FORM 10-K

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

(Mark One)

[X]  Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
     Act of 1934

For the fiscal year ended June 30, 1997

                                       or

[ ]  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

         For the transition period from _____________ to _______________

                         Commission File Number 0-28510


                             HOME FINANCIAL BANCORP
             (Exact name of registrant as specified in its charter)

                  INDIANA                                35-1975585
       (State or other Jurisdiction            (I.R.S. Employer Identification
     of Incorporation or Organization)                     Number)

 279 East Morgan Street, Spencer, Indiana                   47460
 (Address of Principal Executive Offices)                (Zip Code)

Registrant's telephone number including area code:  (812) 829-2095

Securities Registered Pursuant to Section 12(b) of the Act:

     Title of each class              Name of each exchange on which registered
            NONE                                        NONE

Securities Registered Pursuant to Section 12(g) of the Act:

                         Common Stock, without par value
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (ss.  229.405 of this chapter) is not contained  herein,  and
will not be  contained,  to the best of  Registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.

The aggregate market value of the issuer's voting stock held by  non-affiliates,
as of August 29, 1997, was $5,196,949.

The  number of shares of the  Registrant's  Common  Stock,  without  par  value,
outstanding as of August 29, 1997, was 469,526 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

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

                            Exhibit Index on Page 33
                               Page 1 of 33 Pages

<PAGE>

                             HOME FINANCIAL BANCORP

                                    Form 10-K

                                      INDEX

                                                                            Page

Forward Looking Statements.................................................... 1

PART I
Item  1.          Business.................................................... 1
Item  2.          Properties..................................................26
Item  3.          Legal Proceedings...........................................27
Item  4.          Submission of Matters to a Vote of Security Holders.........27
Item  4.5.        Executive Officers of Registrant............................27

PART II
Item  5.          Market for Registrant's Common Equity and Related
                    Stockholder Matters.......................................28
Item  6.          Selected Financial Data.....................................28
Item  7.          Management's Discussion and Analysis of Financial
                    Condition and Results of Operation........................28
Item  7A.         Quantitative and Qualitative Disclosures About Market Risk..29
Item  8.          Financial Statements and Supplementary Data.................30
Item  9.          Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure.......................30

PART III
Item 10.          Directors and Executive Officers of Registrant..............30
Item 11.          Executive Compensation......................................30
Item 12.          Security Ownership of Certain Beneficial Owners
                    and Management............................................30
Item 13.          Certain Relationships and Related Transactions..............30

PART IV
Item 14.          Exhibits, Financial Statement Schedules, and Reports
                    on Form 8-K...............................................31
                  Signatures..................................................32


<PAGE>

                           FORWARD LOOKING STATEMENTS

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

                                     PART I
Item 1.       Business.

General

         Home Financial  Bancorp (the "Holding  Company" and,  together with the
Bank (as defined below), the "Company") is an Indiana  corporation  organized in
February, 1996, to become a bank holding company upon its acquisition of all the
issued and  outstanding  capital stock of Owen Community Bank, s.b. (the "Bank")
in connection with the Bank's  conversion from mutual to stock form. The Holding
Company became the Bank's holding company on July 1, 1996; therefore, historical
financial  and other data  contained  herein for  periods  prior to July 1, 1996
relate solely to the Bank, while  historical  financial and other data contained
herein for the periods  after July 1, 1996 relate to the Company.  The principal
asset of the  Holding  Company  currently  consists  of 100% of the  issued  and
outstanding shares of common stock of the Bank. The Bank was organized under the
name  Owen  County  Savings  and Loan  Association  in 1911.  In 1972,  the Bank
converted to a federally chartered savings and loan and changed its name to Owen
County Federal Savings and Loan Association,  and in 1989, the Bank converted to
a federally chartered savings bank known as Owen County Federal Savings Bank. In
1994, the Bank became an Indiana savings bank known as Owen Community Bank, s.b.
The Bank's principal  business consists of attracting  deposits from the general
public and  originating  long-term  adjustable-rate  loans secured  primarily by
first  mortgage  liens on one- to  four-family  real estate.  The Bank's deposit
accounts  are  insured  up to  applicable  limits  by  the  Savings  Association
Insurance Fund (the "SAIF") of the Federal Deposit  Insurance  Corporation  (the
"FDIC").


<PAGE>

         The Bank is the oldest  continuously  operating  financial  institution
headquartered  in  Owen  County,  Indiana.  Management  believes  the  Bank  has
developed  a solid  reputation  among its loyal  customer  base  because  of its
commitment to personal  service and its strong  support of the local  community.
The Bank offers a number of consumer and commercial  financial  services.  These
services  include:  (i)  residential  real estate  loans;  (ii)  indemnification
mortgage loans ("ID Mortgage Loans");  (iii) mobile home loans; (iv) combination
land-mobile  home loans ("Combo  Loans");  (v)  construction  loans;  (vi) share
loans; (vii)  nonresidential  real estate loans; (viii) multi-family loans; (ix)
installment loans; (x) NOW accounts;  (xi) passbook savings accounts;  and (xii)
certificates of deposit.  The Company  conducts  business out of its main office
located  in  Spencer,  Indiana.  The Bank  is,  and  historically  has  been,  a
significant  real estate  mortgage lender in Owen County,  Indiana,  originating
approximately 12.8% of the mortgages recorded in Owen County during the calendar
year ended December 31, 1996.

         The Bank  historically has  concentrated its lending  activities on the
origination  of  loans  secured  by  first  mortgage  liens  for  the  purchase,
construction  or refinancing of one- to four-family  residential  real property.
One- to four-family residential mortgage loans continue to be the major focus of
the Bank's loan origination  activities,  representing 57.2% of the Bank's total
loan  portfolio  at June 30,  1997.  The Bank also  offers  mobile  home  loans,
multi-family  mortgage loans,  nonresidential real estate loans, Combo Loans and
consumer loans. Mobile home loans and Combo Loans totaled approximately 3.9% and
12.6%  of the  Bank's  total  loan  portfolio  at June 30,  1997,  respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled  approximately  2.8% and 19.8%,  respectively,  of the Bank's total loan
portfolio at June 30, 1997. Consumer loans constituted approximately 1.8% of the
Bank's total loan portfolio at June 30, 1997.

Lending Activities

         Loan Portfolio  Data. The following table sets forth the composition of
the  Bank's  loan  portfolio  by loan  type and  security  type as of the  dates
indicated,   including  a   reconciliation   of  gross  loans  receivable  after
consideration of the allowance for loan losses, deferred loan costs and loans in
process.

<TABLE>
<CAPTION>
                                                             At June 30,
                               ----------------------------------------------------------------------
                                       1997                     1996                      1995
                               -------------------      --------------------      -------------------
                                           Percent                   Percent                  Percent
                                Amount    of Total        Amount    of Total       Amount    of Total
                                ------    --------        ------    --------       ------    --------
                                                       (Dollars in thousands)
<S>                            <C>          <C>          <C>           <C>        <C>           <C>   
TYPE OF LOAN
Mortgage loans:
   Residential...............  $19,898      57.22%       $18,240       66.12%     $17,841       69.05%
   Combo.....................    4,396      12.64          3,513       12.73        2,748       10.64
   Nonresidential............    6,896      19.83          2,544        9.22        2,933       11.35
   Multi-family..............      980       2.82            604        2.19           11        0.04
Mobile home loans............    1,361       3.91          1,241        4.50        1,615        6.25
Commercial and
   industrial loans..........      634       1.82            350        1.27          ---         .---
Consumer loans...............      612       1.76          1,094        3.97          691        2.67
                               -------     ------        -------      ------      -------      ------ 
     Gross loans receivable..  $34,777     100.00%       $27,586      100.00%     $25,839      100.00%
                               =======     ======        =======      ======      =======      ====== 

TYPE OF SECURITY
   Residential real estate...  $19,898      57.22        $18,240       66.12%     $17,841       69.05%
   Mobile home and land......    4,396      12.64          3,513       12.73        2,748       10.64
   Nonresidental real estate.    6,896      19.83          2,544        9.22        2,933       11.35
   Multi-family real estate..      980       2.82            604        2.19           11        0.04
   Mobile home...............    1,361       3.91          1,241        4.50        1,615        6.25
   Deposits..................      122       0.35            217        0.79          225        0.87
   Other security............    1,124       3.23          1,227        4.45          466        1.80
                               -------     ------        -------      ------      -------      ------ 
     Gross loans receivable..   34,777     100.00         27,586      100.00       25,839      100.00

Deduct:
Allowance for loan losses....      231       0.66            150        0.54           57        0.22
Loans in process and
   deferred loan costs.......      428       1.23            311        1.13          234        0.91
                               -------     ------        -------      ------      -------      ------ 
   Net loans receivable......  $34,118      98.11%       $27,125       98.33%     $25,548       98.87%
                               =======      =====        =======       =====      =======       ===== 
Mortgage Loans:
   Adjustable-rate...........  $22,296      69.31%       $16,415       65.92%     $17,736       75.37%
   Fixed-rate................    9,874      30.69          8,486       34.08        5,797       24.63
                               -------     ------        -------      ------      -------      ------ 
     Total...................  $32,170     100.00%       $24,901      100.00%     $23,533      100.00%
                               =======     ======        =======      ======      =======      ====== 
</TABLE>
<PAGE>

     The  following  table  sets forth  certain  information  at June 30,  1997,
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on the contractual terms to maturity.  Demand loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.  This schedule does not reflect the effects of possible  prepayments or
enforcement of due-on-sale  clauses.  Management expects  prepayments will cause
actual maturities to be shorter.

<TABLE>
<CAPTION>
                                         Balance                         Due during years ended June 30,
                                       Outstanding                                  2001     2003      2008       2013
                                       at June 30,                                   to       to       to        and
                                          1997        1998       1999      2000     2002     2007      2012     following
                                         -------      ----        ---      ----     ----    ------  -------     -------
                                                                             (In thousands)
Mortgage loans:
<S>                                      <C>        <C>           <C>     <C>       <C>     <C>    <C>          <C>    
   Residential.....................      $19,898    $    9        $15     $  45     $379    $2,798 $  5,528     $11,124
   Combo...........................        4,396       ---          6       ---       49       210    1,685       2,446
   Nonresidential..................        6,896       ---        ---       ---      247       ---    3,809       2,840
   Multi-family....................          980       ---        ---       ---      ---       ---      674         306
Mobile home loans..................        1,361         1          7        25      122       712      494         ---
Commercial and industrial loans....          634       ---        ---       ---      ---        63      571         ---
Consumer loans.....................          612       358         16        50       94        64       30         ---
                                         -------      ----        ---      ----     ----    ------  -------     -------
     Total.........................      $34,777      $368        $44      $120     $891    $3,847  $12,791     $16,716
                                         =======      ====        ===      ====     ====    ======  =======     =======
</TABLE>

         The following  table sets forth, as of June 30, 1997, the dollar amount
of all loans due after one year which have fixed  interest rates and floating or
adjustable rates.


                                           Due After June 30, 1998
                                    --------------------------------------
                                    Fixed Rates  Variable Rates    Total
                                    -----------  --------------    -----
                                                        (In thousands)

Mortgage loans:
   Residential....................   $   6,883       $13,006       $19,889
Combo  ...........................       1,451         2,945         4,396
   Nonresidential.................       1,336         5,560         6,896
   Multi-family...................         561           419           980
Mobile home loans.................       1,360           ---         1,360
Commercial and industrial loans...         387           247           634
Consumer loans....................         254           ---           254
                                       -------       -------       -------
     Total........................     $12,232       $22,177       $34,409
                                       =======       =======       =======

         One- to Four-  Family  Residential  Loans.  Residential  loans  consist
primarily of one- to four-family loans. Approximately $19.9 million, or 57.2% of
the Bank's portfolio of loans at June 30, 1997, consisted of one- to four-family
residential  mortgage loans, of which  approximately 65.3% had adjustable rates.
Pursuant to federal  regulations,  such loans must require at least  semi-annual
payments and be for a term of not more than 40 years,  and, if the interest rate
is  adjustable,  they must be  correlated  with changes in a readily  verifiable
index.


<PAGE>

         The Bank currently  offers three (3) types of  adjustable-rate  one- to
four-family  residential  mortgage  loans  ("ARMs").  The Bank offers ARMs which
adjust annually and are indexed to the Auction Average of One Year U.S. Treasury
Bills as published  monthly by the Federal Reserve Board ("FRB") (the "Average 1
Year  T-Bill").  The maximum rate  adjustment  per year and over the life of the
loan for the Bank's  one-year  ARMs are 1%-1.5% and 4%-5%,  respectively.  These
ARMs are  generally  underwritten  for  terms of up to 25  years.  The Bank also
offers  three-year and five-year ARMs which are indexed to the National  Average
Contract  Interest  Rate  for the  Purchase  of  Previously  Occupied  Homes  as
published by the Federal Housing  Finance Board ("FHFB") (the "National  Average
Contract Rate") and have maximum rate adjustments per adjustment period and over
the life of the  loan of 3% and 5%,  respectively.  The  Bank's  three-year  and
five-year ARMs are generally  underwritten for terms of up to 25 years. The Bank
will not  generally  lend  more than  $75,000  for any  residential  loan with a
Loan-to-Value Ratio of 90%.

         The  initial  interest  rate  for  each  of the  Bank's  ARM  loans  is
determined  by the  Executive  Committee of the Bank's Board of Directors  based
upon prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The
interest rates for loans with Loan-to-Value  Ratios of greater than 80% and less
than or equal to 85% are  typically  100 basis points higher than the same loans
with  Loan-to-Value  Ratios of 80% or less.  The  interest  rates for loans with
Loan-to-Value  Ratios of greater than 85% are  generally 150 basis points higher
than the corresponding loans with Loan-to-Value  Ratios of 80% or less. When the
initial  interest rate is determined  for an ARM loan, a margin is calculated by
subtracting  the  then-current  index rate (i.e.,  the Average 1 Year T-Bill for
one-year ARMs or the National Average Contract Rate for three-year and five-year
ARMs) from the initial  interest rate.  Interest rate adjustments are thereafter
determined based on fluctuations of the index rate with a specific loan's margin
remaining constant.

