) or the maximum  dollar loss on
the sale of that loan would exceed $4,063,  whichever  comes first. In addition,
<PAGE>
the Bank's  policy  provides  that any loan held for sale which bears a rate too
high to sell in the  secondary  market  without  having to  accept a  discounted
premium will continue to be held until such time as market  conditions allow the
loan to be sold without a premium discount.

         Government  loans are  committed  for sale with a private  investor the
same day an  application  is received.  The  requirements  for delivery are on a
"best effort"  basis,  providing that if for any reason the loan does not close,
there is no financial exposure to the Bank.

         The Board of Directors receives a monthly report identifying the number
and  dollar  amount of  mortgage  loans not sold  which  present  any  potential
interest rate risk exposure to the Bank. The report further  details the current
secondary  market buy rates and the  estimated  gain or loss at such rates.  The
Bank attempts to limit any interest rate risk exposure created by commitments to
make or sell loans by limiting  the number of days  between the  commitment  and
closing,  charging fees for commitments and managing the amount of its uncovered
commitments outstanding at any one time.

         The Bank occasionally  purchases loans and loan participations for one-
to four-family,  multi-family and commercial real estate loans. Such loans had a
carrying value of approximately  $9.1 million,  $8.5 million and $7.1 million at
March 31, 1995, 1996 and 1997, respectively.

         During  the  past  three   fiscal   years,   the  Bank  has   purchased
mortgage-backed  securities in order to supplement loan demand.  In fiscal 1995,
the Bank  purchased  $11.1 million of  mortgage-backed  securities and purchased
$30.2  million  and $34.5  million of such  securities  in fiscal 1996 and 1997,
respectively. The mortgage-backed securities purchased generally had fixed rates
and maturities of up to 15 years and adjustable rates up to 30 years.
See "Investment Activities."

         The Bank had commitments to make loans,  including  participations,  of
approximately  $800,000,  $4.0 million and $1.6 million  (excluding  undisbursed
portions of loans in process),  at March 31, 1995, 1996 and 1997,  respectively.
In addition, the Bank had approximately $266,500, $0 and $104,000 in commitments
to sell loans at March 31, 1995, 1996 and 1997, respectively.

         The  amount of loans  serviced  by the Bank for  others  totaled  $41.3
million,  $37.9  million,  and $34.3  million at March 31, 1995,  1996 and 1997,
respectively.

         The  Bank  generally  earns  servicing  fees  of 25  basis  points  for
servicing  loans for others.  For the years ended March 31, 1995,  1996 and 1997
such  fees   amounted  to   approximately   $123,000,   $104,000  and  $101,000,
respectively.
<PAGE>
         The  following  table sets  forth the loan  origination,  purchase  and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
                                                            1995          1996        1997
                                                           ------        ------      -----
<S>                                                       <C>           <C>         <C>
Originations by type:
 Adjustable rate:
  Real estate - one- to four-family.......................$ 9,754       $12,373     $20,717
              - multi-family..............................    ---          ---          ---
              - commercial real estate....................     75          ---          ---
              - construction..............................  1,736         2,147       3,865
  Non-real estate - consumer..............................    ---          ---          875
                  -commercial business....................     25           419         ---
                                                          -------       -------     -------

         Total adjustable-rate............................ 11,590        14,939      25,457

 Fixed rate:
  Real estate - one- to four-family.......................$15,806      $23,698      $11,303
              - multi-family..............................    ---          315          ---
              - commercial real estate....................    ---          ---          ---
              - construction..............................  2,903          341        2,205
  Non-real estate - consumer ............................. 21,097       25,312       23,772
                  -commercial business....................     30           19           16
                                                          -------      -------      -------
         Total fixed-rate................................. 39,836       49,685       37,296
         Total loans originated........................... 51,426       64,624       62,753

Purchases:
  Real estate - one- to four-family.......................$   ---      $   ---      $   ---
              - multi-family..............................    ---          ---          ---
              - commercial real estate....................    ---          ---          ---
              - construction..............................    ---          ---          ---
  Non-real estate - consumer..............................    ---          ---          ---
              - commercial business.......................    ---          ---          ---
              - commercial paper..........................    ---        1,974       17,741
              - bankers' acceptances......................  3,049        3,286          ---
                                                          -------      -------      -------
         Total loans purchased............................  3,049        5,260       17,741
 Mortgage-backed securities-fixed rate.................... 11,055       22,278        6,914
              - adjustable-rate...........................    ---        7,898       27,577
                                                          -------      -------      -------
         Total purchases.................................. 14,104       35,436       52,232
                                                          -------      -------      -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                            1995          1996        1997
                                                           ------        ------      -----
<S>                                                        <C>         <C>          <C>
Sales and Principal Repayments:
Sales:
Real estate - adjustable-rate one- to four-family......... $  ---      $  ---       $   ---
   - fixed-rate one- to four-family.......................  1,486       3,250           962
              - multi-family..............................    ---          ---          ---
              - commercial real estate....................    ---          ---          ---
              - construction..............................    ---          ---          ---
  Non-real estate - consumer..............................    ---          ---          ---
        - commercial business.............................    ---          ---          ---
                                                           ------      -------      -------
         Total loans sold.................................  1,486        3,250          962
  Mortgage-backed securities..............................    ---          743       11,143
                                                           ------      -------      -------
         Total sales......................................  1,486        3,993       12,105
Principal repayments...................................... 55,041       67,613       91,807
                                                           ------      -------      -------
         Total reductions................................. 56,527       71,606      103,912
Increase (decrease) in other items, net...................    ---          ---          ---
                                                          -------      -------      -------
         Net increase (decrease)..........................$ 9,003      $28,454      $11,073
                                                          =======      =======      =======

</TABLE>
<PAGE>
Asset Quality

         Loan  Monitoring  Procedures.  When a borrower fails to make a required
payment on a loan,  the Bank  attempts to cause the  delinquency  to be cured by
contacting  the borrower.  In the case of loans  secured by real estate,  a late
notice is sent nine days after the scheduled payment date and a second notice is
sent after 16 days.  In the case of consumer  loans,  a late notice is sent five
days  after the  scheduled  payment  date and a second  notice is sent after ten
days. If the delinquency is not cured by this time, contact with the borrower is
made by phone.  Additional  written and verbal  contacts  or  meetings  with the
borrower are made to the extent  necessary.  With respect to mortgage  loans, if
the  delinquency  is not cured by the 90th day, a 30-day  default letter is sent
and, once that period lapses, appropriate action to foreclose on the property is
initiated.  Interest income on loans at this point is reduced by the full amount
of accrued and uncollected  interest.  If foreclosed,  the property is sold at a
sheriff's sale and typically is purchased by the Bank. Delinquent consumer loans
are  handled  in a  similar  manner.  If these  efforts  fail to bring  the loan
current,  appropriate  action  may be taken to  collect  any loan  payment  that
remains delinquent.  The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under Indiana consumer protection
laws.

         Real estate acquired by Permanent Federal as a result of foreclosure or
by deed in lieu of  foreclosure  is  classified as real estate owned until it is
sold.  When  property  is  acquired,  it is  recorded  at the  lower  of cost or
estimated fair value at the date of  acquisition,  and any write-down  resulting
therefrom is charged  against the allowance for loan losses.  Upon  acquisition,
all costs  incurred in  maintaining  the property are expensed.  However,  costs
relating to the  development  and improvement of the property are capitalized to
the extent of net realizable value.

         Prior to the  consummation of commercial  real estate loans,  financial
information on the project and its  principals are reviewed,  and appraisals are
obtained and reviewed.  Subsequent  balance sheets and operating  statements are
obtained  and  reviewed  on at least an annual  basis.  On loans  that  indicate
potential weaknesses, more frequent reviews are made.

         A committee of senior officers of the Bank  periodically  reviews large
loans  (generally,  those with  balances in excess of  $100,000).  The committee
examines  the  borrower's   financial   statements  and  position,   prior  loan
performance and any industry or economic trends which would  potentially  affect
the borrower's operations or collateral values.

         Appraisals  are obtained on  properties  that are  transferred  to real
estate  owned.  The  Bank  performs  periodic  fair  value   computations  using
methodology  consistent  with that of an  appraiser.  For a  description  of the
Bank's  fair  value  computations  for  certain  Cardinal  loans,  see  "Lending
Activities  -  Multi-Family  and  Commercial  Real  Estate  Lending --  Cardinal
Industries,  Inc." Appraisals are assigned only to qualified  appraisers located
within or familiar  with the location of the subject  property.  Net  realizable
value  calculations  are performed on all properties in either real estate owned
or loans classified as impaired. The result of these calculations may indicate a
writedown of the asset or specific reserve allowance.
<PAGE>
         Classified Assets.  Federal  regulations provide for the classification
of loans and other assets, such as debt and equity securities  considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered  "substandard"  if it is  inadequately  protected  by the current net
worth and paying capacity of the obligor or of the collateral  pledged,  if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the insured  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and  of  such  little  value  that  their  continuance  as  assets  without  the
establishment  of a specific loss reserve is not warranted.  Assets which do not
currently  expose  the  insured   institution  to  sufficient  risk  to  warrant
classification in one of the  aforementioned  categories but possess  weaknesses
are required to be designated "special mention" by management.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem  assets as  "loss,"  it is  required  either  to  establish  a  specific
allowance for losses equal to 100% of that portion of the asset so classified or
to  charge-off  such  amount.   An   institution's   determination   as  to  the
classification  of its  assets  and the amount of its  valuation  allowances  is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
<PAGE>
         In connection with the filing of its periodic  reports with the OTS and
in accordance  with its  classification  of assets  policy,  the Bank  regularly
reviews  problem  loans and real  estate  acquired  through  foreclosure  in its
portfolio to determine whether such assets require  classification in accordance
with applicable  regulations.  Classified  assets of the Bank at March 31, 1997,
(without deduction for specific  valuation  allowances of $342,000) all of which
are included in the table of non-performing assets.
<TABLE>
<CAPTION>
                                                              At March 31,
                                                 ------------------------------------
                                                   1995          1996           1997
                                                 -------        -------        ------
                                                            (In Thousands)
<S>                                              <C>            <C>            <C>
Substandard (including real
 estate owned)...................................$ 5,146        $ 4,928        $2,965
Doubtful.........................................     13             91            87
Loss.............................................    ---            ---           ---
                                                 -------        -------        ------
     Total classified assets
      (including real estate
      owned).....................................$ 5,159        $ 5,019        $3,052
                                                 =======        =======        ======

