PEOPLES-SIDNEY FINANCIAL CORPORATION
                                  Sidney, Ohio

                                  ANNUAL REPORT
                                  June 30, 1997


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                      PEOPLES-SIDNEY FINANCIAL CORPORATION
--------------------------------------------------------------------------------
                                  Sidney, Ohio

                                  ANNUAL REPORT
                                  June 30, 1997





                                    CONTENTS




TO OUR SHAREHOLDERS.........................................................  2

DIRECTORS OF THE BOARD......................................................  3

BUSINESS OF PEOPLES-SIDNEY FINANCIAL CORPORATION............................  4

MARKET PRICE OF THE CORPORATION'S COMMON SHARES
  AND RELATED SHAREHOLDER MATTERS...........................................  4

SELECTED CONSOLIDATED FINANCIAL INFORMATION
  AND OTHER DATA............................................................  6

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS.......................................  8

REPORT OF INDEPENDENT AUDITORS ............................................. 20

CONSOLIDATED FINANCIAL STATEMENTS

      Consolidated Balance Sheets .......................................... 21

      Consolidated Statements Of Income .................................... 22

      Consolidated Statements Of Shareholders' Equity ...................... 23

      Consolidated Statements Of Cash Flows ................................ 24

      Notes To Consolidated Financial Statements ........................... 26

SHAREHOLDER INFORMATION..................................................... 46

CORPORATE INFORMATION....................................................... 47
<PAGE>
[PHOTO]

To Our Shareholders:

On behalf of your  directors,  officers  and  employees,  it is my  pleasure  to
present our first annual report as a public company. To say that 1997 was a very
important  year  for  our  Association  would  be an  understatement.  It  was a
redefining year and one of transition as we converted from a federally chartered
mutual savings and loan  association to a federally  chartered stock savings and
loan  association.  In  connection  with  the  conversion  on  April  25,  1997,
Peoples-Sidney Financial Corporation was organized to become the holding company
for Peoples  Federal Savings and Loan  Association and sold 1,785,375  shares at
$10 in the subscription  offering.  This influx of capital gives our Association
new positioning for growth, profitability and shareholder enhancements.

During  1997,  operations  of the  Association  surpassed  those of 1996 in many
areas. Growth in assets and loan originations  contributed to a successful year.
Assets grew to  $103,000,000  or a 19%  increase and loan  originations  totaled
$10,826,000 for the fiscal year end, an increase of 14% over the past year.

Our focus during the year was not totally  centered on the conversion.  Congress
continued to pass  legislation  which  affected the  financial  industry and its
future.  The  Savings  Association   Insurance  Fund  Deposit   Recapitalization
Assessment caused a $301,000 net after-tax charge to income during the year. Due
to the payment of this  assessment,  net  earnings  for the year were  $564,000,
compared with  $852,000 for the previous  year.  Absent the Savings  Association
Insurance Fund Assessment,  earnings for the year would have been $865,000. This
represents the first of several changes in the government's attempt to modernize
our industry over the next few years.  Our  legislators are considering a merger
of the bank and savings association deposit insurance funds as well as requiring
a change in our corporate charter.  Our management team is carefully  evaluating
these proceedings as they move forward.

The  success  of our  Company  continues  to be driven by a  dedicated  staff of
officers and  employees as well as our  commitment  to  participate  and support
numerous  community events and charities.  We take  considerable  pride that our
staff members participate in many community  organizations.  Everyone at Peoples
Federal is committed to supporting  those  organizations  and individuals  whose
purpose  is to  improve  the  quality  of life  for all of the  citizens  in the
communities we serve.

We  appreciate  your  continued  support and look  forward to serving you in the
future. Your questions and comments are always welcome.

                                                          Sincerely,



                                                          Douglas Stewart
                                                          President


                                       2
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[PHOTOS -- DIRECTORS OF THE BOARD]





                                       3
<PAGE>
BUSINESS OF PEOPLES-SIDNEY

FINANCIAL CORPORATION

Peoples-Sidney   Financial   Corporation,   a  unitary  thrift  holding  company
incorporated under the laws of the State of Delaware (the  "Corporation"),  owns
all issued and  outstanding  common  stock of Peoples  Federal  Savings and Loan
Association,  a savings  and loan  association  chartered  under the laws of the
United States (the  "Association").  On April 25, 1997, the Corporation acquired
all of the common stock issued by the  Association  upon its  conversion  from a
mutual savings and loan association to a stock savings and loan association (the
"Conversion").  The  Corporation's  activities  have been  limited  primarily to
holding the common shares of the Association.

Serving the Sidney, Ohio area since 1886, the Association conducts business from
its office at 101 East Court Street,  Sidney,  Ohio. The Association's  business
involves  attracting deposits from the general public and using such deposits to
originate one- to four-family  permanent and construction  residential  mortgage
and, to a lesser extent, commercial real estate, consumer, land multi-family and
commercial  business  loans in its market area,  consisting  primarily of Shelby
County  and  contiguous  counties  in Ohio.  The  Association  also  invests  in
securities consisting primarily of U.S. government obligations and various types
of short-term liquid assets.

As a savings and loan holding company, the Corporation is subject to regulation,
supervision  and  examination by the Office of Thrift  Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
chartered  under the laws of the United  States,  the  Association is subject to
regulation,  supervision  and  examination  by the OTS and the  Federal  Deposit
Insurance  Corporation (the "FDIC").  Deposits in the Association are insured up
to  applicable  limits  by the  FDIC.  The  Association  is also a member of the
Federal Home Loan Bank of Cincinnati (the "FHLB").


MARKET PRICE OF THE CORPORATION'S
COMMON SHARES AND RELATED
SHAREHOLDER MATTERS

The Corporation had 1,785,375 common shares  outstanding on August 8, 1997, held
of record by approximately 990  shareholders.  Price information with respect to
the Corporation's  common shares is quoted on The Nasdaq National Market System.
Since the  Conversion  and formation of the  Corporation  on April 25, 1997, the
trading price for the common shares of the Corporation,  as quoted by The Nasdaq
Stock Market, Inc., have ranged from $12.88 to $14.06 through June 30, 1997.

No dividends  were paid during the year ended June 30,  1997.  On July 25, 1997,
the Board of Directors of the Corporation declared a dividend of $.05 per common
share  which was paid on August  6, 1997 to  shareholders  of record on July 31,
1997.

In addition to certain federal income tax considerations, OTS regulations impose
limitations  on the payment of  dividends  and other  capital  distributions  by
savings  associations.  Under OTS  regulations  applicable to converted  savings
associations,  the  Association  is not  permitted to pay a cash dividend on its
common shares if its regulatory  capital  would,  as a result of payment of


                                       4
<PAGE>
such dividend,  be reduced below the amount required for the Liquidation Account
(the account established for the purpose of granting a limited priority claim on
the assets of the  Association  in the event of  complete  liquidation  to those
members of the Association  before the Conversion who maintain a savings account
at the  Association  after the  Conversion),  or applicable  regulatory  capital
requirements prescribed by the OTS.

OTS regulations  applicable to all savings and loan associations  provide that a
savings  association  which immediately prior to, and on a pro forma basis after
giving  effect to, a proposed  capital  distribution  (including a dividend) has
total capital (as defined by OTS  regulations)  that is equal to or greater than
the amount of its  capital  requirements  is  generally  permitted  without  OTS
approval  (but  subsequent  to 30 days' prior notice to the OTS) to make capital
distributions,  including dividends,  during a calendar year in an amount not to
exceed the greater of (1) 100% of its net  earnings to date during the  calendar
year,  plus an amount equal to one-half  that which its total  capital to assets
ratio  exceeded  its required  capital to assets  ratio at the  beginning of the
calendar  year, or (2) 75% of its net earnings for the most recent  four-quarter
period.  Savings  associations  with  total  capital  in excess  of the  capital
requirements  that have been  notified  by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends.  A savings
association  that  fails  to  meet  current  minimum  capital   requirements  is
prohibited from making any capital  distributions  without the prior approval of
the OTS.

The Association currently meets all of its capital requirements and, because the
OTS has not determined  that the  Association  is an institution  requiring more
than normal  supervision,  the  Association may pay dividends in accordance with
the foregoing provisions of OTS regulations.

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<PAGE>
SELECTED CONSOLIDATED FINANCIAL
INFORMATION AND OTHER DATA

The following tables set forth certain  information  concerning the consolidated
financial  condition,  earnings and other data regarding the  Corporation at the
dates and for the periods  indicated.  As the  conversion was completed on April
25,  1997,  information  prior  to the  year  ended  June  30,  1997  is for the
Association.
<TABLE>
<CAPTION>
Selected Financial Condition                                            At June 30,
  and Other Data:                             1997          1996            1995            1994         1993
  --------------                         ------------   -------------    -----------   ------------    ------------
                                                                    (In thousands)
<S>                                      <C>            <C>             <C>            <C>             <C>         
Total amount of:
     Assets                              $    103,142   $      86,882   $     78,976   $     76,134    $     72,276
     Time deposits with other
       financial institutions                   5,000           1,100
     Securities available for sale              2,013
     Securities held to maturity                1,999           2,598          3,098          3,596           4,434
     FHLB stock                                   763             667            622            572             545
     Loans receivable - net(1)                 88,924          78,233         71,933         66,610          62,867
     Deposits                                  77,045          77,318         70,306         68,367          65,168
     Shareholders' equity(2)                   25,712           9,213          8,361          7,526           6,940
<CAPTION>

                                                                    Year ended June 30,
Selected Operations Data:                     1997          1996            1995            1994           1993
------------------------                 ------------   -------------    -----------   ------------    ------------
                                                                    (In thousands)
<S>                                      <C>            <C>             <C>            <C>             <C>         
Interest and dividend income             $      7,189   $       6,513   $      5,725   $      5,071    $      5,357
Interest expense                                4,051           3,706          2,968          2,637           2,898
                                         ------------   -------------   ------------   ------------    ------------
Net interest income                             3,138           2,807          2,757          2,434           2,459
Provision for loan losses                         103              68             55             83              41
                                         ------------   -------------   ------------   ------------    ------------
Net interest income after
  provision for loan losses                     3,035           2,739          2,702          2,351           2,418
Service fees and other charges                     63              57             60             65              91
Other noninterest income(3)                                                                                      95
                                         ------------   -------------   ------------   ------------    ------------
Total noninterest income                           63              57             60             65             186
Noninterest expense                             2,222           1,504          1,495          1,427           1,394
                                         ------------   -------------   ------------   ------------    ------------
Income before income tax and
  accounting change                               876           1,292          1,267            989           1,210
Provision for income tax                          312             440            432            334             435
Cumulative effect of change in
  accounting for income taxes                                                                   (69)
                                         ------------   -------------   ------------   ------------    ------------
Net income                               $        564   $         852   $        835   $        586    $        775
                                         ============   =============   ============   ============    ============

Earnings per share(4)                    $       0.09
                                         ============
Dividends declared per share(4)          $
                                         ============
</TABLE>

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<PAGE>
<TABLE>
<CAPTION>
                                                             At or for the year ended June 30,
Selected Financial Ratios and                 1997          1996            1995            1994         1993
-----------------------------            ------------   -------------    -----------   ------------    --------
  Other Data:
  ----------
<S>                                      <C>            <C>              <C>           <C>             <C>
Performance Ratios:
     Return on assets (ratio of net
       income to average total assets)         0.60%         1.01%           1.07%           0.79%         1.07%
     Return on equity (ratio of net
       income to average equity)(2)            4.70          9.70           10.55            8.10         11.84
     Interest rate spread(5):
       Average during period                   2.81          2.97            3.30            3.05          3.19
       End of period                           2.62          2.74            3.08            2.99          3.12
     Net interest margin(6)                    3.45          3.41            3.66            3.35          3.49
     Ratio of operating expense to
       average total assets                    2.38          1.78            1.93            1.91          1.92
     Ratio of average interest-earning
       assets to average interest-
       bearing liabilities                     1.14x         1.10x           1.09x           1.08x         1.07x
Quality Ratios:
     Nonperforming assets to total
       assets at end of period(7)              0.84%         1.41%           1.80%           2.10%         3.26%
     Allowance for loan losses to
       nonperforming loans                    45.78         25.14           17.70           12.98          5.79
     Allowance for loan losses to
       gross loans receivable(8)               0.43          0.37            0.33            0.29          0.19
Capital Ratios:
     Shareholders equity to total
       assets at end of period(2)             24.93         10.60           10.59            9.88          9.60
     Average equity to average
       assets(2)                              12.87         10.43           10.24            9.70          9.03
Other Data:
     Number of full service offices            1             1               1               1             1
</TABLE>
<PAGE>
-----------------------------------

(1)  Loans  receivable  are shown net of loans in  process,  net  deferred  loan
     origination fees and the allowance for loan losses.

(2)  Retained earnings only prior to June 30, 1997.

(3)  During  1992,  the  Association  lost an appeal with the  Internal  Revenue
     Service  regarding  adjustments  to its federal  income  taxes for calendar
     years  1973  through  1980.  The  Association  overestimated  the  interest
     associated with the Internal Revenue Service federal income tax adjustments
     for the years  noted.  As a result,  the  Association  received a refund of
     interest of $95,000 which was included in  noninterest  income for the year
     ended June 30, 1993.