         Adjustable-rate  loans  decrease  the risk  associated  with changes in
interest  rates but involve  other risks,  primarily  because as interest  rates
rise, the payment by the borrowers may rise to the extent permitted by the terms
of the loan, thereby increasing the potential for default. Also, adjustable-rate
loans have features  which  restrict  changes in interest  rates on a short-term
basis and over the life of the loan.  At the same time,  the market value of the
underlying property may be adversely affected by higher interest rates.

         The Bank also currently  offers  fixed-rate loans which provide for the
payment of principal and interest over a period not to exceed 20 years.  At June
30,  1997,  34.6% of the Bank's  residential  mortgage  loans had fixed rates of
interest.

         The Bank does not currently originate residential mortgage loans if the
Loan-to-Value  Ratio exceeds 90% and does not currently require private mortgage
insurance  on  its  residential   single-family   mortgage  loans.  The  maximum
Loan-to-Value  Ratio for  non-owner  occupied  one- to  four-family  residential
mortgage loans is 80%.

         Substantially  all of the  residential  mortgage  loans  that  the Bank
originates  include  "due-on-sale"  clauses,  which  give the Bank the  right to
declare a loan  immediately  due and  payable  in the event  that,  among  other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid.

         The Bank's  residential  mortgage loans are not originated on terms and
conditions and using  documentation that conform with the standard  underwriting
criteria required to sell such loans in the secondary market. The Bank generally
retains its loans in its portfolio and does not  anticipate the need to sell its
non-conforming loans. See "-- Origination, Purchase and Sale of Loans."

         At June 30, 1997,  residential loans amounting to $558,000, or 1.60% of
total loans, were included in non-performing  assets. See "-- Non-Performing and
Problem Assets."

         The Bank offers mortgage loans for the construction of residential real
estate.  Such loans are made with  respect to  owner-occupied  residential  real
estate  and, in limited  cases,  to builders  or  developers  constructing  such
properties on a speculative investment basis (i.e., before the builder/developer
obtains a commitment from a buyer).  Substantially all of such loans are made to
owners who are to occupy the premises.


<PAGE>

         These  loans are  written as  permanent  mortgage  loans such that only
disbursed  principal  and interest are payable  during the  construction  phase,
which is typically limited to six (6) months.  Inspections are made prior to any
disbursement under a such a loan.
         Mortgage loans written for the construction of residential real estate,
like  construction  loans  generally,  involve a higher level of risk than loans
secured by existing  properties.  For example, if a project is not completed and
the borrower defaults,  the Bank may have to hire another contractor to complete
the project at a higher cost.  Also, a house may be completed,  but not salable,
resulting in the borrower defaulting and the Bank taking title to the house.

         The Bank also offers ID Mortgage  Loans.  ID Mortgage Loans are similar
to home  equity  loans in that such loans  create a line of credit  secured by a
real  estate  mortgage  against  which a borrower  may draw,  and are  typically
written as second  mortgage  loans.  The Bank  generally  writes its ID Mortgage
Loans so that  all  future  indebtedness  of a  borrower  is  secured  by the ID
Mortgage without the necessity of recording an additional  security  instrument.
ID Mortgage  loans carry  fixed  rates and are  generally  written for terms not
exceeding 20 years. The maximum Loan-to-Value Ratio for ID Mortgage Loans is 90%
if the subject  real estate is not  encumbered  by another  mortgage or the Bank
holds the first  mortgage on the subject real estate,  and 80% if another lender
holds the first  mortgage on the subject real estate.  If an appraisal  has been
completed on the subject  property  within 5 years,  the Bank does not generally
require a new appraisal.

         Combo Loans.  At June 30, 1997,  $4.4  million,  or 12.6% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 67.0% had
adjustable  rates. The Bank currently offers three (3) types of  adjustable-rate
Combo Loans. The Bank's one-year  adjustable-rate Combo Loans are indexed to the
Average One Year T-Bill and have maximum rate  adjustments per year and over the
life of the loan of 1.5% and 3%,  respectively.  The Bank also offers three-year
and five-year  adjustable-rate Combo Loans which are indexed to National Average
Contract Rate and have maximum rate  adjustments per adjustment  period and over
the life of the loan of 3% and 5%,  respectively.  The  Bank's  Combo  Loans are
generally  underwritten for terms of up to 25 years.  The maximum  Loan-to-Value
Ratio for a Combo Loan is 90%.

         The  initial  interest  rate  for  each of the  Bank's  Combo  Loans is
determined  by the  Executive  Committee of the Bank's Board of Directors  based
upon prevailing rates in the Bank's market area and the Loan-to-Value Ratio. The
Bank  generally  establishes  its base interest rates for Combo Loans at a level
100 basis points higher than the corresponding  rate for a residential ARM loan.
The interest rates for Combo Loans with a  Loan-to-Value  Ratio of more than 80%
are   typically  100  basis  points  higher  than  the  same  Combo  Loans  with
Loan-to-Value  Ratios of 80% or less. An interest rate margin is determined  for
each Combo Loan in the same manner as described above for residential ARM loans.

         The Bank also offers  fixed-rate Combo Loans with terms of 10 years, 15
years and 20 years. At June 30, 1997,  33.0% of the Bank's Combo Loans had fixed
rates of interest.

         Mobile Home Loans.  The Bank  originates  loans for the purchase of new
and used mobile homes. At June 30, 1997,  approximately $1.4 million, or 3.9% of
the Bank's  portfolio of loans,  consisted of mobile home loans.  The  Company's
mobile home loans are  fixed-rate  loans with maximum  terms of 15 years for new
mobile  homes  and 10 years for  previously  owned  mobile  homes.  The  maximum
Loan-to-Value Ratio for mobile home loans is 90%.

         The Bank has  emphasized  mobile home loans because they generally have
shorter terms to maturity and higher yields than the Bank's residential mortgage
loans.  In  addition,  the Bank is the primary  lender in its market area making
mobile home loans,  and mobile home  lending  significantly  enhances the Bank's
compliance  under the Community  Reinvestment  Act of 1977. The Bank anticipates
that it will continue to be an active originator of mobile home loans.


<PAGE>

         Mobile home lending entails greater risk than  traditional  residential
mortgage  lending.  Loans  secured by mobile homes involve more credit risk than
residential mortgage loans because of the type and nature of the collateral, the
fact that such loans generally are made to borrowers with low income levels, and
the fact that mobile homes tend to rapidly  depreciate in value.  In many cases,
any repossessed collateral for a defaulting mobile home loan will not provide an
adequate source of repayment of the outstanding loan balance because of improper
repair and  maintenance  of the underlying  security.  None of the Bank's mobile
home loans was included in non-performing assets at June 30, 1997.

         Nonresidential  Real Estate Loans. At June 30, 1997,  $6.9 million,  or
19.8% of the Bank's  total loan  portfolio,  consisted  of  nonresidential  real
estate loans, of which $1.2 million constituted loans secured by unimproved land
only. The nonresidential  real estate loans included in the Bank's portfolio are
primarily  secured  by real  estate  such as a motel,  a  warehouse,  a  medical
facility, a funeral home and several churches.  At June 30, 1997,  $507,000,  or
7.4% of the Bank's nonresidential loan portfolio,  was secured by churches.  The
Bank  currently   originates   nonresidential  real  estate  loans  as  one-year
adjustable-rate  loans indexed to the prime rate with a margin of 1% to 3% above
such index. In addition,  the maximum rate adjustment per adjustment  period and
over the life of the loan is unrestricted. The Bank underwrites these loans on a
case-by-case  basis and, in addition to its normal  underwriting  criteria,  the
Bank evaluates the borrower's ability to service the debt from the net operating
income of the property.  The largest nonresidential real estate loan on June 30,
1997 was  $895,000.  None of the Bank's  nonresidential  real  estate  loans was
included in non-performing assets at that date.

         Loans secured by  nonresidential  real estate generally are larger than
one- to  four-family  residential  loans and  involve a greater  degree of risk.
Nonresidential  real estate loans often  involve  large loan  balances to single
borrowers  or groups of related  borrowers.  Payments on these loans depend to a
large degree on results of operations  and  management of the properties and may
be affected to a greater extent by adverse  conditions in the real estate market
or the economy in general.  Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.

         Multi-Family  Loans.  Approximately  $980,000,  or 2.8%  of the  Bank's
portfolio  of loans at June 30,  1997,  consisted  of  multi-family  loans.  The
largest  multi-family  loan at June 30, 1997 had a balance of  $561,000  and was
secured by an apartment complex. All of the Bank's multi-family loans were fully
performing as of June 30, 1997.  The Bank's  multi-family  loans are written for
maximum terms of 20 years, and the Bank does not originate multi-family loans if
the Loan-to-Value Ratio exceeds 80%.

         Consumer  Loans.  The Bank's consumer  loans,  consisting  primarily of
installment and share loans, aggregated $612,000 as of June 30, 1997, or 1.8% of
the Bank's total loan portfolio. The Bank consistently originates consumer loans
to meet the needs of its customers and to assist in meeting its  asset/liability
management  goals.  All of the Bank's consumer loans are fixed-rate  loans,  and
substantially all are secured loans.

         The Bank's  installment loans are fixed-rate loans generally secured by
collateral,  including  vehicle titles,  and are made for maximum terms of up to
five years  (depending  on the  collateral).  The Bank  generally  will not make
installment loans in amounts greater than $5,000.

         The  Bank's  share  loans  are made up to 80% of the  original  account
balance and accrue at a rate of 2% over the  underlying  certificate  of deposit
rate. Interest on share loans is paid semi-annually.

         Consumer  loans may  entail  greater  credit  risk than do  residential
mortgage  loans,  particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles.  Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the  outstanding  loan balance as a result of the greater
likelihood  of  damage,  loss  or  depreciation.   In  addition,  consumer  loan
collections are dependent on the borrower's continuing financial stability,  and
thus  are  more  likely  to  be  affected  by  adverse  personal  circumstances.
Furthermore,  the  application  of various  federal  and state  laws,  including
bankruptcy and  insolvency  laws, may limit the amount which can be recovered on
such loans.  At June 30, 1997,  consumer loans amounting to $4,000 were included
in non-performing  assets. See  "--Non-Performing and Problem Assets." There can
be no assurances,  however, that additional  delinquencies will not occur in the
future.


<PAGE>

         Origination,  Purchase and Sale of Loans. The Bank currently originates
its mortgage loans pursuant to its own  underwriting  standards which are not in
conformity  with  the  standard  criteria  of the  Federal  Home  Loan  Mortgage
Corporation  ("FHLMC") or Federal National Mortgage Association  ("FNMA"). If it
desired to sell its mortgage  loans,  the Bank might  therefore  experience some
difficulty  selling such loans quickly in the secondary market.  The Bank has no
intention,  however, of attempting to sell such loans. The Bank's ARMs vary from
secondary market criteria because, among other things, the Bank does not require
current  property  surveys in all cases,  does not require  escrow  accounts for
taxes and insurance  and does not permit the  conversion of those loans to fixed
rate loans in the first three years of their term.

         The Bank  confines its loan  origination  activities  primarily to Owen
County.  At June 30, 1997, no loans were secured by property  located outside of
Indiana.  The Bank's loan  originations  are generated  from referrals from real
estate dealers and existing customers, and newspaper and periodical advertising.
All loan applications are processed and underwritten at the Bank's main office.

         The Bank's loan approval  process is intended to assess the  borrower's
ability to repay the loan,  the  viability  of the loan and the  adequacy of the
value of the  property  that will  secure  the loan.  To assess  the  borrower's
ability  to repay,  the Bank  studies  the  employment  and credit  history  and
information  on  the  historical  and  projected  income  and  expenses  of  its
mortgagors.  Mortgage loans up to $150,000 and mobile home loans may be approved
by the Executive  Committee.  All mortgage  loans for more than $150,000 must be
approved in advance by the Board of Directors.  Consumer  loans up to $5,000 may
be approved by the Bank's Senior  Installment  Loan Officer.  Consumer loans for
more than $5,000 must be approved by the Executive Committee.

         The Bank  generally  requires  appraisals on all property  securing its
loans and  requires  title  insurance  and a valid  lien on its  mortgaged  real
estate.  Appraisals for  residential  real property valued at less than $250,000
are performed by an in-house  appraiser.  Appraisals for residential  properties
valued in excess of $250,000 and appraisals for all  nonresidential  real estate
are performed by an appraiser who is a state-licensed residential appraiser. The
Bank requires fire and extended coverage  insurance in amounts at least equal to
the principal amount of the loan and requires  vandalism  coverage on all mobile
home loans.  It also requires flood  insurance to protect the property  securing
its  interest  if the  property is in a flood  plane.  The Bank does not require
escrow  accounts to be established by its borrowers for the payment of insurance
premiums or taxes and does not require private mortgage insurance for its loans.

         The Bank's  underwriting  standards for consumer  loans are intended to
protect against some of the risks inherent in making  consumer  loans.  Borrower
character, paying habits and financial strengths are important considerations.

         The Bank historically has sold  participations in its mortgage loans on
a  limited  number  of  occasions  to ensure  compliance  with the  loans-to-one
borrower restrictions.  See "Regulation -- Loans-to-One Borrower." The Bank also
occasionally   purchases   participations  in  nonresidential  real  estate  and
multi-family loans from other financial institutions. However, at June 30, 1997,
the Bank did not hold any participation loans.


<PAGE>

         The  following  table shows loan  origination,  purchase and  repayment
activity for the Bank during the periods indicated.

