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

                                   FORM 10-KSB

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
                  For the fiscal year ended June 30, 1997
                                       OR
[  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
        For the transition period from ___________________ to _________________

                         Commission file number 0-22656

                          CAPITAL SAVINGS BANCORP, INC.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

        Delaware                                         43-1656529
--------------------------------------------------------------------------------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

425 Madison Street, Jefferson City, Missouri                           65101
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (573) 635-4151
                                                           --------------

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

                                      None
                                      ----

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

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [   ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will 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-KSB or any  amendment to
this Form  10-KSB.  [X]
<PAGE>

State the issuer's revenues for its most recent fiscal year:   $19.0 million.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant,  computed by reference  to the average of the closing  price of such
stock on the Nasdaq System as of September  12, 1997,  was $27.3  million.  (The
exclusion from such amount of the market value of the shares owned by any person
shall  not be deemed  an  admission  by the  registrant  that such  person is an
affiliate of the  registrant.)

As of September 22, 1997, there were issued and outstanding  1,891,800 shares of
the Registrant's Common Stock.


                       DOCUMENTS INCORPORATED BY REFERENCE

Parts II of Form  10-KSB - Annual  Report to  Stockholders  for the fiscal  year
ended June 30, 1997.

Part  III  of  Form  10-KSB  -  Proxy  Statement  for  1997  Annual  Meeting  of
Stockholders.

Transitional Small Business Disclosure Format: YES ____; NO  X .
<PAGE>
                                     PART I


Item 1.  Description of Business

         General.  Capital  Savings  Bancorp,  Inc.,  ("Capital  Savings" or the
"Company"),  a Delaware corporation,  was formed in September 1993 to act as the
holding  company for Capital  Savings Bank, FSB (the "Bank") upon the completion
of the Bank's  conversion from the mutual to the stock form (the  "Conversion").
The Company received approval from the Office of Thrift  Supervision (the "OTS")
to acquire all of the common stock of the Bank to be outstanding upon completion
of the  Conversion.  The  Conversion  was  completed on December  28, 1993.  All
references to Capital Savings or the Company,  unless otherwise indicated, at or
before  December  28,  1993  refer  to  the  Bank  and  its  subsidiaries  on  a
consolidated  basis.  The  Company's  Common Stock is traded on The Nasdaq Stock
Market under the symbol "CAPS".

         At June 30,  1997,  the  Company  had  $242.5  million  of  assets  and
stockholders' equity of $21.3 million (or 8.8% of total assets).

         The Bank is a federally  chartered stock savings bank  headquartered in
Jefferson City,  Missouri.  Its deposits are insured up to applicable  limits by
the Federal  Deposit  Insurance  Corporation  (the "FDIC") and are backed by the
full faith and credit of the United States.  The Bank,  through its wholly-owned
subsidiary,  Capital Savings Financial  Services,  Inc. ("CSFS"),  offers mutual
funds, annuities and brokerage services to its customers.

         The principal  business of the Company  consists of  attracting  retail
deposits from the general public and investing  those funds primarily in one- to
four-family  residential  mortgage loans with an increasing emphasis on consumer
loans,  including  automobile and home equity loans.  The Company also has small
amounts of commercial and multi-family real estate and residential  construction
loans.  See  "Lending   Activities."  The  Company   purchases   mortgage-backed
securities  and  invests in U.S.  Government  and agency  obligations  and other
permissible  investments.  See "Lending  Activities -  Originations,  Purchases,
Sales and Servicing of Loans and Mortgage-Backed Securities."

         The Company's  revenues are derived  primarily  from interest on loans,
mortgage-backed  securities,  investments,  income from service charges and loan
originations,  loan  servicing  fee income  and  income  from the sale of mutual
funds, annuities and brokerage services.

         The Company offers a variety of deposit accounts having a wide range of
interest rates and terms,  which generally  include savings,  checking and money
market  checking  accounts,  and  certificate  accounts with varied  terms.  The
Company only  solicits  deposits in its primary  market area and does not accept
brokered deposits.

         The executive offices of the Company are located at 425 Madison Street,
Jefferson  City,  Missouri  65101,  and its telephone  number at that address is
(573) 635-4151.

