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, 1999

                                       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. [X]

The aggregate market value of the issuer's voting stock held by  non-affiliates,
as of August 31, 1999, was $5,104,990.

The  number of shares of the  Registrant's  Common  Stock,  without  par  value,
outstanding as of August 31, 1999, was 885,200 shares.

                    DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders  for the year ended June 30, 1999,
are  incorporated by reference into Part II. Portions of the Proxy Statement for
the 1999 Annual Meeting of Shareholders are incorporated in Part III.

                            Exhibit Index on Page E-1
                             Page 1 of 33 Pages


<PAGE>
                           HOME FINANCIAL BANCORP

                                 Form 10-K

                                   INDEX

                                                                            Page

Forward Looking Statements.................................................   3

PART I
Item  1.    Business.......................................................   3
Item  2.    Properties.....................................................  29
Item  3.    Legal Proceedings..............................................  29
Item  4.    Submission of Matters to a Vote of Security Holders............  29
Item  4.5.  Executive Officers of Registrant...............................  30
PART II
Item  5.    Market for Registrant's Common Equity and Related
              Stockholder Matters..........................................  30
Item  6.    Selected Financial Data........................................  31
Item  7.    Management's Discussion and Analysis of Financial
              Condition and Results of Operation...........................  31
Item  7A.   Quantitative and Qualitative Disclosures About Market Risk.....  31
Item  8.    Financial Statements and Supplementary Data....................  31
Item  9.    Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure..........................  31
PART III
Item 10.    Directors and Executive Officers of Registrant.................  31
Item 11.    Executive Compensation.........................................  31
Item 12.    Security Ownership of Certain Beneficial Owners
              and Management...............................................  31
Item 13.    Certain Relationships and Related Transactions.................  31
PART IV
Item 14.    Exhibits, Financial Statement Schedules, and Reports
              on Form 8-K..................................................  32
            Signatures.....................................................  33






<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 Federal Savings Bank. In 1994,
the Bank became an Indiana savings bank known as Owen Community Bank, s.b. As of
May 1, 1999,  the Bank  converted  back to a federal  stock savings bank and the
Company became a savings and loan holding company. 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").

         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) home equity  loans;  (xi) NOW  accounts;  (xii)  demand
deposit accounts;  (xiii) passbook savings accounts;  and (xiv)  certificates of
deposit.  The  Company  conducts  business  out of its main  office  located  in
Spencer, Indiana and its branch office in Cloverdale, Indiana.


         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 53.5% of the Bank's total
loan  portfolio  at June 30,  1999.  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 2.4% and
13.6%  of the  Bank's  total  loan  portfolio  at June 30,  1999,  respectively.
Mortgage loans secured by multi-family properties and nonresidential real estate
totaled  approximately  2.8% and 23.8%,  respectively,  of the Bank's total loan
portfolio at June 30, 1999. Consumer loans constituted approximately 2.6% of the
Bank's total loan portfolio at June 30, 1999.



                                     - 3 -
<PAGE>

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,
                                            ---------------------------------------------------------------------------
                                                   1999                     1998                            1997
                                            ------------------        ------------------             ------------------
                                                       Percent                   Percent                        Percent
                                            Amount    of Total        Amount    of Total             Amount    of Total
                                            ------    --------        ------    --------             ------    --------
                                                                   (Dollars in thousands)

TYPE OF LOAN
Mortgage loans:
<S>                                        <C>          <C>          <C>           <C>              <C>           <C>
   Residential..........................   $20,952      53.46%       $19,563       56.76%           $19,898       57.22%
   Combo................................     5,331      13.60          4,666       13.52              4,396       12.64
   Nonresidential.......................     9,323      23.79          7,614       22.07              6,896       19.83
   Multi-family.........................     1,096       2.80            904        2.62                980        2.82
Mobile home loans.......................       950       2.43            831        2.43              1,361        3.91
Commercial and industrial loans.........       538       1.37            242        0.70                634        1.82
Consumer loans..........................       999       2.55            655        1.90                612        1.76
                                           -------     ------        -------      ------            -------      ------
     Gross loans receivable.............   $39,189     100.00%       $34,475      100.00%           $34,777      100.00%
                                           =======     ======        =======      ======            =======      ======

TYPE OF SECURITY
   Residential real estate..............   $20,952      53.46%       $19,563       56.76%           $19,898       57.22%
   Mobile home and land.................     5,331      13.60          4,666       13.52              4,396       12.64
   Nonresidental real estate............     9,323      23.79          7,614       22.07              6,896       19.83
   Multi-family real estate.............     1,096       2.80            904        2.62                980        2.82
   Mobile home..........................       950       2.43            831        2.43              1,361        3.91
   Deposits.............................       154       0.39            152         .44                122        0.35
   Other security.......................     1,383       3.53            745        2.16              1,124        3.23
                                           -------     ------        -------      ------            -------      ------
     Gross loans receivable.............    39,189     100.00         34,475      100.00             34,777      100.00
Deduct:
Allowance for loan losses...............       336       0.86            320        0.93                231        0.66
Loans in process and
   deferred loan costs..................       615       1.57            196        0.57                428        1.23
                                           -------     ------        -------      ------            -------      ------
   Net loans receivable.................   $38,238      97.57%       $33,959       98.50%           $34,118       98.11%
                                           =======     ======        =======      ======            =======      ======

Mortgage Loans:
   Adjustable-rate......................   $23,748      64.70%       $21,502       65.69%           $22,296       69.31%
   Fixed-rate...........................    12,954      35.30         11,245       34.31              9,874       30.69
                                           -------     ------        -------      ------            -------      ------
     Total..............................   $36,702     100.00%       $32,747      100.00%           $32,170      100.00%
                                           =======     ======        =======      ======            =======      ======
</TABLE>


     The  following  table  sets forth  certain  information  at June 30,  1999,
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.

                                     - 4 -
<PAGE>
<TABLE>
<CAPTION>
                                         Balance                         Due during years ended June 30,
                                       Outstanding                                  2003     2005      2010       2015
                                        at June 30,                                  to       to        to         and
                                          1999        2000       2001      2002     2004     2009      2014     following
                                          -------------------------------------------------------------------------------
                                                                             (In thousands)
Mortgage loans:
<S>                                      <C>          <C>         <C>      <C>      <C>     <C>      <C>        <C>
   Residential.....................      $20,952      $176        $42      $144     $221    $2,315   $3,279     $14,775
   Combo...........................        5,331        54        ---        38       99       698    1,042       3,400
   Nonresidential..................        9,323         1        ---        20    1,647       281    4,626       2,748
   Multi-family....................        1,096       ---        ---        83      ---       578      150         285
Mobile home loans..................          950        10          8        19      160       411      235         107
Commercial and industrial loans....          538       ---        ---       ---      298       ---      240         ---
Consumer loans.....................          999       557        100       221      121       ---      ---         ---
                                         -------      ----       ----      ----   ------    ------   ------     -------
     Total.........................      $39,189      $798       $150      $525   $2,546    $4,283   $9,572     $21,315
                                         =======      ====       ====      ====   ======    ======   ======     =======
</TABLE>


         The following  table sets forth, as of June 30, 1999, the dollar amount
of all loans due after one year which have fixed  interest rates and floating or
adjustable rates.
<TABLE>
<CAPTION>
                                                            Due After June 30, 2000
                                        --------------------------------------------------------
                                        Fixed Rates             Variable Rates             Total
                                        -----------             --------------             -----
                                                                (In thousands)

Mortgage loans:
<S>                                       <C>                      <C>                    <C>
   Residential.....................       $7,569                   $13,207                $20,776
   Combo...........................        2,826                     2,451                  5,277
   Nonresidential..................        1,304                     8,018                  9,322
   Multi-family....................          921                       175                  1,096
Mobile home loans..................          940                       ---                    940
Commercial and industrial loans....          240                       298                    538
Consumer loans.....................          442                       ---                    442
                                         -------                   -------                -------
     Total.........................      $14,242                   $24,149                $38,391
                                         =======                   =======                =======
</TABLE>


         One- to Four-  Family  Residential  Loans.  Residential  loans  consist
primarily of one- to four-family loans. Approximately $21.0 million, or 53.5% of
the Bank's portfolio of loans at June 30, 1999, consisted of one- to four-family
residential  mortgage loans, of which  approximately 63.0% 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,  the rate must be correlated with changes in a readily verifiable
index.