<TABLE>
<CAPTION>
                                                         For the Year Ended
                                                                June 30,
                                              ------------------------------------------
                                                1997             1996              1995
                                              -------           -------          -------
                                                            (In thousands)
<S>                                           <C>               <C>              <C>    
Gross loans receivable
   at beginning of period..................   $27,586           $25,839          $21,540
                                              -------           -------          -------
Originations:
   Mortgage loans:
     Residential...........................     7,967             7,018            7,099
     Other.................................     4,380               664               48
                                              -------           -------          -------
       Total mortgage loans................    12,347             7,682            7,147
                                              -------           -------          -------
   Mobile home loans.......................        78               146              286
   Consumer loans:
     Installment...........................       915               805              578
     Share.................................       131               157              132
                                              -------           -------          -------
       Total consumer loans................     1,124               962              710
                                              -------           -------          -------
            Total originations.............    13,471             8,790            8,143
Purchases (sales) of participation loans...       ---              (250)              62
Repayments and other deductions............     6,280             6,793            3,906
                                              -------           -------          -------
   Gross loans receivable at end of period.   $34,777           $27,586          $25,839
                                              =======           =======          =======
</TABLE>

         Origination and Other Fees. The Bank realizes  income from  origination
fees,  late  charges,  checking  account  service  charges,  and fees for  other
miscellaneous  services.  The Bank does not  currently  charge any points on its
loans.  However,  the Bank  currently  charges  $300 plus  closing  costs on its
mortgage loans.  Late charges are generally  assessed if payment is not received
within a specified  number of days after it is due. The grace period  depends on
the individual loan documents.

         The Bank does not maintain any automated  teller machines  ("ATMs") but
offers ATM cards to its customers.  The Bank's ATM cards permit customers to use
ATMs  operating  in the MAC(R)  regional  network and the  CIRRUS(R)  nationwide
network. The Company does not expect to derive any income from the ATM cards.

         Mortgage-Backed  Securities. At June 30, 1997, the Bank had $788,000 of
mortgage-backed  securities  outstanding,   all  of  which  were  classified  as
available for sale. These fixed-rate  mortgage-backed  securities may be used as
collateral for borrowings  and,  through  repayments,  as a source of liquidity.
Mortgage-backed  securities  generally  offer yields above those  available  for
investments of comparable credit quality and duration.

         The following table sets forth the amortized cost and fair value of the
Bank's mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>
                                                                At June 30,
                                        1997                      1996                     1995
                               -------------------       --------------------      --------------------
                               Amortized     Fair        Amortized      Fair       Amortized      Fair
                                  Cost       Value          Cost        Value         Cost        Value
                                  ----       -----          ----        -----         ----        -----
                                                              (In thousands)
<S>                              <C>         <C>           <C>         <C>          <C>          <C>   
Mortgage-backed securities:
   Held to maturity........     $ ---       $ ---         $   ---     $   ---       $1,477       $1,462
   Available for sale......       788         793           3,151       3,119          ---          ---
                                 ----        ----          ------      ------       ------       ------
     Total mortgage-backed
     securities............      $788        $793          $3,151      $3,119       $1,477       $1,462
                                 ====        ====          ======      ======       ======       ======
</TABLE>


<PAGE>

     The  following  table sets forth the amount of  mortgage-backed  securities
which  mature  during each of the periods  indicated  and the  weighted  average
yields for each range of maturities at June 30, 1997.

<TABLE>
<CAPTION>
                                                Amount at June 30, 1997, which matures in
                              -------------------------------------------------------------------------
                                Less than 1 year        Two through five years     Over five years
                              --------------------      ----------------------   ----------------------
                                          Weighted                   Weighted                  Weighted
                              Amortized    Average      Amortized     Average     Amortized     Average
                                 Cost       Yield          Cost        Yield         Value       Yield
                                                             (In thousands)
<S>                              <C>        <C>             <C>                      <C>         <C> 
   Mortgage-backed securities
     available for sale....      $41        8.5%            $---         .---%       $747        7.5%
</TABLE>

         The   following   table   sets   forth  the   changes   in  the  Bank's
mortgage-backed securities portfolio for the years ended June 30, 1997, 1996 and
1995.

                                            For the Year Ended, June 30,
                                      -----------------------------------------
                                       1997             1996              1995
                                      ------            ------           ------
                                                   (In thousands)
Beginning balance.................    $3,119            $1,477           $1,636
Purchases.........................       899             1,918              ---
Sales  ...........................    (2,904)              ---              ---
Monthly repayments................      (366)             (248)            (161)
Premium and discount
   amortization, net..............        10               ---                2
Unrealized loss on securities
   available for sale.............         5               (28)             ---
                                      ------            ------           ------
Ending balance....................    $  793            $3,119           $1,477
                                      ======            ======           ======

Non-Performing and Problem Assets

         Mortgage  loans are  reviewed  by the Bank on a  regular  basis and are
placed on a non-accrual  status when the loans become  contractually past due 90
days or more.  It is the  policy of the Bank  that all  earned  but  uncollected
interest on all loans be reviewed  monthly to determine  if any portion  thereof
should be classified as  uncollectible  for any loan past due less than 90 days.
Delinquency  notices are sent three times per month with respect to all mortgage
loans for which payments have not been  received.  Contact by phone or in person
is made, if feasible,  with respect to all such loans. When loans are 40 days in
default,  an additional  delinquency notice is sent and personal contact is made
with the borrower to establish an acceptable repayment schedule.  When loans are
60 days in  default,  contact is again made with the  borrower to  establish  an
acceptable  repayment  schedule.  The Bank also provides  free  in-house  credit
counseling to all  borrowers.  Management is authorized to commence  foreclosure
proceedings  for any loan upon making a  determination  that it is prudent to do
so. All loans for which  foreclosure  proceedings have been commenced are placed
on non-accrual status.

         Non-performing  assets.  At June 30,  1997,  $562,000,  or 1.32% of the
Company's total assets, were non-performing loans (loans delinquent more than 90
days and non-accruing loans) compared to $359,000,  or 0.91%, of total assets at
June 30, 1996. At June 30, 1997,  residential loans and consumer loans accounted
for  99%  and  1%,  respectively,   of  non-performing   loans.  There  were  no
non-accruing  investments  at June 30, 1997. As of June 30, 1997,  the Bank held
$177,000 of Real Estate Owned ("REO")  properties and $10,000 other  repossessed
properties.
<PAGE>

         The table  below sets forth the amounts  and  categories  of the Bank's
non-performing assets.

                                                     At June 30,
                                           1997         1996         1995
                                                   (In thousands)

Non-accruing loans (1)................... $ 562        $  359       $  100
Total non-performing assets..............   749           408          100
Non-performing loans to total loans......   1.65%        1.32%        0.39%
Non-performing assets to total assets....   1.76%        1.03%        0.32
-------------

(1)  The Bank  generally  places loans on a  non-accruing  status when the loans
     become  contractually past due 90 days or more. At June 30, 1997,  $558,000
     of  non-accruing  loans were  residential  loans and $4,000  were  consumer
     loans.  Additional interest income that would have been recorded had income
     on  nonaccruing  loans been  considered  collectible  and  accounted for in
     accordance  with their  original  terms was $21,000 for the year ended June
     30, 1997.

         The following table reflects the amount of loans in a delinquent status
as of the dates indicated:

<TABLE>
<CAPTION>

                                                                      June 30,
                                ----------------------------------------------------------------------------------
                                         1997                           1996                       1995
                                                   Percent                       Percent                   Percent
                                                  of total                      of total                  of total
                                 Number  Amount     loans      Number   Amount    loans   Number  Amount    loans
                                 ------  ------     -----      ------   ------    -----   ------  ------    -----
                                                                (Dollars in thousands)
<S>                                <C>             <C>            <C>            <C>        <C>     <C>    <C>  
Loans delinquent
   for (1):
     30-89 days..........           37 $   905      2.65%          45 $    993    3.64%      33      $730   2.85%
     90 days and over....           18     562      1.65           14      359    1.32        6       100   0.39
                                    --  ------      ----           --  -------    ----       --      ----   ---- 
       Total delinquent
          loans..........           55  $1,467(2)   4.30%          59  $ 1,352    4.96%      39      $830   3.24%
                                    ==  ======      ====           ==  =======    ====       ==      ====   ==== 
</TABLE>

(1)      The number of days a loan is  delinquent  is measured  from the day the
         payment was due under the terms of the loan agreement.

(2)      Of such amount,  $1,381,000  consists of residential  real estate loans
         and $86,000 consists of nonresidential real estate and consumer loans.

         Classified assets. The Bank's Asset Classification  Policy provides for
the  classification of loans and other assets such as debt and equity securities
considered  to be of  lesser  quality  as  "substandard,"  "doubtful"  or "loss"
assets. An asset is considered  "substandard" if it is inadequately protected by
the  current net worth and paying  capacity of the obligor or of the  collateral
pledged,  if  any.  "Substandard"  assets  include  those  characterized  by the
"distinct  possibility"  that the  institution  will sustain  "some loss" if the
deficiencies are not corrected.  Assets classified as "doubtful" have all of the
weaknesses   inherent  in  those  classified   "substandard,"   with  the  added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions,  and values "highly
questionable and improbable."  Assets  classified as "loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
which do not currently  expose the insured  institution  to  sufficient  risk to
warrant  classification in one of the  aforementioned  categories but do possess
weaknesses are required to be designated "special mention" by management.


<PAGE>

         An insured  institution is required to establish general allowances for
loan  losses in an amount  deemed  prudent by  management  for loans  classified
substandard or doubtful,  as well as for other problem loans. General allowances
represent loss allowances  which have been established to recognize the inherent
risk associated with lending activities,  but which, unlike specific allowances,
have  not  been  allocated  to  particular  problem  assets.   When  an  insured
institution  classifies  problem  assets as  "loss,"  it is  required  either to
establish  a specific  allowance  for losses  equal to 100% of the amount of the
asset so classified or to charge off such amount.

         At June 30, 1997, the aggregate amount of the Bank's  classified assets
and of the Bank's general and specific loss allowances were as follows:

                                           At June 30, 1997
                                           ----------------
                                            (In thousands)

Substandard loans.................              $590
Doubtful loans....................               ---
Loss loans........................               ---
Special mention loans.............               371
                                               -----
   Total classified loans.........             $ 961
                                               =====
General loss allowances...........             $ 231
Specific loss allowances..........               ---
                                               -----
   Total allowances...............             $ 231
                                               =====

         The Company  regularly  reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.  Not
all of the Company's classifed assets constitute non-performing assets.

Allowance for Loan Losses

         The allowance  for loan losses is maintained  through the provision for
loan losses,  which is charged to  earnings.  The  provision  for loan losses is
determined in  conjunction  with  management's  review and evaluation of current
economic conditions (including those of the Bank's lending area), changes in the
character and size of the loan portfolio,  loan delinquencies (current status as
well as past and  anticipated  trends) and adequacy of collateral  securing loan
delinquencies,  historical and estimated net  charge-offs,  and other  pertinent
information  derived  from a  review  of the  loan  portfolio.  In  management's
opinion,  the Bank's allowance for loan losses is adequate to absorb anticipated
future  losses from loans at June 30, 1997.  However,  there can be no assurance
that  regulators,  when reviewing the Bank's loan portfolio in the future,  will
not require  increases  in its  allowances  for loan  losses or that  changes in
economic conditions will not adversely affect the Bank's loan portfolio.


<PAGE>

         Summary of Loan Loss  Experience.  The following table analyzes changes
in the allowance for loan losses during the past five (5) one-year periods ended
June 30, 1997.

<TABLE>
<CAPTION>


                                                                           Year Ended June 30,
                                                   1997            1996           1995            1994           1993
                                                   ----            ----           ----            ----           ----
                                                                             (Dollars in thousands)
<S>                                                <C>          <C>              <C>              <C>             <C> 
Balance of allowance at beginning
   of period................................       $150         $   57           $  26            $ 12            $ 13
                                                   ----           ----            ----            ----            ----
Less charge offs:
Consumer loans..............................         (4)            (1)             (6)             (1)             (8)
Add recoveries:
Consumer loans..............................        ---            ---               1               1             ---
                                                   ----           ----            ----            ----            ----
Net (charge-offs) recoveries................         (4)            (1)             (5)            ---              (8)
Provisions for losses on loans..............         85             94              36              14               7
                                                   ----           ----            ----            ----            ----
Balance of allowance at end of period.......       $231           $150            $ 57            $ 26            $ 12
                                                   ====           ====            ====            ====            ====
Net charge-offs to total average
   loans receivable for period..............       0.01%           ---%            0.02%           ---%           0.04%
Allowance at end of period to
   net loans receivable at end
   of period (1)............................       0.67            0.55%           0.22%           0.12%           0.06%
Allowance to total non-performing
   loans at end of period...................      41.10           41.78%          57.00%         108.33%          .---%%
</TABLE>

(1)  Total loans less net loans in process and deferred loan costs.

   Allocation of Allowance  for Loan Losses.  The  following  table  presents an
analysis of the allocation of the Bank's  allowance for loan losses at the dates
indicated.