Forward-Looking Statements

         When used in this Annual Report on Form 10-KSB or future filings by the
Company with the  Securities  and Exchange  Commission,  in the Company's  press
releases or other public or shareholder  communications,  or in oral  statements
made with the approval of an authorized  executive officer, the words or phrases
"will likely  result",  "are expected to", "will  continue",  "is  anticipated",
"estimate", "project", "believe" or similar expressions are intended to identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995.  The  Company  wishes to caution  readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors--including regional
and national  economic  conditions,  changes in levels of market interest rates,
credit   risks  of  lending   activities,   and   competitive   and   regulatory
factors--could  affect the Company's  financial  performance and could cause the
Company's  actual  results for future  periods to differ  materially  from those
anticipated or projected.

         The  Company  does  not  undertake--and   specifically   disclaims  any
obligation--to publicly release the result of any revisions which may be made to
any  forward-looking  statements  to reflect the  occurrence of  anticipated  or
unanticipated events or circumstances after the date of such statements.

Market Area

         Capital  Savings' primary market area covers all or a portion of Boone,
Callaway, Camden, Cole, Crawford, Franklin, Gasconade, Maries, Miller, Moniteau,
Morgan,  Osage,  Phelps and  Pulaski  counties  in central  Missouri,  which are
serviced  through  its three full  service  offices in  Jefferson  City and five
additional full service offices located in California, Eldon, Fulton, Owensville
and Rolla,  Missouri. The Company also maintains a limited service agency office
in Morgan County, Missouri.

         The main  office of the  Company is in the  Missouri  state  capital of
Jefferson  City located in Cole County.  The  Company's  market  area's  primary
economic  livelihood  is the  state  government,  which  is by far  the  largest
employer  in the  region.  There also is a  significant  concentration  of state
employees  due to the  presence  of  various  campuses  of the state  university
system.   Other  major   employment   segments  in  the  region   include  light
manufacturing,  agriculture,  and,  in the  southwestern  edge of the  Company's
market, tourism due to the Lake of the Ozarks region.

         In June  1996,  the  Company  opened a branch  office in a  supermarket
located in  Jefferson  City,  Missouri.  The Bank opened its second  supermarket
branch office in Jefferson City during the Spring of 1997.  Management  believes
that these  supermarket  branch  offices  are an  effective  way to service  its
customers due to their size, efficiency and convenient high traffic locations.

Lending Activities

         General.  Capital  Savings  has been,  and intends to continue to be, a
community-oriented   financial  corporation  offering  a  variety  of  financial
services to meet the needs of the  communities it serves.  The Company  attracts
deposits  from  the  general  public  and  uses  such  deposits,  together  with
borrowings  and  other  funds,  to  originate   primarily  one-  to  four-family
residential mortgage loans,  consumer loans and residential  construction loans,
and to a much lesser extent multi-family and commercial real estate loans. These
loans are  originated  predominantly  in the Company's  primary market area. The
Company also purchases a limited  amount of one- to  four-family  and commercial
real  estate  loans and loan  participations  from other  lenders  generally  to
supplement loan  production.  At June 30, 1997, the Company's net loan portfolio
totaled $190.2 million.

         The Company also  purchases  mortgage-backed  securities and invests in
U.S. Government and agency obligations and other permissible investments. See "-
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities."

         The Company  primarily  originates  fixed- and adjustable rate, one- to
four-family   mortgage  loans.   The  Company  focuses  on  the  origination  of
adjustable-rate  mortgage ("ARM") loans and short-term  consumer and other loans
for retention in its  portfolio.  ARM and consumer loans are originated in order
to increase  the  percentage  of loans with more  frequent  repricing or shorter
maturities,  and  in  some  cases  higher  yields,  than  fixed-rate,   one-  to
four-family mortgage loans.

         While the Company's loan portfolio  consists  mainly of adjustable rate
one- to four-family  loans and short-term  consumer  loans,  it also  originates
fixed-rate  mortgage loans in response to customer demand. See "- Loan Portfolio
Composition."  The Company's  general policy is to originate one- to four-family
fixed-rate  mortgages  with terms up to 20 years for retention in its portfolio.
Fixed-rate  mortgage  loans  originated  with terms in excess of 20 years may be
either sold without recourse in the secondary market with servicing  retained or
retained in portfolio. Selling loans in the secondary market permits the Company
to  generate  fee  income  and to reduce the  Company's  exposure  to changes in
interest  rates.  The Company  originates  loans for sale  pursuant to cash sale
commitments  at rates  agreed to by the Federal Home Loan  Mortgage  Corporation
("FHLMC") in order to reduce its exposure to rising interest rates.  See "- One-
to Four-Family Residential Mortgage Lending."