         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
One 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% to 1.5% and 4% to 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 (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 $100,000 for any residential  loan with a Loan-to-Value
Ratio of 90% or higher.

         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  (the
"Executive  Committee")  based upon prevailing  rates in the Bank's market area,
the credit  history  of the  applicant  and the  Loan-to-Value  Ratio.  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 One 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.


                                     - 5 -
<PAGE>

         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,  1999,  37.0% 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, 1999,  residential loans amounting to $51,000,  or 0.13% 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.

         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 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 originates a personal revolving line of credit loan secured by
a first or second  mortgage on the borrower's  primary  residence.  The combined
total of first and second  mortgages on property  securing  Home Equity Loans is
generally  limited to 80%.  The draw period for the Home Equity Loan  product is
generally limited to 10 years, with a maximum of 15 years.

         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  five (5) years,  the Bank does not
generally require a new appraisal.

         Combo Loans.  At June 30, 1999,  $5.3  million,  or 13.6% of the Bank's
total loan portfolio, consisted of Combo Loans, of which approximately 46.0% 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


                                      - 6 -

<PAGE>

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 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 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 based upon prevailing rates in the Bank's
market area, the applicant's  credit history 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  rates for residential ARM loans.
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, 1999,  54.0% 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, 1999,  approximately $950,000, or 2.4% 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.

         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, and
because such loans  generally are made to borrowers with low income levels,  and
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.  One of the Bank's mobile home loans was
included in non-performing assets at June 30, 1999.

         Nonresidential  Real Estate Loans. At June 30, 1999,  $9.3 million,  or
23.8% of the Bank's  total loan  portfolio,  consisted  of  nonresidential  real
estate loans,  of which $967,000  constituted  loans secured by unimproved  land
only. The nonresidential  real estate loans included in the Bank's portfolio are
primarily  secured by real estate that includes a motel, a warehouse,  a medical
facility,  a funeral  home,  several  churches  and a  residential  real  estate
development  project.  At June 30, 1999,  $1.4  million,  or 15.0% of the Bank's
nonresidential  loan  portfolio,  was secured by real estate being developed for
residential  housing.  At the  same  date,  $477,000,  or  5.1%  of  the  Bank's
nonresidential  loan  portfolio,  was secured by  churches.  The Bank  currently
originates  nonresidential  real estate  loans as one-year  adjustable-rate  and
monthly  floating-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, 1999 was  $950,000,  net of  participation  portion  sold.  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.



                                     - 7 -
<PAGE>

         Multi-Family  Loans.  Approximately $1.1 million, or 2.8% of the Bank's
portfolio  of loans at June 30,  1999,  consisted  of  multi-family  loans.  The
largest  multi-family  loan at June 30, 1999 had a balance of  $512,000  and was
secured by an apartment complex. All of the Bank's multi-family loans were fully
performing as of June 30, 1999.  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 $999,000 as of June 30, 1999, or 2.6% 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'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 residential mortgage
loans do,  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, 1999,  consumer loans amounting to $28,000 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.

         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  experience some difficulty
selling such non-conforming  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 in that,  among other things,  the Bank 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
terms.

         The Bank confines its loan  origination  activities  primarily to Owen,
Putnam and  surrounding  counties in Indiana.  At June 30,  1999,  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


                                     - 8 -
<PAGE>

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, 1999,
the Bank did not hold any participation loans.

         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,
                                                    ------------------------------------------
                                                      1999             1998              1997
                                                    -------           -------          -------
                                                                  (In thousands)
<S>                                                 <C>               <C>              <C>
Gross loans receivable
   at beginning of period......................     $34,475           $34,777          $27,586
                                                    -------           -------          -------
Originations:
   Mortgage loans:
     Residential...............................       9,660             5,664            7,967
     Other.....................................       2,044               641            4,380
                                                    -------           -------          -------
       Total mortgage loans....................      11,704             6,305           12,347
                                                    -------           -------          -------
   Mobile home loans...........................         317               164               78
   Consumer loans:
     Installment...............................         810               793              915
     Share.....................................         101                97              131
                                                    -------           -------          -------
       Total consumer loans....................         911               890            1,046
                                                    -------           -------          -------
            Total originations.................      12,932             7,359           13,471
Purchases (sales) of participation loans.......         ---               ---              ---
Repayments and other deductions................       8,218             7,661            6,280
                                                    -------           -------          -------
   Gross loans receivable at end of period.....     $39,189           $34,475          $34,777
                                                    =======           =======          =======
</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
residential  mortgage  loans. A late charge is 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 presently  maintains two automated  teller machines  ("ATMs").
One is located at its main office in Spencer,  Indiana.  A second ATM is located
at the Bank's branch office in Cloverdale,  Indiana.  The Bank's ATMs operate in
the MAC(R) regional network and the CIRRUS(R)  nationwide  network.  The Company
does not derive significant income from the ATM cards.

         Mortgage-Backed Securities. At June 30, 1999, the Bank had $7.8 million
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.

                                     - 9 -
<PAGE>
<TABLE>
<CAPTION>

                                                                           At June 30,
                                          -----------------------------------------------------------------------
                                                   1999                       1998                      1997
                                          -------------------       --------------------      -------------------
                                          Amortized     Fair        Amortized      Fair       Amortized      Fair
                                             Cost       Value          Cost        Value         Cost        Value
                                             ----       -----          ----        -----         ----        -----
                                                                         (In thousands)

<S>                                       <C>         <C>               <C>         <C>          <C>          <C>
     Total mortgage-backed
     securities............               $7,771      $7,570            $537        $543         $788         $793

     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, 1999.

                                                            Amount at June 30, 1999, 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)

   Mortgage-backed securities
     available for sale....                  ---      ---                ---      ---          $7,771       $6.4%
</TABLE>


     The  following  table sets forth the changes in the Bank's  mortgage-backed
securities portfolio for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>


                                                  For the Year Ended June 30,
                                             ---------------------------------------
                                             1999             1998             1997
                                             -----          ---------         ------
                                                         (In thousands)
<S>                                           <C>             <C>              <C>
Beginning balance.....................        $543            $  793           $3,119
Purchases.............................       8,659               ---              929
Sales  ...............................         ---               ---           (2,904)
Monthly repayments....................      (1,385)             (249)            (366)
Premium and discount
   amortization, net..................         (46)               (1)              10
Unrealized loss on securities
   available for sale.................        (201)              ---                5
                                            ------            ------          -------
Ending balance........................      $7,570            $  543          $   793
                                            ======            ======          =======
</TABLE>


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,  1999,  $79,000,  or 0.15% of the
Company's total assets, were non-performing loans (loans delinquent more than 90
days and non-accruing  loans) compared to $279,000,  or 0.66% of total assets at
June 30, 1998. At June 30, 1999,  residential loans and consumer loans accounted
for 64.6% and 35.4%, respectively, of non-performing loans. There were no


                                     - 10 -
<PAGE>

non-accruing  investments  at June 30, 1999. As of June 30, 1999,  the Bank held
$6,000  of  Real  Estate  Owned  ("REO")  properties  and no  other  repossessed
properties.