<TABLE>
<CAPTION>
                                                                        At June 30,
                                            1997                            1996                         1995
                                                  Percent                        Percent                        Percent
                                                 of loans                       of loans                       of loans
                                                  in each                        in each                        in each
                                                 category                       category                       category
                                                 of total                       of total                       of total
                                     Amount        loans            Amount        loans           Amount         loans
                                     ------        -----            ------        -----           ------         -----
                                                                  (Dollars in thousands)
<S>                                   <C>            <C>            <C>             <C>             <C>            <C>   
Balance at end of period
   applicable to:
Residential.........................  $  25          57.22%         $  18           66.12%          $---           69.05%
Combo...............................     24          12.64             20           12.73              7           10.64
Nonresidential......................     23          19.83             20           10.91              7           11.35
Multi-family........................    ---           2.82            ---            0.50            ---            0.04
Mobile home loans...................     25           3.91             25            4.50             12            6.25
Commercial and industrial
   loans............................      5           1.82            ---            1.27            ---             ---
Consumer loans......................     14           1.76             27            3.97             17            2.67
Unallocated.........................    115            ---             40             ---             14             ---
                                       ----         ------           ----          ------            ---          ------ 
     Total..........................   $231         100.00%          $150          100.00%           $57          100.00%
                                       ====         ======           ====          ======            ===          ====== 
</TABLE>


<PAGE>

Investments and FHLB Stock

         The   Company's   investment   portfolio   (excluding   mortgage-backed
securities) consists of U.S. government agency and treasury  securities,  equity
securities  and  Federal  Home  Loan  Bank  ("FHLB")  stock.  At June 30,  1997,
approximately $1.3 million, or 2.9% of the Company's total assets,  consisted of
such investments.  All of the Company's securities,  except for FHLB stock, were
classified as available for sale at June 30, 1997.

         The following table sets forth the amortized cost and fair value of the
Company's investments at the dates indicated.

<TABLE>
<CAPTION>
                                                                           At June 30,
                                                         1997                  1996                  1995
                                                Amortized     Fair    Amortized     Fair    Amortized     Fair
                                                   Cost       Value      Cost       Value      Cost       Value
                                                   ----       -----      ----       -----      ----       -----
                                                                               (In thousands)
<S>                                             <C>           <C>      <C>        <C>       <C>        <C>    
Securities available for sale (1):
   Federal agencies.........................    $   925       $931     $1,100     $1,105    $   934    $   934
   State and municipal......................        ---        ---        678        677        ---        ---
   Marketable equity securities.............        344        378        ---        ---        ---        ---
                                                 ------     ------     ------     ------     ------     ------
     Total securities
       available for sale...................      1,269      1,309      1,778      1,782        934        934
                                                 ------     ------     ------     ------     ------     ------
Securities held to maturity:
   Federal agencies.........................        ---        ---        ---        ---      1,477      1,462
   State and municipal......................        ---        ---        ---        ---        350        346
                                                 ------     ------     ------     ------     ------     ------
     Total securities
       held to maturity.....................        ---        ---        ---        ---      1,827      1,808
                                                 ------     ------     ------     ------     ------     ------
FHLB stock (2)..............................        500        500        360        360        250        250
                                                 ------     ------     ------     ------     ------     ------
     Total investments......................     $1,769     $1,809     $2,138     $2,142     $3,011     $2,992
                                                 ======     ======     ======     ======     ======     ======
</TABLE>
-------------
(1)      In  accordance  with SFAS No. 115,  securities  available  for sale are
         recorded at fair value in the financial statements.

(2)      Fair value approximates carrying value.

         The following  table sets forth  investment  securities  excluding FHLB
stock and marketable  equity  securities which mature during each of the periods
indicated and the weighted  average  yields for each range of maturities at June
30, 1997.

<TABLE>
<CAPTION>
                                                         Amount at June 30, 1997, which matures in
                                             ----------------------------------------------------------------
                                                      One Year                                One to
                                                       or Less                              Five Years
                                             --------------------------            --------------------------
                                                              Weighted                               Weighted
                                             Amortized         Average             Amortized          Average
                                               Cost             Yield                 Cost             Yield
                                               ----             -----                 ----             -----
                                                                     (Dollars in thousands)
<S>                                          <C>               <C>                    <C>              <C>  
Securities available for sale : 
   Federal agencies.....................     $   ---            ---%                  $100             7.84%
   Treasuries...........................         475           6.00                    350             6.25
                                             -------                                  ----
     Total investments..................     $   475           6.00%                  $450             6.60%
                                             =======                                  ====              
</TABLE>


<PAGE>

Sources of Funds

         General.  Deposits have traditionally been the Bank's primary source of
funds for use in lending and investment activities. In addition to deposits, the
Bank derives funds from  scheduled  loan payments,  loan  prepayments,  retained
earnings and income on earning assets.  While scheduled loan payments and income
on earning assets are relatively  stable sources of funds,  deposit  inflows and
outflows can vary widely and are influenced by prevailing interest rates, market
conditions and levels of  competition.  Borrowings from the FHLB of Indianapolis
may be used in the  short-term  to  compensate  for  reductions  in  deposits or
deposit  inflows at less than  projected  levels.  The Bank rarely  borrows on a
longer-term basis, for example,  to support expanded  activities or to assist in
its asset/liability management.

         Deposits. Deposits are attracted,  principally from within Owen County,
through  the  offering of a broad  selection  of deposit  instruments  including
fixed-rate  certificates of deposit,  NOW and other  transaction  accounts,  and
savings  accounts.  The Bank does not actively solicit or advertise for deposits
outside of Owen County. Substantially all of the Bank's depositors are residents
of that county. Deposit account terms vary, with the principal differences being
the minimum balance required, the amount of time the funds remain on deposit and
the interest rate. The Bank does not pay a fee for any deposits it receives.

         Interest  rates  paid,  maturity  terms,  service  fees and  withdrawal
penalties are  established  by the Bank on a periodic  basis.  Determination  of
rates and terms are predicated on funds acquisition and liquidity  requirements,
rates paid by competitors,  growth goals, and applicable  regulations.  The Bank
relies,  in part,  on customer  service  and  long-standing  relationships  with
customers  to attract  and  retain its  deposits,  but also  closely  prices its
deposits in relation to rates offered by its competitors.

         The flow of deposits is influenced  significantly  by general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.  The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with  flexibility to changes
in  consumer  demand.  The  Bank  has  become  more  susceptible  to  short-term
fluctuations  in deposit  flows as  customers  have  become more  interest  rate
conscious.  The Bank  manages  the pricing of its  deposits in keeping  with its
asset/liability   management  and   profitability   objectives.   Based  on  its
experience,  the Bank believes that its passbook,  NOW and  non-interest-bearing
checking  accounts  are  relatively  stable  sources of deposits.  However,  the
ability of the Bank to attract and  maintain  certificates  of deposit,  and the
rates paid on these  deposits,  have been and will continue to be  significantly
affected by market conditions.

     An analysis of the Bank  deposit  accounts by type,  maturity,  and rate at
June 30, 1997, is as follows:

<TABLE>
<CAPTION>
                                            Minimum         Balance at                          Weighted
                                            Opening          June 30,           % of             Average
Type of Account                             Balance            1997           Deposits            Rate
---------------                             -------            ----           --------            ----
                                                               (Dollars in thousands)
<S>                                         <C>             <C>                <C>                <C>  
Withdrawable:
   Savings accounts......................   $    10         $  2,942           11.25%             3.00%
NOW and other transaction accounts.......        50            3,682           14.08              3.13
                                                             -------          ------  
     Total withdrawable..................                      6,624           25.33              3.07
                                                             -------          ------  
Certificates (original terms):
   91 days...............................     1,000              156            0.60              4.11
   6 months..............................     1,000              664            2.54              4.82
   12 months.............................     1,000            6,471           24.74              5.32
   24 months.............................     1,000            3,256           12.43              6.26
   30 months.............................     1,000            3,030           11.58              5.87
   36 months.............................     1,000              506            1.93              6.21
   48 months.............................     1,000              815            3.12              5.56
   60 months.............................     1,000            4,614           17.64              5.96
IRAs (orginal terms):
   12 months.............................     1,000                7            0.03              5.25
   36 months.............................     1,000                7            0.03              6.00
   60 months.............................     1,000                7            0.03              6.00
                                                             -------          ------  
     Total certificates and IRAs.........                     19,533           74.67              5.72
                                                             -------          ------  
     Total deposits......................                    $26,157          100.00%             5.05%
                                                             =======          ======              
</TABLE>

<PAGE>

         The following table sets forth by various  interest rate categories the
composition of time deposits of the Bank's at the dates indicated:

                                    Year Ended June 30,
                       --------------------------------------------
                          1997             1996             1995
                        -------           -------          -------
                                      (In thousands)

4.00% and under....  $       55         $     276         $  1,169
4.01 - 6.00 %......      14,174            13,402           10,053
6.01 - 8.00%.......       5,304             4,968            5,507
                        -------           -------          -------
Total  ............     $19,533           $18,646          $16,729
                        =======           =======          =======

         The following table  represents,  by various  interest rate categories,
the amounts of time deposits  maturing  during each of the three years following
June 30, 1997, and the total amount maturing  thereafter.  Matured  certificates
which have not been renewed as of June 30, 1997,  have been allocated based upon
certain rollover assumptions:

<TABLE>
<CAPTION>
                                               Amounts At
                                       June 30, 1997, Maturing in
                      One Year             Two             Three         Greater Than
                       or Less            Years            Years          Three Years
                       -------            -----            -----          -----------
                                             (In thousands)
<S>                    <C>              <C>               <C>               <C>    
4.00% and under..      $    47          $   ---           $   ---           $   ---
4.01 - 6.00 %....        9,485            2,797             1,244               656
6.01-8.00%.......        1,636              832             2,268               568
                       -------           ------            ------            ------
Total  ..........      $11,168           $3,629            $3,512            $1,224
                       =======           ======            ======            ======
</TABLE>

         The following table indicates the amount of the Bank's  certificates of
deposit of  $100,000  or more by time  remaining  until  maturity as of June 30,
1997.

          Maturity                                            (In thousands)
          --------                                            --------------
Three months or less.......................................      $   499
Greater than three months
     through six months....................................          100
Greater than six months
     through twelve months.................................          407
Over twelve months.........................................        2,473
                                                                  ------
     Total.................................................       $3,479
                                                                  ======

<PAGE>

         The following table sets forth the dollar amount of savings deposits in
the  various  types  of  deposits  programs  offered  by the  Bank at the  dates
indicated,  and the amount of increase or decrease in such  deposits as compared
to the previous period.

<TABLE>
<CAPTION>
                                                                          Deposit Activity
                                                              Increase                       Increase
                                                             (Decrease)                     (Decrease)
                                        Balance at              from   Balance at              from   Balance at
                                         June 30,     % of    June 30,  June 30,     % of    June 30,  June 30,    % of
                                           1997     Deposits    1996      1996     Deposits    1995      1995    Deposits
                                           ----     --------    ----      ----     --------    ----      ----    --------
                                                                           (Dollars in thousands)
<S>                                         <C>      <C>      <C>     <C>            <C>      <C>     <C>           <C>   
Withdrawable:
   Savings accounts.....................    $2,942   11.25%   $(4,742)$   7,684      26.75%   $3,969  $  3,715      16.51%
   NOW accounts.........................     3,682   14.08      1,286     2,396       8.34       340    2,056        9.14
                                           -------  ------     ------   -------     ------    ------  -------      ------ 
     Total withdrawable.................     6,624   25.33     (3,456)   10,080      35.09     4,309    5,771       25.65
Certificates (original terms):
   91 days..............................       156    0.60         24       132       0.46        58       74         .33
   6 months.............................       664    2.54        (94)      758       2.64      (187)     945        4.20
   12 months............................     6,471   24.74     (1,553)    8,023      27.93       939    7,084       31.48
   24 months............................     3,256   12.43        694     2,562       8.92     1,890      672        2.99
   30 months............................     3,030   11.58      1,536     1,494       5.20      (332)   1,826        8.12
   36 months............................       506    1.93        169       337       1.17       (48)     385        1.71
   48 months............................       815    3.12       (240)    1,055       3.67      (543)   1,598        7.10
   60 months............................     4,614   17.64        329     4,285      14.92       140    4,145       18.42
IRAs (original terms):
   12 months............................         7    0.03         --        --        .--       ---      ---         .--
   36 months............................         7    0.03         --        --        .--       ---      ---         .--
   60 months............................         7    0.03         --        --        .--       ---      ---         .--
                                           -------  ------     ------   -------     ------    ------  -------      ------ 
     Total certificates and IRAs........    19,533   74.67        865    18,646      64.91     1,917   16,729       74.35
                                           -------  ------     ------   -------     ------    ------  -------      ------ 
       Total deposits...................   $26,157  100.00%    (2,591)  $28,726     100.00%   $6,226  $22,500      100.00%
                                           =======  ======     ======   =======     ======    ======  =======      ====== 
</TABLE>

         During fiscal year 1997, the Bank began offering to its customers a new
deposit  product  called the "Money  Management  Account." The Money  Management
Account is similar to a money market checking account, but customers do not have
check writing  privileges.  Funds may be transferred  from  non-interest-bearing
accounts  or  interest-bearing  accounts  paying  lower  rates  into  the  Money
Management  Account.  Funds may also be  transferred  from the Money  Management
Account  into  other  accounts  at the Bank  when such  funds are  needed by the
customer. The number of fund transfers per month is limited by the Bank, and the
Money Management Account has a minimum required balance of $5,000. The Bank also
began offering  individual  retirement  account ("IRA")  certificates of deposit
during fiscal year 1997.

         Borrowings.  The Bank focuses on generating loans by utilizing the best
source of funding from deposits,  investments  or borrowings.  At June 30, 1997,
the Bank had $9.0  million in  borrowings  from the FHLB of  Indianapolis  which
mature on various  dates  primarily  during the years 1997 through 2005 and have
interest  rates ranging from 5.55% to 6.86%.  The Bank does not  anticipate  any
difficulty in obtaining  advances  appropriate to meet its  requirements  in the
future.  The Bank had $22.7 million in eligible  assets  available as collateral
for advances  from the FHLB of  Indianapolis  as of June 30, 1997.  Based on the
Bank's blanket  collateral  agreements,  advances from the FHLB of  Indianapolis
must be  collateralized  by 160%  of  eligible  assets.  Therefore,  the  Bank's
eligible collateral would have supported approximately $14.2 million in advances
from the FHLB of Indianapolis as of June 30, 1997. However,  the Bank's Board of
Directors has by resolution limited the amount of authorized borrowings to $13.0
million at June 30, 1997.