(4)  Earnings  and  dividends  per  share and is not  applicable  for any of the
     periods  presented  prior  to  June  30,  1997  due to its  mutual  form of
     ownership prior to April 25, 1997.  Earnings per share for the period ended
     June 30, 1997 was  computed  based on net income of the  Corporation  since
     April 25, 1997.

(5)  The average  interest rate spread  represents  the  difference  between the
     weighted average yield on interest-earning  assets and the weighted average
     cost of interest-bearing liabilities.

(6)  The net interest  margin  represents  net  interest  income as a percent of
     average interest-earning assets.

(7)  Nonperforming  assets consist of nonperforming loans and foreclosed assets.
     Nonperforming  loans consist of all accruing loans 90 days or more past due
     and all nonaccrual loans.

(8)  Gross loans receivable are stated at unpaid principal balances.

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

General

The following is management's analysis of the Corporation's  financial condition
and results of operations  as of and for the year ended June 30, 1997,  compared
to prior  years.  This  discussion  is designed to provide a more  comprehensive
review of the operating  results and  financial  position than could be obtained
from an examination of the financial  statements  alone. This analysis should be
read in  conjunction  with the  consolidated  financial  statements  and related
footnotes and the selected financial data included elsewhere in this report.

On November 8, 1996, the Board of Directors of the Peoples  Federal  Savings and
Loan Association (the "Association") unanimously adopted a Plan of Conversion to
convert from a federally  chartered  mutual  savings and loan  association  to a
federally  chartered  stock  savings and loan  association  with the  concurrent
formation  of a  holding  company,  Peoples-Sidney  Financial  Corporation  (the
"Corporation"). The conversion was consummated on April 25, 1997 by amending the
Association's  charter and the sale of the holding  company's common stock in an
amount equal to the market value of the  Association  after giving effect to the
conversion.  A total of 1,785,375  common shares of the Corporation were sold at
$10.00 per share and net proceeds from the sale were $17,217,944 after deducting
the costs of conversion.

The Corporation retained 50% of the net proceeds from the sale of common shares.
The  remainder of the net proceeds  were invested in the capital stock issued by
the Association to the Corporation as a result of the conversion.

The Corporation is a financial intermediary primarily engaged in the business of
attracting  savings deposits from the general public and investing such funds in
permanent mortgage loans secured by one- to four-family  residential real estate
located in Shelby, Logan, Auglaize, Miami, Darke and Champaign,  Counties, Ohio.
The Corporation also originates,  to a lesser extent, loans for the construction
of one- to four-family  residential  real estate,  loans secured by multi-family
residential real estate (over four units) and  nonresidential  real estate,  and
consumer  loans and  invests in U.S.  government  obligations,  interest-bearing
deposits in other  financial  institutions  and other  investments  permitted by
applicable law.


Financial Condition

Total assets at June 30, 1997 were $103.1  million  compared to $86.9 million at
June 30, 1996,  an increase of $16.2  million,  or 18.6%.  The increase in total
assets was  primarily  due to growth in net loans  receivable  of $10.7  million
combined  with  increases in  securities  of $1.4 million and time deposits with
other financial  institutions of $3.9 million.  The increase in loans receivable
was largely in one- to four-family  residential  real estate,  increasing  $10.4
million,  which is reflective of a strong local economy  coupled with attractive
rates and products  compared to the local  competition.  Consumer  loan balances
experienced a slight  decrease of $235,000.  The increase in securities and time
deposits with other financial  institutions  was the result of the investment of
excess  funds  provided  from  the  conversion  from a mutual  to stock  form of


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<PAGE>
ownership.  Funds were  invested in shorter term time  deposits  and  securities
classified as available for sale to provide the  Corporation  the flexibility to
redirect such funds to loans as needed.

Total  liabilities  remained  relatively stable with only a slight decrease from
$77.7 million at June 30, 1996 to $77.4  million at June 30, 1997.  The decrease
was  primarily due to a $272,000 net decrease in deposits.  Significant  deposit
growth  experienced early in the year was negated by subsequent  deposit decline
as many  depositors  used such funds to purchase common stock of the Corporation
during the  conversion.  In addition,  the makeup of the deposit  portfolio  was
shifted  by  the  movement  of  funds  from  savings  and  demand   accounts  to
certificates  of  deposit  as  a  result  of  several   special   promotions  on
certificates of deposits  conducted during the year. Changes in accrued expenses
and other liabilities were not significant.


Results of Operations

The  operating  results of the  Corporation  are  affected  by general  economic
conditions,  the  monetary  and  fiscal  policies  of federal  agencies  and the
regulatory  policies of  agencies  that  regulate  financial  institutions.  The
Corporation's  cost of funds  is  influenced  by  interest  rates  on  competing
investments  and  general  market  rates of  interest.  Lending  activities  are
influenced  by the demand for real estate loans and other types of loans,  which
in turn is affected by the interest rates at which such loans are made,  general
economic conditions and the availability of funds for lending activities.

The  Corporation's  net income  primarily  depends upon its net interest income,
which is the difference  between the interest income earned on  interest-earning
assets,  such  as  loans  and  securities,  and  interest  expense  incurred  on
interest-bearing  liabilities,  such as deposits and other borrowings. The level
of net interest  income is dependent upon the interest rate  environment and the
volume  and  composition  of   interest-earning   assets  and   interest-bearing
liabilities.  Net income is also affected by provisions for loan losses, service
charges,  gains on the sale of assets and other income,  noninterest expense and
income taxes.


Comparison of Results of Operations for the Year Ended June 30, 1997
and June 30, 1996

Net Income.  The  Corporation  experienced  net income of $564,000  for the year
ended June 30, 1997,  compared to net income of $852,000 for the year ended June
30,  1996.  The  decrease  in net income was  primarily  the result of a special
deposit insurance assessment, as more fully discussed below.

Net Interest Income.  Net interest income totaled  $3,138,000 for the year ended
June 30, 1997,  as compared to  $2,807,000  for the year ended June 30, 1996, an
increase  of  $331,000,   or  11.8%.  The  change  in  net  interest  income  is
attributable to higher average  balances of  interest-earning  assets  partially
offset by an overall  increase  in the cost of funds on an  increased  volume of
interest-bearing liabilities. The increase in the cost of funds was attributable
to a larger portion of the deposit base being in higher yielding certificates of
deposit and an increased level of borrowed  funds.  See "Yields Earned and Rates
Paid."

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<PAGE>
Interest and fees on loans increased $757,000, or 12.5%, from $6,048,000 for the
year ended  June 30,  1996 to  $6,805,000  the year  ended  June 30,  1997.  The
increase  in  interest  income  was  due to  higher  average  loans  receivable,
partially  offset by a decline in the average  yield  earned on loans from 8.17%
for the year ended June 30, 1996 to 8.06% for the year ended June 30, 1997.

Interest earned on securities totaled $141,000 for the year ended June 30, 1997,
as compared to $150,000  for the year ended June 30,  1996.  The  decrease was a
result of lower average  balances of securities  partially offset by an increase
in the average yield earned.

Interest on  interest-bearing  deposits and overnight deposits decreased $76,000
for the year ended June 30,  1997,  as compared to the year ended June 30, 1996.
The  decline  was the  result  of lower  average  balances  of  interest-bearing
deposits and overnight funds, offset by slightly higher rates earned.

Dividends  on FHLB stock  increased  slightly  for the year ended June 30, 1997,
compared to the year ended June 30,  1996,  primarily  due to an increase in the
number of shares of FHLB stock owned.

Interest paid on deposits  increased  $279,000 for the year ended June 30, 1997,
as compared to the year ended June 30, 1996.  The  increase in interest  expense
was due to an increase in average deposit balances  combined with an increase in
the cost of funds.  The average  cost of deposits  increased  from 4.94% for the
year  ended  June 30,  1996,  to 5.09% for the year  ended  June 30,  1997.  The
increase  in the average  cost of deposits  was the result of a shift in deposit
accounts  from  savings  and  demand   deposit   accounts  to  higher   yielding
certificates  of deposits as a result of special  interest rate  promotions  for
certificates of deposit.  Certificates of deposit  increased from 69.5% of total
deposits at June 30, 1996 to 71.3% of total deposits at June 30, 1997. The yield
on certificates of deposits was 5.84% for the year ended June 30, 1996, compared
to 5.93% for the year ended June 30,  1997,  while the average  yield on savings
and demand  deposit  accounts  increased  from 2.91% for the year ended June 30,
1996 to 2.96% for the year ended June 30, 1997.

The  Corporation  borrowed  funds for the first time from the Federal  Home Loan
Bank of Cincinnati  (FHLB) during the year ended June 30, 1997.  The  borrowings
were used as a source of short-term liquidity to provide funding for loan demand
and were repaid prior to year-end.  Interest on the borrowings  totaled  $65,000
for the year ended June 30, 1997.  The average yield paid on the  borrowings was
5.59%.

Provision  for Loan Losses.  The  Corporation  maintains  an allowance  for loan
losses in an amount  which,  in  management's  judgment,  is  adequate to absorb
reasonably  foreseeable losses inherent in the loan portfolio.  While management
utilizes its best judgment and information  available,  the ultimate adequacy of
the allowance is dependent upon a variety of factors,  including the performance
of the Corporation's loan portfolio,  the economy, changes in real estate values
and  interest  rates  and the view of the  regulatory  authorities  toward  loan
classifications.  The  provision  for loan losses is determined by management as
the amount to be added to the  allowance  for loan losses after net  charge-offs
have  been  deducted  to bring  the  allowance  to a level  which is  considered
adequate  to absorb  losses  inherent in the loan


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<PAGE>
portfolio.  The amount of the provision is based on management's  monthly review
of the loan  portfolio  and  consideration  of such factors as  historical  loss
experience,  general  prevailing  economic  conditions,  changes in the size and
composition  of  the  loan  portfolio  and  specific  borrower   considerations,
including the ability of the borrower to repay the loan and the estimated  value
of the underlying collateral.

The provision for loan losses for the year ended June 30, 1997 totaled  $103,000
compared to $68,000 for the year ended June 30, 1996, an increase of $35,000, or
51.5%.  The allowance for loan losses totaled  $397,000,  or .43% of total loans
receivable  and 45.8% of total  nonperforming  loans at June 30, 1997,  compared
with  $307,000,   or  .37%  of  total  loans   receivable  and  25.1%  of  total
nonperforming  loans at June 30, 1996.  The increase in the  provision  for loan
losses was  attributable to an increase in the total loan  portfolio.  Despite a
decrease  in the  volume  of  nonperforming  loans,  management  believes  it is
prudent,  as total loans  increase,  to increase the level of the  allowance for
loan losses through regular provisions.

Noninterest  income.  Noninterest  income for the year  ended June 30,  1997 was
$63,000  compared  to $57,000 for the year ended June 30,  1996,  an increase of
$6,000,  or 10.5%. The increase was primarily a result of an increase in various
service fees collected and miscellaneous operating income.

Noninterest expense.  Noninterest expense was $2,222,000 for the year ended June
30, 1997 compared to $1,503,000 for the year ended June 30, 1996, an increase of
$719,000,  or 47.8%.  The increase was primarily a result of a $456,000  special
deposit insurance assessment  resulting from legislation  discussed below. Other
significant  components of the increase  include an increase in compensation and
benefits  expense by $208,000,  or 31.2%,  and an increase in other  expenses by
$77,000, or 26.7%.  Compensation and benefits expense increased primarily due to
the added expense from the  implementation  of an employee stock  ownership plan
combined with normal, annual merit increases. The increase in other expenses was
a result of an increase in directors  compensation  combined  with  increases in
other miscellaneous expenses arising from the process of converting to mutual to
stock ownership.

On  September  30, 1996  legislation  was enacted into law to  recapitalize  the
Savings  Association  Insurance  Fund  (SAIF) of the Federal  Deposit  Insurance
Corporation  (FDIC).  The SAIF was  below the level  required  by law  because a
significant  portion of the assessments paid into the SAIF by thrifts,  like the
Association, were used to pay the cost of prior thrift failures. The legislation
called for a one-time  assessment  estimated at $0.657 for each $100 in deposits
held as of March 31, 1995. As a result of the  recapitalization of the SAIF, the
disparity between bank and thrift insurance assessments was reduced. Thrifts had
been paying  assessments of $.23 per $100 of deposits,  which, for most thrifts,
was reduced to $.064 per $100 in deposits in January 1997 and will be reduced to
$.024 per $100 in deposits no later than January 2000.

The legislation  also provides for the merger of the SAIF and the Bank Insurance
Fund (BIF) effective January 1, 1999, assuming there are no savings associations
under federal law. Under separate proposed legislation,  Congress is considering
the  elimination  of  the  federal  thrift  charter  and  the  separate  federal
regulation of thrifts. As a result, the Association would be required to convert
to a different financial institution charter and possibly become subject to more
restrictive  activity limits.  The Association  cannot predict the impact of any
such legislation until it is enacted.

                                       11
<PAGE>
Income Tax Expense.  The change in income tax expense is primarily  attributable
to the change in income  before  income  taxes.  The  provision for income taxes
totaled  $312,000 for the year ended June 30, 1997  compared to $441,000 for the
year ended June 30,  1996, a decrease of  $129,000,  or 29.3%.  The decrease was
largely due to the tax effect of $(155,000) for the special assessment discussed
above. The effective tax rates were 35.6% and 34.1% for the years ended June 30,
1997 and 1996, respectively.