Special mention..................................$ 8,635        $ 6,088        $4,587
                                                 -------        -------        ------
     Total classified assets
      (including real estate
      owned) and special
      mention....................................$13,794        $11,107        $7,639
                                                 =======        =======        ======

</TABLE>

         The specific reserves established with respect to classified assets are
included in the allowance for loan losses.
<PAGE>
         Allowance for Loan Losses. The distribution of the Bank's allowance for
losses on loans at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
                                                                         At March 31,
                          ----------------------------------------------------------------------------------------------------------
                                1993                 1994                  1995                  1996                  1997
                          ------------------   ------------------     ------------------    -------------------    -----------------
                                     Percent              Percent               Percent                Percent              Percent
                                     f Loans             of Loans               of Loans               of Loans             of Loans
                                     in Each              in Each               in Each                in Each              in Each
                                    Category             Category               Category               Category             Category
                                    to Total             to Total               to Total               to Total             to Total
                          Amount     Loans     Amount      Loans       Amount    Loans       Amount     Loans      Amount     Loans
                          ------     -----     ------      -----       ------    -----       ------     -----      ------     -----
<S>                      <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>        <C>        <C>
One- to four-
 family..................$    3      69.3%     $    1      67.0%      $    1      68.2%     $   90      69.4%     $   90      71.7%
Multi-family.............   378       9.4         493       9.4          210       7.9         166       5.5         183       3.8
Commercial real
 estate..................    90       4.2         ---       3.4          ---       2.9         ---       2.4         ---       1.9
Construction or
 development.............   ---       1.1         ---       0.9          ---       1.2         ---       1.3         ---       1.0
Consumer.................    10      15.7           4      19.2           18      19.7          50      20.3          68      21.1
Commercial business......   155       0.3         162       0.1          107       0.1         ---       ---         ---       ---
Bankers' acceptances.....   ---       ---         ---       ---          ---       ---         ---       0.1         ---       ---
Commercial paper.........   ---       ---         ---       ---          ---       ---         ---       1.0         ---        .5
Unallocated
  Consumer...............   278       N/A         362       N/A          382       N/A         456       N/A         454       N/A
  One- to four-family....   956       N/A         929       N/A          630       N/A         647       N/A         876       N/A
 Multi-family and
    commercial
    real estate..........   192       N/A         146       N/A          734       N/A         829       N/A         455       N/A
  Construction or
    development..........    15       N/A          13       N/A           11       N/A         ---       N/A         ---       N/A
                         ------     -----      ------     -----       ------     -----      -------    -----      ------     -----

     Total...............$2,077     100.0%     $2,110     100.0%      $2,093     100.0%     $2,238     100.0%     $2,126     100.00%
                         ======     =====      ======     =====       ======     =====      ======     =====      ======     ======

</TABLE>

         The  distribution  of the allowance for loan losses is consistent  with
the Bank's accounting  policy.  See also "Lending  Activities - Multi-Family and
Commercial Real Estate Lending -- Cardinal Industries, Inc."

         Additional  information  concerning the quality of the Company's assets
and  allowance  for  loan  losses  is   incorporated   herein  by  reference  to
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" contained in the Annual Report.

Investment Activities

         General.  Permanent Federal must maintain minimum levels of investments
that qualify as liquid assets under OTS  regulations.  Liquidity may increase or
decrease  depending upon the  availability  of funds and  comparative  yields on
investments  in  relation  to the  return on loans.  Historically,  the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS  regulations  and at levels  believed  adequate to meet the  requirements of
normal operations,  including  repayments of maturing debt and potential deposit
<PAGE>
outflows.  Cash flow  projections  are regularly  reviewed and updated to assure
that adequate  liquidity is maintained.  At March 31, 1997, the Bank's liquidity
ratio (liquid assets as a percentage of net  withdrawable  savings  deposits and
current  borrowings)  was 8.7%.  See  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations  Liquidity and Capital Resources"
in the Annual Report and "Regulation - Liquidity."

         Federally  chartered savings  institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities  of various  federal  agencies,  certain  certificates  of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.

         Generally,  the investment  policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's liquidity
needs, asset/liability management policies, investment quality and marketability
and performance objectives.

         Securities.  At March 31, 1997,  Permanent Federal's securities totaled
$85.2  million,  or 20.1% of total assets.  As of such date, the Bank also had a
$5.2 million investment in FHLB stock, satisfying its requirement for membership
in the  FHLB of  Indianapolis.  It is the  Bank's  general  policy  to  purchase
securities which are U.S. Government securities or federal agency obligations or
other issues that are rated  investment  grade.  At March 31, 1997,  the average
term to maturity or repricing of the securities portfolio was 7.0 years.

         OTS  guidelines   regarding  investment  portfolio  accounting  require
institutions  to  categorize  securities  and certain  other  assets as "held to
maturity",  "available  for sale" or  "trading."  The portion of the  investment
portfolio  which is held with the intent to hold to maturity is accounted for on
an amortized cost basis.  Assets which are categorized as available for sale are
carried at the lower of  historical  cost or market.  At March 31, 1995 the Bank
had $992,000 in securities  "Available for Sale" and no securities identified as
"Trading".  The  securities  available for sale at March 31, 1995 had unrealized
gains of $3,000.  At March 31, 1996,  the Bank had $73.2  million in  securities
available for sale and no securities  identified  as "trading."  The  securities
available for sale at March 31, 1996 had net unrealized  losses of $238,000.  At
March 31, 1997, the Bank had $85.2 million in securities  available for sale and
no securities  identified as trading. The securities available for sale at March
31, 1997 had net unrealized losses of $1,840,000.
<PAGE>
         The following table sets forth the composition of the Bank's securities
portfolio (including  securities held to maturity and available for sale) at the
dates indicated.
<TABLE>
<CAPTION>
                                                                  At March 31,
                                               1995                  1996                   1997
                                       -------------------    -------------------    -------------------
                                         Book       % of       Book        % of       Book        % of
                                         Value      Total      Value       Total      Value       Total
                                       -------      -----     -------      -----     -------      -----
                                                           (Dollars in Thousands)
<S>                                   <C>           <C>      <C>           <C>      <C>           <C>
Securities:
  U.S. government securities ....      $28,034       54.3%    $17,029       22.2%    $ 7,009        7.8%
  Federal agency obligations ....       20,984       40.6      54,648       71.2      78,171       86.5
  Municipal bonds and other .....           50        0.1       1,519        2.0          25       --
                                       -------      -----     -------      -----     -------      -----
     Subtotal ...................      $49,068       95.0%     73,196       95.4      85,205       94.3
FHLB stock ......................        2,571        5.0       3,504        4.6       5,193        5.7
                                       -------      -----     -------      -----     -------      -----
     Total securities and FHLB
      stock .....................      $51,639      100.0%    $76,700      100.0%    $90,398      100.0%
                                       =======      =====     =======      =====     =======      =====

Average remaining life of
 securities, excluding FHLB stock    1.6 years               5.7 years             7.0 years

Other interest-earning assets:
  Interest-bearing deposits
   with banks ...................      $ 1,159      100.0%    $    16      100.0%    $ 3,154      100.0%
                                       =======      =====     =======      =====     =======      =====
Average remaining life or
 term to repricing of
 securities and other interest-
 earning assets, excluding FHLB
 stock ..........................    1.6 years              5.7 years              6.7 years

</TABLE>
<PAGE>
     The  following  table sets forth as of March 31, 1997 the  composition  and
maturities of the securities portfolio, excluding FHLB stock.
<TABLE>
<CAPTION>
                                                                  At March 31, 1997
                                    ------------------------------------------------------------------------------
                                    Less Than          1 to 5          Over 5               Total Investment
                                      1 Year           Years           Years                   Securities
                                    Fair Value        eir Value      Fair Value      Fair Value     Amortized Cost
                                    ----------        ---------      ----------      ----------     --------------
                                                                  (Dollars in Thousands)
<S>                                   <C>             <C>             <C>            <C>               <C>
U.S. government
 securities........................   $4,005          $ 3,004         $              $ 7,009           $ 7,029
Federal agency
 obligations.......................    1,950           12,901          63,320         78,171            79,991
State and local
 government
 obligations and other.............       25                                              25                25
                                      ------          -------          ------        -------           -------
Total investment
 securities........................   $5,980          $15,905         $63,320        $85,205           $87,045
                                      ======          =======         =======        =======           =======

Weighted average
 yield.............................     5.94%            6.67%           7.38%          7.15%             6.99%

</TABLE>
         At March 31,  1997 the  Bank's  securities  portfolio  did not  contain
securities  of any issuer with an  aggregate  book value in excess of 10% of the
Bank's  retained  earnings,  excluding  securities  issued by the United  States
Government or its agencies.

         The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors.  Investments may be made by
authorized Bank officers within  specified  limits.  At March 31, 1997, the Bank
held  $25,000  of such  securities  as held to  maturity  and $85.2  million  as
available  for sale.  See also Note [2] of the Notes to  Consolidated  Financial
Statements in the Annual Report.