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

<TABLE>
<CAPTION>
                                                             At June 30,
                                               ---------------------------------------
                                               1999             1998              1997
                                               ----            -------            ----
                                                           (In thousands)

<S>                                             <C>              <C>              <C>
Non-accruing loans (1).................         $79              $279             $ 562
Total non-performing assets............          85               499               749
Non-performing loans to total loans....         0.20%            0.81%             1.65%
Non-performing assets to total assets..         0.16             1.17              1.76
</TABLE>
---------------
(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,  1999,
         $51,000 of non-accruing  loans were residential  loans and $28,000 were
         consumer  loans.  Additional  interest  income  that  would  have  been
         recorded had income on non-accruing loans been  considered  collectible
         and accounted for in accordance  with their  original  terms was $5,000
         for the year ended June 30, 1999.

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

<TABLE>
<CAPTION>
                                                                       June 30,
                                 --------------------------------------------------------------------------------
                                          1999                           1998                      1997
                                 --------------------------    -------------------------  -----------------------
                                                   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>  <C>       <C>
Loans delinquent
   for (1):
     30-89 days..........           25    $630      1.61%          12     $293    0.86%      37   $   905   2.65%
     90 days and over....           10      79      0.20           11      279    0.81       18       562   1.65
                                  ----    ----      ----           --     ----    ----       --    ------   ----
       Total delinquent
          loans..........           35    $709(2)   1.81%          23     $572    1.67%      55    $1,467   4.30%
                                  ====    ====      ====           ==     ====    ====       ==    ======   ====
</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, $611,000 consisted of residential real estate loans and
         $98,000 consisted 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.

         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
risks 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
assets so classified or to charge off such amounts.

                                     - 11 -
<PAGE>

         At June 30, 1999, 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, 1999
                                                         -----------------
                                                          (In thousands)

Substandard loans....................................           $77
Doubtful loans.......................................            14
Loss loans...........................................           ---
Special mention loans................................           657
                                                               ----
   Total classified loans............................          $748
                                                               ====
General loss allowances..............................          $336
Specific loss allowances.............................           ---
                                                               ----
   Total allowances..................................          $336
                                                               ====

         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 classified 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, 1999.  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.

         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, 1999.

<TABLE>
<CAPTION>


                                                                           Year Ended June 30,
                                                   ------------------------------------------------------------------
                                                   1999            1998           1997            1996           1995
                                                   ----            ----           ----            ----           ----
                                                                         (Dollars in thousands)
<S>                                                <C>            <C>             <C>           <C>              <C>
Balance of allowance at beginning
   of period................................       $320           $231            $150          $   57           $  26
                                                   ----           ----            ----            ----            ----
Less charge offs:
Mortgage loans..............................        (26)            (6)            ---             ---             ---
Consumer loans..............................         (2)            (7)             (4)             (1)             (6)
Add recoveries:
Consumer loans..............................        ---            ---             ---             ---               1
                                                   ----           ----            ----            ----            ----
Net (charge-offs) recoveries................        (28)           (13)             (4)             (1)             (5)
Provisions for losses on loans..............         44            102              85              94              36
                                                   ----           ----            ----            ----            ----
Balance of allowance at end of period.......       $336           $320            $231            $150            $ 57
                                                   ====           ====            ====            ====            ====
Net charge-offs to total average
   loans receivable for period..............       0.08%          0.04%           0.01%            --- %          0.02%
Allowance at end of period to
   net loans receivable at end
   of period (1)............................       0.88           0.94            0.67            0.55            0.22
Allowance to total non-performing
   loans at end of period...................     425.32         114.70           41.10           41.78           57.00
</TABLE>


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



                                     - 12 -
<PAGE>

         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,
                                     ----------------------------------------------------------------------------------
                                            1999                            1998                         1997
                                     ---------------------         ----------------------         ---------------------
                                                  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.........................  $  45          53.46%         $  35           56.76%         $  25           57.22%
Combo...............................     30          13.60             33           13.52             24           12.64
Nonresidential......................     45          23.79             32           22.07             23           19.83
Multi-family........................     20           2.80             12            2.62                           2.82
Mobile home loans...................     45           2.43             35            2.43             25            3.91
Commercial and industrial
   loans............................     15           1.37              6            0.70              5            1.82
Consumer loans......................     25           2.55             19            1.90             14            1.76
Unallocated.........................    111            ---            148             ---            115             ---
                                       ----         ------           ----          ------           ----          ------
     Total..........................   $336         100.00%          $320          100.00%          $231          100.00%
                                       ====         ======           ====          ======           ====          ======
</TABLE>


Investments and FHLB Stock

         The   Company's   investment   portfolio   (excluding   mortgage-backed
securities) consists of U.S. government agency securities, equity securities and
Federal Home Loan Bank  ("FHLB")  stock.  At June 30, 1999,  approximately  $1.6
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, 1999.

         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,
                                                --------------------------------------------------------------
                                                         1999                  1998                  1997
                                                --------------------------------------------------------------
                                                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.........................       $100       $101       $100       $103    $   925       $931
   Marketable equity securities.............        813        617      1,320      1,272        344        378
                                                 ------     ------     ------     ------     ------     ------
     Total securities
       available for sale...................        913        718      1,420      1,375      1,269      1,309
                                                 ------     ------     ------     ------     ------     ------
FHLB stock (2)..............................        660        660        500        500        500        500
                                                 ------     ------     ------     ------     ------     ------
     Total investments......................     $1,573     $1,378     $1,920     $1,875     $1,769     $1,809
                                                 ======     ======     ======     ======     ======     ======
</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.



                                     - 13 -
<PAGE>

         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, 1999.
<TABLE>
<CAPTION>
                                                         Amount at June 30, 1999, 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%                   ---               ---%
                                                ----                                  ----
     Total investments..................        $100           7.84                    ---               ---%
                                                ====                                  ====
</TABLE>


Sources of Funds

         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
are also an important source of funding for the Bank.

         Deposits.  Deposits  are  attracted,  principally  from within Owen and
Putnam  Counties,   through  the  offering  of  a  broad  selection  of  deposit
instruments  including  fixed-rate   certificates  of  deposit,  NOW  and  other
transaction  accounts,  and savings  accounts.  Substantially  all of the Bank's
depositors  are  residents of Owen County and the five  surrounding  counties of
Putnam,  Clay, Greene,  Monroe and Morgan.  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 rarely pays 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.



                                     - 14 -
<PAGE>

     An analysis of the Bank  deposit  accounts by type,  maturity,  and rate at
June 30, 1999, is as follows:
<TABLE>
<CAPTION>

                                                           Minimum         Balance at                          Weighted
                                                           Opening          June 30,           % of             Average
Type of Account                                            Balance            1999           Deposits            Rate
---------------                                            ---------       ----------        --------          --------
                                                                              (Dollars in thousands)
<S>                                                        <C>               <C>              <C>                <C>
Withdrawable:
   Savings accounts..................................      $    10           $3,782           11.58%             2.62%
   Money market accounts.............................        5,000            1,715            5.25              3.73
   NOW and other transaction accounts................           50            3,293           10.08              1.60
                                                                            -------          ------
     Total withdrawable..............................                         8,790           26.91              2.45
                                                                            -------          ------
Certificates (original terms):
   91 days...........................................        1,000              193            0.59              4.04
   6 months..........................................        1,000              918            2.81              4.46
   12 months.........................................        1,000           11,816           36.21              5.21
   24 months.........................................        1,000            2,911            8.91              5.37
   30 months.........................................        1,000            2,572            7.88              5.99
   36 months.........................................        1,000              416            1.27              6.09
   48 months.........................................        1,000              671            2.05              5.61
   60 months.........................................        1,000            4,017           12.30              5.95
IRAs (original terms):
   12 months.........................................        1,000              265            0.81              6.17
   36 months.........................................        1,000                8            0.02              6.00
   60 months.........................................        1,000               80            0.24              5.08
                                                                            -------          ------
     Total certificates and IRAs.....................                        23,867           73.09              5.44
                                                                            -------          ------
     Total deposits..................................                       $32,657          100.00%             4.63%
                                                                            =======          ======
</TABLE>