Prior to the enactment of legislation discussed below, thrifts which met certain
tests  relating to the  composition  of assets had been  permitted  to establish
reserves for bad debts and to make annual additions thereto which could,  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  "nonqualifying  loans" was computed under the experience method. The amount
of the bad debt reserve  deduction for "qualifying real property loans" could be
computed under either the experience  method or the percentage of taxable income
method, based on an annual election.

In August  1996,  legislation  was enacted  that  repeals the reserve  method of
accounting  used by many thrifts to calculate their bad debt reserve for federal
income tax purposes.  As a result,  small thrifts such as the  Association  must
recapture  that  portion of the reserve  that exceeds the amount that could have
been taken under the experience  method for tax years  beginning  after December
31, 1987.  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.  At  June  30,  1997,  the  Association  had
approximately  $581,000 in bad debt  reserves  subject to recapture  for federal
income tax  purposes.  The deferred tax  liability  related to the recapture has
been previously established.


Comparison of Results of Operations for the Years Ended June 30, 1996
and June 30, 1995

Net  Income.  Net  income  for the year ended  June 30,  1996 was  $852,000,  an
increase of $17,000,  or 2.0%,  from net earnings of $835,000 for the year ended
June 30,  1995.  The  increase  was  primarily  a result of an  increase  in net
interest  income  partially  offset by  increases  in  noninterest  expense  and
provision for income taxes.

Net Interest  Income.  Net interest  income  increased  $51,000,  or 1.9%,  from
$2,756,000  for the year ended June 30, 1995 compared to $2,807,000 for the year
ended June 30, 1996.  The  increase in net interest  income was the result of an
increase  in  average  balances  of  higher  yielding  interest-earning  assets,
partially  offset by an overall  increase in the cost of funds for an  increased
volume of deposits  with a larger  portion of the  deposit  base being in higher
yielding certificates of deposit. See "Yields Earned and Rates Paid."

Interest and fees on loans increased $644,000, or 11.9%, from $5,404,000 for the
year ended June 30, 1995,  to $6,048,000  for the year ended June 30, 1996.  The
increase in interest income was due to higher average loans  receivable  related
to the  origination  of new one- to four-family  residential  real estate loans,
combined with an increase  average yield earned on loans  receivable  from 7.78%
for the year ended June 30, 1995 to 8.17% for the year ended June 30, 1996.

                                       12
<PAGE>
Interest earned on securities totaled $150,000 for the year ended June 30, 1996,
as compared to $161,000  for the year ended June 30,  1995.  The  decrease was a
result of lower average  balances of securities  partially offset by an increase
in the yield earned.

Interest  on   interest-bearing   deposits  and  overnight   deposits  increased
approximately  $149,000,  or 123.1%,  from  $121,000 for the year ended June 30,
1995 to $270,000 for the year ended June 30,  1996.  The increase was the result
of higher  average  balances  due to the  temporary  investment  of excess funds
received from deposit  growth in short-term  time deposits with other  financial
institutions  and overnight  deposits with the FHLB.  Additionally,  the average
yield  earned on such  investments  increased  slightly  from 5.33% for the year
ended June 30, 1995 to 5.45% for the year ended June 30, 1996.

Dividends  on FHLB stock  increased  slightly  for the year ended June 30, 1996,
compared to the year ended June 30,  1995,  primarily  due to an increase in the
number of shares of FHLB stock owned.

Interest paid on deposits  totaled  $3,706,000 for the year ended June 30, 1996,
as  compared  to  $2,968,000  for the year ended June 30,  1995,  an increase of
$738,000,  or 24.9%.  The increase in interest expense was due to an increase in
average  deposit  balances  combined with an increase in the cost of funds.  The
average cost of deposits  increased from 4.30% for the year ended June 30, 1995,
to 4.94% for the year ended June 30,  1996.  The increase in the average cost of
deposits was the result of a shift in deposit  accounts  from savings and demand
deposit  accounts  to higher  yielding  certificates  of deposits as a result of
special  interest  rate  promotions  for  certificates  of  deposit as well as a
general increase in the interest rates on certificates of deposit offered by the
Association.  Certificates of deposit  increased from 66.8% of total deposits at
June 30,  1995 to  69.5%  of total  deposits  at June  30,  1996.  The  yield on
certificates of deposits was 5.02% for the year ended June 30, 1995, compared to
5.84% for the year ended June 30, 1996,  while the average  yield on savings and
demand deposit accounts declined from 2.96% at 2.91% over the same periods.

Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1996 was $68,000  compared to $55,000 for the year ended June 30,  1995,  an
increase of $13,000,  or 23.6%. The allowance for loan losses totaled  $307,000,
or .37% of total loans receivable and 25.1% of total nonperforming loans at June
30, 1996, compared with $251,000, or .33% of total loans receivable and 17.7% of
total  nonperforming  loans at June 30, 1995.  The amount of the  provision  and
allowance  for  estimated  losses on loans is  influenced  by  current  economic
conditions,  actual loss  experience,  industry  trends and other  factors.  The
increase in the  provision  for loan losses was the result of a higher volume of
loans  receivable  during the year ended June 30, 1996 when compared to the year
ended June 30, 1995.

Noninterest  income.  Noninterest  income  remained  relatively  stable totaling
$57,000 for the year ended June 30, 1996, compared to $60,000 for the year ended
June 30, 1995.

Noninterest  expense.   Noninterest  expense  increased  $8,000,  or  .5%,  from
$1,495,000  for the year ended June 30,  1995 to  $1,503,000  for the year ended
June 30,  1996.  There were no  significant  changes in the various  noninterest
expense categories.

Income  Tax  Expense.   The  volatility  of  income  tax  expense  is  primarily
attributable to the change in net income before income taxes.  The provision for
income taxes  totaled  $441,000  for the year ended June 30,  1996,  compared to
$432,000 for the year ended June 30, 1995, resulting in an effective tax rate of
34.1% for both years.

                                       13
<PAGE>
Yields Earned and Rates Paid. The following table sets forth certain information
relating to the Corporation's average balance sheet information and reflects the
average   yield   on   interest-earning   assets   and  the   average   cost  of
interest-bearing  liabilities for the periods  indicated.  Such yields and costs
are  derived  by  dividing  income  or  expense  by  the  average   balances  of
interest-earning assets or interest-bearing liabilities,  respectively,  for the
periods presented. Average balances are derived from average month-end balances.
Nonaccruing  loans  have been  included  in the table as loans  carrying  a zero
yield.
<TABLE>
<CAPTION>
                                                                Year ended June 30,
                                     1997                              1996                              1995
                         ----------------------------      ----------------------------      ---------------------------
                          Average   Interest                Average   Interest                Average   Interest
                        outstanding  earned/    Yield/    outstanding  earned/   Yield/     outstanding  earned/   Yield/
                          balance     paid       rate       balance     paid      rate        balance     paid      rate
                          -------     ----       ----       -------     ----      ----        -------     ----      ----
                                                                     (Dollars in thousands)
<S>                      <C>        <C>          <C>       <C>        <C>          <C>       <C>        <C>          <C>  
Interest-earning assets:
   Interest-earning
     deposits            $  3,467   $    194     5.60%     $  4,849   $    270     5.57%     $  2,293   $    121     5.28%
   Securities available
     for sale(1)              308         21     6.84            --         --      --             --         --      --
   Securities held to
     maturity               2,138        120     5.61         2,752        150     5.45         3,020        161     5.33
   Loans receivable(2)     84,421      6,805     8.06        74,071      6,048     8.17        69,453      5,404     7.78
   Federal Home Loan
     Bank stock               698         49     7.02           640         45     7.03           591         38     6.43
                         --------   --------               --------   --------               --------   --------

     Total interest-
       earning assets    $ 91,032      7,189     7.90      $ 82,312      6,513     7.91      $ 75,357      5,724     7.60
                         ========   --------               ========   --------               ========   --------

Interest-bearing
  liabilities:
   Savings deposits      $ 17,973        555     3.09      $ 18,484        563     3.05      $ 19,491        602     3.09
   Demand and NOW
     deposits               4,313        105     2.43         4,580        108     2.36         4,819        118     2.45
   Certificate accounts    56,085      3,326     5.93        52,012      3,035     5.84        44,760      2,248     5.02
                         --------   --------               --------   --------               --------   --------

     Total deposits        78,371      3,986     5.09        75,076      3,706     4.94        69,070      2,968     4.30

   Borrowings               1,163         65     5.59            --         --       --            --         --      --
                         --------   --------               --------   --------               --------   --------

     Total interest-
       bearing
       liabilities      $   79,534     4,051     5.09    $   75,076      3,706     4.94  $     69,070      2,968     4.30 
                        ==========  --------             ==========   --------           ============   ========
<PAGE>
<CAPTION>
                                                                Year ended June 30,
                                     1997                              1996                              1995
                         ----------------------------      ----------------------------      ---------------------------
                          Average   Interest                Average   Interest                Average   Interest
                        outstanding  earned/    Yield/    outstanding  earned/   Yield/     outstanding  earned/   Yield/
                          balance     paid       rate       balance     paid      rate        balance     paid      rate
                          -------     ----       ----       -------     ----      ----        -------     ----      ----
                                                                     (Dollars in thousands)
<S>                      <C>        <C>          <C>       <C>        <C>          <C>       <C>        <C>          <C>  
Net interest income;
  interest rate spread(3)           $  3,138     2.81%                $  2,807    2.97%                 $   2,756    3.30%
                                    ========     ====                 ========    ====                  =========    ==== 
                                    

Net earning assets       $ 11,498                          $  7,236                          $  6,287
                         ========                          ========                          ========

Net interest margin(4)                           3.45%                             3.41%                             3.66%
                                               ======                            ======                            ======

Average interest-earning
  assets to interest-
  bearing liabilities                            1.14x                             1.10x                             1.09x
                                                 ====                              ====                              ==== 
</TABLE>

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

(1)  Average balance  includes  unrealized gains and losses while yield is based
     on amortized cost.

(2)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     allowance for loan losses and includes nonperforming loans.

(3)  Net interest rate spread  represents  the  difference  between the yield on
     interest-earning assets and the cost of interest-bearing liabilities.

(4)  Net  interest  margin  represents  net interest  income  divided by average
     interest-earning assets.


                                       14
<PAGE>
The table below  describes  the extent to which  changes in  interest  rates and
changes in volume of interest-earning  assets and  interest-bearing  liabilities
have affected the  Corporation's  interest  income and expense  during the years
indicated.  For each category of  interest-earning  assets and  interest-bearing
liabilities,  information is provided on changes  attributable to (1) changes in
volume (multiplied by prior year rate), (2) changes in rate (multiplied by prior
year volume) and (3) total changes in rate and volume.  The combined  effects of
changes in both volume and rate, that are not separately  identified,  have been
allocated proportionately to the change due to volume and change due to rate:
<TABLE>
<CAPTION>
                                                                           Year ended June 30,
                                                   ----------------------------------------------------------------
                                                            1996 vs. 1997                     1995 vs. 1996
                                                   -------------------------------   ------------------------------
                                                          Increase                         Increase
                                                         (decrease)                       (decrease)
                                                           due to                           due to
                                                     Volume      Rate        Total     Volume     Rate       Total
                                                     ------      ----        -----     ------     ----       -----
                                                                           (In thousands)
<S>                                                <C>         <C>        <C>         <C>       <C>         <C>    
Interest income attributable to:
     Interest-earning deposits                     $     (77)  $      1   $     (76)  $   142   $      7    $   149
     Securities available for sale                        21         --          21        --         --         --
     Securities held to maturity                         (34)         4         (30)      (15)         4        (11)
     Loans receivable                                    835        (78)        757       371        273        644
     Federal Home Loan Bank stock                          4         --           4         3          4          7
                                                   ---------   --------   ---------   -------   --------    -------

         Total interest-earning assets             $     749   $    (73)        676   $   501   $    288        789
                                                   =========   ========   ---------   =======   ========    -------

Interest expense attributable to:
     Savings deposits                                    (16)         8          (8)      (31)        (8)       (39)
     Demand and NOW deposits                              (6)         3          (3)       (6)        (4)       (10)
     Certificates accounts                               241         50         291       393        394        787
     Borrowings                                           65         --          65        --         --         --
                                                   ---------   --------   ---------   -------   --------    -------

         Total interest-bearing liabilities        $     284   $     61         345   $   356   $    382        738
                                                   =========   ========   ---------   =======   ========    -------

Net interest income                                                       $     331                         $    51
                                                                          =========                         =======
</TABLE>

Asset and Liability Management

The Association,  like other financial institutions, is subject to interest rate
risk to the extent that its interest-earning assets reprice differently than its
interest-bearing  liabilities.  As part of its  effort  to  monitor  and  manage
interest rate risk,  the  Association  uses the "net  portfolio  value"  ("NPV")
methodology adopted by the OTS as part of its capital regulations.  Although the
Association is not currently  subject to NPV regulation  because such regulation
does not  apply to  institutions  with  less than  $300  million  in assets  and
risk-based  capital  in  excess  of  12%,  application  of NPV  methodology  may
illustrate the Association's interest rate risk.