         Mortgage-Backed Securities. The Bank has a portfolio of mortgage-backed
securities and has utilized such  investments to complement its mortgage lending
activities.  See "Lending Activities - One- to Four-Family  Residential Mortgage
Lending."  At March 31,  1997,  the Bank's  mortgage-backed  securities  totaled
$101.2 million. At such date, the mortgage-backed securities portfolio consisted
entirely of securities  backed by loans insured or guaranteed by the  Government
National   Mortgage   Association   ("GNMA"),   the  Federal  National  Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). At
March  31,  1997,   the  Bank's   portfolio   consisted  of  $27.2   million  in
mortgage-backed  securities  held to maturity and $74.0  million  available  for
sale. At such date, the portfolio had a weighted average interest rate of 6.71%.
<PAGE>
         The following table sets forth the contractual maturities of the Bank's
mortgage-backed  securities held to maturity and available for sale at March 31,
1997.
<TABLE>
<CAPTION>
                                                                                                       At
                                                                                                    March 31,
                                                                                                      1997
                           Less than                                                            --------------
                           6 Months         1 to          3 to 5       5 to 10       Over 10         Balance
                          to 1 Year         3 Years        Years        Years         Years        Outstanding
                         ------------    ------------   -----------  -----------   -----------  --------------
                                                         (Dollars in Thousands)
<S>                        <C>             <C>            <C>          <C>           <C>             <C>
Federal Home Loan
 Mortgage Corporation      $585            $5,188         $5,773       $3,156        $27,261         $ 41,963

Federal National
 Mortgage Association       ---               122            ---        2,961         28,940           32,023

Government National
 Mortgage Association       ---               ---            ---          ---         27,247           27,247
                          -----            ------         ------       ------        -------         --------

     Total                 $585            $5,310         $5,773       $6,117        $83,448         $101,233
                           ====            ======         ======       ======        =======         ========
</TABLE>
         For  information  regarding the carrying and market values of Permanent
Federal's  mortgage-backed  securities  portfolio,  see Note  3  of the Notes to
Consolidated Financial Statements in the Annual Report.

         Under the OTS risk-based  capital  requirements,  GNMA  mortgage-backed
securities  have a zero  percent  risk  weighting  and FNMA,  FHLMC and AA-rated
mortgage-backed  securities  have a 20% risk  weighting,  in contrast to the 50%
risk weighting carried by one- to four-family  performing  residential  mortgage
loans.

Sources of Funds

         General. The Bank's primary sources of funds are deposits, amortization
and  repayment  of  loan  principal  and  interest  (including   mortgage-backed
securities), maturities of securities, mortgage-backed securities and short-term
investments, FHLB advances and funds provided from operations.

         Borrowings are used to compensate  for seasonal  reductions in deposits
or deposit inflows at less than projected levels, to purchase investments and to
support lending  activities.  At March 31, 1997, the Bank's borrowings  included
FHLB  advances  totaling  $98.5  million,  FHLB  funds due April 1, 1997 of $1.2
million and  securities  sold under  agreements to  repurchase of $607,000.  See
"Borrowings" and Notes 8 and 9 of the Notes to Consolidated Financial Statements
in the Annual Report.

         Deposits. Permanent Federal offers a variety of deposit accounts having
a wide  range of  interest  rates and  terms.  The  Bank's  deposits  consist of
passbook accounts, NOW, money market and other checking accounts and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer  service to attract and retain these  deposits.  Permanent  Federal
solicits  deposits  from its  market  area only and does not  solicit  or accept
brokered deposits.
<PAGE>
         The flow of deposits is influenced  significantly  by general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.  The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with  flexibility to changes
in  consumer  demand.  The  Bank  has  become  more  susceptible  to  short-term
fluctuations  in deposit  flows as  customers  have  become more  interest  rate
conscious.  The Bank  manages  the pricing of its  deposits in keeping  with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and  maintain  certificates  of deposit,  and the rates paid on these
deposits,  has been and will  continue  to be  significantly  affected by market
conditions.  The Bank  believes  that the  recent  trends in  deposit  migration
represents an industry  phenomenon and are not unique to the Bank. The Bank will
continue to remain rate  competitive  on maturing  deposits  and to utilize FHLB
advances as a funding  alternative when necessary.  During fiscal year 1995, the
Bank  experienced a net outflow of deposits,  but had a net inflow during fiscal
1996 and fiscal  1997.  The FHLB has  recently  introduced  several  new advance
programs that offer variable rates or amortizing  principal amounts specifically
tied to funding one-to four-family residential loans. These advances have proven
to be a less costly  funding source after  consideration  of the cost of deposit
insurance associated with traditional deposits.
<PAGE>
      The following  table sets forth the dollar  amount of savings  deposits in
the  various  types of  deposit  programs  offered  by the Bank for the  periods
indicated.
<TABLE>
<CAPTION>
                                                                        At March 31,
                                            --------------------------------------------------------------------
                                                    1995                    1996                    1997
                                            -------------------     --------------------     -------------------
                                                       Percent                 Percent                  Percent
                                             Amount    of Total     Amount     of Total      Amount     of Total
                                             ------    --------     ------     --------      ------     --------
<S>                                         <C>         <C>         <C>          <C>        <C>         <C>  
Transactions and Savings Deposits:

Commercial Demand                           $   649       0.24%     $   994         .35%    $   902       0.32%
Passbook Accounts (2.90-5.50%)               33,178      12.33       54,796       19.45      54,245      19.20
NOW Accounts (2.50-5.25%)                    25,379       9.43       25,371        9.00      24,046       8.51
Money Market Accounts (2.90-5.50%)           15,916       5.91       11,199        3.97      11,542       4.08
                                            -------      -----      -------     -------      ------      -----

Total Non-Certificates                       75,122      27.91       92,360       32.77      90,736      32.11
                                            -------      -----      -------     -------      ------      -----

Certificates:

 0.00 -  3.49%                                  590       0.22          389         .14         158       0.06
 3.50 -  5.49%                              101,813      37.83       85,124       30.21      81,947      29.00
 5.50 -  7.49%                               76,093      28.27       98,266       34.87     104,618      37.02
 7.50 -  9.49%                               13,011       4.83        3,869        1.37       3,295       1.17
 9.50 and above                                 891       0.33          ---         ---         ---        ---
                                           --------     ------      -------     -------     -------     ------

Total Certificates                          192,398      71.48      187,648       66.59     190,018      67.24
                                           --------     ------      -------     -------     -------     ------
Accrued Interest                              1,636       0.61        1,764         .64       1,809      0.65
                                           --------     ------      -------      ------     -------      ------
Total Deposits                             $269,156     100.00%    $281,772      100.00%   $282,563     100.00%
                                           ========     ======     ========      ======    ========     ======

</TABLE>
<PAGE>
    The  following  table sets forth the  savings  flows at the Bank  during the
periods indicated.
<TABLE>
<CAPTION>
                                               Year Ended March 31,
                                    ----------------------------------------
                                      1995            1996            1997

<S>                                 <C>             <C>             <C>
Opening balance....                  285,180        $267,520        $280,008
Deposits...........                  420,227         405,665         566,909
Withdrawals........                  446,325         402,754         575,977
Interest credited..                    8,438           9,577           9,813
                                    --------        --------        --------

Ending balance.....                 $267,520        $280,008        $280,753
                                    ========        ========        ========

Net (decrease)
 increase..........                 $(17,660)       $ 12,488        $    745
                                    ========        ========        ========

Percent (decrease)
 increase..........                    (6.19)%          4.67%           0.26%
                                     ========       ========        ========
</TABLE>
         The following  table sets forth the rate and maturity  information  for
the Bank's certificates of deposit as of March 31, 1997.
<TABLE>
<CAPTION>
                                                0.00-      3.50-       5.50-      7.50-                       Percent
                                                3.49%      5.49%       7.49%      9.49%         Total        of Total
                                                -----      -----       -----      -----         -----        --------
                                                                    (Dollars in Thousands)

Certificate accounts maturing
in quarter ending:
<S>                                            <C>       <C>        <C>           <C>        <C>              <C>
June 30, 1997....................              $ 158     $14,913    $  9,253      $  146     $ 24,469          12.88%
September 30, 1997...............                ---      30,250      19,665         431       50,346          26.50
December 31, 1997................                ---       5,891       9,560         161       15,612           8.22
March 31, 1998...................                ---       6,622       3,546           2       10,170           5.35
June 30, 1998....................                ---       7,006       3,154         ---       10,160           5.35
September 30, 1998...............                ---       6,548       4,287         ---       10,835           5.70
December 31, 1998................                ---       2,868       8,309         ---       11,177           5.88
March 31, 1999...................                ---       3,777       9,497          28       13,302           7.00
June 30, 1999....................                ---       1,431       5,416         ---        6,847           3.60
September 30, 1999...............                ---         470       1,584         ---        2,054           1.08
December 31, 1999................                ---         149       1,411         ---        1,560           0.82
March 31, 2000...................                ---         416         922         ---        1,338           0.70
Thereafter.......................                ---       1,607      28,014       2,527       32,148          16.92
                                               -----      ------    --------       -----     --------          -----

   Total.........................              $ 158     $81,947    $104,618      $3,295     $190,018         100.00%
                                               =====     =======    ========      ======     ========         ======

   Percent of total..............               0.08%      43.13%      55.06%       1.73%      100.00%
                                                ====       =====       =====        ====       ======
</TABLE>
<PAGE>
     The  following  table  indicates the amount of the Bank's  certificates  of
deposit and public funds by time remaining until maturity as of March 31, 1997.
<TABLE>
<CAPTION>
                                                           Maturity
                                                            Over          Over
                                             3 Months      3 to 6        6 to 12         Over
                                             or Less       Months        Months        12 months        Total
                                             -------       ------        ------        ---------        -----
                                                                      (In thousands)
<S>                                          <C>           <C>           <C>           <C>            <C>
Certificates of deposit less
 than $100,000.............................. $ 21,822      $ 44,798      $ 22,540      $ 79,572       $168,732

Certificates of deposit of
 $100,000 or more...........................    2,270         3,967         1,945         9,781         17,963

Public funds(1).............................      377         1,581         1,297            68          3,323
                                             --------      --------      --------      --------       --------

Total certificates of
 deposit.................................... $ 24,469      $ 50,346      $ 25,782      $ 89,421       $190,018
                                             ========      ========      ========      ========       ========
---------------
      (1)  Deposits from governmental and other public entities.
</TABLE>

         Borrowings.  Although  deposits are the Bank's primary source of funds,
the Bank's  policy has been to utilize  borrowings  when they are a less  costly
source of funds or can be invested at a positive rate of return.