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


                                                      Year Ended June 30,
                                          ------------------------------------------
                                            1999             1998              1997
                                          -------           -------          -------
                                                        (In thousands)

<S>                                       <C>              <C>               <C>
4.00% and under....................       $   ---          $     65          $    55
4.01 - 6.00 %......................        19,682            14,971           14,174
6.01 - 8.00%.......................         4,185             4,020            5,304
                                          -------           -------          -------
Total  ............................       $23,867           $19,056          $19,533
                                          =======           =======          =======
</TABLE>


         The following table  represents,  by various  interest rate categories,
the amounts of time deposits  maturing  during each of the three years following
June 30, 1999, and the total amount maturing  thereafter.  Matured  certificates
which have not been renewed as of June 30, 1999,  have been allocated based upon
certain rollover assumptions:
<TABLE>
<CAPTION>


                                                             Amounts At
                                                     June 30, 1999, 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................      $   ---           $  ---             $ ---            $  ---
4.01 - 6.00 %..................       14,686            2,562               324             2,110
6.01-8.00%.....................        3,117              177               520               371
                                     -------           ------              ----            ------
Total  ........................      $17,803           $2,739              $844            $2,481
                                     =======           ======              ====            ======
</TABLE>




                                     - 15 -
<PAGE>

         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,
1999.

                Maturity                                         (In thousands)
         Three months or less.................................      $   535
         Greater than three months
              through six months..............................        1,981
         Greater than six months
              through twelve months...........................        1,327
         Over twelve months...................................        1,305
                                                                     ------
              Total...........................................       $5,148
                                                                     ======


         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
                                       1999     Deposits      1998        1998       Deposits    1997        1997      Deposits
                                    ----------  --------    -------    ----------    --------  ---------   ---------  ----------
                                                                       (Dollars in thousands)

<S>                                  <C>         <C>           <C>       <C>           <C>     <C>         <C>            <C>
Withdrawable:
   Savings accounts................. $   3,782   11.58%        $511      $3,271        12.28%  $   329     $2,942         11.25%
   Money market accounts............     1,715    5.25          203       1,512         5.67      (705)     2,217          8.48
   NOW accounts and
     other transaction accounts.....     3,293   10.08          483       2,810        10.54     1,345      1,465          5.60
                                       -------  ------       ------     -------       ------      ----    -------        ------
     Total withdrawable.............     8,790   26.91        1,197       7,593        28.49       969      6,624         25.33
Certificates (original terms):
   91 days..........................       193    0.59           61         132         0.50       (24)       156          0.60
   6 months.........................       918    2.81          209         709         2.66        45        664          2.54
   12 months........................    11,816   36.21        4,625       7,191        26.98       720      6,471         24.74
   24 months........................     2,911    8.91          547       2,364         8.87      (892)     3,256         12.43
   30 months........................     2,572    7.88         (251)      2,823        10.59      (207)     3,030         11.58
   36 months........................       416    1.27           11         405         1.52      (101)       506          1.93
   48 months........................       671    2.05          (50)        721         2.71       (94)       815          3.12
   60 months........................     4,017   12.30         (609)      4,626        17.36        12      4,614         17.64
IRAs (original terms):
   12 months........................       265    0.81          193          72         0.27        65          7          0.03
   36 months........................         8    0.02            1           7         0.03       ---          7          0.03
   60 months........................        80    0.24           74           6         0.02        (1)         7          0.03
                                       -------  ------       ------     -------       ------      ----    -------        ------
     Total certificates and IRAs....    23,867   73.09        4,811      19,056        71.51      (477)    19,533         74.67
                                       -------  ------       ------     -------       ------      ----    -------        ------
       Total deposits...............   $32,657  100.00%      $6,008     $26,649       100.00%     $492    $26,157        100.00%
                                       =======  ======       ======     =======       ======      ====    =======        ======
</TABLE>

         During fiscal year 1998, 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 1998.

         Borrowings.  The Bank focuses on generating loans by utilizing the best
source of funding from deposits,  investments  or borrowings.  At June 30, 1999,
the Bank had $13.2 million in borrowings  from the FHLB of  Indianapolis,  which
mature on various  dates  primarily  during the years 2000 through 2005 and have
interest  rates ranging from 5.17% to 6.86%.  The Bank does not  anticipate  any
difficulty in obtaining  advances  appropriate to meet its  requirements  in the
future. The Bank had $30.9 million in eligible assets available as collateral


                                     - 16 -
<PAGE>

for advances  from the FHLB of  Indianapolis  as of June 30, 1999.  Based on the
Bank's blanket  collateral  agreements,  advances from the FHLB of  Indianapolis
must be  collateralized  by 170%  of  eligible  assets.  Therefore,  the  Bank's
eligible collateral would have supported approximately $19.2 million in advances
from the FHLB of Indianapolis as of June 30, 1999. However,  the Bank's Board of
Directors has by resolution limited the amount of authorized borrowings to $16.0
million at June 30, 1999.

         The following table presents certain information relating to the Bank's
FHLB borrowings for the years ended June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>

                                                                   At or for the Year
                                                                     Ended June 30,
                                                       -------------------------------------------
                                                        1999               1998            1997
                                                       -------            ------         --------
                                                                 (Dollars in thousands)

<S>                                                    <C>                <C>            <C>
FHLB Advances:
   Average balance outstanding.......................  $10,242            $8,592         $  7,725
   Maximum amount outstanding at any
     month-end during the period.....................   13,200            10,000           10,000
   Weighted average interest rate
     during the period...............................     5.83%             6.16%           6.30%
   Weighted average interest rate
     at end of period................................     5.61%             6.01%           6.29%
</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.

         In connection  with the Bank's  conversion to an Indiana mutual savings
bank in 1996,  the FDIC required the Bank to cease BSF's land  acquisitions  and
divest of BSF's  non-conforming  real estate holdings  within five years,  among
other conditions.  Recognizing the FDIC's mandate,  BSF has methodically reduced
its outstanding  land contracts and real estate  holdings.  As of June 30, 1999,
outstanding contracts on BSF subdivision lots were:

 Name of Subdivision                 Number of Contracts     Contract Balance
 -------------------                 -------------------     ----------------
 10 O'Clock Line                              3                  $  39,340
 Greene Woods                                 3                     34,412
 Autumn Hills                                11                    115,829
 Coon Path                                    2                     18,662
 Purchased contracts                          2                     15,112
                                             --                   --------
      Total outstanding contracts            21                   $223,355
                                             ==                   ========

         Additionally,  at June 30, 1999,  BSF had four unsold lots in Coon Path
with a sale price of $44,900 and cost of $20,433.

         BSF, from time to time, keeps a number of its tracts of land for mobile
home repossession.  BSF purchases repossessed mobile homes from the Bank at book
value, which would approximate market 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.



                                     - 17 -
<PAGE>

         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 order to permit the Company to continue its  profitable  real estate
development activities through BSF, the Company and the Bank successfully sought
charter  conversions  under  the  authority  granted  to the  Office  of  Thrift
Supervision  ("OTS").  Effective  May 1,  1999 the  Company  became a  federally
chartered  savings and loan holding  company and the Bank became a federal stock
savings  bank.  Management  expects  the  resumption  of BSF  activity to have a
positive impact on Company earnings in future periods.