                                       15
<PAGE>
Generally,  NPV is the  discounted  present  value  of  the  difference  between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on  interest-bearing  and other liabilities.  The application of the methodology
attempts  to  quantify  interest  rate risk as the  change in the NPV that would
result from a theoretical 200 basis point (1 basis point equals 0.01%) change in
market interest rates.  Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are  considered.  If the
NPV would  decrease  by more than 2% of the present  value of the  institution's
assets with either an increase or a decrease in market  rates,  the  institution
must  deduct  50%  of the  amount  of  decrease  in  excess  of  such  2% in the
calculation of the institution's  risk-based capital. See "Liquidity and Capital
Resources."

At March 31, 1997,  the most recent  available  date, 2% of the present value of
the Association's assets was $1,875,000. Because the interest rate risk of a 200
basis  point  decrease in market  interest  rates  (which was  greater  than the
interest rate risk of a 200 basis point  increase)  was  $1,406,000 at March 31,
1997, the Association would not have been required to make additional deductions
from its capital in  determining  whether  the  Association  met its  risk-based
capital requirement.

Presented  below,  as of March 31,  1997,  is an analysis  of the  Association's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel  shifts of 100 basis points in market interest rates. As illustrated in
the table,  NPV is more  sensitive to rising rates than  declining  rates.  Such
difference in sensitivity occurs principally  because, as rates rise,  borrowers
do not prepay  adjustable-rate  loans which reprice less  frequently  than on an
annual  basis,  adjustable-rate  loans with interest  rate  adjustment  caps and
fixed-rate loans as quickly as they do when interest rates are declining.  Thus,
in a rising  interest rate  environment,  the amount of interest the Association
would receive on its loans would increase  relatively slowly as loans are slowly
prepaid  and new loans at higher  rates are made.  Moreover,  the  interest  the
Association  would  pay on its  deposits  would  increase  rapidly  because  the
Association's deposits generally have shorter periods to repricing.
<PAGE>
<TABLE>
<CAPTION>
                                                                          NPV as % of               Target Limit   
                                                                        Portfolio Value                 Under      
                             Net Portfolio Value                           of Assets               Asset/Liability 
    Change      ----------------------------------------------  --------------------------------     Management    
   in Rates        $ Amount       $ Change        % Change       NPV Ratio         % Change            Policy
   --------        --------       --------        --------       ---------         --------     --------------------
<S>                  <C>           <C>             <C>             <C>              <C>               <C>
   +400              $6,498        ($2,781)        (30.0)%         6.93%            (30.0)%           (75)%
   +300               7,651         (1,628)        (17.6)%         8.16%            (17.6)%           (45)%
   +200               8,697           (582)         (6.3)%         9.28%             (6.3)%           (20)%
   +100               9,360             80           0.9%          9.99%              0.9%            (10)%
   Static             9,279              0           0.0%          9.90%              0.0%              0%
   (100)              8,851           (429)         (4.6)%         9.44%             (4.6)%           (10)%
   (200)              7,873         (1,406)        (15.2)%         8.40%            (15.2)%           (20)%
   (300)              6,933         (2,346)        (25.3)%         7.40%            (25.3)%           (45)%
   (400)              6,885         (2,394)        (25.8)%         7.35%            (25.8)%           (75)%
</TABLE>

                                       16
<PAGE>
As with any method of measuring  interest rate risk,  certain  shortcomings  are
inherent  in  the  NPV  approach.  For  example,  although  certain  assets  and
liabilities may have similar maturities or periods of repricing,  they may react
in different  degrees to changes in market  interest  rates.  Also, the interest
rates on certain  types of assets and  liabilities  may  fluctuate in advance of
changes in market  interest  rates,  while interest rates on other types may lag
behind  changes in market rates.  Further,  in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed  securities and
early  withdrawal  levels from  certificates  of deposit  would  likely  deviate
significantly from those assumed in making risk calculations.


Liquidity and Capital Resources

The Corporation's  liquidity,  primarily  represented by cash equivalents,  is a
result of its operating,  investing and financing  activities.  These activities
are summarized below for the years ended June 30, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                                        1997              1996             1995
                                                                        ----              ----             ----
<S>                                                                <C>               <C>               <C>         
Net income                                                         $         564     $        852      $        835
Adjustments to reconcile net income to net
  cash from operating activities                                             134              (15)               (2)
                                                                   -------------     ------------      ------------
Net cash from operating activities                                           698              837               833
Net cash from investing activities                                       (16,140)          (6,968)           (4,887)
Net cash from financing activities                                        15,517            7,012             1,939
                                                                   -------------     ------------      ------------
Net change in cash and cash equivalents                                       75              881            (2,115)
Cash and cash equivalents at beginning of period                           2,721            1,840             3,955
                                                                   -------------     ------------      ------------
Cash and cash equivalents at end of period                         $       2,796     $      2,721      $      1,840
                                                                   =============     ============      ============
</TABLE>

The  Corporation's  principal  sources of funds are deposits,  loan  repayments,
maturities of securities and other funds provided by operations. The Corporation
also has the ability to borrow from the FHLB.  While  scheduled loan  repayments
and maturing  investments  are relatively  predictable,  deposit flows and early
loan  prepayments  are more  influenced  by  interest  rates,  general  economic
conditions and  competition.  The  Corporation  maintains  investments in liquid
assets based upon  management's  assessment of (1) need for funds,  (2) expected
deposit  flows,  (3)  yields  available  on  short-term  liquid  assets  and (4)
objectives of the asset/liability management program.

OTS regulations  presently  require the Association to maintain an average daily
balance of investments in United States Treasury, federal agency obligations and
other investments  having maturities of five years or less in an amount equal to
5% of the sum of the  Corporation's  average daily  balance of net  withdrawable
deposit  accounts  and  borrowings  payable in one year or less.  The  liquidity
requirement,  which  may be  changed  from  time to  time by the OTS to  reflect
changing  economic  conditions,  is intended  to provide a source of  relatively
liquid funds upon which the Corporation may rely, if necessary,  to fund deposit
withdrawals or other short-term funding needs. At June 30, 1997, the Association
had  commitments  to  originate  fixed-rate  commercial  and  residential  loans
totaling  $156,000,  and variable rate  commercial and  residential  real estate
mortgage loans totaling  $876,000.  Loan  commitments are generally for 30 days.
The Association  considers its liquidity and capital reserves sufficient to meet
its outstanding  short- and long-term  needs.


                                       17
<PAGE>
The  Association is required by OTS  regulations to meet certain minimum capital
requirements,   which  must  be  generally  as  stringent  as  the  requirements
established for banks. Current capital requirements call for tangible capital of
1.5% of adjusted total assets, core capital (which for the Association  consists
solely of  tangible  capital) of 3.0% of adjusted  total  assets and  risk-based
capital  (which  for the  Association  consists  of  core  capital  and  general
valuation  allowances)  of 8% of  risk-weighted  assets  (assets are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
OTS  has  proposed  to  amend  the  core  capital   requirement  so  that  those
associations that do not have the highest  examination  rating and an acceptable
level of risk  will be  required  to  maintain  core  capital  of from 4% to 5%,
depending  on  the  association's  examination  rating  and  overall  risk.  The
Association  does not anticipate that it will be adversely  affected if the core
capital requirements regulations are amended as proposed.

The following table summarizes the Association's regulatory capital requirements
and actual capital at June 30, 1997.
<TABLE>
<CAPTION>
                                                                                   Excess of Actual
                                                                                Capital Over Current
                              Actual capital        Current requirement             Requirement          Applicable
                           Amount      Percent      Amount      Percent          Amount     Percent      Asset Total
                           ------      -------      ------      -------          ------     -------      -----------
                                                   (Dollars in thousands)
<S>                      <C>            <C>        <C>            <C>           <C>          <C>        <C>        
Tangible Capital         $   17,088     16.6%      $   1,547      1.5%          $  15,541    15.1%      $   103,128
Core Capital                 17,088     16.6           3,094      3.0              13,994    13.6           103,128
Risk-based Capital           17,481     26.9           5,208      8.0              12,273    18.9            65,095
</TABLE>

At June 30,  1997,  the  Association  had no  material  commitments  for capital
expenditures.


Impact of New Accounting Standards

Statement of Financial  Accounting  Standards ("SFAS") No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was issued by the  Financial  Accounting  Standards  Board  ("FASB") in 1996. It
revises the  accounting  for  transfers of financial  assets,  such as loans and
securities,  and for distinguishing between sales and secured borrowings. It was
originally  effective for some transactions in 1997 and others in 1998. SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" was issued in December 1996. SFAS No. 127 defers for one year the effective
date of provisions  related to securities  lending,  repurchase  agreements  and
other similar transactions.  The remaining portions of SFAS 125 became effective
January  1,  1997.  SFAS  No.  125  did  not  have  a  material  impact  on  the
Corporation's financial statements.

In March 1997,  the FASB issued SFAS No.  128,  "Earnings  Per Share,"  which is
effective for periods ending after December 15, 1997, including interim periods.
SFAS No.  128  simplifies  the  calculation  of  earnings  per share  ("EPS") by
replacing  primary EPS with basic EPS. It also  requires  dual  presentation  of
basic EPS and diluted EPS for entities with complex  capital  structures.  Basic
EPS includes no dilution and is computed by dividing income  available to common
shareholders by the  weighted-average  common shares outstanding for the period.
Diluted EPS reflects the potential  dilution of  securities  that could share in
earnings such as stock options, warrants or other common stock equivalents.  All
prior period EPS data will be restated to conform with the new presentation.

                                       18
<PAGE>
In February  1997,  the FASB issued SFAS No. 129,  "Disclosures  of  Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure  about a company's  capital  structure.  Public companies
generally have always been required to make disclosures now required by SFAS No.
129 and, therefore, SFAS No. 129 should have no impact on the Corporation.  SFAS
No. 129 is effective for financial  statements for periods ending after December
15, 1997.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information." This Statement  significantly  changes the
way that public business enterprises report information about operating segments
in annual  financial  statements  and  requires  that those  enterprises  report
selected  information  about reportable  segments in interim  financial  reports
issued to shareholders.  It also establishes  standards for related  disclosures
about products and services,  geographic areas and major customers. SFAS No. 131
uses a "management  approach" to disclose financial and descriptive  information
about an enterprise's  reportable operating segments which is based on reporting
information the way that management organizes the segments within the enterprise
for making operating decisions and assessing performance.  For many enterprises,
the management  approach will likely result in more segments being reported.  In
addition,  the Statement requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements. The Statement also requires that selected information be reported in
interim financial statements. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997.


Impact of Inflation and Changing Prices

The  Consolidated  Financial  Statements  and Notes  included  herein  have been
prepared in accordance with generally accepted accounting  principles  ("GAAP").
Presently,  GAAP  requires the  Corporation  to measure  financial  position and
operating  results  primarily  in  terms of  historic  dollars.  Changes  in the
relative  value of  money  due to  inflation  or  recession  are  generally  not
considered.

In  management's  opinion,  changes  in  interest  rates  affect  the  financial
condition of a financial institution to a far greater degree than changes in the
inflation  rate.  While interest rates are greatly  influenced by changes in the
inflation  rate, they do not change at the same rate or in the same magnitude as
the inflation rate. Rather,  interest rate volatility is based on changes in the
expected  rate of  inflation,  as well as on  changes  in  monetary  and  fiscal
policies.

                                       19
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS



Board of Directors and Shareholders
Peoples-Sidney Financial Corporation
Sidney, Ohio


We have audited the accompanying  consolidated  balance sheets of Peoples-Sidney
Financial Corporation as of June 30, 1997 and 1996 and the related statements of
income,  shareholders'  equity and cash flows for each of the three years in the
period ended June 30, 1997. These financial statements are the responsibility of
the  Corporation's  management.  Our  responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of  Peoples-Sidney
Financial  Corporation  as of June 30,  1997 and 1996,  and the  results  of its
operations  and its cash flows for each of the three  years in the period  ended
June 30, 1997 in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements,  the Corporation changed its
method of accounting for impaired loans in 1996.