<PAGE>

         The following table presents certain information relating to the Bank's
FHLB borrowings for the years ended June 30, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                        At or for the Year
                                                          Ended June 30,
                                           -------------------------------------------
                                              1997             1996              1995
                                              ----             ----              ----
                                                      (Dollars in thousands)

<S>                                           <C>                <C>              <C> 
FHLB Advances:
   Average balance outstanding............ $  7,725            $5,043           $3,321
   Maximum amount outstanding at any
     month-end during the period..........   10,000             7,200            5,000
   Weighted average interest rate
     during the period....................    6.30%              6.21%            6.03%
   Weighted average interest rate
     at end of period.....................    6.29%              6.08             6.36
</TABLE>

Service Corporation Subsidiary

         BSF, Inc.,  the Bank's  service  corporation  subsidiary  ("BSF"),  was
organized in 1989 and has historically  engaged in the purchasing and developing
of large tracts of real estate. After land was acquired, BSF subdivided the real
estate into lots, made  improvements  such as streets and sold individual  lots,
usually on contract.  Each subdivision has separate restrictive  covenants,  but
most permit mobile or modular homes. Each of BSF's  subdivisions is described in
detail below.

         On  April  6,  1989,  BSF  purchased  the  128  acre  10  O'Clock  Line
subdivision  in Owen County for  $110,000.  The purchase was funded by a capital
infusion  from the  Bank.  At that  time,  the  appraised  value of the land was
$180,000.  The property was divided into 19 separate tracts and sold on contract
to buyers.  The actual selling price per acre of tracts sold was slightly higher
than the original  predicted selling price. The total sales price for all tracts
of land was over $300,000.

         A second piece of property in Owen County totalling  approximately  160
acres, the Autumn Hill Subdivision, was purchased on contract by BSF for $96,000
on September 21, 1990. The appraised value at the time of purchase was $110,000.
The area was divided into 23 separate tracts of land, all of which had been sold
as of June 30, 1997, for an aggregate price of $268,850.

         On May 21, 1991,  BFS purchased a 215 acre tract of heavily wooded land
in Greene  County,  Indiana,  now known as the  Greene  Woods  subdivision,  for
$92,500. BSF divided this tract into sixteen parcels, all of which had been sold
on contract at June 30, 1996,  and built one large lake and three small lakes in
this subdivision.  As of June 30, 1997, eleven of the Greene Woods contracts had
been paid in full, and title to the  corresponding  parcels had been transferred
to the  purchasers.  The  aggregate  sales price for the sixteen  parcels in the
Greene Woods subdivision was $257,605.

         On May 8, 1992, BFS purchased  approximately 60 acres of land now known
as the Watkins Farm  subdivision  for $32,000.  This property is also located in
Greene  County,  Indiana.  Prior to dividing this parcel into the three existing
tracts of land, BSF cleared and sold approximately $26,000 of timber. As of June
30,  1997,  BSF had sold two of these  tracts  for cash and the  other  tract on
contract. The aggregate sales price for these three parcels totalled $86,157.

         On May 21, 1993, BSF purchased  approximately  16 acres of land in Owen
County for  $58,500.  BSF divided  this  property,  now known as the County Line
East,  subdivision,  into sixteen  separate  parcels and  installed  underground
power,  telephone,  cable  television  and water lines.  As of June 30, 1997, 15
parcels had been sold for an aggregate sales price of $366,757.

         On November 29, 1993, BSF purchased  approximately thirty acres of land
located  in Owen  County  for  $20,359.  This  land,  now known as the Coon Path
subdivision,  was  divided  into ten  separate  tracts  of land,  three of which
remained  unsold  at June 30,  1997.  The  aggregate  sales  price for the seven
parcels which had been sold at June 30, 1997 totaled $73,850.  At June 30, 1996,
BSF's total investment in the Coon Path subdivision was approximately $27,432.


<PAGE>

         On February 6, 1992,  BSF purchased  four  contracts  with an aggregate
balance of $123,875 from an Owen County couple for a discounted principal amount
of $87,500.  At June 30, 1997, only one of such contracts remained  outstanding.
BSF also held a second  contract at June 30, 1997,  which was  purchased  from a
probate estate in 1992.

         BSF,  from time to time,  keeps a number of its tracts for mobile  home
repossession.  BSF  purchases  repossessed  mobile  homes  from the Bank at book
value. The mobile homes are then placed on the vacant tracts of land and sold by
BSF, thereby protecting the Bank from related losses. Currently, the Bank has no
mobile homes on lots waiting for sale.

         BSF pays the Bank rent of $500 per month for the use of its  facilities
and  management  and staff  support.  The  operations  of BSF are managed by the
Bank's and the Holding Company's Chairman,  Frank R. Stewart.  All of the Bank's
directors  serve as  directors  of BSF,  and  BSF's  executive  officers  are as
follows:

                 Frank R. Stewart                President
                 Robert W. Raper                 Vice President
                 Charles W. Chambers             Secretary and Treasurer

         In  connection  with the Bank's  conversion to an Indiana stock savings
bank,  the  FDIC  required  the  Bank  to  (i)  immediately   cease  BSF's  land
acquisitions,  (ii) divest BSF's non-conforming real estate holdings within five
years (or by November 16, 2000),  provided,  however,  the Bank is not precluded
from  requesting  an extension of the  divestiture  period,  and (iii)  maintain
capital  at  levels  sufficient  to  classify  the  Bank  as a  well-capitalized
institution.  The FDIC's  authorization  for the Bank and BSF to  undertake  the
required  divestiture  of  BSF's  non-conforming  real  estate  holdings  over a
five-year  period is  conditioned  on, among other things,  BSF continuing to be
satisfactorily  capitalized  and operated  separately for the Bank, and the Bank
and BSF  complying  with  Sections  23A and 23B of the  Federal  Reserve  Act in
connection with future  transactions  between the Bank and BSF. BSF is currently
completing the divestiture of its real estate  holdings.  It is anticipated that
this divestiture  will be accomplished  through the sale of the parcels to BSF's
contract  purchasers who will obtain  mortgage loans from the Bank to facilitate
their  purchase of the  parcels.  As parcels  are  purchased  by BSF's  contract
purchasers,  BSF and such  purchasers  will  terminate  the  corresponding  land
contracts.  The Bank currently  anticipates that all non-conforming  real estate
will be sold prior to November 16, 2000 as required by the FDIC.

         At June 30, 1997, the Bank's aggregate  investment in BSF was $417,000.
The  consolidated  statements of income of the Bank and its subsidiary  included
elsewhere  herein  include the operations of BSF. All  significant  intercompany
balances and transactions have been eliminated in the consolidation.

         The following are  condensed  balance  sheets for BSF at June 30, 1997,
1996 and 1995, and a condensed income statement for BSF for the years ended June
30, 1997, 1996 and 1995.

                                          Condensed Balance Sheet
                                                 June 30,
                                      1997         1996        1995
                                      ----         ----        ----
                                              (In thousands)
Assets:
   Cash..........................    $  29        $  42        $  57
   Loans, net....................      370          457          644
   Land acquired for development.       21          172          188
                                      ----         ----         ----
       Total assets..............     $420         $671         $889
                                      ====         ====         ====
Liabilities:
   Other borrowings..............    $ ---        $ ---        $  29
   Other liabilities.............        3           16          159
                                      ----         ----         ----
       Total liabilities.........        3           16          188
Equity Capital...................      417          655          701
                                      ----         ----         ----
       Total liabilities and
         equity capital..........     $420         $671         $889
                                      ====         ====         ====


<PAGE>

                                         Condensed Income Statement
                                                 June 30,
                                    1997         1996        1995
                                    ----         ----        ----
                                              (In thousands)
Interest income..................    $44           $84         $88
Interest expense.................    ---             1           9
                                    ----          ----        ----
   Net interest income...........     44            83          79
                                    ----          ----        ----
Income from sale of real estate..     31            57          78
                                    ----          ----        ----
Non-interest expense:
   Salaries and employee benefits      4             4           4
   Printing and office supplies..      6             8           7
   Management fees...............    ---            23          33
   Other expenses................      8             7          14
                                    ----          ----        ----
       Total non-interest expense     18            42          58
                                    ----          ----        ----
Income before income tax.........     57            98          99
   Income tax expense............     22            39          40
                                    ----          ----        ----
       Net income................    $35           $59         $59
                                    ====          ====        ====

Employees

         As of June 30, 1997, the Bank employed 16 persons on a full-time  basis
and  four  persons  on a  part-time  basis.  None  of the  Bank's  employees  is
represented by a collective bargaining group.  Management considers its employee
relations to be excellent.

         The Bank's employee  benefits for full-time  employees  include,  among
other things, a Pentegra  (formerly known as Financial  Institutions  Retirement
Fund) defined benefit pension plan ("Pension Plan"), a Pentegra thrift plan, and
major medical,  dental, and short-term and long-term  disability  insurance.  As
part of the  conversion to stock form, the Bank  established  the Employee Stock
Ownership Plan and Trust ("ESOP") and the Management  Recognition  and Retention
Plan  and  Trust  ("RRP").  Both the ESOP  and RRP are  employee  benefit  plans
designed to provide  directors and employees of the Bank and the Holding Company
with ownership interest in the Company.

         Employee  benefits are considered by management to be competitive  with
those offered by other financial  institutions and major employers in the Bank's
area.

                                   COMPETITION

         The  Bank  originates  most of its  loans  to and  accepts  most of its
deposits  from  residents  of Owen  County,  Indiana.  The  Bank  is the  oldest
continuously  operating  financial  institution  headquartered  in Owen  County,
Indiana.

         The Bank is subject to competition from various financial institutions,
including  state and national  banks,  state and federal  savings  institutions,
credit unions, and certain non-banking  consumer lenders, and other companies or
firms,  including  brokerage  houses and mortgage  brokers that provide  similar
services in Owen  County.  The Bank also  competes  with money market funds with
respect  to  deposit  accounts  and with  insurance  companies  with  respect to
individual retirement accounts.

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


<PAGE>

         In  addition,   The  Riegle-Neal   Interstate   Banking  and  Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to
acquire banks in other states and,  with state  consent to certain  limitations,
allows banks to acquire  out-of-state  branches either through merger or de novo
expansion.  The State of Indiana recently passed a law  establishing  interstate
branching  provisions for Indiana state  chartered  banks  consistent with those
established by the Riegle-Neal Act (the "Indiana  Branching  Law").  The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion and authorizes  out-of-state  banks meeting  certain  requirements  to
branch into Indiana by merger or de novo  expansion.  The Indiana  Branching Law
became  effective March 15, 1996,  provided that interstate  mergers and de novo
branches  are not  permitted to out of state banks unless the laws of their home
states  permit  Indiana  banks to  merge  or  establish  de novo  branches  on a
reciprocal basis.
This new legislation may also result in increased competition for the Company.

         Because of recent changes in federal law,  interstate  acquisitions  of
banks are less restricted than they were under prior law.  Savings  associations
have certain powers to acquire savings  associations  based in other states, and
Indiana  law  expressly  permits  reciprocal   acquisition  of  Indiana  savings
associations.  In addition, Federal savings associations are permitted to branch
on an  interstate  basis.  See  "Regulation--Acquisitions  or  Dispositions  and
Branching."

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

                                   REGULATION

Bank Holding Company Regulation

         The Holding  Company is  registered as a bank holding  company,  and is
subject to the  regulations  of the FRB under the Bank  Holding  Company  Act of
1956, as amended ("BHCA").  Bank holding companies are required to file periodic
reports with, and are subject to periodic  examination  by, the FRB. The FRB has
issued regulations under the BHCA requiring a bank holding company to serve as a
source of financial and managerial  strength to its subsidiary  banks. It is the
policy of the FRB that,  pursuant to this  requirement,  a bank holding  company
should stand ready to use its resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity.  Additionally,
under  the  Federal  Deposit  Insurance  Corporation  Improvement  Act  of  1991
("FedICIA"),  a bank holding  company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in the statute) with the terms of any capital restoration plan filed
by such subsidiary with its appropriate  federal banking agency up to the lesser
of (i) an amount equal to 5% of the  institution's  total assets at the time the
institution  became  undercapitalized;  or (ii) the amount that is necessary (or
would have been  necessary) to bring the  institution  into  compliance with all
applicable capital standards as of the time the institution fails to comply with
such capital  restoration  plan.  Under the BHCA,  the FRB has the  authority to
require a bank holding  company to terminate any activity or relinquish  control
of a nonbank  subsidiary  (other than a nonbank  subsidiary  of a bank) upon the
FRB's  determination that such activity or control constitutes a serious risk to
the financial soundness and stability of any bank subsidiary of the bank holding
company.

         The Holding Company is prohibited by the BHCA from acquiring  direct or
indirect  control  of more  than 5% of the  outstanding  shares  of any class of
voting  stock or  substantially  all of the  assets  of any bank or  merging  or
consolidating  with another bank holding  company  without prior approval of the
FRB.  Additionally,  the Holding Company is prohibited by the BHCA from engaging
in or from  acquiring  ownership  or control of more than 5% of the  outstanding
shares of any class of  voting  stock of any  company  engaged  in a  nonbanking
business  unless such business is determined by the FRB to be so closely related
to banking as to be a proper incident thereto.
<PAGE>

Capital Adequacy Guidelines for Bank Holding Companies

         The FRB is the federal  regulatory  and  examining  authority  for bank
holding  companies.  The FRB has adopted  capital  adequacy  guidelines for bank
holding companies.