         At June 30, 1999, the Bank's aggregate  investment in BSF was $305,000.
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 a condensed  balance sheet for BSF at June 30, 1999,
1998 and 1997, and a condensed income statement for BSF for the years ended June
30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>

                                                                     Condensed Balance Sheet
                                                                            June 30,
                                                   ---------------------------------------------------------
                                                   1999                       1998                      1997
                                                   ----                       ----                      ----
                                                                         (In thousands)
Assets:
<S>                                                 <C>                     <C>                        <C>
   Cash.................................            $72                     $   14                     $   29
   Investment securities................            ---                         85                        ---
   Loans, net...........................            223                        329                        370
   Land acquired for development........             20                         21                         21
                                                   ----                       ----                       ----
       Total assets.....................           $315                       $449                       $420
                                                   ====                       ====                       ====
Liabilities:
   Other liabilities....................            $10                         10                          3
                                                   ----                       ----                       ----
       Total liabilities................            ---                         10                          3
Equity Capital..........................            305                        439                        417
                                                   ----                       ----                       ----
       Total liabilities and
         equity capital.................           $315                       $449                       $420
                                                   ====                       ====                       ====

                                                                   Condensed Income Statement
                                                                            June 30,
                                                 -----------------------------------------------------------
                                                 1999                        1998                      1997
                                                 ----                        ----                      ----
                                                                         (In thousands)
Interest income.........................          $35                       $  39                       $44
Interest expense........................          ---                         ---                       ---
                                                 ----                        ----                      ----
   Net interest income..................           35                          39                        44
                                                 ----                        ----                      ----
Income from sale of real estate.........            6                           7                        31
Non-interest expense:
   Salaries and employee benefits.......            5                           4                         4
   Printing and office supplies.........            1                         ---                         6
   Other expenses.......................            8                           7                         8
                                                 ----                        ----                      ----
       Total non-interest expense.......           14                          11                        18
                                                 ----                        ----                      ----

Income before income tax................           27                          35                        57
   Income tax expense...................           11                          14                        22
                                                 ----                        ----                      ----
       Net income.......................          $16                       $  21                       $35
                                                 ====                        ====                      ====
</TABLE>




                                     - 18 -
<PAGE>

Income Tax Credits

         The  Company's  subsidiary  Bank entered into a  Partnership  Agreement
("Agreement") with Area Ten Development,  Inc. (the "General Partner"), a wholly
owned  subsidiary of Area 10 Council on Aging of Monroe and Owen Counties,  Inc.
to finance  construction  and development of a low income housing  project.  The
project,  Cunot  Apartments,  L.P.,  is a 24-unit  apartment  complex for senior
living.  The Bank  purchased a 99% limited  partnership  interest for  $732,000.
Funds were  dispersed by  installments  during project  construction,  which was
completed during July 1999. The Bank's investment in the project is eligible for
income tax credits over the fifteen-year life of the Agreement.

         As  of  June  30,  1999,  the  total  capitalized  building,  land  and
organizational costs for the project were $1,373,000.  Management estimates that
the Bank will be able to utilize approximately $107,000 in low-income tax credit
annually, beginning in fiscal year 2000. However, to maximize the benefit of the
tax credits,  the project must maintain an acceptable  occupancy  rate and prove
that it qualifies  for the tax credits on an annual basis.  Additionally,  there
are no assurances  that changes in tax laws will not affect the  availability of
low income tax credits in future years.  Recent reports from the General Partner
indicate  an  occupancy  rate of  approximately  80%.  In  accordance  with  the
Agreement,  the process of certifying the project's  eligibility for tax credits
if currently underway.

Employees

         As of June 30,  1999,  the  Company  employed 20 persons on a full-time
basis and four persons on a part-time basis. None of the Company's  employees is
represented by a collective bargaining group.  Management considers its employee
relations to be excellent.

         The Company'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 Company established the Employee Stock
Ownership Plan and Trust ("ESOP") and the Management  Recognition  and Retention
Plan and Trust ("RRP").  In October,  1997, the shareholders  approved the Stock
Option Plan. The ESOP, RRP and the Stock Option Plan 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 and Putnam 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.

         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."

                                     - 19 -
<PAGE>

         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

General

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

         An OTS  regulation  establishes  a schedule for the  assessment of fees
upon all savings  associations to fund the operations of the OTS. The regulation
also  establishes a schedule of fees for the various types of  applications  and
filings made by savings associations with the OTS. The general assessment, to be
paid on a  semiannual  basis,  is based  upon the  savings  association's  total
assets, including consolidated  subsidiaries,  as reported in a recent quarterly
thrift financial report.  Currently,  the quarterly  assessment rates range from
 .01164% of assets for associations with assets of $67 million or less to .00308%
for  associations  with assets in excess of $35 billion.  The Bank's  semiannual
assessment  under this assessment  scheme,  based upon its total assets at March
31, 1999, was $9,151.

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

      The  U.S.  Congress  is  currently   considering  broad  financial  reform
legislation  intended to modernize the financial  services  industry.  Under the
pending  legislation,  bank  holding  companies  may be  authorized,  subject to
certain conditions,  to acquire manufacturing and other nonfinancial  companies,
and nonfinancial  companies may be authorized to acquire banks. Other provisions
of the  pending  legislation  could  affect the types of  activities  in which a
unitary  savings and loan  holding  company,  such as the Holding  Company,  may
engage. In addition,  previous versions of banking reform legislation considered
by  Congress  included   provisions  that  would  require  all  federal  savings
associations,  including  the  Bank,  to  convert  to  either a state  bank or a
national  bank and would  require  savings and loan holding  companies to become
bank holding  companies.  Because  Congress is currently  considering  different
versions of the proposed  legislation,  it cannot be  determined  which of these
conflicting  provisions might be included in any final  legislation  approved by
Congress or how such legislation, if enacted, would affect the activities of the
Holding Company or the Bank.

Federal Home Loan Bank System

         The  Bank is a  member  of the  FHLB of  Indianapolis,  which is one of
twelve  regional  FHLBs.  Each FHLB serves as a reserve or central  bank for its
member savings associations and othe financial  institutions within its assigned
region. It is funded primarily from funds deposited by savings  associations and
proceeds  derived from the sale of consolidated  obligations of the FHLB System.
It makes loans to members  (i.e.,  advances)  in  accordance  with  policies and
procedures  established by the Board of Directors of the FHLB. All FHLB advances


                                     - 20 -
<PAGE>

must be fully  secured by sufficient  collateral as determined by the FHLB.  The
Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB
System, including the FHLB of Indianapolis.

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of Indianapolis  in an amount equal to at least 1% of its aggregate  unpaid
residential  mortgage loans, home purchase contracts,  or similar obligations at
the  beginning  of each year.  The Bank is  currently  in  compliance  with this
requirement.  At June 30, 1999,  the Bank's  investment  in stock of the FHLB of
Indianapolis was $660,000. The FHLB imposes various limitations on advances such
as limiting the amount of certain types of real estate-related collateral to 30%
of a member's  capital and limiting total  advances to a member.  Interest rates
charged for advances vary depending upon maturity, the cost of funds to the FHLB
of Indianapolis and the purpose of the borrowing.

      All twelve 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 have adversely affected
the level of FHLB dividends paid and could continue to do so in the future.  For
the fiscal year ended June 30, 1999,  dividends paid by FHLB to the Bank totaled
$45,000, for an annual rate of 8.01%.