                                                   Crowe, Chizek and Company LLP

Columbus, Ohio
July 11, 1997


                                       20
<PAGE>
<TABLE>
<CAPTION>
                                       PEOPLES-SIDNEY FINANCIAL CORPORATION
                                            CONSOLIDATED BALANCE SHEETS
                                              June 30, 1997 and 1996
-------------------------------------------------------------------------------------------------------------------

                                                                                     1997                 1996
                                                                                     ----                 ----
<S>                                                                           <C>                  <C>             
ASSETS
Cash and amounts due from depository
  institutions                                                                $         297,722    $        365,614
Interest-bearing deposits in other banks                                              1,498,104           1,355,195
Overnight deposits                                                                    1,000,000           1,000,000
                                                                              -----------------    ----------------
     Total cash and cash equivalents                                                  2,795,826           2,720,809

Time deposits with other financial institutions                                       5,000,000           1,100,000
Securities available for sale                                                         2,012,802
Securities held to maturity  (Estimated  
  fair value of $1,996,795 and $2,575,990
  at June 30, 1997
  and June 30, 1996, respectively)                                                    1,999,375           2,598,404
Loans receivable, net                                                                88,924,339          78,232,660
Accrued interest receivable                                                             735,462             622,962
Premises and equipment, net                                                             755,286             797,671
Federal Home Loan Bank stock available for sale                                         762,500             667,000
Other assets                                                                            156,772             142,469
                                                                              -----------------    ----------------
     Total assets                                                             $     103,142,362    $     86,881,975
                                                                              =================    ================

LIABILITIES
Deposits                                                                      $      77,045,430    $     77,317,506
Accrued expense and other liabilities                                                   385,219             351,932
                                                                              -----------------    ----------------
     Total liabilities                                                               77,430,649          77,669,438

SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares
  authorized, none issued and outstanding
Common stock, $.01 par value, 3,500,000 shares
  authorized, 1,785,375 shares issued and outstanding                                    17,854
Additional paid-in capital                                                           17,234,087
Retained earnings                                                                     9,776,982           9,212,537
Unearned employee stock ownership plan shares                                        (1,326,280)
Unrealized gain on securities available for sale                                          9,070
                                                                              -----------------
     Total shareholders' equity                                                      25,711,713           9,212,537
                                                                              -----------------    ----------------
     Total liabilities and shareholders' equity                               $     103,142,362    $     86,881,975
                                                                              =================    ================
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       21
<PAGE>
<TABLE>
<CAPTION>
                                       PEOPLES-SIDNEY FINANCIAL CORPORATION
                                         CONSOLIDATED STATEMENTS OF INCOME
                                     Years Ended June 30, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------------------------------

                                                                      1997              1996               1995
                                                                      ----              ----               ----
<S>                                                            <C>                <C>               <C>            
Interest income
     Loans, including fees                                     $    6,804,933     $    6,048,141    $     5,404,797
     Securities                                                       140,604            150,483            160,846
     Interest-bearing deposits and overnight
       deposits                                                       194,226            269,849            121,059
     Dividends on Federal Home Loan
       Bank stock                                                      49,055             44,781             37,730
                                                               --------------     --------------    ---------------
         Total interest income                                      7,188,818          6,513,254          5,724,432

Interest expense
     Deposits                                                       3,985,995          3,706,608          2,968,012
     Other borrowings                                                  64,640
                                                               --------------     --------------    ---------------
         Total interest expense                                     4,050,635          3,706,608          2,968,012
                                                               --------------     --------------    ---------------
Net interest income                                                 3,138,183          2,806,646          2,756,420

Provision for loan losses                                             102,743             68,447             54,734
                                                               --------------     --------------    ---------------
Net interest income after
  provision for loan losses                                         3,035,440          2,738,199          2,701,686
                                                               --------------     --------------    ---------------
Noninterest income
     Service fees and other charges                                    63,048             57,473             59,941
                                                               --------------     --------------    ---------------

Noninterest expense
     Compensation and benefits                                        873,749            665,728            675,126
     Occupancy and equipment                                          137,027            123,922            127,580
     Computer processing expense                                      152,318            138,926            143,495
     FDIC deposit insurance premiums                                  559,660            165,917            156,672
     State franchise taxes                                            133,639            120,222            108,594
     Other                                                            365,709            288,720            283,295
                                                               --------------     --------------    ---------------
         Total noninterest expense                                  2,222,102          1,503,435          1,494,762
                                                               --------------     --------------    ---------------

Income before income taxes                                            876,386          1,292,237          1,266,865
Income tax expense                                                    311,941            440,511            431,686
                                                               --------------     --------------    ---------------
Net income                                                     $      564,445     $      851,726    $       835,179
                                                               ==============     ==============    ===============
Earnings per common share                                      $          .09
                                                               ==============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       22
<PAGE>
<TABLE>
<CAPTION>
                                       PEOPLES-SIDNEY FINANCIAL CORPORATION
                                  CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                     Years Ended June 30, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------------------------------

                                                                                          Unrealized
                                                                                            Gain on
                                            Additional                       Unearned     Securities
                                Common        Paid-In        Retained          ESOP        Available
                                 Stock        Capital        Earnings         Shares       for Sale       Total
                                 -----        -------        --------         ------       --------       -----
<S>                           <C>         <C>              <C>            <C>            <C>         <C>           
Balance, July 1, 1994                                      $  7,525,632                              $    7,525,632

Net income for the year
  ended June 30, 1995                                           835,179                                     835,179
                                                           ------------                              --------------

Balance, June 30, 1995                                        8,360,811                                   8,360,811

Net income for the year
  ended June 30, 1996                                           851,726                                     851,726
                                                           ------------                              --------------

Balance, June 30, 1996                                        9,212,537                                   9,212,537

Net income for the year
  ended June 30, 1997                                           564,445                                     564,445

Sale of 1,785,375 shares of
  $.01 par common stock,
  net of conversion costs     $  17,854   $  17,200,090                                                  17,217,944

142,830 shares purchased
  under employee
  stock ownership plan                                                    $ (1,428,300)                  (1,428,300)

Commitment to release
  10,202 employee stock
  ownership plan shares                          33,997                        102,020                      136,017

Change in unrealized gain on
  securities available for sale                                                          $   9,070           9,070
                              ---------   -------------    ------------   ------------   ---------   --------------

Balance, June 30, 1997        $  17,854   $  17,234,087    $  9,776,982   $ (1,326,280)  $   9,070   $   25,711,713
                              =========   =============    ============   ============   =========   ==============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       23
<PAGE>
<TABLE>
<CAPTION>
                                       PEOPLES-SIDNEY FINANCIAL CORPORATION
                                       CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
                                     Years Ended June 30, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------------------------------


                                                                      1997              1996               1995
                                                                      ----              ----               ----
<S>                                                           <C>                  <C>                <C>         
Cash flows from operating activities
     Net income                                               $       564,445      $     851,726      $    835,179
     Adjustments to reconcile net income to
       net cash from operating activities
         Depreciation                                                  53,973             55,445             52,460
         Provision for loan losses                                    102,743             68,447             54,734
         FHLB stock dividends                                         (48,900)           (44,600)           (37,600)
         Deferred taxes                                               (12,778)            44,507             55,961
         Gain on sale of real estate owned                                                                     (394)
         (Gain)/loss on sale or disposal of
           premises and equipment                                                         (8,890)             5,891
         Compensation expense related to
           ESOP shares                                                136,017
         Change in
              Accrued interest receivable and
                other assets                                         (127,860)           (99,015)          (134,780)
              Accrued expense and other liabilities                    41,393             (2,259)            11,960
              Deferred loan fees                                      (11,400)           (28,282)           (10,746)
                                                              ---------------      -------------      ------------
                  Net cash from operating activities                  697,633            837,079            832,665

Cash flows from investing activities
     Purchase of securities available for sale                     (1,998,974)
     Proceeds from maturities of securities
       held to maturity                                               600,000          3,000,000          1,500,000
     Purchase of securities held to maturity                                          (2,498,047)        (1,000,000)
     Proceeds from maturities of time deposits
       in other financial institutions                              1,100,000
     Purchase of time deposits in
       other financial institutions                                (5,000,000)        (1,100,000)
     Purchase of Federal Home Loan Bank stock                         (46,600)                              (12,900)
     Net increase in loans                                        (10,825,674)        (6,352,041)        (5,366,558)
     Premises and equipment expenditures                              (11,588)           (39,844)           (81,561)
     Proceeds from sale of premises and
       equipment                                                                          10,000                125
     Capital improvement expenditures
       on real estate owned                                                                                 (30,899)
     Proceeds from sale of real estate owned                           42,652             11,938            105,000
                                                              ---------------      -------------       ------------
         Net cash from investing activities                       (16,140,184)        (6,967,994)        (4,886,793)
</TABLE>
                                   (Continued)

                                       24
<PAGE>
<TABLE>
<CAPTION>
                                        PEOPLES-SIDNEY FINANCIAL CORPORATION
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                      Years Ended June 30, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------------------------------

                                                                      1997              1996               1995
                                                                      ----              ----               ----
<S>                                                           <C>                  <C>               <C>         
Cash flows from financing activities
     Net change in deposits                                   $      (272,076)    $    7,011,556    $     1,939,089
     Proceeds from issuance of common stock,
       net of conversion costs                                     17,217,944
     Cash provided to ESOP                                         (1,428,300)
         Net cash from financing activities                        15,517,568          7,011,556          1,939,089

Net change in cash and cash equivalents                                75,017            880,641         (2,115,039)

Cash and cash equivalents at beginning
  of period                                                         2,720,809          1,840,168          3,955,207
                                                              ---------------     --------------    ---------------

Cash and cash equivalents at end of period                    $     2,795,826     $    2,720,809    $     1,840,168
                                                              ===============     ==============    ===============

Supplemental disclosures of
  cash flow information
     Cash paid during the year for
         Interest $                                                4,096,411      $    3,716,477    $    2,950,679
         Income taxes                                                240,000            406,444            378,955

     Noncash transactions
         Transfer from loans to
           real estate owned                                          42,652             11,938            101,204
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       25
<PAGE>
                      PEOPLES-SIDNEY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          June 30, 1997, 1996 and 1995

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant  accounting  policies  followed in the
preparation of the accompanying financial statements.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of Peoples-Sidney  Financial  Corporation (the  "Corporation")  and its
wholly-owned  subsidiary,  Peoples  Federal  Savings and Loan  Association  (the
"Association"),  a federal stock savings and loan  association.  All significant
intercompany accounts and transactions have been eliminated in consolidation.

Nature of Operations: The Corporation and the Association's revenues,  operating
income and assets are primarily  from the financial  institution  industry.  The
Association  is engaged  primarily  in the business of making  residential  real
estate loans and accepting deposits. Its operations are conducted solely through
its main office located in Sidney,  Ohio. The Association's market area consists
of Shelby and surrounding counties.

Use  of  Estimates  in the  Preparation  of  Financial  Statements:  To  prepare
financial   statements  in  conformity   with  generally   accepted   accounting
principles,  management  makes  estimates  and  assumptions  based on  available
information.  These estimates and assumptions affect the amounts reported in the
financial  statements  and the  disclosures  provided,  and future results could
differ. The collectibility of loans, fair values of financial  instruments,  and
status of contingencies are particularly subject to change.

Cash Flow  Reporting:  Cash and cash  equivalents  are  defined as cash on hand,
deposits with financial institutions,  overnight deposits and time deposits with
an original maturity of 90 days or less. Overnight deposits are sold for one-day
periods.  The  Corporation  reports net cash flows for customer loan and deposit
transactions, as well as short-term borrowings under its cash management line of
credit with the Federal Home Loan Bank of Cincinnati.

Securities:    Securities   are    classified    into    held-to-maturity    and
available-for-sale categories. Securities are classified as held to maturity and
carried  at  amortized  cost when  management  has the  positive  intent and the
ability to hold them to maturity.  Securities  are  classified  as available for
sale when they might be sold before maturity.  Available-for-sale securities are
carried at fair value,  with  unrealized  gains or losses included as a separate
component of equity, net of tax.

Realized  gains  and  losses on sales of  securities  are  determined  using the
amortized  cost of the  specific  security  sold.  Amortization  of premiums and
accretion of discounts are recorded as interest income from securities.


                                       26
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Receivable:  Loans are reported at the principal balance outstanding,  net
of deferred loan fees and costs,  the allowance for loan losses and charge-offs.
Interest income is reported on the interest method and includes  amortization of
net deferred loan fees and costs over the loan term.

Interest income is not reported when full loan repayment is in doubt,  typically
when  payments  are past due over 90 days.  Payments  received on such loans are
reported as principal reductions.

Allowance  for Loan  Losses:  The  allowance  for  loan  losses  is a  valuation
allowance,  increased  by  the  provision  for  loan  losses  and  decreased  by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss  experience,  known and inherent risks in the portfolio,
information about specific borrower situations and estimated  collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans,  but the entire allowance is available for any loan that, in
management's judgment, should be charged off.

Statement of Financial  Accounting  Standards (SFAS) No. 114, as amended by SFAS
No. 118, was adopted  July 1, 1995.  These  Standards  require  recognition  and
measurement  of impaired  loans.  Loan  impairment is reported when full payment
under the loan terms is not expected.  The carrying values of impaired loans are
reduced to the present value of expected future cash flows, or to the fair value
of collateral if the loan is  collateral  dependent,  by allocating a portion of
the  allowance  for loan losses to such loans.  If these  allocations  cause the
allowance  for loan losses to require an increase,  such increase is reported as
bad debt  expense.  The effect of adopting  these  Standards  did not affect the
allowance for loan losses during fiscal 1997 or 1996.

Loan  impairment  is  evaluated  in total for  smaller-balance  loans of similar
nature such as  residential  first mortgage loans secured by one- to four-family
residences, residential construction loans, credit card, automobile, home equity
and second mortgage loans.  Commercial loans and mortgage loans secured by other
properties are evaluated  individually  for impairment.  Loans are evaluated for
impairment  when  payments are delayed,  typically 90 days or more,  or when the
internal grading system indicates a doubtful classification. The carrying values
of impaired loans are  periodically  adjusted to reflect cash payments,  revised
estimates of future cash flows and  increases  in the present  value of expected
cash  flows due to the  passage of time.  Cash  payments  representing  interest
income are reported as such.  Other cash  payments are reported as reductions in
carrying  value,  while increases or decreases due to changes in future payments
and due to the passage of time are  reported as part of the  provision  for loan
losses.