         Bank holding companies are required to comply with the FRB's risk-based
capital   guidelines   which  require  a  minimum  ratio  of  total  capital  to
risk-weighted  assets  (including  certain  off-balance sheet activities such as
standby  letters of credit) of 8%. At least half of the total  required  capital
must be "Tier I capital," consisting principally of common stockholders' equity,
noncumulative   perpetual  preferred  stock,  a  limited  amount  of  cumulative
perpetual  preferred  stock and  minority  interests  in the equity  accounts of
consolidated subsidiaries,  less certain goodwill items. The remainder ("Tier II
capital")   may  consist  of  a  limited   amount  of   subordinated   debt  and
intermediate-term  preferred stock, certain hybrid capital instruments and other
debt securities,  cumulative  perpetual preferred stock, and a limited amount of
the  general  loan  loss  allowance.  In  addition  to  the  risk-based  capital
guidelines,  the FRB has adopted a Tier I (leverage)  capital  ratio under which
the bank  holding  company  must  maintain a minimum  level of Tier I capital to
average total  consolidated  assets of 3% in the case of bank holding  companies
which have the highest regulatory  examination ratings and are not contemplating
significant  growth or expansion.  All other bank holding companies are expected
to maintain a ratio of at least 1% to 2% above the stated minimum.

Bank Regulation

         The Bank is  organized  under the laws of the State of  Indiana  and as
such is subject to the  supervision of the Department of Financial  Institutions
("DFI"),  whose examiners conduct periodic examinations of state banks. In 1994,
the Bank converted from a federal savings bank to an Indiana savings bank. Prior
to such conversion,  it was subject to regulation at the federal level primarily
by the  Office of Thrift  Supervision  ("OTS").  The Bank is not a member of the
Federal Reserve System,  so its principal  federal  regulator is the FDIC, which
also conducts periodic examinations of the Bank. The Bank's deposits continue to
be insured by the SAIF  administered by the FDIC and are subject to FDIC's rules
and  regulations  respecting  the  insurance of deposits.  See "--  Insurance of
Deposits".

         Both federal and state law extensively  regulate various aspects of the
banking   business   such  as   reserve   requirements,   truth-in-lending   and
truth-in-savings  disclosure,  equal credit opportunity,  fair credit reporting,
trading in securities and other aspects of banking  operations.  Current federal
law also requires banks,  among other things,  to make deposited funds available
within specified time periods.

         Insured   state-chartered  banks  are  prohibited  under  FedICIA  from
engaging as principal in activities  that are not permitted for national  banks,
unless: (i) the FDIC determines that the activity would pose no significant risk
to the appropriate  deposit  insurance fund; and (ii) the bank is, and continues
to be, in compliance with all applicable capital  standards.  As a result of its
conversion to an Indiana  savings  bank,  the Bank is required to cease the real
estate development operations and divest the non-conforming real estate holdings
of BSF. See "Business -- Service Corporation Subsidiary."

Federal Home Loan Bank System

         The Bank is a member of the FHLB System,  which consists of 12 regional
banks. The FHFB, independent agency, controls the FHLB System including the FHLB
of  Indianapolis.  The FHLB System provides a central credit facility  primarily
for member  savings and loan  associations  and savings  banks and other  member
financial institutions.  The Bank is required to hold shares of capital stock in
the FHLB of Indianapolis in an amount at least equal to the greater of 1% of the
aggregate  principal  amount of its  unpaid  residential  mortgage  loans,  home
purchase  contracts and similar  obligations  at the end of each calendar  year,
0.3% of its assets or 1/20 (or such greater fraction established by the FHLB) of
outstanding FHLB advances,  commitments,  lines of credit and letters of credit.
The Bank is currently in compliance with this requirement. At June 30, 1997, the
Bank's investment in stock of the FHLB of Indianapolis was $500,000.

         In past years,  the Bank has received  dividends on its FHLB stock. All
12 FHLBs are  required by law to provide  funds for the  resolution  of troubled
savings associations and to establish affordable housing programs through direct
loans or  interest  subsidies  on  advances to members to be used for lending at
subsidized interest rates for low- and moderate-income,  owner-occupied  housing
projects, affordable rental housing, and certain other community projects. These
contributions  and obligations  could adversely affect the FHLB's ability to pay
dividends and the value of FHLB stock in the future. For the year ended June 30,
1997,  dividends paid to the Bank by the FHLB of Indianapolis  totaled  $33,000,
for an annual rate of 7.63%.


<PAGE>

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

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

         Interest rates charged for advances vary  depending upon maturity,  the
cost of funds to the FHLB of Indianapolis and the purpose of the borrowing.

Insurance of Deposits

         The FDIC is an independent federal agency that insures the deposits, up
to prescribed  statutory  limits, of banks and thrifts and safeguards the safety
and soundness of the banking and thrift  industries.  The FDIC  administers  two
separate  insurance  funds, the Bank Insurance Fund ("BIF") for commercial banks
and state  savings  banks and the SAIF for savings  associations  and banks that
have  acquired  deposits  from  savings  associations.  The FDIC is  required to
maintain  designated  levels of  reserves in each fund.  Currently,  thrifts may
convert  from one  insurance  fund to the other upon payment of certain exit and
entrance  fees.  Such fees need not be paid if a SAIF member  converts to a bank
charter or merges with a bank,  as long as the resulting  bank  continues to pay
the applicable insurance  assessments to the SAIF during such period and as long
as certain other conditions are met.  Consequently,  although the Bank converted
to a state savings bank in 1994, the Bank's  deposits  continue to be insured by
the SAIF.

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

         For the  first six  months of 1995,  the  assessment  schedule  for BIF
members and SAIF members  ranged from .23% to .31% of  deposits.  As is the case
with the SAIF, the FDIC is authorized to adjust the insurance  premium rates for
banks that are insured by the BIF of the FDIC in order to  maintain  the reserve
ratio of the BIF at  1.25%  of  BIF-insured  deposits.  As a  result  of the BIF
reaching  its  statutory  reserve  ratio,  the FDIC in 1995  revised the premium
schedule  for BIF  insured  institutions  to  provide a range of .04% to .31% of
deposits.  The revisions  became effective in the third quarter of 1995. At that
time, healthy  BIF-insured banks paid premiums of approximately $.04 per $100 in
deposits  compared  to $.23 per $100 in  deposits  paid by healthy  SAIF-insured
institutions.  The BIF rates were further  revised,  effective  January 1996, to
provide  a range of 0% to  .27%,  eliminating  insurance  premiums  for  healthy
BIF-insured banks. The SAIF rates,  however,  were not adjusted. At the time the
FDIC revised the BIF premium schedule,  it noted that, absent legislative action
(as discussed  below),  the SAIF would not attain its  designated  reserve ratio
until the year 2002.  As a result,  SAIF-insured  members  would  continue to be
generally  subject  to  higher  deposit  insurance   premiums  than  BIF-insured
institutions  until,  all things  being  equal,  the SAIF  attained its required
reserve ratio of 1.25% of BIF-insured deposits.


<PAGE>

         In order to eliminate this disparity and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation to  recapitalize  the SAIF was enacted in September 1996.
The legislation provided for a one time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to  recapitalize  the
SAIF.  It also  provided  for the  merger of the BIF and the SAIF on  January 1,
1999, if no savings  associations  then exist.  The special  assessment rate was
established  by the FDIC at .657% of deposits,  and the resulting  assessment of
$142,000  before  taxes on the Bank was paid in  November,  1996.  This  special
assessment  significantly  increased  noninterest expense and adversely affected
the Holding  Company's results of operations for the three months ended December
31, 1996. As a result of the special  assessment,  the Bank's deposit  insurance
premiums  were  reduced  to $.06 per $100 in  deposits  upon  its  current  risk
classification  and the new assessment  schedule for SAIF-insured  institutions.
These premiums are subject to change in future periods.

        Prior  to the  enactment  of the  legislation,  a  portion  of the  SAIF
assessment imposed on savings  associations was used to repay obligations issued
by a federally  chartered  corporation  to provide  financing  for resolving the
thrift crisis in the 1980s.  Although the FDIC has equalized the SAIF assessment
schedule with the BIF  assessment  schedule,  SAIF-insured  institutions  remain
subject  to a  Financing  Corporation  ("FICO")  assessment  as a result of this
continuing obligation. Although the legislation also now requires assessments to
be made on BIF-assessable deposits for this purpose,  effective January 1, 1997,
that  assessment  is  limited  to 20% of the  rate  imposed  on SAIF  assessable
deposits until the earlier of September 30, 1999, or when no savings association
continues  to  exist,   thereby   imposing  a  greater  burden  on  SAIF  member
institutions such as the Bank.  Thereafter,  however,  assessments on BIF-member
institutions  are  expected  to  be  made  on  the  same  basis  as  SAIF-member
institutions.

Regulatory Capital

         The FDIC has adopted  risk-based  capital ratio guidelines to which the
Bank  generally is subject.  The  guidelines  establish a systematic  analytical
framework  that  makes  regulatory   capital   requirements  more  sensitive  to
differences in risk profiles  among banking  organizations.  Risk-based  capital
ratios are  determined by  allocating  assets and  specified  off-balance  sheet
commitments  to four risk  weighted  categories,  with higher  levels of capital
being required for the categories perceived as representing greater risk.

         Like the  capital  guidelines  established  by the FRB for the  Holding
Company, these guidelines divide a bank's capital into two tiers. The first tier
("Tier I") includes common equity,  certain  non-cumulative  perpetual preferred
stock (excluding  auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries,  less goodwill and certain other intangible assets
(except  mortgage  servicing  rights and  purchased  credit card  relationships,
subject to certain  limitations).  Supplementary  ("Tier II") capital  includes,
among other items,  cumulative  perpetual and long-term  limited-life  preferred
stock,  mandatory  convertible  securities,  certain hybrid capital instruments,
term subordinated  debt and the allowance for loan and lease losses,  subject to
certain limitations,  less required deductions. Banks are required to maintain a
total  risk-based  capital ratio of 8%, of which 4% must be Tier I capital.  The
FDIC may,  however,  set higher capital  requirements  when a bank's  particular
circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions,  well
above the minimum levels.

         In addition, the FDIC established guidelines prescribing a minimum Tier
I leverage  ratio (Tier I capital to adjusted  total  assets as specified in the
guidelines).  These guidelines provide for a minimum Tier I leverage ratio of 3%
for banks that meet certain  specified  criteria,  including  that they have the
highest  regulatory rating and are not experiencing or anticipating  significant
growth.  All other banks are required to maintain a Tier I leverage  ratio of 3%
plus an additional cushion of at least 100 to 200 basis points.

         In connection  with the Bank's  conversion to a state savings bank, the
FDIC  imposed  heightened  capital  requirements  on  the  Bank  because  of the
impermissible real estate development  activities of BSF, the Bank's subsidiary.
The FDIC currently  requires that the Bank maintain  capital (after deduction of
its  investment in BSF) at levels  sufficient for the Bank to be classified as a
well-capitalized  institution  (i.e.,  total risk-based  capital ratio of 10% or
greater,  Tier I risk-based capital ratio of 6% or greater, and leverage capital
ratio of 5% or  greater).  The Bank  currently  exceeds its  heightened  capital
requirements.


<PAGE>

Prompt Corrective Regulatory Action

         FedICIA   requires,   among  other  things,   federal  bank  regulatory
authorities to take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements.  For these purposes, FedICIA establishes five
capital  tiers:  well  capitalized,  adequately  capitalized,  undercapitalized,
significantly  undercapitalized,  and critically  undercapitalized.  At June 30,
1997, the Bank was categorized as "well capitalized."

         An  institution  is deemed to be "well  capitalized"  if it has a total
risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of
6% or greater,  and a leverage  ratio of 5% or greater,  and is not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any  capital  measure.  An  institution  is  deemed to be  "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier
I risk-based  capital ratio of 4% or greater,  and generally a leverage ratio 4%
or greater. An institution is deemed to be  "undercapitalized" if it has a total
risk-based  capital ratio of less than 8%, a Tier I risk-based  capital ratio of
less  than  4%,  or  generally  a  leverage  ratio  of  less  than  4%;  and (d)
"significantly  undercapitalized"  if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based  capital  ratio of less than 3%, or a leverage
ratio  of  less  than  3%.   An   institution   is  deemed  to  be   "critically
undercapitalized"  if it has a ratio  of  tangible  equity  (as  defined  in the
regulations) to total assets that is equal to or less than 2%.

         "Undercapitalized"  institutions are subject to growth  limitations and
are  required to submit a capital  restoration  plan.  If an  "undercapitalized"
institution  fails to submit,  or fails to implement in a material  respect,  an
acceptable  plan,  it is treated as if it is  "significantly  undercapitalized."
"Significantly  undercapitalized"  institutions  are subject to one or more of a
number of requirements and restrictions,  including an order by the FDIC to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total  assets and cease  receipt  of  deposits  from  correspondent  banks,  and
restrictions    on    compensation    of   executive    officers.    "Critically
undercapitalized"  institutions  may  not,  beginning  60  days  after  becoming
"critically  undercapitalized,"  make any  payment of  principal  or interest on
certain subordinated debt or extend credit for a highly leveraged transaction or
enter into any transaction outside the ordinary course of business. In addition,
"critically  undercapitalized"  institutions  are  subject to  appointment  of a
receiver or conservator.

Dividend Limitations

         Under FRB supervisory  policy, a bank holding company  generally should
not maintain its existing rate of cash dividends on common shares unless (i) the
organization's  net income available to common  shareholders  over the past year
has been sufficient to fully fund the dividends and (ii) the prospective rate of
earnings  retention appears  consistent with the  organization's  capital needs,
asset  quality,  and overall  financial  condition.  The FDIC also has authority
under the Financial Institutions  Supervisory Act to prohibit a bank from paying
dividends  if, in its opinion,  the payment of  dividends  would  constitute  an
unsafe or unsound  practice  in light of the  financial  condition  of the bank.
Under Indiana law, the Holding  Company is precluded  from paying cash dividends
if, after giving effect to such  dividends,  the Holding Company would be unable
to pay its debts as they become due or the Holding  Company's total assets would
be less than its liabilities and obligations to preferential shareholders.