Liquidity

         Federal  regulations  require  the Bank to maintain  minimum  levels of
liquid assets (cash,  certain time  deposits,  bankers'  acceptances,  specified
United States Government, state or federal agency obligations,  shares of mutual
funds and certain  corporate debt  securities and commercial  paper) equal to an
amount not less than a  specified  percentage  of its net  withdrawable  deposit
accounts plus short-term  borrowings.  This liquidity requirement may be changed
from  time to  time  by the  OTS to an  amount  within  the  range  of 4% to 10%
depending upon economic conditions and savings flows of member institutions. The
OTS recently  lowered the level of liquid  assets that must be held by a savings
association from 5% to 4% of the  association's  net withdrawable  accounts plus
short-term borrowings based upon the average daily balance of such liquid assets
for each quarter of the  association's  fiscal year.  The Bank has  historically
maintained its liquidity  ratio at a level in excess of that  required.  At June
30, 1999, the Bank's  liquidity ratio was 38.4%. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.

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 (the "BIF") for commercial
banks and state savings banks and the SAIF for savings  associations such as the
Bank and banks that have acquired deposits from savings  associations.  The FDIC
is  required  to maintain  designated  levels of  reserves  in each fund.  As of
September  30, 1996,  the reserves of the SAIF were below the level  required by
law,  primarily  because a significant  portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996,  provisions  designed to  recapitalize  the SAIF and eliminate the premium
disparity  between the BIF and SAIF were  signed into law, as further  described
below.

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



                                     - 21 -
<PAGE>

         On September 30, 1996,  President  Clinton signed into law  legislation
which included  provisions  designed to recapitalize  the SAIF and eliminate the
significant  premium  disparity between the BIF and the SAIF. Under the new law,
the Bank was charged a one-time  special  assessment  equal to $.657 per $100 in
assessable  deposits  at March  31,  1995.  The Bank  recognized  this  one-time
assessment as a non-recurring  operating expense of $142,000 ($86,000 after tax)
during the three-month period ended September 30, 1996. The assessment was fully
deductible for both federal and state income tax purposes.  Beginning January 1,
1997, the Bank's annual deposit  insurance premium was reduced from .23% to .06%
of total  assessable  deposits.  BIF  institutions  pay lower  assessments  than
comparable SAIF  institutions  because BIF institutions pay only 20% of the rate
being paid by SAIF  institutions  on their  deposits with respect to obligations
issued  by  the  federally-chartered  corporation  which  provided  some  of the
financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also
provides for the merger of the SAIF and the BIF by 1999, but not until such time
as bank and thrift  charters are  combined.  Until the  charters  are  combined,
savings  associations  with SAIF deposits may not transfer deposits into the BIF
system without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution  converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance  assessments to
the SAIF, and as long as certain other conditions are met.

Regulatory Capital

         Currently,  savings  associations are subject to three separate minimum
capital-to-assets  requirements:  (i) a leverage limit,  (ii) a tangible capital
requirement,  and (iii) a risk-based  capital  requirement.  The leverage  limit
requires that savings  associations  maintain  "core  capital" of at least 3% of
total  assets.  The OTS recently  adopted a regulation,  which became  effective
April 1, 1999,  that  requires  savings  associations  that  receive the highest
supervisory  rating for safety and  soundness to maintain  "core  capital" of at
least 3% of total  assets.  All other  savings  associations  must maintain core
capital of at least 4% of total  assets.  Core capital is  generally  defined as
common shareholders' equity (including retained income), noncumulative perpetual
preferred  stock and related  surplus,  certain  minority  equity  interests  in
subsidiaries,  qualifying  supervisory  goodwill,  purchased  mortgage servicing
rights and purchased credit card relationships  (subject to certain limits) less
nonqualifying  intangibles.  Under the tangible capital  requirement,  a savings
association  must maintain  tangible  capital (core capital less all  intangible
assets except  purchased  mortgage  servicing rights which may be included after
making the above-noted  adjustment in an amount up to 100% of tangible  capital)
of at least 1.5% of total assets. Under the risk-based capital  requirements,  a
minimum amount of capital must be maintained by a savings association to account
for the  relative  risks  inherent  in the type and amount of assets held by the
savings  association.  The  risk-based  capital  requirement  requires a savings
association to maintain  capital  (defined  generally for these purposes as core
capital plus general  valuation  allowances  and  permanent or maturing  capital
instruments such as preferred stock and  subordinated  debt less assets required
to be deducted) equal to 8.0% of risk-weighted  assets.  Assets are ranked as to
risk in one of four categories (0-100%). A credit risk-free asset, such as cash,
requires no risk-based  capital,  while an asset with a significant credit risk,
such as a non-accrual loan, requires a risk factor of 100%.  Moreover, a savings
association must deduct from capital,  for purposes of meeting the core capital,
tangible capital and risk-based capital  requirements,  its entire investment in
and loans to a subsidiary  engaged in activities not  permissible for a national
bank (other than  exclusively  agency  activities  for its customers or mortgage
banking  subsidiaries).  At June 30, 1999,  the Bank was in compliance  with all
capital requirements imposed by law.

         The OTS has  promulgated  a rule which sets forth the  methodology  for
calculating an interest rate risk  component to be used by savings  associations
in calculating  regulatory  capital.  The OTS has delayed the  implementation of
this rule, however.  The rule requires savings  associations with "above normal"
interest rate risk  (institutions  whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain  additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation,  the
Bank would be exempt from its  provisions  because it has less than $300 million
in assets and its  risk-based  capital ratio exceeds 12%. The Bank  nevertheless
measures its interest rate risk in conformity with the OTS regulation and, as of
June 30, 1999, the Bank's interest rate risk was within the parameters set forth
in the regulation.



                                     - 22 -
<PAGE>

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

Prompt Corrective Action

         The Federal Deposit Insurance  Corporation  Improvement Act of 1991, as
amended ("FedICIA")  requires,  among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements.  For these purposes,  FedICIA establishes
five capital tiers: well capitalized, adequately capitalized,  undercapitalized,
significantly  undercapitalized,  and critically  undercapitalized.  At June 30,
1999,  the Bank was  categorized as "well  capitalized,"  meaning that its total
risk-based  capital  ratio  exceeded  10%, its Tier I risk-based  capital  ratio
exceeded  6%,  its  leverage  ratio  exceeded  5%,  and it was not  subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.

      The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as  "undercapitalized"  would be  subject  to  growth  limitations  and would be
required  to submit a capital  restoration  plan,  and a  holding  company  that
controls  such a savings  association  would be required to  guarantee  that the
savings   association   complies  with  the  restoration  plan.   "Significantly
undercapitalized"   savings   associations   would  be  subject  to   additional
restrictions.  Savings  associations  deemed  by  the  FDIC  to  be  "critically
undercapitalized"  would  be  subject  to  the  appointment  of  a  receiver  or
conservator.

Capital Distributions Regulation

         The OTS recently adopted a regulation,  which became effective on April
1, 1999, that revised the restrictions that apply to "capital  distributions" by
savings associations. The amended regulation defines a capital distribution as a
distribution of cash or other property to a savings  association's  owners, made
on account of their ownership.  This definition includes a savings association's
payment  of  cash  dividends  to  shareholders,  or  any  payment  by a  savings
association  to  repurchase,  redeem,  retire,  or otherwise  acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an  affiliate's  acquisition  of those shares or interests.
The amended regulation does not apply to dividends  consisting only of a savings
association's shares or rights to purchase such shares.

         The amended  regulation  exempts certain savings  associations from the
requirement  under the previous  regulation that all savings  associations  file
either  a notice  or an  application  with the OTS  before  making  any  capital
distribution.  As revised, the regulation requires a savings association to file
an application for approval of a proposed capital  distribution  with the OTS if
the association is not eligible for expedited  treatment under OTS's application
processing  rules, or the total amount of all capital  distributions,  including
the proposed capital distribution, for the applicable calendar year would exceed
an amount  equal to the savings  association's  net income for that year to date
plus the savings  association's  retained net income for the preceding two years


                                     - 23 -
<PAGE>

(the "retained net income standard").  At June 30, 1999, the Bank's retained net
income standard was 554,000. A savings association must also file an application
for  approval of a proposed  capital  distribution  if,  following  the proposed
distribution, the association would not be at least adequately capitalized under
the OTS prompt corrective action  regulations,  or if the proposed  distribution
would violate a prohibition contained in any applicable statute,  regulation, or
agreement between the association and the OTS or the FDIC.