         Permanent  Federal may obtain  advances  from the FHLB of  Indianapolis
upon the  security of its FHLB capital  stock and certain of its mortgage  loans
and  mortgage-backed  securities.  Such advances may be made pursuant to several
different credit programs,  each of which has its own interest rate and range of
maturities. At March 31, 1997 the Bank's FHLB advances totaled $98.5 million and
its FHLB overnight  borrowings  totaled $1.2 million.  See also Notes 8 and 9 of
the Notes to Consolidated Financial Statements in the Annual Report.
<PAGE>
         The  following  table  sets forth the  maximum  month-end  balance  and
average balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
                                                                  Year Ended March 31,
                                                        ------------------------------------
                                                           1995           1996          1997
                                                        --------        -------     --------
                                                                    (In Thousands)
<S>                                                     <C>             <C>         <C>
Maximum Balance:
  FHLB advances........................................ $ 25,689        $68,303     $100,141
  Securities sold under
   agreements to repurchase............................      899            983        2,945
  FHLB overnight borrowings............................    1,526          2,127        1,710
                                                        --------        -------     --------
                                                        $ 28,114        $71,413     $104,796
                                                        ========        =======     ========
Average Balance:
  FHLB advances........................................ $ 20,101        $46,308     $ 92,604
  Securities sold under
   agreements to repurchase............................    1,474            530        1,485
  FHLB overnight borrowings............................      267          1,135          208
                                                        --------        -------     --------
                                                        $ 21,842        $47,973     $ 94,297
                                                        ========        =======     ========

</TABLE>
<PAGE>
         The  following  table sets forth certain  information  as to the Bank's
FHLB advances and FHLB overnight borrowings at the dates indicated.
<TABLE>
<CAPTION>
                                                                      At March 31,
                                                      -------------------------------------------
                                                        1995             1996              1997
                                                      --------         -------           --------
                                                                  (Dollars in Thousands)
<S>                                                   <C>              <C>               <C>

FHLB advances........................................ $ 25,689         $68,303           $ 98,484
Securities sold under
 agreements to repurchase............................      899             555                607
FHLB overnight borrowings............................    1,526           2,127              1,187
                                                      --------         -------           --------

     Total borrowings................................ $ 28,114         $70,985           $100,278
                                                      ========         =======           ========

Weighted average interest
 rate of FHLB advances...............................     6.53%           5.77%              5.64%

Weighted average interest
 rate of securities sold
 under agreements to
 repurchase..........................................     4.60%           4.80%              5.19%

Weighted average interest rate
 of FHLB overnight borrowings........................      ---%            ---%               ---%
------------------
         (1) The FHLB funds  represent  checks written by the Bank on its demand
         account at the FHLB of Indianapolis  and $107,000 of borrowings under a
         $1 million  overdraft line of credit  agreement  with the FHLB.  Checks
         written  by the bank  include  $12.4  million  of  stock  subscriptions
         refundable in conjunction with the Conversion.
</TABLE>

Service Corporation Activities

         Federal  associations  generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In  addition,  federal  associations  may  invest up to 50% of their  regulatory
capital in conforming loans to service  corporations in which they own more than
10% of the capital stock.  In addition to  investments in service  corporations,
federal  associations  are permitted to invest an unlimited  amount in operating
subsidiaries engaged solely in activities which a federal association may engage
in directly.

         Permanent Federal has one first-tier service corporation, Perma Service
Corp.  ("Perma  Service"),  located in  Evansville,  Indiana.  Perma Service has
approximately a 20% interest,  along with four other financial institutions,  in
Family Financial Life Insurance Company  ("FFLIC"),  which  underwrites  various
types of life and disability  insurance and annuity programs.  FFLIC reinsures a
majority of the risk it underwrites  with other  insurers.  Permanent  Federal's
share of FFLIC's net income for the year ended March 31, 1997 was $43,000.
<PAGE>
         Perma Service also has one wholly owned subsidiary, Permanent Insurance
Agency  Inc.  ("PIAI"),  which  offers,  on an  agency  basis,  casualty,  life,
accident, health, mortgage,  disability, and consumer credit insurance. PIAI had
a net loss of $25,000 for the year ended March 31, 1997.

         Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVESTTM.

Competition

         Permanent  Federal faces strong  competition,  both in originating real
estate and other loans and in attracting  deposits.  Competition  in originating
real estate loans comes  primarily  from  commercial  banks,  other  thrifts and
mortgage companies.  The Bank competes for loans principally on the basis of the
interest  rates and loan fees it charges,  the types of loans it originates  and
the quality of services it provides to borrowers.

         The  Bank  attracts  most of its  deposits  from  Vanderburgh,  Gibson,
Warrick,   Posey  and  Dubois  Counties.   Competition  for  those  deposits  is
principally  from  commercial  banks,  other  thrifts,  credit  unions and other
financial  intermediaries  doing business in the same community.  The ability of
the Bank to attract  and retain  deposits  depends on its  ability to provide an
investment  opportunity  that satisfies the requirements of investors as to rate
of  return,  liquidity,  risk and other  factors.  The Bank  competes  for these
deposits by  offering a variety of deposit  accounts  at  competitive  rates and
convenient  business  hours.  At June  30,  1996,  the  latest  date  for  which
information is available,  the Bank's share of the savings market in its primary
market area was 6.6%.

Regulation

         General.  Permanent Federal is a federally  chartered savings bank, the
deposits of which are federally  insured and backed by the full faith and credit
of the  United  States  Government.  Accordingly,  the Bank is  subject to broad
federal regulation and oversight extending to all its operations.  The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited  regulation
by the Board of Governors of the Federal  Reserve  System (the "Federal  Reserve
Board").  As the  savings  and loan  holding  company of the Bank,  the  Holding
Company also is subject to federal regulation and oversight.  The purpose of the
regulation  of the Holding  Company and other  holding  companies  is to protect
subsidiary savings associations. The Bank is a member of the Savings Association
Insurance  Fund (the  "SAIF")  and the  deposits  of the Bank are insured by the
FDIC. As a result,  the FDIC has certain  regulatory and  examination  authority
over the Bank.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

         Federal  Regulation  of  Savings  Associations.  The OTS has  extensive
authority  over  the  operations  of  savings  associations.  As  part  of  this
authority,  the Bank is required to file  periodic  reports  with the OTS and is
subject to periodic  examinations  by the OTS and the FDIC. The last regular OTS
and FDIC examinations of Permanent Federal,  for which reports have been issued,
were as of December 1996 and April 1991,  respectively.  When these examinations
are  conducted by the OTS and the FDIC,  the  examiners  may require the Bank to
provide  for  higher   general  or  specific  loan  loss   reserves.   Financial
<PAGE>
institutions  in various  regions of the United  States have been called upon by
examiners  to write down assets and to establish  increased  levels of reserves,
primarily as a result of perceived  weaknesses  in real estate values and a more
restrictive regulatory climate.

         All savings associations are subject to a semi-annual assessment, based
upon the savings  association's total assets, to fund the operations of the OTS.
Permanent Federal's OTS assessment for the fiscal year ended March 31, 1997, was
$97,000.

         The OTS also  has  extensive  enforcement  authority  over all  savings
institutions  and their holding  companies,  including the Bank and the Company.
This enforcement  authority includes,  among other things, the ability to assess
civil  money  penalties,  to issue  cease-and-desist  or  removal  orders and to
initiate  injunctive  actions.  In  general,  these  enforcement  actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.

         In addition,  the  investment,  lending and branching  authority of the
Bank is prescribed by federal laws and  regulations,  and it is prohibited  from
engaging in any  activities  not  permitted  by such laws and  regulations.  For
instance,  no savings  institution may invest in non-investment  grade corporate
debt  securities.  In addition,  the permissible  level of investment by federal
associations  in loans secured by  non-residential  real property may not exceed
400% of  total  capital,  except  with  approval  of the  OTS.  Federal  savings
associations are also generally authorized to branch nationwide.  The Bank is in
compliance with the noted restrictions.

         The Bank's general permissible  lending limit for  loans-to-oneborrower
is equal to 15% of  unimpaired  capital  and  surplus  (except  for loans  fully
secured by certain readily  marketable  collateral,  in which case this limit is
increased to 25% of  unimpaired  capital and  surplus).  At March 31, 1997,  the
Bank's lending limit under this restriction was $5.3 million. At March 31, 1997,
the Bank had no loans in excess of this limit.  The Bank is in  compliance  with
the loans-to-one-borrower limitation.

         The OTS, as well as the other  federal  banking  agencies,  has adopted
guidelines  establishing  safety and soundness standards on matters such as loan
underwriting and  documentation,  asset quality,  earnings  standards,  internal
controls and audit  systems,  interest rate risk exposure and  compensation  and
other  employee  benefits.  Any  institution  which  fails to comply  with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an  approved  plan will  subject  the  institution  to further  enforcement
action. The Bank has not been required to submit a compliance plan.