                                       27
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Real Estate  Owned:  Real estate  acquired in  settlement  of loans is initially
reported at estimated fair value at acquisition.  After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and changes
in the  valuation  allowance  are  reported  in net gain or loss on  other  real
estate. The Corporation had no real estate owned at year-end 1997 or 1996.

Premises and Equipment:  Asset cost is reported net of accumulated depreciation.
Depreciation  expense is calculated using the straight-line  method based on the
estimated  useful lives of the assets.  These assets are reviewed for impairment
when events indicate the carrying amount may not be recoverable. Maintenance and
repairs are charged to expense as incurred and improvements are capitalized.

Income  Taxes:  Income tax expense is the sum of the current year income tax due
or refundable  and the change in deferred tax assets and  liabilities.  Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences   between  the  carrying   amounts  and  tax  bases  of  assets  and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.

Concentration  of  Credit  Risk:  The  Corporation's   loan  portfolio  consists
principally of long-term  conventional  loans secured by first mortgage deeds on
single family  residences  located in its primary lending area of Shelby County,
Ohio.  Mortgage  loans  comprise  approximately  97% of the  Corporation's  loan
portfolio at June 30, 1997 and 1996. The remaining 3% of the portfolio  consists
of consumer loans secured by  automobiles,  deposit  balances at the Association
and various other assets.

Fair Values of Financial  Instruments:  Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately.  Fair value estimates involve uncertainties and matters of
significant  judgment  regarding  interest rates,  credit risk,  prepayments and
other factors,  especially in the absence of broad markets for particular items.
Changes in assumptions or in market  conditions could  significantly  affect the
estimates.  The fair value  estimates  of  existing  on- and  off-balance  sheet
financial instruments do not include the value of anticipated future business or
the values of assets and liabilities not considered financial instruments.


                                       28
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings per Common Share: Earnings per common share is computed by dividing net
income by the weighted average number of shares  outstanding during the year. As
more fully discussed in Note 2, the  Association  converted from mutual to stock
ownership with the concurrent formation of a holding company effective April 25,
1997.  Accordingly,  earnings  per share for the period  ended June 30, 1997 was
computed  based on net  income of the  Corporation  since  April 25,  1997.  The
weighted average number of shares  outstanding  during the period ended June 30,
1997 was 1,644,981.  Unreleased ESOP shares are not considered to be outstanding
shares for the purpose of determining the weighted average number of shares used
in the earnings per common  share  calculation.  No earnings per common share is
shown for the years  ended June 30, 1996 and 1995,  as prior to April 25,  1997,
the  Association was a mutual  company.  The financial  information for the year
ended June 30, 1996 and 1995 reflects the Association prior to the conversion.

Reclassification:  Reclassification  of  certain  amounts  in the  1996 and 1995
consolidated  financial  statements  have  been  made  to  conform  to the  1997
presentation.


NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS
AND LOAN ASSOCIATION WITH THE CONCURRENT FORMATION OF
A HOLDING COMPANY

On November  8, 1996,  the Board of  Directors  of the  Association  unanimously
adopted a Plan of  Conversion  to  convert  from a  federally  chartered  mutual
savings and loan  association  to a federally  chartered  stock savings and loan
association with the concurrent  formation of a holding company,  Peoples-Sidney
Financial  Corporation.  The  conversion  was  consummated  on April 25, 1997 by
amending the Association's  charter and the sale of the holding company's common
stock in an amount  equal to the market  value of the  Association  after giving
effect to the conversion.  A total of 1,785,375 common shares of the Corporation
were sold at $10.00 per share and net  proceeds  from the sale were  $17,217,944
after deducting the costs of conversion.

The Corporation retained 50% of the net proceeds from the sale of common shares.
The  remainder of the net proceeds  were invested in the capital stock issued by
the Association to the Corporation as a result of the conversion.

At the time of conversion,  the  Association  established a liquidation  account
which was equal to its  regulatory  capital  as of the latest  practicable  date
prior to the conversion.  In the event of a complete liquidation,  each eligible
depositor  will be  entitled  to  receive a  distribution  from the  liquidation
account in an amount  proportionate to the current adjusted  qualifying balances
for the accounts then held.


                                       29
<PAGE>
NOTE 2 - CONSUMMATION OF THE CONVERSION TO A STOCK SAVINGS
AND LOAN ASSOCIATION WITH THE CONCURRENT FORMATION OF
A HOLDING COMPANY (Continued)

Under Office of Thrift Supervision  ("OTS")  regulations,  limitations have been
imposed on all "capital  distributions" by savings institutions,  including cash
dividends.  The regulation  establishes a three-tiered  system of  restrictions,
with  the   greatest   flexibility   afforded   to   thrifts   which   are  both
well-capitalized and given favorable qualitative examination ratings by the OTS.


NOTE 3 - SECURITIES

The amortized  cost and estimated fair values of securities at June 30, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
                                                                Gross           Gross          Estimated
                                               Amortized     Unrealized      Unrealized          Fair
                                                 Cost           Gains          Losses            Value
                                                 ----           -----          ------            -----
<S>                                        <C>                <C>            <C>            <C>           
1997
----

Securities available for sale
    U.S. Government agencies               $     1,999,060    $   13,742                    $    2,012,802
                                           ===============    ==========                    ==============

Securities held to maturity
    U.S. Government agencies               $     1,999,375                  $     2,580     $    1,996,795
                                           ===============                  ===========     ==============

1996

Securities held to maturity
    U.S. Government agencies               $     2,598,404    $      600    $    23,014     $    2,575,990
                                           ===============    ==========    ===========     ==============
</TABLE>


                                       30
<PAGE>
NOTE 3 - SECURITIES (Continued)

The amortized  cost and estimated  fair value of securities at year-end 1997, by
contractual  maturity,  are shown  below.  Actual  maturities  could differ from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                                                             Estimated
                                                                          Amortized            Fair
                                                                            Cost               Value
                                                                            ----               -----
<S>                                                                    <C>               <C>            
        Securities available for sale
           Due after one year through five years                       $    1,999,060    $     2,012,802
                                                                       ==============    ===============

        Securities held to maturity
           Due in one year or less                                     $      999,375    $       997,965
           Due after one year through five years                            1,000,000            998,830
                                                                       --------------    ---------------
                                                                       $    1,999,375    $     1,996,795
                                                                       ==============    ===============
</TABLE>

No securities were pledged as collateral at year-end 1997 or 1996. No securities
were sold during the years ended June 30, 1997, 1996 and 1995.


NOTE 4 - LOANS RECEIVABLE

Year-end loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                              1997              1996
                                                                              ----              ----
<S>                                                                     <C>               <C>             
           Mortgage loans:
                1-4 family residential                                  $    75,808,323   $     65,448,109
                Multi-family residential                                        219,153            485,379
                Commercial real estate                                        5,842,476          5,301,864
                Real estate construction and
                  development                                                 6,551,430          7,090,779
                Land                                                          1,446,838          1,342,146
                    Total mortgage loans                                     89,868,220         79,668,277
           Consumer and other loans                                           2,314,263          2,549,131
                                                                        ---------------   ----------------
                    Total loans receivable                                   92,182,483         82,217,408
           Less:
                Allowance for loan losses                                      (397,159)          (307,308)
                Loans in process                                             (2,702,795)        (3,507,850)
                Deferred loan fees                                             (158,190)          (169,590)
                                                                        ---------------   ----------------

                                                                        $    88,924,339   $     78,232,660
                                                                        ===============   ================
</TABLE>


                                       31
<PAGE>
NOTE 4 - LOANS RECEIVABLE (Continued)

Activity in the  allowance for loan losses for years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
                                                                     1997           1996           1995
                                                                     ----           ----           ----
<S>                                                            <C>            <C>             <C>         
         Balance at beginning of year                          $    307,308   $    250,880    $    197,800
         Provision for losses                                       102,743         68,447          54,734
         Charge-offs                                                (21,645)       (14,748)         (3,733)
         Recoveries                                                   8,753          2,729           2,079
                                                               ------------   ------------    ------------

         Balance at end of year                                $    397,159   $    307,308    $    250,880
                                                               ============   ============    ============
</TABLE>

As of and for the years ended June 30, 1997 and 1996,  no loans were required to
be evaluated for impairment on an individual loan basis within the scope of SFAS
No. 114. Loans on nonaccrual status totaled approximately  $719,000 and $826,000
at June 30, 1997 and 1996.

In the ordinary course of business,  the Corporation has and expects to continue
to have transactions,  including  borrowings,  with its officers,  directors and
their  affiliates.  In the  opinion of  management,  such  transactions  were on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for  comparable  transactions  with other persons and did
not  involve  more than a normal  risk of  collectibility  or present  any other
unfavorable  features  to the  Corporation.  A summary of activity on loans with
executive  officers,  directors  and  companies  with which they are  affiliated
aggregating $60,000 or more to any one related party for the year ended June 30,
1997 is as follows:

         Balance at beginning of period                $      461,503
         New loans                                                 --
         Principal repayments                                 (49,101)
                                                       --------------

         Balance at end of period                      $      412,402
                                                       ==============




                                       32
<PAGE>
NOTE 5 - ACCRUED INTEREST RECEIVABLE

Year-end accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
                                                                                   1997            1996
                                                                                   ----            ----
<S>                                                                          <C>              <C>         
         Loans                                                               $    635,372     $    542,937
         Interest-bearing deposits in other
           financial institutions                                                  50,311           40,017
         Securities                                                                49,779           40,008
                                                                             ------------     ------------

                                                                             $    735,462     $    622,962
                                                                             ============     ============
</TABLE>

NOTE 6 - PREMISES AND EQUIPMENT

Year-end premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
                                                                                   1997            1996
                                                                                   ----            ----
<S>                                                                          <C>             <C>          
         Land                                                                $    185,166    $     185,166
         Buildings and improvements                                               989,091          989,091
         Furniture and equipment                                                  564,022          552,434
                                                                             ------------     ------------
              Total cost                                                        1,738,279        1,726,691
         Accumulated depreciation                                                 982,993          929,020
                                                                             ------------     ------------

                                                                             $    755,286     $    797,671
                                                                             ============     ============
</TABLE>

NOTE 7 - FEDERAL INCOME TAXES

The  provision  for federal  income tax for the years ended June 30 consisted of
the following:
<TABLE>
<CAPTION>
                                                                      1997           1996          1995
                                                                      ----           ----          ----
<S>                                                              <C>            <C>           <C>         
         Current tax expense                                     $    324,719   $    396,004  $    375,725
         Deferred tax expense/(benefit)                               (12,778)        44,507        55,961
                                                                 ------------   ------------  ------------

                                                                 $    311,941   $    440,511  $    431,686
                                                                 ============   ============  ============
</TABLE>


                                       33
<PAGE>
NOTE 7 - FEDERAL INCOME TAXES (Continued)

The sources of gross deferred tax assets and gross deferred tax  liabilities for
the years ended June 30 are as follows:
<TABLE>
<CAPTION>
                                                                                   1997            1996
                                                                                   ----            ----
<S>                                                                          <C>              <C>         
         Items giving rise to deferred tax assets
              Deferred loan fees                                             $     33,693     $     37,741
              Reserve for delinquent interest                                       8,092           10,108
              Other                                                                 2,824               81
                                                                             ------------     ------------
                  Total deferred tax assets                                        44,609           47,930

         Items giving rise to deferred tax liabilities
              Depreciation                                                        (43,727)         (43,428)
              Federal Home Loan Bank
                stock dividends                                                   (74,052)         (57,426)
              Allowance for loan losses                                           (58,055)         (91,079)
              Unrealized gain on securities available for sale                     (4,672)
                                                                             ------------     ------------
                  Total deferred tax liabilities                                 (180,506)        (191,933)
                                                                             ------------     ------------

                  Net deferred tax liability                                 $   (135,897)    $   (144,003)
                                                                             ============     ============
</TABLE>

The  difference  between  the  financial  statement  tax  provision  and amounts
computed  by applying  the  statutory  federal  income tax rate of 34% to income
before income taxes is primarily because of the difference  between the cost and
market value of ESOP shares released and  nondeductible  meals and entertainment
and  club  dues  expenses.  The  reconciled  difference  between  the  financial
statement provision and the amounts computed by using the statutory rate for the
years ended June 30 is as follows:
<TABLE>
<CAPTION>
                                                                   1997            1996            1995
                                                                   ----            ----            ----
<S>                                                          <C>             <C>              <C>         
         Income taxes computed at the statutory
           tax rate on pretax income                         $    297,971    $    439,361     $    430,734
         Add tax effect of:
             ESOP                                                  11,559
             Nondeductible expenses and other                       2,411           1,150              952
                                                             ------------    ------------     ------------

                                                             $    311,941    $    440,511     $    431,686
                                                             ============    ============     ============

         Statutory tax rate                                          34.0%           34.0%            34.0%
                                                             ============    ============     ============
         Effective tax rate                                          35.6%           34.1%            34.1%
                                                             ============    ============     ============
</TABLE>


                                       34
<PAGE>
NOTE 7 - FEDERAL INCOME TAXES (Continued)

Prior to the enactment of legislation discussed below, thrifts which met certain
tests  relating to the  composition  of assets had been  permitted  to establish
reserves for bad debts and to make annual additions thereto which could,  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  "nonqualifying  loans" was computed under the experience method. The amount
of the bad debt reserve  deduction for "qualifying real property loans" could be
computed under either the experience  method or the percentage of taxable income
method, based on an annual election.