         The amended regulation  requires a savings association to file a notice
of a proposed capital  distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and:  (1) the  savings  association  will not be at least well  capitalized  (as
defined  under the OTS  prompt  corrective  action  regulations)  following  the
capital  distribution;  (2) the capital distribution would reduce the amount of,
or retire any part of the savings  association's  common or preferred  stock, or
retire any part of debt instruments such as notes or debentures  included in the
association's  capital  under the OTS  capital  regulation;  or (3) the  savings
association is a subsidiary of a savings and loan holding  company.  Because the
Bank is a  subsidiary  of a  savings  and  loan  holding  company,  this  latter
provision requires that, at a minimum,  the Bank must file a notice with the OTS
thirty days before making any capital distributions to the Holding Company.

         In  addition  to these  regulatory  restrictions,  the  Bank's  Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company.  The Plan of Conversion requires the Bank to
establish and maintain a liquidation account for the benefit of Eligible Account
Holders and  Supplemental  Eligible  Account Holders and prohibits the Bank from
making capital  distributions  to the Holding  Company if its net worth would be
reduced below the amount required for the liquidation account.

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 the 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 Bank does not believe that these regulations
will have a materially adverse effect on its current operations.

Safety and Soundness Standards

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

Real Estate Lending Standards

         OTS regulations require savings  associations to establish and maintain
written  internal  real estate  lending  policies.  Each  association's  lending
policies  must  be  consistent  with  safe  and  sound  banking   practices  and
appropriate  to the size of the  association  and the  nature  and  scope of its
operations.   The  policies  must  establish   loan  portfolio   diversification
standards;  establish prudent underwriting  standards,  including  loan-to-value
limits, that are clear and measurable;  establish loan administration procedures
for the  association's  real  estate  portfolio;  and  establish  documentation,
approval,   and  reporting   requirements   to  monitor   compliance   with  the
association's  real estate  lending  policies.  The  association's  written real
estate lending policies must be reviewed and approved by the association's board
of directors at least annually. Further, each association is expected to monitor
conditions  in its real  estate  market  to  ensure  that its  lending  policies
continue to be appropriate for current market conditions.

Loans to One Borrower

         Under OTS regulations, the Bank may not make a loan or extend credit to
a single or  related  group of  borrowers  in  excess  of 15% of its  unimpaired
capital and  surplus.  Additional  amounts may be lent,  not in excess of 10% of
unimpaired capital and surplus,  if such loans or extensions of credit are fully
secured by readily  marketable  collateral,  including  certain  debt and equity
securities but not including real estate.  In some cases, a savings  association
may lend up to 30 percent of unimpaired  capital and surplus to one borrower for
purposes  of  developing  domestic  residential   housing,   provided  that  the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending  authority.  At June 30, 1999, the Bank
did not have any loans or  extensions  of credit to a single or related group of
borrowers  in excess of its lending  limits.  The Bank does not believe that the
loans-to-one-borrower  limits  will have a  significant  impact on its  business
operations or earnings.



                                     - 24 -
<PAGE>

Transactions with Affiliates

         The Bank and Holding Company are 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.

Holding Company Regulation

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

         The HOLA  generally  prohibits  a  savings  and loan  holding  company,
without prior approval of the Director of the OTS, from (i) acquiring control of
any other savings association or savings and loan holding company or controlling
the assets  thereof or (ii)  acquiring or  retaining  more than 5 percent of the
voting shares of a savings association or holding company thereof which is not a
subsidiary.  Except  with the prior  approval  of the  Director  of the OTS,  no
director or officer of a savings and loan  holding  company or person  owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.

         The Holding Company's Board of Directors  presently intends to continue
to operate the Holding  Company as a unitary  savings and loan holding  company.
Under  current OTS  regulations,  there are  generally  no  restrictions  on the
permissible business activities of a unitary savings and loan holding company.

         Notwithstanding  the above rules as to permissible  business activities
of unitary  savings  and loan  holding  companies,  if the  savings  association
subsidiary of such a holding  company fails to meet the Qualified  Thrift Lender
("QTL") test,  then such unitary  holding  company  would become  subject to the
activities  restrictions  applicable to multiple holding companies.  (Additional
restrictions on securing  advances from the FHLB also apply).  See  "--Qualified
Thrift Lender." At June 30, 1999, the Bank's asset  composition was in excess of
that required to qualify the Bank as a Qualified Thrift Lender.

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



                                     - 25 -
<PAGE>

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

         Indiana  law  permits  federal and state  savings  association  holding
companies with their home offices  located outside of Indiana to acquire savings
associations  whose home offices are located in Indiana and savings  association
holding  companies with their principal  place of business in Indiana  ("Indiana
Savings  Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial  Institutions.  Moreover,  Indiana  Savings  Association
Holding  Companies  may acquire  savings  associations  with their home  offices
located outside of Indiana and savings associations holding companies with their
principal place of business  located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.

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

Federal Securities Law

         The shares of Common Stock of the 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.  If the Holding Company has fewer
than 300 shareholders, it may deregister the 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  or  unless  sold in
accordance  with the resale  restrictions of Rule 144 under 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.

Qualified Thrift Lender

         Savings  associations  must meet a QTL test.  If the Bank  maintains an
appropriate   level  of  qualified  thrift   investments   ("QTIs")   (primarily
residential    mortgages   and   related    investments,    including    certain
mortgage-related  securities)  and  otherwise  qualifies as a QTL, the Bank will
continue to enjoy full borrowing  privileges from the FHLB of Indianapolis.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus  intangible  assets,  property used by the  association  in conducting its
business and liquid  assets equal to 10% of total  assets).  Certain  assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings  associations may include shares of stock of the FHLBs,  FNMA, and FHLMC
as QTIs.  Compliance  with the QTL test is determined on a monthly basis in nine
out of every twelve months.

         A savings  association  which  fails to meet the QTL test  must  either
convert to a bank (but its deposit  insurance  assessments  and payments will be
those of and paid to SAIF) or be subject to the following penalties:  (i) it may
not enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities shall be limited to
those  of a  national  bank;  (iii) it shall  not be  eligible  for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting  payment of  dividends.  Three years  after  failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national  bank and a savings  association  and (ii) repay all  outstanding  FHLB

                                     - 26 -
<PAGE>
advances.  If such a savings  association  is  controlled  by a savings and loan
holding  company,  then such holding  company  must,  within a  prescribed  time
period,  become  registered as a bank holding  company and become subject to all
rules  and  regulations   applicable  to  bank  holding   companies   (including
restrictions as to the scope of permissible business activities).

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

         At June 30, 1999,  88.4% of the Bank's  portfolio assets (as defined on
that date) were  invested in qualified  thrift  investments  (as defined on that
date), and therefore the Bank's asset composition was in excess of that required
to qualify the Bank as a QTL.  Also,  the Bank does not expect to  significantly
change its lending or investment activities in the near future. The Bank expects
to continue to qualify as a QTL, although there can be no such assurance.

Acquisitions or Dispositions and Branching

         The Bank  Holding  Company Act  specifically  authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located.  Similarly,
a savings and loan  holding  company may  acquire  control of a bank.  Moreover,
federal  savings  associations  may  acquire  or  be  acquired  by  any  insured
depository  institution.   Regulations  promulgated  by  the  FRB  restrict  the
branching authority of savings associations  acquired by bank holding companies.
Savings  associations  acquired by bank  holding  companies  may be converted to
banks if they continue to pay SAIF premiums,  but as such they become subject to
branching and activity restrictions applicable to banks.