         Insurance of Accounts and  Regulation by the FDIC. The Bank is a member
of the SAIF,  which is  administered  by the FDIC.  Deposits  are  insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States  Government.  As insurer,  the FDIC imposes  deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured  institutions.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
order  to pose a  serious  risk to the SAIF or the  BIF.  The FDIC  also has the
authority to initiate  enforcement actions against savings  associations,  after
<PAGE>
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines  that the  institution  has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized  (i.e., those with a core capital ratio of at least 5%, a ratio
of Tier 1 or core capital to risk-weighted  assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based  capital  ratio of at least 10%) and  considered
healthy pay the lowest premium while  institutions that are less than adequately
capitalized  (i.e., those with core and Tier 1 risk-based capital ratios of less
than 4% or a  risk-based  capital  ratio  of less  than  8%) and  considered  of
substantial   supervisory   concern   would  pay  the  highest   premium.   Risk
classification  of all  insured  institutions  is  made  by the  FDIC  for  each
semi-annual assessment period.

         The FDIC is authorized to increase  assessment  rates,  on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC. The FDIC may impose  special  assessments on SAIF members to repay amounts
borrowed  from  the  United  States  Treasury  or for any  other  reason  deemed
necessary by the FDIC.

         For the  first six  months of 1995,  the  assessment  schedule  for BIF
members and SAIF members  ranged from .23% to .31% of  deposits.  As is the case
with the SAIF, the FDIC is authorized to adjust the insurance  premium rates for
banks that are insured by the BIF of the FDIC in order to  maintain  the reserve
ratio of the BIF at  1.25%  of BIF  insured  deposits.  As a  result  of the BIF
reaching its statutory  reserve ratio the FDIC revised the premium  schedule for
BIF insured  institutions  to provide a range of .04% to .31% of  deposits.  The
revisions  became  effective in the third quarter of 1995. In addition,  the BIF
rates were further revised,  effective January 1996, to provide a range of 0% to
 .27%. The SAIF rates,  however,  were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below),  the SAIF would not attain its  designated  reserve ratio until the year
2002. As a result,  SAIF insured members would continue to be generally  subject
to higher deposit insurance  premiums than BIF insured  institutions  until, all
things being equal, the SAIF attained its required reserve ratio.

         In order to eliminate this disparity and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation to recapitalize the SAIF was enacted in September,  1996.
The  legislation  provides  for a  one-time  assessment,  to be  imposed  on all
deposits  assessed at the SAIF rates as of March 31, 1995.  It also provides for
the merger of the BIF and the SAIF on January 1, 1999 if no savings associations
then  exist.  The  special  assessment  rate  has been  established  at .657% of
deposits by the FDIC and the  resulting  assessment  of  $1,766,185  was paid in
November  1996.  This special  assessment  significantly  increased  noninterest
expense and adversely  affected the Bank's  results of  operations  for the year
ended March 31, 1997. As a result of the special assessment,  the Bank's deposit
insurance   premiums   was  reduced  to  .065%  based  upon  its  current   risk
classification  and the new assessment  schedule for SAIF insured  institutions.
These premiums are subject to change in future periods.
<PAGE>
         Prior  to the  enactment  of the  legislation,  a  portion  of the SAIF
assessment imposed on savings  associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift  crisis in the 1980s.  although the FDIC has  proposed  that the SAIF
assessment be equalized with the BIF assessment  schedule,  effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing  obligation.  Although the  legislation  also now
requires  assessments  to be made on  BIF-assessable  deposits for this purpose,
effective  January  1,  1997,  that  assessment  was  limited to 20% of the rate
imposed on SAIF  assessable  deposits  until the earlier of December 31, 1999 or
when no  savings  association  continues  to exist,  thereby  imposing a greater
burden  on SAIF  member  institutions  such as the  Bank.  Thereafter,  however,
assessments  on  BIF-member  institutions  will  be made on the  same  basis  as
SAIF-member  institutions.  The rates to be established by the FDIC to implement
this  requirement for all  FDIC-insured  institutions is uncertain at this time,
but are  anticipated to be about a 6.5 basis points  assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions  participate
fully in the assessment.

Legislative Action

         On September 30, 1996,  President  Clinton signed into law the Economic
Development  and  Regulatory  paperwork  Reduction Act of 1996 (the "Act").  The
Act's  principal  provisions  relate to  recapitalization  of SAIF,  but it also
contains  numerous  regulatory  relief  measures,  some of  which  are  directly
appliable to the Bank.

         Pursuant  to the Act, as of January 1, 1997,  commercial  banks will be
required  to  share in the  payment  of  interst  due on  Financial  Corporation
("FICO")  bonds used to rescue the  savings  and loan  industry  in the  1980's.
Annual FICO assessments to be added to deposit  insurance  premiums are expected
to equal  approximately  6.4 basis  points for SAIF members and 1.3 basis points
for  BIF  members  from  January  1,  1997  through   December  31,  1999,   and
approximately 2.4 basis points for both BIF and SAIF members thereafter.

         Although  this  provision of the Act  establishes  a time frame for the
eventual elimination of the thrift charter, it contains no provisions concerning
the form the current  thrift  charter  may be required to take.  The Bank cannot
determine  at this time  what  effect  this  provision  will  have on  financial
position or operations.

         Finally,  the Act contains several other provisions  designed to reduce
regulatory  burdens  associated with compliance with various  consumer and other
laws applicabale to the Company,  including for example,  provisions designed to
coordinate the disclosure and other requirements under the  Truth-in-Lending and
Real  Estate   Settlement   Procedures   Act,  modify  certain  insider  lending
restrictions,  permit OTS to allow  exemptions  to  anti-tying  prohibitions  an
exempt  certain   transactions  and  simplilfy  certain  disclosures  under  the
Truth-in-Lending Act.

         In addition,  the United  States  Department  of the Treasury  recently
released a form of proposed legislation that would restructure the regulation of
the financial services industry, by among other things,  eliminating the various
restrictions  on the ability of banks to  affiliate  with  companies  engaged in
lines of business not generally  currently  permissible,  such as securities and
insurance activities. Although the Company believes that the form of legislation
currently  under  consideration  will not have a material  adverse effect on the
Company, the Company cannot determine, whether or in what form, such legislation
will eventually be enacted or its effect on the Bank.
<PAGE>
         Regulatory    Capital    Requirements.    Federally   insured   savings
associations,  such as the Bank,  are  required to  maintain a minimum  level of
regulatory  capital.  The OTS has  established  capital  standards,  including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations.  These
capital  requirements  must be generally as stringent as the comparable  capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis.
 
         The capital  regulations  require  tangible capital of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the requirement. At March 31, 1997, the Bank had no purchased mortgage servicing
rights.

         The OTS regulations establish special  capitalization  requirements for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.  At March 31,  1997,  the Bank's  service  corporation,
Perma Service, was an includable subsidiary; however, Perma Service's investment
in FFLIC was not considered an includable investment and, accordingly,  the Bank
was required to deduct 100% of its  investment in FFLIC from  capital.  At March
31, 1997, the  nonincludable  portion of the Bank's  investment in FFLIC totaled
$633,302. See also "Service Corporation Activities."

         At March 31, 1997, the Bank had tangible  capital of $34.7 million,  or
8.27% of adjusted total assets,  which is approximately  $28.4 million above the
minimum requirement of 1.50% of adjusted total assets in effect on that date.
 
         The capital standards also require core capital equal to at least 3% of
adjusted  total  assets  (as  defined by  regulation).  Core  capital  generally
consists of tangible capital plus certain intangible assets, including a limited
amount  of  purchased  credit  card  relationships.  As a result  of the  prompt
corrective action provisions  discussed below,  however,  a savings  association
must maintain a core capital  ratio of at least 4% to be  considered  adequately
capitalized  unless its supervisory  condition is such to allow it to maintain a
3% ratio.  At March 31, 1997, the Bank had no intangibles  which were subject to
these tests.

         At March 31, 1997, the Bank had core capital equal to $34.7 million, or
8.27% of  adjusted  total  assets,  which is $22.1  million  above  the  minimum
leverage ratio requirement of 3% in effect on that date.

          The OTS risk-based  requirement  requires savings associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets.
<PAGE>
         Certain  exclusions from capital and assets are required to be made for
the purpose of calculating  total  capital.  Such  exclusions  consist of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments. The Bank's only exclusion
from capital and assets at March 31, 1997 was its investment in FFLIC.
 
         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the OTS has assigned a risk weight of 50% for  prudently  underwritten
permanent  one- to  four-family  first lien mortgage loans not more than 90 days
delinquent  and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         OTS Regulations  also require that every savings  association with more
than normal  interest rate risk exposure to deduct from its total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest-rate  risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings  association,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule will not become effective until the OTS
evaluates the process by which savings  associations may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed.  Any savings  association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement  unless the
OTS determines otherwise.  Until the rule is finalized,  no determination can be
made of what, if any, impact this rule may have on the Bank.

         At March  31,  1997,  the  Bank  had  total  capital  of $36.5  million
(including  $34.7  million in core capital) and  risk-weighted  assets of $175.4
million (including $2.3 million in converted  off-balance sheet assets) or total
capital of 20.80% of risk-weighted  assets.  This amount was $22.5 million above
the 8% requirement in effect on that date.
 
         The OTS and the FDIC are authorized  and,  under certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

          As a condition to the approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  association  must agree that it will
enter  into  a  limited  capital  maintenance  guarantee  with  respect  to  the
institution's achievement of its capital requirements.
<PAGE>
         Any savings  association  that fails to comply with its capital plan or
is  "significantly  undercapitalized"  (i.e.,  Tier 1 risk-based or core capital
ratios of less than 3% or a  risk-based  capital  ratio of less than 6%) must be
made  subject  to one or more of  additional  specified  actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general  enforcement  actions by the OTS and the FDIC,  including
the appointment of a conservator or a receiver.

         The OTS is also generally  authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

         The  imposition by the OTS or the FDIC of any of these  measures on the
Bank  may  have a  substantial  adverse  effect  on the  Bank's  operations  and
profitability  and the value of the Common Stock  purchased  in the  Conversion.
Holding Company  shareholders do not have preemptive rights;  and therefore,  if
the  Holding  Company  is  directed  by the OTS or the FDIC to issue  additional
shares of  Common  Stock,  such  issuance  may  result  in the  dilution  in the
percentage of ownership of the Company.