         Real  estate  loans are  considered  and  approved  by the Bank's  loan
committee  comprised of officers of the Bank. Approval of at least two committee
members is required for all real estate loans.  Consumer loan  applications  are
initially  considered and approved at various levels of authority,  depending on
the type,  amount and loan to value  ratio of the loan.  All  mortgage  loans in
excess of $1.0 million require board approval.

         The aggregate  amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower,  including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is  generally  the greater of 15% of  unimpaired  capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At June
30, 1997,  the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was approximately $2.9 million.  At June 30,
1997,  the Bank did not have any  loans  or  series  of loans  with  outstanding
balances in excess of this  amount.  At that date,  the Bank's  largest  lending
relationship  totaled  $1.3  million  and  consisted  of 14 loan  participations
secured by one- to four-family  residential  properties  located in the State of
Missouri. The Bank had eight other lending relationships to a single borrower or
group of related borrowers at June 30, 1997 which exceeded $500,000. At June 30,
1997, these loans were all performing in accordance with their repayment terms.
<PAGE>
         Loan Portfolio  Composition.  The following table shows the composition
of the Company's loan  portfolio in dollar  amounts and in  percentages  (before
deductions for loans in process,  deferred fees and discounts and allowances for
losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                                           June 30,
                                            -----------------------------------------------------------------------
                                                   1993                      1994                      1995             
                                            -----------------------------------------------------------------------
                                             Amount     Percent        Amount     Percent        Amount     Percent    
                                            --------    -------       --------    -------       --------    -------    
                                                                     (Dollars in Thousands)
<S>                                         <C>          <C>          <C>          <C>          <C>          <C>      
Real Estate Loans:
 One- to four-family.................       $122,608      93.03%      $125,376      91.76%      $137,088      89.18%   
 Commercial..........................          2,179       1.65          1,836       1.34          2,634       1.71    
 Multi-family........................          1,117        .85            929        .68          1,618       1.05    
 Construction or development.........            814        .62          1,807       1.32          2,657       1.73    
                                            --------     ------       --------     ------       --------     ------    
    Total real estate loans..........        126,718      96.15        129,948      95.10        143,997      93.70    
                                            --------     ------       --------     ------       --------     ------    
Other Loans:
 Consumer Loans:                                                                                                       
  Home equity/2nd mortgage...........          1,711       1.30          2,098       1.54          4,498       2.93    
  Automobile.........................          1,119        .85          2,016       1.48          3,067       2.00    
  Home improvement...................            236        .18            640        .47            424        .28    
  Deposit account....................            706        .54            756        .55            702        .46    
  Student............................            274        .21            334        .24            422        .28    
  Unsecured..........................            245        .19            310        .23            270        .18    
  Other..............................            786        .60            534        .39            339        .22    
                                            --------     ------       --------     ------       --------     ------    
    Total consumer loans.............          5,077       3.85          6,688       4.90          9,722       6.33    
                                            --------     ------       --------     ------       --------     ------    
    Total loans......................        131,795     100.00%       136,636     100.00%       153,719     100.00%   
                                                         ======                    ======                    ======    
                                                                                                                       
Less:                                                                                                                  
 Loans in process....................            512                     1,155                     1,195               
 Deferred fees and discounts.........            123                       146                       167               
 Allowance for losses................            425                       454                       514               
                                            --------                  --------                  --------               
    Total loans receivable, net......       $130,735                  $134,881                  $151,843               
                                            ========                  ========                  ========               
<PAGE>
<CAPTION>
                                                                           June 30,
                                                  ----------------------------------------------------        
                                                            1996                         1997                       
                                                  ----------------------------------------------------        
                                                   Amount          Percent       Amount        Percent               
                                                  --------         -------      --------       -------  
<S>                                               <C>               <C>         <C>             <C>    
Real Estate Loans:                                                                                      
 One- to four-family.................             $146,476           86.71%     $163,586         85.23% 
 Commercial..........................                5,619            3.33         5,993          3.12  
 Multi-family........................                1,767            1.04         6,175          3.22  
 Construction or development.........                2,939            1.74         1,472           .77  
                                                  --------          ------      --------        ------  
    Total real estate loans..........              156,801           92.82       177,226         92.34  
                                                  --------          ------      --------        ------  
                                                                                                        