In August  1996,  legislation  was enacted  that  repeals the reserve  method of
accounting  used by many thrifts to calculate their bad debt reserve for federal
income tax purposes.  As a result,  small thrifts such as the  Association  must
recapture  that  portion of the reserve  that exceeds the amount that could have
been taken under the experience  method for tax years  beginning  after December
31, 1987.  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.  At  June  30,  1997,  the  Association  had
approximately  $581,000 in bad debt  reserves  subject to recapture  for federal
income tax  purposes.  The deferred tax  liability  related to the recapture has
been  previously  established.  In  fiscal  1997,  no  bad  debt  reserves  were
recaptured as the Association met the residential lending requirements.

Retained  earnings at June 30, 1997 and 1996 included  approximately  $1,732,000
for which no  provision  for  federal  income  taxes had been made.  This amount
represents the qualifying and  nonqualifying tax bad debt reserve as of December
31,  1987,  which is the end of the  Association's  base  year for  purposes  of
calculating  the bad debt  deduction  for tax  purposes.  The related  amount of
unrecognized deferred tax liability was approximately  $589,000 at June 30, 1997
and 1996.  If this  portion of  retained  earnings is used in the future for any
purpose  other  than to absorb  bad  debts,  it will be added to future  taxable
income.

                                       35
<PAGE>
NOTE 8 - DEPOSITS

A summary of deposits for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
                                                                              1997               1996
                                                                              ----               ----
<S>                                                                    <C>                <C>             
         Noninterest-bearing
           demand deposits                                             $       150,161    $        117,725
         NOW accounts                                                        3,469,190           3,183,873
         Money market accounts                                                 776,507           1,236,293
         Savings accounts                                                   17,685,203          19,038,989
         Certificates of deposit                                            54,964,369          53,740,626
                                                                       ---------------    ----------------

                                                                       $    77,045,430    $     77,317,506
                                                                       ===============    ================
</TABLE>

The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000 was $4,219,000 and $4,343,000 at June 30, 1997 and 1996,  respectively.
Deposits in excess of $100,000 are not insured by the FDIC.

The scheduled  maturities of  certificates of deposit as of June 30, 1997 are as
follows:

                           1998                 $      31,961,931
                           1999                        15,687,169
                           2000                         4,294,322
                           2001                         2,224,668
                           2002                           796,279
                                                -----------------

                                                $      54,964,369
                                                =================


NOTE 9 - SAVINGS ASSOCIATION INSURANCE FUND  RECAPITALIZATION

Included in FDIC deposit  insurance  premium  expense in the Statement of Income
for the year ended June 30, 1997 is $455,901 for a special assessment  resulting
from  legislation  passed  and  enacted  into  law  on  September  30,  1996  to
recapitalize  the Savings  Association  Insurance  Fund of the  Federal  Deposit
Insurance  Corporation.   Thrifts  such  as  the  Association  paid  a  one-time
assessment in November, 1996 of $0.657 for each $100 in deposits as of March 31,
1995. As a result of the  recapitalization,  the Association  began paying lower
deposit insurance premiums in January, 1997.

                                       36
<PAGE>
NOTE 10 - RETIREMENT PLANS

Pension  Plan:  Prior  to  January  31,  1997,  the  Association   maintained  a
noncontributory  defined  benefit  pension plan  covering all  employees who met
certain  minimum  service  requirements.  The  Plan's  funds  were  invested  in
certificates of deposit of the Association with varying  maturities and interest
rates,  as selected by the  trustees.  The amount of benefit was computed  based
upon  average  monthly  compensation  and  number  of years of  employment.  The
Association's  policy was to fund the plan  sufficiently to meet minimum funding
requirements set forth in the Employees  Retirement Income Security Act of 1974,
plus such  additional  amounts  as the  Association  may have  determined  to be
appropriate up to the maximum amount deductible for federal income tax purposes.

On November 8, 1996,  the Board of Directors  approved a resolution to terminate
the pension plan  effective  January 31, 1997.  This  eliminated  the accrual of
benefits for future  services,  except for additional  benefits that accrued for
employees during the Plan year beginning July 1, 1996. The nonvested accumulated
benefit  obligation  as of January 31, 1997 became  vested.  The vested  benefit
obligation  was  settled by a lump-sum  payment to each  covered  employee.  The
pension expense for the year ended June 30, 1997 was $29,617.

The following  table sets forth the Plan's funded status and amounts  recognized
in the Corporation's financial statements at June 30, 1996.
<TABLE>
<CAPTION>
         Actuarial present value of accumulated benefit obligation:
<S>                                                                           <C>            
         Vested                                                               $       200,961
         Nonvested                                                                       377
                                                                              --------------
              Total accumulated benefit obligation                                   201,338
         Additional benefits based on estimated
           future salary levels                                                      219,340
              Projected benefit obligation                                           420,678
         Plan assets at fair value, consisting of
           certificates of deposit of the Association                                338,658
              Excess of projected benefit obligation
                 over plan assets                                                    (82,020)
         Items not yet recognized in income:
         Unrecognized transition amount                                               62,930
         Unrecognized prior service cost                                              23,350
         Unrecognized net gain                                                       (26,807)
         Contribution adjustment                                                      22,785
                                                                              --------------

         Prepaid pension cost                                                 $          238
                                                                              ==============
</TABLE>

                                       37
<PAGE>
NOTE 10 - RETIREMENT PLANS (Continued)

Net pension cost for the years ended June 30 included the following components:
<TABLE>
<CAPTION>
                                                                                   1996            1995
                                                                                   ----            ----
<S>                                                                          <C>              <C>         
         Service cost - benefits earned during the period                    $     24,407     $     26,407
         Interest cost on projected benefit obligation                             27,182           25,880
         Actual return on plan assets                                             (30,641)          20,693
         Net amortization and deferral                                             20,648          (29,496)
                                                                             ------------     ------------

                                                                             $     41,596     $     43,484
                                                                             ============     ============
</TABLE>

Significant  assumptions  used in determining  the net pension cost for 1996 and
1995 were:

         Discount rate                                             7.50%
         Rate of increase in compensation levels                   4.00
         Expected long-term rate of return on assets               5.00

Employee  401(k) and Profit Sharing Plan: In connection  with the termination of
its defined  benefit  pension  plan,  the  Corporation  adopted a 401(k)  profit
sharing plan on April 1, 1997. With certain  exceptions,  all employees who have
attained the age of 21 and who have  completed  one year of  employment,  during
which they worked at least 1,000 hours, are eligible to participate in the plan.
The Corporation  provides a matching  contribution on behalf of participants who
make  elective  compensation  deferrals  at the  rate of 50% of the  first 6% of
participant  contributions  up to a  maximum  match  of 3% of the  participant's
compensation.  The  Corporation may also  contribute  additional  amounts at its
discretion. Employee contributions are vested at all times and the Corporation's
matching   contributions  vest  evenly  over  5  years  of  service.   The  cash
contribution and related expense included in salaries and employee  benefits was
$5,219 for fiscal 1997.


NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN

The Corporation offers an employee stock ownership plan ("ESOP") for the benefit
of substantially  all employees of the Corporation and the  Association.  During
July, 1997, the ESOP received a favorable determination letter from the Internal
Revenue Service on the qualified status of the ESOP under applicable  provisions
of the Internal Revenue Code.

                                       38
<PAGE>
NOTE 11 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)

The ESOP borrowed  funds from the  Corporation in order to acquire common shares
of the  Corporation.  The loan is secured by the shares  purchased with the loan
proceeds  and will be  repaid  by the ESOP  with  funds  from the  Association's
discretionary  contributions  to the  ESOP  and  earnings  on ESOP  assets.  All
dividends  on  unallocated  shares  received  by the  ESOP  are used to pay debt
service.  The shares  purchased  with the loan  proceeds  are held in a suspense
account for allocation among participants as the loan is repaid. As payments are
made and the shares are released from the suspense account,  such shares will be
validly issued, fully paid and nonassessable.

The  Corporation  accounts for its ESOP in accordance with Statement of Position
(SOP)  93-6.  Accordingly,  the shares  pledged as  collateral  are  reported as
unearned ESOP shares in the Consolidated  Balance Sheets. As shares are released
from  collateral,  the  Corporation  reports  compensation  expense equal to the
current  market  price of the  shares  and the  shares  become  outstanding  for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained  earnings;  dividends on unallocated  ESOP shares are
recorded as a reduction of debt and accrued interest.  ESOP compensation expense
was $136,017 for the year ended June 30, 1997.

The ESOP shares as of June 30, 1997 were as follows:

         Allocated shares                                 10,202
         Unreleased shares                               132,628
              Total ESOP shares                          142,830
                                                  --------------
         Fair value of unreleased shares          $    1,865,081
                                                  ==============


NOTE 12 - REGULATORY CAPITAL REQUIREMENTS

The  Association  is  subject  to  various   regulatory   capital   requirements
administered by the federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory  actions that, if undertaken,  could
have a direct material affect on the Association's  financial statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action,  the  Association  must meet specific  capital  guidelines  that involve
quantitative  measures  of the  Association's  assets,  liabilities  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Association's   capital  amounts  and   classifications   are  also  subject  to
qualitative judgments by the regulators about the Association's components, risk
weightings and other factors. At June 30, 1997 and 1996, management believes the
Association is in compliance with all regulatory capital requirements.  Based on
the  Association's  computed  regulatory  capital  ratios,  the  Association  is
considered well capitalized  under the Federal Deposit Insurance Act at June 30,
1997 and 1996.

                                       39
<PAGE>
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS (Continued)

At  year-end  1997  and  1996,  the  Association's  actual  capital  levels  (in
thousands) and minimum required levels were:
<TABLE>
<CAPTION>
                                                                                                     Minimum
                                                                                                  Required To Be
                                                                        Minimum Required         Well Capitalized
                                                                           For Capital        Under Prompt Corrective
                                                   Actual               Adequacy Purposes       Action Regulations
                                                   ------               -----------------       ------------------
                                               Amount    Ratio          Amount     Ratio         Amount      Ratio
                                               ------    -----          ------     -----         ------      -----
<S>                                          <C>           <C>         <C>           <C>        <C>          <C>
June 30, 1997
Total capital (to risk-weighted assets)      $  17,481     26.9%       $   5,208     8.0%       $   6,510    10.0%
Tier 1 (core) capital (to
  risk-weighted assets)                         17,088     26.3            2,604     4.0            3,906     6.0
Tier 1 (core) capital (to adjusted
  total assets)                                 17,088     16.6            3,094     3.0            5,156     5.0
Tangible capital (to adjusted total assets)     17,088     16.6            1,547     1.5        N/A

June 30, 1996
Total capital (to risk-weighted assets)      $   9,520     16.8%       $   4,532     8.0%       $   5,666    10.0%
Tier 1 (core) capital (to
  risk-weighted assets)                          9,213     16.3            2,266     4.0            3,399     6.0
Tier 1 (core) capital (to adjusted
  total assets)                                  9,213     10.6            2,607     3.0            4,345     5.0
Tangible capital (to adjusted total assets)      9,213     10.6            1,304     1.5        N/A
</TABLE>

In addition to certain federal income tax  considerations,  the Office of Thrift
Supervision (OTS) regulations impose limitations on the payment of dividends and
other  capital  distributions  by savings  associations.  Under OTS  regulations
applicable to converted savings  associations,  the Association is not permitted
to pay a cash dividend on its common shares if its regulatory  capital would, as
a result of payment of such dividends,  be reduced below the amount required for
the Liquidation  Account,  or below applicable  regulatory capital  requirements
prescribed by the OTS.

                                       40
<PAGE>
NOTE 12 - REGULATORY CAPITAL REQUIREMENTS (Continued)

OTS regulations  applicable to all savings and loan associations  provide that a
savings  association  which immediately prior to, and on a pro forma basis after
giving  effect to, a proposed  capital  distribution  (including a dividend) has
total capital (as defined by OTS  regulations)  that is equal to or greater than
the amount of its  capital  requirements  is  generally  permitted  without  OTS
approval  (but  subsequent  to 30 days' prior notice to the OTS) to make capital
distributions,  including dividends,  during a calendar year in an amount not to
exceed the greater of (1) 100% of its net  earnings to date during the  calendar
year,  plus an amount equal to one-half  that which its total  capital to assets
ratio  exceeded  it required  capital to assets  ratio at the  beginning  of the
calendar  year, or (2) 75% of its net earnings for the most recent  four-quarter
period.  Savings  associations  with  total  capital  in excess  of the  capital
requirements  that have been  notified  by the OTS that they are in need of more
than normal supervision will be subject to restrictions on dividends.  A savings
association  that  fails  to  meet  current  minimum  capital   requirements  is
prohibited from making any capital  distributions  without the prior approval of
the OTS.

The Association  currently meets all of its capital requirements and, unless the
OTS determines that the Association is an institution requiring more than normal
supervision,  the Association may pay dividends in accordance with the foregoing
provisions of OTS regulations.