         Limitations   on  Dividends  and  Other  Capital   Distributions.   OTS
regulations impose various  restrictions or requirements on savings associations
with respect to their ability to make  distributions  of capital,  which include
dividends,  stock  redemptions  or  repurchases,   cash-out  mergers  and  other
transactions  charged to the capital  account.  OTS regulations  also prohibit a
savings  association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result,  the  regulatory  capital  of the  association
would be reduced below the amount  required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.

         Generally,  savings  associations,  such as the  Subsidiary  Bank  that
before and after the proposed distribution meet their capital requirements,  may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the  association's  tangible,  core or  risk-based  capital  exceeds its capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar  year,  or 75% of their net income  for the most  recent  four  quarter
period.  However,  an  association  deemed  to be in need of  more  than  normal
supervision  by the OTS may have its dividend  authority  restricted by the OTS.
Permanent Federal may pay dividends in accordance with this general authority.

         Savings  associations  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  associations  that do not,  or would  not meet  their  current  minimum
capital requirements  following a proposed capital  distribution,  however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns. See "- Regulatory Capital Requirements."
<PAGE>
         The OTS has proposed  regulations that would revise the current capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory concern, and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Savings  associations  that would remain  adequately  capitalized  following the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings  association  may not make a capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

         Liquidity.  All savings associations,  including the Bank, are required
to  maintain  an  average  daily  balance  of liquid  assets  equal to a certain
percentage of the sum of its average daily balance of net  withdrawable  deposit
accounts and  borrowings  payable in one year or less.  For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report.  This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending  upon economic  conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.

         In  addition,  short-term  liquid  assets  (e.g.,  cash,  certain  time
deposits,  certain  bankers  acceptances  and short-term  United States Treasury
obligations)  currently must constitute at least 1% of the association's average
daily  balance of net  withdrawable  deposit  accounts  and current  borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio  requirement.  At March 31,  1997,  the Bank was in  compliance  with both
requirements,  with an  overall  liquid  asset  ratio of 8.71% and a  short-term
liquid assets ratio of 3.69%.
 
         Accounting.   An  OTS  policy  statement   applicable  to  all  savings
associations  clarifies and  re-emphasizes  that the investment  activities of a
savings   association  must  be  in  compliance  with  approved  and  documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement,  management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.

         OTS accounting regulations,  which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must  incorporate any other accounting  regulations or orders  prescribed by the
OTS.
<PAGE>
         Qualified Thrift Lender Test. All savings  associations,  including the
Bank,  are  required to meet a qualified  thrift  lender  ("QTL")  test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code.  Under either test, such assets primarily  consist
of residential  housing  related loans and  investments.  At March 31, 1997, the
Bank met the test and has always met the test since it has been in effect.

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
BIF. If such an association  has not yet  requalified or converted to a national
bank, its new  investments  and activities are limited to those  permissible for
both a savings  association  and a national  bank, and it is limited to national
bank  branching  rights in its home  state.  In  addition,  the  association  is
immediately  ineligible  to receive  any new FHLB  borrowings  and is subject to
national  bank  limits for payment of  dividends.  If such  association  has not
requalified  or  converted  to a national  bank  within  three  years  after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

Community Reinvestment Act

         Under the  Community  Reinvestment  Act  ("CRA"),  every  FDIC  insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking  practices to help meet the credit needs of its entire  community,
including  low and moderate  income  neighborhoods.  The CRA does not  establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's  discretion to develop the types of products and services
that it believes are best suited to its particular  community,  consistent  with
the CRA.  The CRA  requires  the OTS,  in  connection  with the  examination  of
Permanent  Federal,  to assess the  institution's  record of meeting  the credit
needs of its community and to take such record into account in its evaluation of
certain  applications,  such as a merger or the  establishment  of a branch,  by
Permanent  Federal.  An  unsatisfactory  rating may be used as the basis for the
denial of an application by the OTS.

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  the Bank may be required to devote  additional funds for
investment  and lending in its local  community.  The Bank was  examined for CRA
compliance in September 1995 and received a rating of satisfactory.
<PAGE>
         Transactions with Affiliates. Generally, transactions between a savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain  of these  transactions,  such as loans to an  affiliate  are
restricted to a percentage of the association's capital.  Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition,  a savings  association  may not lend to any  affiliate  engaged in
activities not  permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates,  however;
the OTS has the  discretion to treat  subsidiaries  of savings  associations  as
affiliates on a case-by-case basis.

         Certain  transactions with directors,  officers or controlling  persons
are also subject to conflict of interest  regulations enforced by the OTS. These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

         Holding Company  Regulation.  The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is  required  to  register  and  file  reports  with the OTS and is  subject  to
regulation  and  examination  by the OTS. In addition,  the OTS has  enforcement
authority over the Company and its non-savings  association  subsidiaries  which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary savings association.

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such  restrictions  unless such other  associations each
qualify as a QTL and were acquired in a supervisory acquisition.

         If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing  after such  failure,  directly or through its other
subsidiaries,  any  business  activity  other than those  approved  for multiple
savings and loan holding companies or their  subsidiaries.  In addition,  within
one year of such failure the Company must register as and will become subject to
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding  company are more limited than are the activities  authorized
for a unitary or multiple  savings and loan  holding  company.  See "- Qualified
Thrift Lender Test."
<PAGE>
         The Company must obtain approval from the OTS before acquiring  control
of  any  other  SAIF-insured   association.   Such  acquisitions  are  generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

         Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities  Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information,  proxy solicitation,  insider trading
restrictions and other requirements of the SEC under the Exchange Act.

         Company stock held by persons who are affiliates  (generally  officers,
directors and principal  stockholders)  of the Holding Company may not be resold
without   registration   or  unless  sold  in  accordance  with  certain  resale
restrictions.   If  the  Company  meets  specified  current  public  information
requirements,  each  affiliate  of the  Company  is able  to sell in the  public
market,  without  registration,  a limited  number of shares in any  three-month
period.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking  accounts).  At March 31, 1997,  the Bank was in compliance  with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the OTS. See "- Liquidity."

         Savings  associations are authorized to borrow from the Federal Reserve
Bank  "discount   window,"  but  Federal  Reserve  Board   regulations   require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

         Federal  Home  Loan  Bank  System.  The Bank is a member of the FHLB of
Indianapolis,   which  is  one  of  12  regional  FHLBs  ("FHLB  System"),  that
administers  the home financing  credit function of savings  associations.  Each
FHLB  serves as a reserve or central  bank for its members  within its  assigned
region.  It  is  funded  primarily  from  proceeds  derived  from  the  sale  of
consolidated  obligations  of the FHLB System.  It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB which are subject to the  regulation  and oversight of the
Federal  Housing  Finance  Board.  All advances from the FHLB are required to be
fully secured by  sufficient  collateral as determined by the FHLB. In addition,
all  long-term  advances  are  required to provide  funds for  residential  home
financing.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of  Indianapolis.  At March 31,  1997,  the Bank had $5.2  million  in FHLB
stock,  which was in compliance with this  requirement.  In past years, the Bank
has received substantial  dividends on its FHLB stock. Over the past five fiscal
years,  such  dividends have averaged 8.01% and were 7.77% for fiscal year ended
March 31, 1997.  Under  federal law the FHLBs are required to provide  funds for
the resolution of troubled  savings  associations  and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
<PAGE>
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in  value  of  Permanent   Federal's  FHLB  stock  may  result  in  a
corresponding  reduction in  Permanent  Federal's  capital.  For the fiscal year
ended March 31, 1997,  dividends  paid by the FHLB of  Indianapolis  to the Bank
totaled  $383,691,  which  constitute  a  $166,039  increase  over the amount of
dividends received in the fiscal year ended March 31, 1996.

Federal and State Taxation

         Savings  associations  such as the Bank that meet certain  definitional
tests relating to the composition of assets and other  conditions  prescribed by
the Internal  Revenue Code of 1986, as amended (the "Code"),  had been permitted
to establish  reserves for bad debts and to make annual additions  thereto which
may,  within  specified  formula  limits,  be taken as a deduction  in computing
taxable  income  for  federal  income tax  purposes.  The amount of the bad debt
reserve  deduction for  "non-qualifying  loans" is computed under the experience
method.  The  amount of the bad debt  reserve  deduction  for  "qualifying  real
property  loans"  (generally  loans  secured by  improved  real  estate)  may be
computed under either the experience  method or the percentage of taxable income
method (based on an annual election).

         Under the  experience  method,  the bad debt  reserve  deduction  is an
amount  determined  under a formula based  generally upon the bad debts actually
sustained by the savings association over a period of years.

         The  percentage of specially  computed  taxable  income that is used to
compute a savings  association's bad debt reserve deduction under the percentage
of taxable  income  method  (the  "percentage  bad debt  deduction")  is 8%. The
percentage bad debt  deduction thus computed is reduced by the amount  permitted
as a  deduction  for  non-qualifying  loans  under the  experience  method.  The
availability  of the  percentage  of taxable  income method  permits  qualifying
savings  associations to be taxed at a lower  effective  federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).

         If an  association's  specified  assets  (generally,  loans  secured by
residential  real  estate  or  deposits,  educational  loans,  cash and  certain
government  obligations)  constitute  less  than 60% of its  total  assets,  the
association may not deduct any addition to a bad debt reserve and generally must
include existing  reserves in income over a four-year  period. No representation
can be made as to whether the Bank will meet the 60% test for subsequent taxable
years.