Other Loans:                                                                                            
 Consumer Loans:                                                                                        
  Home equity/2nd mortgage...........                5,279            3.12         6,761          3.52  
  Automobile.........................                4,071            2.41         4,799          2.50  
  Home improvement...................                  496             .29           494           .26  
  Deposit account....................                  973             .58           917           .48  
  Student............................                  366             .22           326           .17  
  Unsecured..........................                  441             .26           696           .36  
  Other..............................                  506             .30           718           .37  
                                                  --------          ------      --------        ------  
    Total consumer loans.............               12,132            7.18        14,711          7.66  
                                                  --------          ------      --------        ------  
    Total loans......................              168,933          100.00%      191,937        100.00% 
                                                                    ======                      ======  
                                                                                                        
Less:                                                                                                   
 Loans in process....................                1,485                           801                
 Deferred fees and discounts.........                  191                           194                
 Allowance for losses................                  634                           739                
                                                  --------                      --------                
    Total loans receivable, net......             $166,623                      $190,203                
                                                  ========                      ========                
</TABLE>
<PAGE>
         The  following  table  shows  the  composition  of the  Company's  loan
portfolio by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
                                                                                        June 30,
                                                     ----------------------------------------------------------------------------- 
                                                              1993                       1994                       1995           
                                                     -----------------------    -----------------------    ----------------------- 
                                                      Amount         Percent     Amount         Percent     Amount         Percent 
                                                     --------        -------    --------        -------    --------        ------- 
                                                                                (Dollars in Thousands)
<S>                                                  <C>              <C>       <C>              <C>       <C>              <C>    
Fixed-Rate Loans:
 Real estate:
  One- to four-family..........................      $ 40,749          30.92%   $ 42,076          30.80%   $ 40,454          26.31%
  Commercial...................................         1,129            .86         877            .64         885            .58 
  Multi-family.................................           172            .13         110            .08          94            .06 
  Construction or development..................           814            .62       1,807           1.32       2,657           1.73 
                                                     --------         ------    --------         ------    --------         ------ 
    Total fixed-rate real estate loans.........        42,864          32.53      44,870          32.84      44,090          28.68 
 Consumer......................................         3,366           2.55       4,582           3.35       6,821           4.44 
                                                     --------         ------    --------         ------    --------         ------ 
    Total fixed-rate loans.....................        46,230          35.08      49,452          36.19      50,911          33.12 
                                                     --------         ------    --------         ------    --------         ------ 
                                                                                                                                   
Adjustable-Rate Loans:                                                                                                             
 Real estate:                                                                                                                      
  One- to four-family(1).......................        81,859          62.11      83,300          60.97      96,634          62.86 
  Commercial...................................         1,050            .80         959            .70       1,749           1.14 
  Multi-family.................................           945            .72         819            .60       1,524            .99 
                                                     --------         ------    --------         ------    --------         ------ 
    Total adjustable-rate real estate loans....        83,854          63.63      85,078          62.27      99,907          64.99 
 Consumer......................................         1,711           1.29       2,106           1.54       2,901           1.89 
                                                     --------         ------    --------         ------    --------         ------ 
    Total adjustable rate loans................        85,565          64.92      87,184          63.81     102,808          66.88 
                                                     --------         ------    --------         ------    --------         ------ 
    Total loans................................       131,795         100.00%    136,636         100.00%    153,719         100.00%
                                                                      ======                     ======                     ====== 
                                                                                                                                   
Less:                                                                                                                              
 Loans in process..............................           512                      1,155                      1,195                
 Deferred fees and discounts...................           123                        146                        167                
 Allowance for losses..........................           425                        454                        514                
                                                     --------                   --------                   --------                
    Total loans receivable, net................      $130,735                   $134,881                   $151,843                
                                                     ========                   ========                   ========                
</TABLE>

------------------------
(1)      Includes  five and seven year ARM loans  totaling $0, $0, $5.5 million,
         $9.8 million and $28.7 million at June 30, 1993,  1994,  1995, 1996 and
         1997, respectively.
<PAGE>
<TABLE>
<CAPTION>
                                                                                June 30,                        
                                                       -------------------------------------------------------- 
                                                                 1996                            1997           
                                                        ------------------------        ----------------------- 
                                                         Amount          Percent         Amount         Percent 
                                                        --------         -------        --------        ------- 
                                                                          (Dollars in Thousands)
<S>                                                     <C>               <C>           <C>              <C>    
Fixed-Rate Loans:                                                                                               
 Real estate:                                                                                                   
  One- to four-family..........................         $ 41,628           24.64%       $ 43,238          22.53%
  Commercial...................................              987             .58           2,464           1.28 
  Multi-family.................................              573             .34           3,633           1.89 
  Construction or development..................            2,939            1.74           1,472            .77 
                                                        --------          ------        --------         ------ 
    Total fixed-rate real estate loans.........           46,127           27.30          50,805          26.47 
 Consumer......................................            8,998            5.33          11,011           5.74 
                                                        --------          ------        --------         ------ 
    Total fixed-rate loans.....................           55,125           32.63          61,817          32.21 
                                                        --------          ------        --------         ------ 
                                                                                                                