         In connection with the Conversion,  the Bank  established a liquidation
account for the benefit of Eligible  Account Holders and  Supplemental  Eligible
Account Holders.  The Bank will not be permitted to pay dividends to the Holding
Company if its net worth  would be reduced  below the  amount  required  for the
liquidation account.

         Under Indiana law, the Bank may pay  dividends  without DFI approval so
long as its capital is  unimpaired  and those  dividends in any calendar year do
not  exceed  the net  profits  of the Bank for that year plus the  retained  net
profits  of the  Bank for the  previous  two  years.  Dividends  may not  exceed
undivided  profits on hand (less  losses,  bad debts and  expenses).  Additional
stringent  regulatory  requirements  affecting  dividend  payments  by the Bank,
however,  are established by the prompt corrective action provisions of FedICIA,
which are  discussed  above.  The Bank's  capital  levels  currently  exceed the
criteria established to be designated as a "well capitalized" institution.  Such
institutions  are required to have a total  risk-based  capital  ratio of 10% or
greater, a Tier I risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater. At June 30, 1997, the Bank's total risk-based capital,  Tier I
risk-based  capital and leverage  capital  exceeded  the amounts  required to be
designated "well capitalized" by $3.7 million,  $4.4 million,  and $3.8 million,
respectively.


<PAGE>

Repurchase Limitations

         Regulations  promulgated by the FRB provide that a bank holding company
must file  written  notice  with the FRB prior to any  repurchase  of its equity
securities if the gross consideration for the purchase, when aggregated with the
net  consideration  paid by the bank holding company for all repurchases  during
the preceding 12 months,  is equal to 10% or more of the bank holding  company's
consolidated net worth. This notice requirement is not applicable, however, to a
bank  holding  company  that  exceeds  the  thresholds  established  for a  well
capitalized bank and that satisfies certain other regulatory requirements.

         Under  Indiana  law,  the  Holding   Company  will  be  precluded  from
repurchasing  its equity  securities if, after giving effect to such repurchase,
the Holding  Company  would be unable to pay its debts as they become due or the
Holding  Company's  assets would be less than its liabilities and obligations to
preferential shareholders.

Loans-to-One Borrower

         Under  Indiana  law,  the  total  loans and  extension  of credit by an
Indiana-chartered  savings  bank to a borrower  outstanding  at one time and not
fully secured may not exceed 15% of such bank's capital and unimpaired  surplus.
An additional amount up to 10% of the bank's capital and unimpaired  surplus may
be  loaned  to the same  borrower  if such  loan is  fully  secured  by  readily
marketable  collateral  having a market  value,  as  determined  by reliable and
continuously  available price  quotations,  at least equal to the amount of such
additional loans outstanding.

         As of June 30, 1997,  the largest  aggregate  amount of loans which the
Bank had to any one borrower was approximately  $933,000.  The Bank had no loans
outstanding  which  management  believes  violate  the  applicable  loans-to-one
borrower  limits.  The Company does not believe that the  loans-to-one  borrower
limits will have a significant impact on its business, operations or earnings.

Limitations on Rates Paid for Deposits

         Regulations   promulgated   by  the  FDIC  pursuant  to  FedICIA  place
limitations on the ability of insured depository  institutions to accept,  renew
or roll over  deposits by offering  rates of  interest  which are  significantly
higher  than the  prevailing  rates of  interest  on  deposits  offered by other
insured  depository  institutions  having  the  same  type  of  charter  in such
depository   institution's   normal  market  area.   Under  these   regulations,
"well-capitalized"  depository  institutions  may  accept,  renew  or roll  such
deposits  over  without   restriction,   "adequately   capitalized"   depository
institutions may accept, renew or roll such deposits over with a waiver from the
FDIC   (subject   to   certain   restrictions   on   payments   of  rates)   and
"undercapitalized"  depository  institutions may not accept,  renew or roll such
deposits  over.  The  regulations  contemplate  that  the  definitions  of "well
capitalized,"  "adequately  capitalized" and "undercapitalized" will be the same
as the  definition  adopted by the agencies to implement the  corrective  action
provisions of FedICIA.  The Company does not believe that these regulations will
have a materially adverse effect on its current operations.

Federal Reserve System

         FRB  regulations  require  savings  associations  and savings  banks to
maintain reserves against their transaction accounts (primarily negotiable order
of  withdrawal  accounts) and certain  nonpersonal  time  deposits.  The reserve
requirements are subject to adjustment by the FRB. As of June 30, 1997, the Bank
was in compliance with the applicable reserve requirements of the FRB.


<PAGE>

Additional Limitations on Activities

         FDIC law and regulations generally provide that the Bank may not engage
as  principal  in any type of  activity,  or in any  activity in an amount,  not
permitted  for  national  banks,  or  directly  acquire  or  retain  any  equity
investment of a type or in an amount not permitted for national banks.  The FDIC
has  authority  to grant  exceptions  from these  prohibitions  (other than with
respect to  non-service  corporation  equity  investments)  if it  determines no
significant  risk to the insurance fund is posed by the amount of the investment
or the  activity  to be engaged  in, and if the Bank is and  continues  to be in
compliance with fully phased-in capital standards.  National banks are generally
not  permitted  to  hold  equity   investments  other  than  shares  of  service
corporations and certain federal agency securities.  Moreover, the activities in
which  service  corporations  are  permitted  to engage are  limited to those of
service  corporations  for national  banks.  As a result of its conversion to an
Indiana savings bank, the Bank is required to cease the real estate  development
operations  and divest the  non-conforming  real  estate  holdings  of BSF.  See
"Business -- Service Corporation Subsidiary."

Other Indiana Regulations

         As an  Indiana-chartered  savings bank,  the Bank derives its authority
from,  and is regulated by, the DFI. The DFI has the right to  promulgate  rules
and   regulations    necessary   for   the   supervision   and   regulation   of
Indiana-chartered savings banks under its jurisdiction and for the protection of
the public investing in such institutions.  The regulatory  authority of the DFI
includes, but is not limited to, the establishment of reserve requirements;  the
regulation of the payment of dividends; the regulation of stock repurchases; the
regulation of incorporators,  shareholders,  directors,  officers and employees;
the  establishment  of  permitted  types of  withdrawable  accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct  and   management  of  savings   banks,   chartering  and  branching  of
institutions, mergers, conversions and conflicts of interest.

         The   DFI   generally   conducts   regular   annual   examinations   of
Indiana-chartered   savings  banks  such  as  the  Bank.  The  purpose  of  such
examination is to assure that institutions are being operated in compliance with
applicable  Indiana  law and  regulations  and in a safe and  sound  manner.  In
addition,  the DFI is required to conduct an examination  of any  institution as
often as it deems  necessary.  The DFI has the power to issue  cease and  desist
orders if any person or  institution  is  engaging  in, or has  engaged  in, any
unsafe or unsound practice in the conduct of its business or has or is violating
any other law,  rule or  regulation  and, as to  officers  and  directors  of an
Indiana savings bank, breached his fiduciary duty as an officer or director.

         With the approval of the DFI, a savings  bank may merge or  consolidate
with another  savings bank, a state bank, a national bank, or a federal or state
savings  association.  In  considering  whether to approve or disapprove  such a
merger or  consolidation,  the DFI is to consider  the  following  factors:  (i)
whether the institutions are operated in a safe, sound and prudent manner;  (ii)
whether the financial  conditions of any of the institutions will jeopardize the
financial stability of the other institutions; (iii) whether the proposed merger
or  consolidation  will result in an institution  that has  inadequate  capital,
unsatisfactory   management  or  poor  earnings  prospects;   (iv)  whether  the
management or other  principals of the  resulting  institution  are qualified by
character  and  financial  responsibility  to control and operate in a legal and
proper  manner the  resulting  institution;  (v)  whether the  interests  of the
depositors and creditors of the  institutions  and the public  generally will be
jeopardized by the transaction; and (vi) whether institutions furnish all of the
information the DFI requires in reaching the DFI's decision.

         Acquisitions  of control of the Bank by a bank or bank holding  company
require the prior approval of the DFI. Control is defined as the power, directly
or  indirectly,   to  (i)  vote  25.0%  or  more  of  the  voting  stock  of  an
Indiana-chartered  savings bank; or (ii) exercise a controlling  influence  over
the management or policies of a savings bank.


<PAGE>

Safety and Soundness Standards

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

Transactions with Affiliates

         The Bank is  subject  to  Sections  22(h),  23A and 23B of the  Federal
Reserve Act, which restrict financial  transactions between banks and affiliated
companies.  The  statute  limits  credit  transactions  between  a bank  and its
executive officers and its affiliates,  prescribes terms and conditions for bank
affiliate  transactions  deemed to be  consistent  with  safe and sound  banking
practices,   and  restricts  the  types  of  collateral  security  permitted  in
connection with a bank's extension of credit to an affiliate.

Federal Securities Law

         The shares of Common Stock of the Holding  Company are registered  with
the SEC under the 1934 Act. The Holding  Company is subject to the  information,
proxy solicitation,  insider trading  restrictions and other requirements of the
1934 Act and the rules of the SEC thereunder. After the third anniversary of the
Bank's  conversion  to stock  form,  if the  Holding  Company has fewer than 300
shareholders  it may  deregister  its shares  under the 1934 Act and cease to be
subject to the foregoing requirements.

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

Community Reinvestment Act Matters

          Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both   a   four-unit   descriptive   rating   --   outstanding,    satisfactory,
unsatisfactory,  and  needs  improvement  -- and a  written  evaluation  of each
institution's  performance.  Each FHLB is required  to  establish  standards  of
community  investment  or service that its members must  maintain for  continued
access to long-term  advances from the FHLBs.  The standards take into account a
member's  performance under the CRA and its record of lending to first-time home
buyers. The examiners have determined that the Bank has a satisfactory record of
meeting community credit needs.

                                    TAXATION
Federal Taxation

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


<PAGE>

         Depending  on the  composition  of its items of income and  expense,  a
savings  association  may be subject to the  alternative  minimum tax. A savings
association must pay an alternative  minimum tax equal to the amount (if any) by
which 20% of  alternative  minimum  taxable  income  ("AMTI"),  as reduced by an
exemption  varying with AMTI,  exceeds the regular tax due. AMTI equals  regular
taxable  income   increased  or  decreased  by  certain  tax   preferences   and
adjustments,  including depreciation  deductions in excess of that allowable for
alternative  minimum tax purposes,  tax-exempt interest on most private activity
bonds  issued  after  August 7, 1986  (reduced by any related  interest  expense
disallowed  for  regular  tax  purposes),  the  amount  of the bad debt  reserve
deduction  claimed in excess of the deduction based on the experience method and
75% of the excess of adjusted current earnings over AMTI (before this adjustment
and before any alternative tax net operating loss).  AMTI may be reduced only up
to 90% by net operating loss carryovers, but alternative minimum tax paid can be
credited against regular tax due in later years.

         For federal income tax purposes, the Bank has been reporting its income
and expenses on the accrual method of accounting.  The Bank's federal income tax
returns have not been audited in recent years.

State Taxation

         The Bank is subject to Indiana's  Financial  Institutions  Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted  gross  income."  "Adjusted
gross  income,"  for purposes of FIT,  begins with taxable  income as defined by
Section 63 of the Code and,  thus,  incorporates  federal  tax law to the extent
that it affects the  computation of taxable  income.  Federal  taxable income is
then adjusted by several Indiana  modifications the most notable of which is the
required  addback of interest  that is tax-free for fedeal  income tax purposes.
Other  applicable state taxes include  generally  applicable sales and use taxes
plus real and personal property taxes.

         The Bank's  state  income tax returns  have not been  audited in recent
years.

Item 2.  Properties.

         The Company  conducts  business from its main office at 279 East Morgan
Street, Spencer, Indiana 47460. The Company owns its main office.

         The following table provides  certain  information  with respect to the
Company's office as of June 30, 1997:

<TABLE>
<CAPTION>
                                                         Net Book Value
                                                          of Property,
                           Owned or    Year     Total      Furniture &       Approximate
Description and Address     Leased    Opened  Deposits      Fixtures       Square Footage
-----------------------     ------    ------  --------      --------       --------------
                                       (Dollars in thousands)
<C>                        <C>         <C>     <C>            <C>              <C>   
279 East Morgan Street       Owned     1987    $26,157        $964             11,300
Spencer, IN  47460
(including annex)
</TABLE>

         As of June 30,  1997,  the Bank  also  owned a  parcel  of real  estate
located  across  the street  from its  office  which is  utilized  for  employee
parking.  In January,  1996,  the Bank  purchased  another parcel of real estate
located  adjacent to its office (the "West Parcel").  The Bank has sold one-half
of the West  Parcel to a local  insurance  agency.  The  Company  has  completed
improvements to the remaining  one-half of the West Parcel,  including an office
facility for the Holding Company and additional storage and office space for the
Bank.

         The Company owns computer and data  processing  equipment which is used
for transaction processing, loan origination, and accounting.

         The Bank has also  contracted  for the data  processing  and  reporting
services of On-Line Financial Services,  Inc. in Oak Brook, Illinois,  which was
acquired  in 1995 by Argo  Federal  Savings  Bank,  FSB.  The cost of these data
processing services is approximately $4,900 per month.


<PAGE>

Item 3.       Legal Proceedings.

         Neither  the  Holding  Company  nor the Bank is a party to any  pending
legal  proceedings,  other  than  routine  litigation  incidental  to the Bank's
business.

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

         No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended June 30, 1997.

Item 4.5.     Executive Officers of the Registrant.

         Presented below is certain information regarding the executive officers
of the Holding Company:

Name                       Position
Kurt J. Meier              President, Chief Executive Officer and Treasurer
Kurt D. Rosenberger        Vice President and Chief Financial Officer
Charles W. Chambers        Secretary

         Kurt J.  Meier  (age 46) is  President,  Chief  Executive  Officer  and
Treasurer of the Holding Company.  Mr. Meier has also served as President of the
Bank since 1994.  Theretofore,  he served as  Managing  Officer of the Bank from
1990 to 1994.