         Under the percentage of taxable income method,  the percentage bad debt
deduction  cannot  exceed the amount  necessary  to increase  the balance in the
reserve for  "qualifying  real property  loans" to an amount equal to 6% of such
loans  outstanding  at the end of the  taxable  year or the  greater  of (i) the
amount  deductible  under the  experience  method or (ii) the amount  which when
added to the bad debt deduction for "non-qualifying  loans" equals the amount by
which 12% of the amount comprising  savings accounts at year-end exceeds the sum
of surplus,  undivided  profits and reserves at the  beginning  of the year.  At
March 31, 1997, the 6% and 12%  limitations  did not restrict the percentage bad
debt deduction  available to the Bank. It is not expected that these limitations
would be a limiting factor in the foreseeable future.
<PAGE>
         In August 1996, legislation was enacted that repeals the reserve method
of accounting  (including  the percentage of taxable income method) used by many
thrifts,  including  the Bank,  to calculate  their bad debt reserve for federal
income tax purposes.  As a result, large thrifts such as the Bank must recapture
that  portion of the reserve  that exceeds the amount that could have been taken
under the specific  charge-off  method for post-1987 tax years.  The legislation
also requires  thrifts to account for bad debts for federal  income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning  after December 31, 1997,
provided the institution meets certain  residential  lending  requirements.  The
management  of the company  does not believe  that the  legislation  will have a
material impact on the Company or the Bank.

         In addition to the regular income tax, corporations,  including savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax, and net operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental  tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

         To the extent earnings appropriated to a savings association's bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of March 31,  1997,  the  Bank's  Excess for tax  purposes  totaled
approximately $6.0 million.

         The  Bank and its  subsidiary  file  consolidated  federal  income  tax
returns on a fiscal  year basis  using the  accrual  method of  accounting.  The
Company  files  consolidated  federal  income tax returns  with the Bank and its
subsidiary. Savings associations, such as the Bank, that file federal income tax
returns as part of a  consolidated  group are  required by  applicable  Treasury
regulations  to reduce  their  taxable  income for  purposes  of  computing  the
percentage  bad debt  deduction  for losses  attributable  to  activities of the
non-savings  association members of the consolidated group that are functionally
related to the activities of the savings association member.

         The Bank and its  consolidated  subsidiary have not been audited by the
IRS with  respect to  consolidated  federal  income tax returns  during the past
seven years. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors of, or entities merged into,
the Bank) would not result in a deficiency  which could have a material  adverse
effect on the  financial  condition,  results of  operations or liquidity of the
Bank and its consolidated subsidiary.
<PAGE>
         Change  in  Accounting   for  Income  Taxes.   Statement  of  Financial
Accounting  Standards No. 109, was issued by the Financial  Accounting Standards
Board  ("FASB") in early 1992 and is required for fiscal years  beginning  after
December  15, 1992.  FASB No. 109 requires a change from the deferred  method to
the asset and liability  method of accounting for income taxes.  Under the asset
and  liability  method,  deferred  income  taxes  are  recognized  for  the  tax
consequences of "temporary  differences" by applying enacted statutory tax rates
applicable  to future  years to  differences  between  the  financial  statement
carrying  amounts and the tax bases of existing  assets and  liabilities.  Under
SFAS  No.  109,  the  effect  on  deferred  taxes of a  change  in tax  rates is
recognized in income in the period that includes the enactment  date.  Under the
deferred method, deferred taxes were recognized using the tax rate applicable to
the year of the calculation and were not adjusted for subsequent  changes in tax
rates.

         In December 1990, the FASB issued SFAS No. 106, "Employers"  Accounting
for  Post-retirement  Benefits Other Than  Pensions." This statement will change
the current practice of accounting for  postretirement  benefits on a cash basis
by requiring  accrual,  during the years that the employee renders the necessary
service,  of the expected cost of providing  those benefits to an employee.  The
Holding  Company  and the Bank  were  required  to  adopt  this  new  method  of
accounting in fiscal 1993. The statement allows for two transition methods.  The
Holding  Company  and the Bank  adopted  this  standard  when  required  and the
adoption of SFAS No. 106 had no material  effect on the  financial  position and
results of operations of either entity.

         Indiana  Taxation.   Indiana  imposes  a  franchise  tax  on  financial
institutions  at the  rate of 8.5%  of  modified  federal  taxable  income.  The
modifications  to federal  taxable  income  include  an  add-back  of  municipal
interest and state and local property taxes and bad debt  deductions are limited
to actual net  charge-offs.  The  franchise  tax is imposed on a combined  basis
including the Company, the Bank and its subsidiary.

         Delaware  Taxation.  As a  Delaware  holding  company,  the  Company is
exempted  from Delaware  corporate  income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware.  The Company is also
subject to an annual franchise tax imposed by the State of Delaware.

Executive Officers of the Company and the Bank

         The following table sets forth certain information as of March 31, 1997
regarding  the  executive  officers of the Company and the Bank who are not also
directors.
<TABLE>
<CAPTION>

   Name                    Age         Positions Held with the Company and the Bank
   ----                    ---         --------------------------------------------
<S>                        <C>            <C>
Carl E. Root               50             Vice President and Secretary of the
                                           Company and Senior Vice President and
                                           Secretary of the Bank

George E. Orr              55             Senior Vice President of Bank

Seth P. Allen              38             Senior Vice President of the Bank
<PAGE>
<CAPTION>
   Name                    Age         Positions Held with the Company and the Bank
   ----                    ---         --------------------------------------------
<S>                        <C>            <C>
Richard A. Condi           43             Vice President of Bank

Joseph M. Schnapf          46             Chief Financial Officer of the Company
                                           and Vice President and Treasurer of
                                           the Bank

Glenna J. Kirsch           47             Vice President of Bank
</TABLE>


         Officers  are elected  annually by the Board of  Directors of the Bank.
The business  experience of each executive officer who is not also a director is
set forth below.

         Carl E. Root.  Effective March 31, 1995, Mr. Root became Vice President
and  Secretary  of the Company and Senior Vice  President  and  Secretary of the
Bank.  As  Vice  President  and  Secretary  of the  Company,  Mr.  Root  is also
responsible for investor relations.  Mr. Root joined the Bank in 1989 and served
as Senior Vice President,  Treasurer and Chief Financial Officer from 1990 until
April 1, 1995, when he assumed his current positions.

         George  E.  Orr.  As  Senior  Vice  President,  Mr.  Orr  is  primarily
responsible  for the  planning  and  development  of the Bank's data  processing
operations and manages the Bank's checking and proof of deposit departments. Mr.
Orr joined the Bank in 1963 and was promoted to his current position in 1990.

         Seth P. Allen. Mr. Allen joined the Bank in January 1997 as Senior Vice
President  and  Commercial  Lending  Officer.  Mr.  Allen  served as Senior Vice
President and Senior Lending Officer at Nashoba Bank in Memphis,  Tennessee from
October 1994 to January 1997.  Prior to that,  Mr. Allen was Vice  President and
Commercial  Lending  Officer  at  Deposit  Guaranty  National  Bank in  Jackson,
Mississippi from January 1991 to October 1994.

         Richard A.  Condi.  Mr.  Condi is Vice  President  in charge of one- to
four-family  mortgage lending.  Mr. Condi joined the Bank in 1979 and has served
in various  capacities in the Bank's lending department before being promoted to
his current position in January 1991.

         Joseph M. Schnapf.  Mr. Schnapf joined the Bank in October 1991 as Vice
President and Controller.  Effective March 31, 1995, Mr. Schnapf was promoted to
Chief  Financial  Officer of the Company as well as Vice President and Treasurer
of the Bank. In this capacity,  he manages the overall financial function of the
Company and the Bank in  collaboration  with the Chief Executive  Officer and is
responsible  for the Bank's  financial  accounting and reporting  function.  Mr.
Schnapf is also responsible for establishing interest rates on all wholesale and
retail funds and manages the Bank's liquidity and investment portfolio.

         Glenna  J.  Kirsch.  Ms.  Kirsch  joined  the Bank in 1980 and has held
several positions at the institution, including Training Officer from 1991 until
1992. In 1992, Ms. Kirsch was appointed Savings Officer and in 1995 was promoted
to Vice President.  Currently, Ms. Kirsch is in charge of Deposit Operations and
is  responsible  for  managing  checking,  savings  and  certificate  of deposit
processing for the Bank.
<PAGE>
Employees

         At  March  31,  1997,  the Bank  had a total  of 115  full-time  and 19
part-time employees.  The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.

Item 2. Properties

         The following table sets forth  information  concerning the main office
and each branch  office of the Bank at March 31, 1997.  At March 31,  1997,  the
Bank's premises,  office properties and equipment had an aggregate book value of
approximately $6.4 million.
<TABLE>
<CAPTION>

                                     Year     Owned or      Lease Expiration       Net Book
         Location                  Acquired    Leased            Date                Value
         --------                  --------    ------            ----                -----
                                                     (In Thousands)
<S>                                  <C>      <C>           <C>                    <C> 
Main (Downtown) Office

  101 Southeast Third Street         1963       Owned            N/A               $2,889
  Evansville, Indiana

Branch Offices

  University Heights
  4615 University Drive              1988       Owned            N/A                  401
  Evansville, Indiana

  Town Center
  201 Diamond Avenue                 1981       Owned            N/A                  366
  Evansville, Indiana

  Green River Road
  123 South Green River Road         1978       Owned            N/A                  270
  Evansville, Indiana

  North Brook
  3820 First Avenue                  1978      Leased       November 1997             145(1)
  Evansville, Indiana

  West Franklin Street
  2131 West Franklin Street          1960       Owned            N/A                  190
  Evansville, Indiana

  Ross Center
  2521 Washington Avenue             1950       Owned            N/A                  798
  Evansville, Indiana

  Fort Branch
  810 East Locust Street             1987       Owned            N/A                  378
  Fort Branch, Indiana
<PAGE>
<CAPTION>

                                     Year     Owned or      Lease Expiration       Net Book
         Location                  Acquired    Leased            Date                Value
         --------                  --------    ------            ----                -----
                                                     (In Thousands)
<S>                                  <C>      <C>           <C>                    <C> 
  Jasper
  771 West Second Street             1991       Owned            N/A                  541
  Jasper, Indiana

  Newburgh
  4855 Highway 261 North             1976       Owned            N/A                  142
  Newburgh, Indiana

  Oakland City
  410 West Morton Street             1984       Owned            N/A                  256
  Oakland City, Indiana


         (1) The Bank owns this branch's building and leases the land.
</TABLE>
         The Bank maintains  depositor and borrower customer files on an on-line
basis with BISYS,  Inc. The net book value of the data  processing  and computer
equipment utilized by the Bank at March 31, 1997 was $343,355.