         Subject to certain  exceptions,  commonly  controlled banks and savings
associations  must reimburse the FDIC for any losses suffered in connection with
a failed  bank or  savings  association  affiliate.  Institutions  are  commonly
controlled  if one is owned by another or if both are owned by the same  holding
company.  Such claims by the FDIC under this provision are subordinate to claims
of depositors,  secured creditors,  and holders of subordinated debt, other than
affiliates.

         The OTS has adopted  regulations which permit  nationwide  branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association  meets the
domestic  building  and loan  test in  ss.7701(a)(19)  of the Code or the  asset
composition  test of ss.7701(c) of the Code.  Branching that would result in the
formation of a multiple  savings and loan holding  company  controlling  savings
associations  in more  than one  state is  permitted  if the law of the state in
which the savings association to be acquired is located specifically  authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their  holding  companies  in the state where the  acquiring  association  or
holding company is located. Moreover, Indiana banks and savings associations are
permitted  to  acquire  other  Indiana  banks and  savings  associations  and to
establish branches throughout Indiana.

         Finally,  the Riegle-Neal  Interstate Banking and Branching  Efficiency
Act of 1994 (the  "Riegle-Neal  Act") permits bank holding  companies to acquire
banks  in  other  states  and,   with  state  consent  and  subject  to  certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo  expansion.  The State of Indiana  enacted  legislation  establishing
interstate  branching  provisions for Indiana  state-chartered  banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de  novo  expansion,  provided  that  such  transactions  are not  permitted  to
out-of-state  banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocal  basis.  The Indiana  Branching
Law became effective March 15, 1996.

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


                                     - 27 -
<PAGE>

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 OTS 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 Internal  Revenue Code of 1986, as amended (the "Code");  or (ii)
excess dividends are paid out by the Bank.

         Depending  on the  composition  of its items of income and  expense,  a
savings  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 federal  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, and its branch office at 102 South Main Street,
Cloverdale, Indiana 46120. The Company owns both of its offices.



                                     - 28 -
<PAGE>

         The following table provides  certain  information  with respect to the
Company's offices as of June 30, 1999:
<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)
<S>                                       <C>               <C>              <C>              <C>               <C>
     279 East Morgan Street               Owned             1987             $29,555          $1,037            11,300
     Spencer, IN  47460
     (including annex)

     102 South Main Street                Owned             1998             $ 3,102           $ 948             6,000
     Cloverdale, IN  46120
</TABLE>


         The Cloverdale, Indiana branch office opened for business on October 1,
1998.

         As of June 30,  1999,  the Bank  also  owned a  parcel  of real  estate
located  across the street  from its Spencer  office  that is used for  employee
parking.

         The Company owns computer and data  processing  equipment  that 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 April 1999 by GFS  Holdings  Co. The cost of these data  processing
services was approximately $8,000 per month for the twelve months ended June 30,
1999.

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, 1999.

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 49) 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 40) 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 84) 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.



                                     - 29 -
<PAGE>

                                  PART II

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

         The Holding Company's common stock, without par value ("Common Stock"),
is quoted on the National  Association of Securities Dealers Automated Quotation
System  ("NASDAQ"),  SmallCap Market,  under the symbol "HWEN." As of August 23,
1999,  there were  approximately  450  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, 1997     $  8 5/8       $ 7  7/16              $  .025
     December 31, 1997         9 1/4         8  1/8                  .025
     March 31, 1998            9 3/4         8  3/4                  .025
     June 30, 1998             9 1/2         8  7/16                 .025

     September 30, 1998        9             7  5/8                  0.25
     December 31, 1998         7 7/8         6  1/2                  0.30
     March 31, 1999            8             7                       0.30
     June 30, 1999             7 7/8         7                       0.30

         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  dependent upon the
earnings  on its  investment  securities  and  the  ability  of the  Bank to pay
dividends to the Holding Company. The Bank's ability to pay dividends is subject
to certain regulatory  restrictions.  See "Regulations -- Capital  Distributions
Regulation."

         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.

         Unlike the Bank,  generally  there is no regulatory  restriction on the
payment of  dividends  by the  Holding  Company.  Indiana  law,  however,  would
prohibit the Holding  Company from paying a dividend,  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 pages 2 through 3 of the Shareholder Annual
Report.



                                     - 30 -
<PAGE>

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 4 through 17 of the Shareholder Annual Report.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

         The  information  required by this item is incorporated by reference to
pages 5 through 7 of the Shareholder Annual Report.

Item 8.       Financial Statements and Supplementary Data.

         The Company's  Consolidated  Financial Statements and Notes thereto are
contained on pages 18 through 37 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.


                                  PART III

Item 10. Directors and Executive Officers of the Registrant.

         The  information  required by this item with  respect to  directors  is
incorporated  by reference to pages 2 through 4 of the Company's Proxy Statement
for  its  1999  Shareholder   Annual  Meeting  (the  "1999  Proxy   Statement").
Information  concerning the Holding Company's  executive officers is included in
Item 4.5 in Part I of this report.  Information concerning the Holding Company's
executive officers is included in Item 4.5 in Part I of this report. Information
concerning  compliance with Section 16(a) of the Exchange Act is incorporated by
reference to page 7 of the 1999 Proxy Statement.

Item 11. Executive Compensation.

         The  information  required  by this  item  with  respect  to  executive
compensation is incorporated by reference to pages 5 through 6 of the 1999 Proxy
Statement.

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

         The  information  required by this item is incorporated by reference to
pages 1 through 3 of the 1999 Proxy Statement.

Item 13.      Certain Relationships and Related Transactions.

         The  information  required by this item is incorporated by reference to
page 6 of the 1999 Proxy Statement.



                                     - 31 -
<PAGE>
                                  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:

                                                                   Annual Report
              Financial Statements                                    Page No.

              Independent Auditor's Report                                18

              Consolidated Statement of Financial Condition
                  at June 30, 1999, and 1998                              19

              Consolidated Statement of Income for the Years Ended
                  June 30, 1999, 1998, and 1997                           20

              Consolidated Statement of Stockholders' Equity
                  for the Years Ended June 30, 1999, 1998, and 1997       21

              Consolidated Statement of Cash Flows for the Years
                  Ended June 30, 1999, 1998, and 1997                     22

              Notes to Consolidated Financial Statements                 23-37

     (b)      Reports on Form 8-K.

              The  Holding  Company  filed no reports on Form 8-K during the
              quarter ended June 30, 1999.

     (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.

                                     - 32 -
<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 27, 1999            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 27th day of September,
1999.



/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, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)

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

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

/s/ Gary Michael Monnett
--------------------------------
Gary Michael Monnett, 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

                                     - 33 -
<PAGE>



                               EXHIBIT INDEX



Exhibit Index*                                                             Page

     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  is  incorporated  by
               reference to Exhibit 10(1) to the Report on Form 10-K for
               the period ended June 30, 1996.

     10(2)     Share  Pledge  Agreement  between  ESOP  Trust  and  Home
               Financial Bancorp is incorporated by reference to Exhibit
               10(2) to the  Report  on Form 10-K for the  period  ended
               June 30, 1996.

     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).

     10(6)     Home Financial  Bancorp Stock Option Plan is incorporated
               by reference to Exhibit 10(6) to the Company's  Form 10-Q
               for the Period Ended September 30, 1997.

     13        1999 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).

     23        Consent of Independent Auditor                              _____

     27        Financial Data Schedule (filed electronically).
------------
*        Management  contracts  and plans  required to be filed as exhibits  are
         included as Exhibits 10(1) - 10(6).