NOTE 13 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK

Various  contingent  liabilities are not reflected in the financial  statements,
including  claims and legal actions  arising in the ordinary course of business.
In the  opinion  of  management,  after  consultation  with legal  counsel,  the
ultimate  disposition of these matters is not expected to have a material effect
on financial condition or results of operations.

Some  financial  instruments  are used in the normal  course of business to meet
financing needs of customers and reduce exposure to interest rate changes. These
financial  instruments include commitments to extend credit,  standby letters of
credit and financial guarantees.  These involve, to varying degrees, credit risk
in excess of the amount reported in the financial statements.

Exposure to credit loss if the other  party does not perform is  represented  by
the  contractual  amount for  commitments to extend credit,  standby  letters of
credit and financial  guarantees written.  The same credit policies are used for
commitments  and  conditional  obligations as are used for loans.  The amount of
collateral  obtained,  if deemed  necessary,  on extension of credit is based on
management's   credit  evaluation  and  generally  consists  of  residential  or
commercial real estate.

                                       41
<PAGE>
NOTE 13 - COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK (Continued)

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there  is  no  violation  of  any  condition   established  in  the  commitment.
Commitments  generally have fixed expiration dates or other termination  clauses
and may require  payment of a fee. Since many of the commitments are expected to
expire without being used, the total  commitments do not  necessarily  represent
future cash requirements.

As of year-end 1997 and 1996, the Corporation had commitments to make fixed rate
commercial and  residential  real estate  mortgage loans at current market rates
approximating   $156,000  and  $581,000,   and  variable  rate   commercial  and
residential  real estate  mortgage loans at current  market rates  approximating
$876,000  and  $1,708,000.  Loan  commitments  are  generally  for 30 days.  The
interest rates on fixed rate  commitments were 8.25% at June 30, 1997 and ranged
from  7.50% to 8.50% at June 30,  1996.  The  interest  rates on  variable  rate
commitments  ranged  from 7.25% to 8.50% at June 30,  1997 and 7.00% to 8.75% at
June 30, 1996.

The  Corporation  also had unused  lines of credit  approximating  $622,000  and
$614,000 at year-end 1997 and 1996.

At June 30, 1997, the  Association had a cash management line of credit enabling
it to  borrow  up to  $5,000,000  with the  Federal  Home  Loan  Bank  (FHLB) of
Cincinnati. The line of credit must be renewed on an annual basis. No borrowings
were outstanding on this line of credit at year-end 1997 or 1996. As a member of
the Federal Home Loan Bank  system,  the  Association  has the ability to obtain
additional  borrowings up to a maximum total of $15,250,000,  including the line
of credit.  Advances under such  borrowing  agreement and the line of credit are
collateralized  by a blanket pledge of the  Association's  residential  mortgage
loan  portfolio  and its Federal  Home Loan Bank stock.  The average  balance of
borrowings  outstanding during fiscal 1997 totaled $1,163,000,  while there were
no borrowings during fiscal 1996.

At June 30, 1997 and 1996,  the  Association  was required to have  $298,000 and
$269,000 on deposit  with its  correspondent  banks as a  compensating  clearing
requirement.

The Association entered into employment  agreements with certain officers of the
Corporation and Association.  The agreements  provide for a term of one to three
years and a salary and  performance  review by the Board of  Directors  not less
often than  annually,  as well as  inclusion  of the  employee  in any  formally
established employee benefit,  bonus, pension and profit-sharing plans for which
management  personnel are eligible.  The agreements provide for extensions for a
period of one year on each  annual  anniversary  date,  subject  to  review  and
approval of the extension by disinterested  members of the Board of Directors of
the  Association.  The employment  agreements also provide for vacation and sick
leave.

                                       42
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The  following  table  shows the  estimated  fair  values  of the  Corporation's
financial  instruments and the related  carrying values for the years ended June
30, 1996 and 1997. Items which are not financial instruments are not included.
<TABLE>
<CAPTION>
                                                                                       1997
                                                                       -----------------------------------
                                                                                              Estimated
                                                                            Carrying            Fair
                                                                              Value             Value
                                                                       ---------------    ----------------
<S>                                                                    <C>                <C>             
         Financial assets:
              Cash and cash equivalents                                $     2,795,826    $      2,796,000
              Time deposits with other financial
                institutions                                                 5,000,000           5,000,000
              Securities available for sale                                  2,012,802           2,013,000
              Securities held to maturity                                    1,999,375           1,997,000
              Loans receivable, net                                         88,924,339          88,015,000
              Accrued interest receivable                                      735,462             735,000
              Federal Home Loan Bank stock                                     762,500             763,000

         Financial liabilities:
              Deposits                                                 $   (77,045,430)   $    (77,542,000)
              Accrued interest payable                                         (36,095)            (36,000)

<CAPTION>
                                                                                       1996
                                                                       -----------------------------------
                                                                                              Estimated
                                                                            Carrying            Fair
                                                                              Value             Value
                                                                       ---------------    ----------------
<S>                                                                    <C>                <C>             
         Financial assets:
              Cash and cash equivalents                                $     2,720,809    $      2,721,000
              Time deposits with other financial
                institutions                                                 1,100,000           1,102,000
              Securities held to maturity                                    2,598,404           2,576,000
              Loans receivable, net                                         78,232,660          77,744,000
              Accrued interest receivable                                      622,962             623,000
              Federal Home Loan Bank stock                                     667,000             667,000

         Financial liabilities:
              Deposits                                                 $   (77,317,506)   $    (77,736,000)
              Accrued interest payable                                         (81,871)            (82,000)
</TABLE>

                                       43
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)

The  estimated  fair  value  for cash  and cash  equivalents  is  considered  to
approximate  cost.  The estimated  fair value for  securities is based on quoted
market  values  for the  individual  securities  or for  equivalent  securities.
Carrying  value is  considered to  approximate  fair value for Federal Home Loan
Bank stock, for loans that  contractually  reprice at intervals of less than one
year,  for  accrued  interest  receivable,  for deposit  liabilities  subject to
immediate  withdrawal  and for  accrued  interest  payable.  The fair  values of
fixed-rate  loans,  loans that  reprice  less  frequently  than each year,  time
deposits  with other  financial  institutions  and  certificates  of deposit are
approximated  by a discount  rate value  technique  utilizing  estimated  market
interest  rates as of June 30, 1997 and 1996,  respectively.  The fair values of
unrecorded commitments at June 30, 1997 and 1996 are not material.

While these  estimates  are based on  management's  judgment of the  appropriate
valuation  factors,   the  Corporation  can  give  no  assurance  that,  if  the
Corporation  were to have  liquidated  such items at June 30, 1997 and 1996, the
estimated fair values would  necessarily have been realized.  The estimated fair
values should not be considered to apply at subsequent dates.

Other  assets  and  liabilities  of the  Corporation  that  are not  defined  as
financial  instruments  are not included in the above  disclosures.  These would
include,  among others,  such items as property and equipment,  other assets and
the intangible value of the Corporation's customer base and profit potential.


NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial  information of Peoples-Sidney  Financial  Corporation as of
June 30, 1997 and for the period beginning April 25, 1997, the effective date of
the conversion, through June 30, 1997 is as follows:
<TABLE>
<CAPTION>
                             CONDENSED BALANCE SHEET
                                  June 30, 1997
<S>                                                       <C>             
     Assets
     Cash and cash equivalents                            $        290,815
     Investment in subsidiary                                   17,097,380
     Loans receivable                                            8,326,279
                                                          ----------------

         Total assets                                     $     25,714,474
                                                          ================

     Liabilities
     Other liabilities                                    $          2,761

     Shareholders' Equity                                       25,711,713

         Total liabilities and shareholders' equity       $     25,714,474
                                                          ================
</TABLE>

                                       44
<PAGE>
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
<TABLE>
<CAPTION>
                          CONDENSED STATEMENT OF INCOME
                         April 25, 1997 - June 30, 1997
<S>                                                        <C>             
     Income
     Interest on loans                                     $         23,006
     Operating expenses                                              14,884
                                                           ----------------
     Income before income taxes and equity in
       undistributed earnings of subsidiary                           8,122
     Income tax expense                                               2,761
                                                           ----------------
     Income before equity in undistributed
       earnings of subsidiary                                         5,361
     Equity in undistributed earnings of subsidiary                 144,937

     Net income                                            $        150,298
                                                           ================
<CAPTION>

                     CONDENSED STATEMENT OF CASH FLOWS April
                            25, 1997 - June 30, 1997
<S>                                                        <C>            
     Cash flows from operating activities
     Net income                                            $       150,298
     Adjustments to reconcile net income
       to cash provided by operations:
         Equity in undistributed income of subsidiary             (144,937)
         Net change in other liabilities                             2,762
              Net cash from operating activities                     8,123

     Cash flows from investing activities
     Purchase of stock in Peoples Federal Savings and
       Loan Association                                         (8,608,972)
     Loan to ESOP                                               (1,428,300)
     Loan to subsidiary                                         (7,000,000)
     Proceeds from loan principal repayments                       102,020
                                                           ---------------
              Net cash from investing activities               (16,935,252)

     Cash flows from financing activities
     Proceeds from issuance of common stock,
       net of conversion costs                                  17,217,944

     Net change in cash and cash equivalents                       290,815
     Cash and cash equivalents at beginning of year

     Cash at end of year                                   $       290,815
                                                           ===============
</TABLE>


                                       45
<PAGE>
                      PEOPLES-SIDNEY FINANCIAL CORPORATION
                             SHAREHOLDER INFORMATION


ANNUAL MEETING

The Annual Meeting of Stockholders will be held at 11:00 a.m., Sidney, Ohio time
on October 10, 1997 at the Holiday Inn, I-75 and S.R. 47, Sidney, Ohio.

STOCK LISTING

Peoples-Sidney  Financial  Corporation  common  stock is traded on the  National
Association of Securities Dealers, Inc. National Market under the symbol "PSFC".

PRICE RANGE OF COMMON STOCK

The per share price range of the common stock for each quarter  since the common
stock began trading on April 25, 1997 was as follows:

FISCAL 1997               HIGH                 LOW                 DIVIDENDS
-----------               ----                 ---                 ---------
Fourth Quarter        $    14 1/16       $     12 7/8              $    --

(1) Reflects the period from April 25, 1997 through June 30, 1997.

The stock price  information  set forth in the table  above was  provided by the
National Association of Securities Dealers, Inc. Automated Quotation System.

At August 8,  1997,  there were  1,785,375  shares of  Peoples-Sidney  Financial
Corporation  common stock issued and  outstanding  (including  unallocated  ESOP
shares) and there were 990 holders of record.

SHAREHOLDERS AND GENERAL INQUIRIES                   TRANSFER AGENT

Douglas Stewart, President                           Registrar and Transfer Co.
Peoples-Sidney Financial Corporation                 10 Commerce Drive
101 East Court Street
P.O. Box 727                                         Cranford, NJ  07016
Sidney, Ohio 45365-3021
(937) 492-6129

ANNUAL AND OTHER REPORTS

A copy of Peoples-Sidney  Financial  Corporation's  Annual Report on Form 10-KSB
for the year ended June 30,  1997,  as filed with the  Securities  and  Exchange
Commission,  may be  obtained  without  charge by  contacting  Douglas  Stewart,
President and Chief Executive Officer, Peoples-Sidney Financial Corporation, 101
East Court Street, P.O. Box 727, Sidney, Ohio 45365.

                                       46
<PAGE>
<TABLE>
<CAPTION>
                      PEOPLES-SIDNEY FINANCIAL CORPORATION
                              CORPORATE INFORMATION
<S>                                                           <C>
CORPORATION AND ASSOCIATION ADDRESS

101 East Court Street                                         Telephone:      (937) 492-6129
P.O. Box 727                                                  Fax:            (937) 498-4554
Sidney, Ohio 45365


DIRECTORS OF THE BOARD

Douglas Stewart                                                Richard T. Martin (Chairman of the Board)
     President and Chief Executive Officer of                        Certified Public Accountant, in private
     Peoples Federal Savings and Loan Association                    practice


Robert W. Bertsch                                              Harry N. Faulkner
     Retired Treasurer of Peoples Federal                            Partner in the law firm of Faulkner,
                                                                     Garmhausen, Keister & Shenk LPA

*George R. Hoellrich                                           James W. Kerber
     Retired President and Chief Executive                           Owner of James W. Kerber CPA, a private
     Officer of Peoples Federal                                      practice accounting firm

John W. Sargeant                                               Officers of the Corporation and the Association:
     Part Owner of Sidney Tool and Die Co. and
     BenSar Development, a warehouse provider                  Douglas Stewart, President & CEO
                                                               David R. Fogt, VP Financial Services and
                                                                 Operations
                                                               Gary N. Fullenkamp, VP Mortgage Loans
                                                                 and Corporate Secretary
                                                               Debra A. Geuy, Treasurer

*Board Member of the Association Only




Special Counsel                                                Independent Auditors

Silver, Freedman & Taff, L.L.P.                                Crowe, Chizek and Company LLP
1100 New York Avenue, N.W.                                     One Columbus
Washington, D.C. 20005-3934                                    10 West Broad Street
                                                               Columbus, OH  43215
</TABLE>

                                       47