Item 3.  Legal Proceedings

         Permanent  Federal is involved as  plaintiff  or  defendant  in various
legal actions  arising in the normal course of its business.  While the ultimate
outcome of these  proceedings  cannot be  predicted  with  certainty,  it is the
opinion of management,  after consultation with counsel  representing  Permanent
Federal in the proceedings,  that the resolution of these proceedings should not
have a material effect on Permanent Federal's results of operations.

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

         No matter was  submitted  to a vote of  security  holders,  through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1997.

                                     PART II


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

         Page 47 & 48 of the  attached  1997 Annual  Report to  Stockholders  is
herein incorporated by reference.


Item 6.  Selected Financial Data

         Pages 3 and 4 of the attached  1997 Annual  Report to  Stockholders  is
herein incorporated by reference.
<PAGE>
Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations

         Pages 6 through 17 of the attached 1997 Annual  Report to  Stockholders
are herein incorporated by reference.


Item 8.  Financial Statements and Supplementary Data

         Page  5 and 18  through  45 of  the  attached  1997  Annual  Report  to
Stockholders are herein incorporated by reference.


Item 9.  Changes in and Disagreements With Accountants on
         Accounting and Financial Disclosure

         There has been no  Current  Report  on Form 8-K filed  within 24 months
prior to the date of the most recent financial  statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

         Information  concerning  Directors of the  Registrant  is  incorporated
herein by reference from the  Corporation's  definitive  Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on July 22, 1997, except for
information  contained  under the  headings  "Compensation  Committee  Report on
Executive  Compensation" and "Stock Performance  Presentation",  a copy of which
will be filed  not later  than 120 days  after  the  close of the  fiscal  year.
Information  concerning the business experience of the executive officers of the
Company  and the Bank  contained  in Part I of this  10-KSB is  incorporated  by
reference herein.

Compliance with Section 16(a) of the Exchange Act.

         Section 16(a) of the Exchange Act requires the Company's  directors and
executive  officers,  and persons who own more than 10% of a registered class of
the Company's equity  securities,  to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity  securities  of
the Company. Officers,  directors and greater than 10% stockholders are required
by SEC  regulation to furnish the Company with copies of all Section 16(a) forms
they file.

         To the Company's  knowledge,  based solely on a review of the copies of
such reports furnished to the Company and written  representations that no other
reports were required,  during the fiscal year ended March 31, 1997, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10%  beneficial  owners were  complied  with the  exception  of three  executive
officers covering one transaction each.
<PAGE>
Item 11.  Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference  from the  Corporation's  definitive  Proxy  Statement  for the Annual
Meeting  of  Stockholders  scheduled  to be held on July 22,  1997,  except  for
information  contained  under the  headings  "Compensation  Committee  Report on
Executive  Compensation" and "Stock Performance  Presentation",  a copy of which
will be filed not later than 120 days after the close of the fiscal year.


Item 12.  Security Ownership of Certain Beneficial Owners and
          Management

         Information  concerning security ownership of certain beneficial owners
and  management  is  incorporated  herein by  reference  from the  Corporation's
definitive  Proxy Statement for the Annual Meeting of Stockholders  scheduled to
be held on July 22, 1997,  except for  information  contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation",  a copy of which  will be filed not later than 120 days after the
close of the fiscal year.


Item 13.  Certain Relationships and Related Transactions

         Information   concerning  certain  relationships  and  transactions  is
incorporated  herein  by  reference  from  the  Corporation's  definitive  Proxy
Statement for the Annual  Meeting of  Stockholders  scheduled to be held on July
22, 1997,  except for  information  contained  under the headings  "Compensation
Committee   Report   on   Executive   Compensation"   and   "Stock   Performance
Presentation",  a copy of which  will be filed not later than 120 days after the
close of the fiscal year.


                                     PART IV


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

         (a) (1)  Financial Statements:

         The following  information  appearing in the Registrant's Annual Report
to Shareholders  for the year ended March 31, 1997, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.

                                                                       Pages in
                                                                        Annual
               Annual Report Section                                    Report
               ---------------------                                    ------

Independent Auditors' Report.............................................   18
Consolidated Statements of Financial Condition
  at March 31, 1997 and 1996............................................    19
Consolidated Statements of Income for the Years Ended
  March 31, 1997, 1996 and 1995.........................................    20
Consolidated Statements of Stockholders' Equity for the
  Years Ended March 31, 1997, 1996 and 1995.............................    21
Consolidated Statements of Cash Flows for Years Ended
  March 31, 1997, 1996 and 1995......................................... 22-23
Notes to Consolidated Financial Statements.............................. 24-45
<PAGE>
         (a) (2)  Financial Statement Schedules:

         All financial  statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.

         (a) (3)  Exhibits:
<TABLE>
<CAPTION>
                                                                                                    
                                                                             Reference to Prior     
   Regulation                                                                Filing or Exhibit      
   S-K Exhibit                                                                Number Attached       
     Number                         Document                                      Hereto            
     ------                         --------                                      ------            
<S>                       <C>                                               <C>                     
       2                  Plan of acquisition, reorganization,                       None           
                          arrangement, liquidation or
                          succession

       3 (i)              Articles of Incorporation                                     *           
       3 (ii)             Bylaws                                                        *           

       4                  Instruments defining the rights of                            *           
                          security holders, including                       See also Exhibit 3
                          indentures

       9                  Voting trust agreement                                     None           

      10                  Material contracts:

                          (a) 1993 Stock Option and                                     *           
                              Incentive Plan

                          (b) Recognition and Retention Plan                            *           

                          (c) Employment Agreement with                                 *           
                              Donald P. Weinzapfel

                          (d) Director Deferred Compensation                           **           
                              Agreement

                          (e) Employment Agreement with                               ***           
                              Murray T. Brown

      11                  Statement re computation of                                None           
                          per share earnings

      12                  Statements re computation of                      Not required            
                          ratios

      13                  Annual Report to security holders                           13            

      16                  Letter re change in certifying                    Not required            
                          accountant

      18                  Letter re change in accounting                             None           
                          principles

      19                  Previously unfiled documents                               None           

      21                  Subsidiaries of the registrant                              21            
<PAGE>
<CAPTION>
                                                                                                    
                                                                             Reference to Prior     
   Regulation                                                                Filing or Exhibit      
   S-K Exhibit                                                                Number Attached       
     Number                         Document                                      Hereto            
     ------                         --------                                      ------            
<S>                       <C>                                               <C>                     
      22                  Published report regarding matters                         None           
                          submitted to vote of security holders

      23                  Consents of experts and counsel                             23            

      24                  Power of Attorney                                 Not required            

      27                  Financial Data Schedule                           Not required            

      28                  Information from reports                          Not required            
                          furnished to state insurance
                          regulatory authorities

      99                  Additional Exhibits                               Not applicable          
</TABLE>

         *Filed as exhibits to the Company's  Registration Statement on Form S-1
under  the  Securities  Act of 1933,  filed  with the  Securities  and  Exchange
Commission  on  December  23,  1993  (Registration  No.  33-73394).  All of such
previously  filed  documents  are hereby  incorporated  herein by  reference  in
accordance with Item 601 of Regulation S-K.

         **Filed as Exhibit  10(d) to the  Company's  Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 29, 1995 (File No. 0-23370).


         ***Filed as Exhibit 10(e) to the  Company's  Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 27, 1996 (File No. 0-23370)

                      (b)  Reports on Form 8-K:

                      No reports on Form 8-K were filed during the three month
period ended March 31, 1997.
<PAGE>
                                   SIGNATURES

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

                                                PERMANENT BANCORP, INC.


Date:   June 30, 1997                       By: /s/ Donald P. Weinzapfel
                                                ------------------------
                                                Donald P. Weinzapfel
                                                (Duly Authorized Representative)


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



By: /s/ Donald P. Weinzapfel                By: /s/ John R. Stone
    ------------------------                    -----------------
    Donald P. Weinzapfel,                       John R. Stone, Director
    Chairman of the Board,
         President and Chief
         Executive Officer (Principal
         Executive Officer)


Date: June 30, 1997                       Date: June 30, 1997
                                            



By: /s/ Daniel F. Korb                      By: /s/ Jack H. Kinkel
    ------------------                          ------------------
    Daniel F. Korb, Director                    Jack H. Kinkel, Director


Date: June 30, 1997                       Date: June 30, 1997



By: /s/ John W. Forster                     By: /s/James W. Vogel
    -------------------                         -----------------
    John W. Forster, Director                   James W. Vogel, Director


Date: June 30, 1997                       Date: June 30, 1997


By: /s/ Murray J. Brown                     By: /s/ Robert L. Northerner
    -------------------                         ------------------------
    Murray J. Brown, Director                   Robert L. Northerner, Director


Date: June 30, 1997                       Date: June 30, 1997
<PAGE>


By: /s/ James D. Butterfield                By: /s/ Joseph M. Schnapf
    ------------------------                    ---------------------
    James D. Butterfield                        Joseph M. Schnapf, Chief
    Director                                    Financial Officer (Principal
                                                Financial and Accounting
                                                Officer)


Date: June 30, 1997                       Date: June 30, 1997



By: /s/ James A. McCarty, Jr.
    -------------------------
        James A. McCarty, Jr.
        Director



Date: June 30, 1997