         Kurt D.  Rosenberger  (age 38) is Vice  President  and Chief  Financial
Officer  of the  Holding  Company.  Mr.  Rosenberger  has  also  served  as Vice
President  of the Bank since 1994.  Theretofore,  he served as Senior  Financial
Analyst for the Office of Thrift Supervision in Indianapolis, Indiana, from 1990
to 1994.

         Charles W. Chambers (age 81) is Secretary of the Holding  Company.  Mr.
Chambers has also served as a Staff  Appraiser of the Bank from 1991 to 1996 and
as Secretary of the Bank since 1990.

                                     PART II

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

         The Bank  converted  from an Indiana  mutual savings bank to an Indiana
stock savings bank  effective  July 1, 1996,  and  simultaneously  formed a bank
holding  company,  the Holding  Company.  The Holding  Company's  common  stock,
without par value  ("Common  Stock"),  is quoted on the National  Association of
Securities  Dealers  Automated  Quotation System  ("NASDAQ"),  Small Cap Market,
under the symbol  "HWEN."  Because the Conversion was not effected until July 1,
1996, no prices were reported by NASDAQ for the Holding  Company's  Common Stock
during the year ended June 30, 1996,  and no  dividends  were paid on the Common
Stock  during the year.  As of August 29,  1997,  there were  approximately  571
record holders of the Holding  Company's Common Stock,  including shares held in
broker accounts.

         The  following  table  sets  forth  the  high  and low bid  prices  and
dividends  paid per  share of  Common  Stock for the  quarters  indicated.  Such
over-the-counter quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.

         Quarter Ended             High Bid    Low Bid   Dividends Declared
         September 30, 1996        $ 13 3/4   $ 9 3/4        $  ---
         December 31,1996            13 1/4    11 3/4           .05
         March 31, 1997              15 1/2    12 3/4           .05
         June 30, 1997               15 3/4    14 1/2           .05

         Since  the  Holding  Company  has no  independent  operations  or other
subsidiaries  to generate  income,  its ability to  accumulate  earnings for the
payment of cash  dividends to its  shareholders  is directly  dependant upon the
earnings  on its  investment  securities  and  the  ability  of the  Bank to pay
dividends to the Holding Company.

         Under  current  federal  income tax law,  dividend  distributions  with
respect to the Common Stock, to the extent that such dividends paid are from the
current or  accumulated  earnings  and  profits of the Bank (as  calculated  for
federal  income  tax  purposes),  will be  taxable  as  ordinary  income  to the
recipient and will not be deductible by the Bank. Any dividend  distributions in
excess of  current or  accumulated  earnings  and  profits  will be treated  for
federal income tax purposes as a distribution  from the Bank's  accumulated  bad
debt reserves,  which could result in increased federal income tax liability for
the Company.  Moreover, the Bank may not pay dividends to the Holding Company if
such  dividends  would  result  in the  impairment  of the  liquidation  account
established in connection with the Conversion.


<PAGE>

         The Holding  Company's  ability to pay dividends on the Common Stock is
subject to certain  regulatory  restrictions.  See  "Regulation."  In  addition,
Indiana law would prohibit the Holding  Company from paying a divided,  if after
giving effect to the payment of that dividend,  the Holding Company would not be
able to pay its debts as they become due in the  ordinary  course of business or
if the Holding  Company's  total  assets would be less than the sum of its total
liabilities plus preferential rights of holders of preferred stock, if any.

Item 6.       Selected Financial Data.


         The  information  required by this item is incorporated by reference to
the material  under the heading  "Selected  Consolidated  Financial Data of Home
Financial Bancorp and Subsidiary" on page 2 of the Shareholder Annual Report.


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

         The  information  required by this item is incorporated by reference to
pages 3 through 18 of the Shareholder Annual Report.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

Asset/Liability Management

         The Bank's  profitability  is  dependent to a large extent upon its net
interest  income,  which  is the  difference  between  its  interest  income  on
interest-earning assets, such as loans and securities,  and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. The Bank, like
other  financial  institutions,  is subject to interest  rate risk to the degree
that its  interest-earning  assets reprice differently than its interest-bearing
liabilities.  The Bank manages its mix of assets and liabilities  with the goals
of limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating  its sources and uses of funds.  Specific  strategies have included
shortening the amortized  maturity of fixed-rate loans and increasing the volume
of  adjustable  rate  loans  to  reduce  the  average  maturity  of  the  Bank's
interest-earning  assets.  FHLB  advances  are used in an  effort  to match  the
effective  maturity  of  interest-bearing  liabilities  to its  interest-earning
assets

         The Bank seeks to control its interest  rate risk  exposure in a manner
that will allow for  adequate  levels of earnings  and  capital  over a range of
possible  interest rate  environments.  The Bank has adopted formal policies and
practices to monitor and manage  interest  rate risk  exposure.  As part of this
effort, the Bank uses the market value ("MV") methodology to gauge interest rate
risk exposure.

         Generally, MV is the discounted present value of the difference between
incoming  cash flows on  interest-earning  assets and other  assets and outgoing
cash  flows  on   interest-bearing   liabilities  and  other  liabilities.   The
application of the  methodology  attempts to quantify  interest rate risk as the
change in the MV which would result from a  theoretical  200 and 400 basis point
(1 basis point equals .01%) change in market  interest  rates.  Both 200 and 400
basis  point  increases  in market  interest  rates and 200 and 400 basis  point
decreases in market interest rates are considered.

         At June 30, 1997,  it was estimated  that the Bank's MV would  decrease
5.2% and  13.7% in the  event of 200 and 400  basis  point  increases  in market
interest rates, respectively. The Bank's MV at the same date would increase 2.3%
and 5.4% in the  event of 200 and 400 basis  point  decreases  in market  ratio,
respectively.


<PAGE>

         Presented  below,  as of June 30,  1997,  is an  analysis of the Bank's
interest rate risk as measured by changes in MV for  instantaneous and sustained
parallel shifts of 200 and 400 basis point increments in market interest rates.

                        Market Value Summary Performance
<TABLE>
<CAPTION>

                                                                          MV as % of
                                                                       Present Value (PV)
      Change                            Market Value                      of Assets
     In Rates              $ Amount       $ Change     % Change     MV Ratio       Change
     --------              --------       --------     --------     --------       ------
(Dollars in thousands)
<S>                         <C>          <C>           <C>          <C>      <C>      
    + 400 bp*                $5,254       $ (831)       (13.66)%     13.48%   (121)  bp
    + 200 bp                  5,769         (317)        (5.20)      14.32     (37)  bp
        0 bp                  6,085            0          0.00       14.69     ---   bp
    - 200 bp                  6,223          138          2.26       14.66       3   bp
    - 400 bp                  6,414          329          5.41       14.74       5   bp
</TABLE>

             Interest Rate Risk Measures: 200 Basis Point Rate Shock

Pre-Shock MV Ratio: MV as % of PV of Assets.....................       14.69%
Exposure Measure: Post-Shock MV Ratio...........................       14.32%
Sensitivity Measure: Change in MV Ratio.........................          37 bp
Change in MV as % of PV of Assets...............................        5.19%
Interest Rate Risk Capital Component............................         ---
----------
*Basis points.
<PAGE>

         Management believes that the MV methodology overcomes three shortcoming
of the  typical  maturity  gap  methodology.  First,  it does not use  arbitrary
repricing  intervals and accounts for all expected future cash flows;  weighting
each by its appropriate discount factor.  Second, because the MV method projects
cash  flows  of  each  financial   instrument   under  different   interest-rate
environments,   it  can  incorporate  the  effect  of  embedded  options  on  an
institution's  interest rate risk exposure.  Third,  it allows interest rates on
different  instruments  to change by varying  amounts in response to a change in
market interest rates, resulting in more accurate estimates of cash flows.

         However,  as with any method of gauging  interest rate risk,  there are
certain shortcomings inherent to the MV methodology.  The model assumes interest
rates changes are instantaneous  parallel shifts in the yield curve. In reality,
rate changes are rarely  instantaneous.  The use of the  simplifying  assumption
that  short-term and long-term rates change by the same degree may also misstate
historic rate patterns,  which rarely show parallel yield curve shifts. Further,
the model assumes that certain  assets and  liabilities  of similar  maturity or
period to repricing will react the same to changes in rates. In reality, certain
types of financial  instruments may react in advance of changes in market rates,
while the  reaction of other types of financial  instruments  may lag behind the
change in general market rates. Additionally, the MV methodology may not reflect
the full  impact of annual and  life-time  restrictions  on changes in rates for
certain assets,  such as  adjustable-rate  mortgage  loans.  When interest rates
change,  actual loan prepayments and actual early  withdrawals from certificates
may deviate  significantly  from  assumptions used in the model.  Finally,  this
methodology does not measure or reflect the impact that higher rates may have on
adjustable-rate  loan  customers'  ability to serviced  their debt. All of these
factors are considered in monitoring the Bank's exposure to interest rate risk.

Item 8.       Financial Statements and Supplementary Data.

         The Company's  Consolidated  Financial Statements and Notes thereto are
contained on pages 20 through 34 of the Shareholder Annual Report.

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

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


<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

         The  information  required by this item with  repsect to  directors  is
incorporated  by reference to pages 2 through 4 of the Company's Proxy Statement
for  its  1997  Shareholder   Annual  Meeting  (the  "1997  Proxy   Statement").
Information  concerning the Holding Company's  executive officers is included in
Item 4.5 in Part I of this report.

Item 11. Executive Compensation.

         The  information  required  by this  item  with  respect  to  executive
compensation is incorporated by reference to pages 5 through 9 of the 1997 Proxy
Statement.

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

         The  information  required by this item is incorporated by reference to
pages 2 through 3 of the 1997 Proxy Statement.

Item 13.      Certain Relationships and Related Transactions.

         The  information  required by this item is incorporated by reference to
pages 2 through 4 of the 1997 Proxy Statement.

                                     PART IV

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

     (a)      List the following documents filed as part of the report:

         Financial Statements                                           Page No.

         Independent Auditor's Report                                      19

         Consolidated Statement of Financial Condition
             at June 30, 1997, and 1996                                    20

         Consolidated Statement of Income for the Years Ended
             June 30, 1997, 1996, and 1995                                 21

         Consolidated Statement of Changes in Stockholders' Equity
             for the Years Ended June 30, 1997, 1996, and 1995             22

         Consolidated Statement of Cash Flows for the Years Ended
             June 30, 1997, 1996, and 1995                                 23

         Notes to Consolidated Financial Statements

(b)      Reports on Form 8-K.

         The  Holding  Company  filed no reports on Form 8-K during the  quarter
ended June 30, 1997.

(c)      The exhibits filed herewith or incorporated by reference herein are set
         forth on the Exhibit Index on page E-1.  Included in those exhibits are
         Executive  Compensation  Plans and Arrangements which are identified as
         Exhibits 10(1) through 10(5).

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

<PAGE>

                                   SIGNATURES



     Pursuant  to the  requirement  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, as amended,  the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.

                                          HOME FINANCIAL BANCORP



Date:  September 26, 1997                 By: /s/ Kurt J. Meier
                                              ---------------------------
                                               Kurt J. Meier, President,
                                                   Chief Executive Officer 
                                                   and Treasurer


     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant  and in the  capacities  indicated on this 26th day of September,
1997.



/s/ Kurt J. Meier
-----------------------------
Kurt J. Meier
President, Chief Executive Officer,
Treasurer and Director
(Principal Executive Officer)

/s/ Kurt D. Rosenberger
-----------------------------
Kurt D. Rosenberger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

/s/ Charles W. Chambers
-----------------------------
Charles W. Chambers, Secretary and Director

/s/ John T. Gillaspy
-----------------------------
John T. Gillaspy, Director

/s/ Stephen Parrish
-----------------------------
Stephen Parrish, Director

/s/ Robert W. Raper
-----------------------------
Robert W. Raper, Vice Chairman

/s/ Frank R. Stewart
-----------------------------
Frank R. Stewart, Chairman

/s/ Tad Wilson
-----------------------------
Tad Wilson, Director


<PAGE>

                                  EXHIBIT INDEX

Exhibit Index*                                                            

     3(1)           The  Articles  of   Incorporation   of  the  Registrant  are
                    incorporated   by   reference   to   Exhibit   3(1)  to  the
                    Registration   Statement  on  Form  S-1   (Registration  No.
                    333-1746).

     3(2)           The Code of By-Laws of the  Registrant are  incorporated  by
                    reference to Exhibit 3(2) to the Report on Form 10-Q for the
                    period ended March 31, 1997.

     10(1)          Exempt Loan and Share Purchase  Agreement between ESOP Trust
                    and Home Financial Bancorp.

     10(2)          Share Pledge Agreement between ESOP Trust and Home Financial
                    Bancorp.

     10(3)          Employment  Agreement  between Owen Community Bank, s.b. and
                    Kurt J. Meier is  incorporated by reference to Exhibit 10(5)
                    to the Registration  Statement on Form S-1 (Registration No.
                    333-1746).

     10(4)          Employment  Agreement  between Owen Community Bank, s.b. and
                    Kurt D.  Rosenberger is incorporated by reference to Exhibit
                    10(6)   to  the   Registration   Statement   on   Form   S-1
                    (Registration No. 333-1746).

     10(5)          Employment  Contract  between Owen Community  Bank, s.b. and
                    Frank R.  Stewart is  incorporated  by  reference to Exhibit
                    10(7)   to  the   Registration   Statement   on   Form   S-1
                    (Registration No. 333-1746).

     13             1997 Shareholder Annual Report.

     21             Subsidiaries of the Registrant are incorporated by reference
                    to  Exhibit  21 to the  Registration  Statement  on Form S-1
                    (Registration No. 333-1746).

     27             Financial Data Schedule.