Adjustable-Rate Loans:                                                                                          
 Real estate:                                                                                                   
  One- to four-family(1).......................          104,848           62.06         120,349          62.70 
  Commercial...................................            4,632            2.74           3,529           1.84 
  Multi-family.................................            1,194             .71           2,542           1.32 
                                                        --------          ------        --------         ------ 
    Total adjustable-rate real estate loans....          110,674           65.51         126,420          65.86 
 Consumer......................................            3,134            1.86           3,700           1.93 
                                                        --------          ------        --------         ------ 
    Total adjustable rate loans................          113,808           67.37         130,120          67.79 
                                                        --------          ------        --------         ------ 
    Total loans................................          168,933          100.00%        191,937         100.00%
                                                                          ======                         ====== 
                                                                                                                
Less:                                                                                                           
 Loans in process..............................            1,485                             801                
 Deferred fees and discounts...................              191                             194                
 Allowance for losses..........................              634                             739                
                                                        --------                        --------                
    Total loans receivable, net................         $166,623                        $190,203                
                                                        ========                        ========                
                                                       
</TABLE>
------------------------
(1)      Includes  five and seven year ARM loans  totaling $0, $0, $5.5 million,
         $9.8 million and $28.7 million at June 30, 1993,  1994,  1995, 1996 and
         1997, respectively.
<PAGE>
         The following table  illustrates  the interest rate  sensitivity of the
Company's  loan  portfolio  at June 30,  1997.  Loans which have  adjustable  or
renegotiable interest rates are shown as maturing in the period during which the
contract  is due.  The  schedule  does  not  reflect  the  effects  of  possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                                                            Real Estate
                                        ----------------------------------------------------------------------------------
                                              One- to               Multi-Family and                    Construction
                                            Four-Family                Commercial                      or Development           
                                        ----------------------      -----------------------         ----------------------      
                                                      Weighted                    Weighted                       Weighted       
                                                       Average                     Average                        Average       
                                          Amount        Rate             Amount      Rate           Amount          Rate        
                                         --------       ----            -------      ----           ------          ----        
                                                                      (Dollars in Thousands)
  Due During
Periods Ending
   June 30,
--------------
<S>                                      <C>            <C>             <C>          <C>            <C>             <C>         
1998(1).............................     $    233       7.13%           $   205      8.97%             446          8.17%       
1999................................          331       7.69                 21      9.23              ---           ---        
2000................................          719       7.64                  8      8.70              ---           ---        
2001 and 2002.......................        3,070       7.96                392      8.36              ---           ---        
2003 to 2007........................       20,908       7.95              1,452      8.85              ---           ---        
2008 to 2012........................       36,668       8.00              4,027      8.55              ---           ---        
2013 and following..................      101,657       7.94              6,063      8.44            1,027          8.38        
                                         --------                       -------                     ------                      
  Total.............................     $163,586       7.95%           $12,168      8.53%          $1,473          8.32%       
                                         ========                       =======                     ======                      
</TABLE>

--------------------
(1)      Includes  demand loans,  loans having no stated  maturity and overdraft
         loans.

<PAGE>
<TABLE>
<CAPTION>
                                              Consumer                      Total       
                                        --------------------        ------------------- 
                                                    Weighted                   Weighted 
                                                     Average                    Average 
                                         Amount       Rate           Amount       Rate  
                                        -------       ----          --------      ----  
                                                    (Dollars in Thousands)
  Due During
Periods Ending                                                                           
   June 30,                                                                              
--------------
<S>                                      <C>          <C>            <C>           <C>   
1998(1).............................     $ 1,623       9.12%         $  2,507      8.76% 
1999................................       1,971       9.14             2,323      8.94  
2000................................       2,476       9.85             3,203      9.35  
2001 and 2002.......................       3,730       9.67             7,192      8.87  
2003 to 2007........................       4,143       9.87            26,503      8.30  
2008 to 2012........................         167      10.14            40,862      8.07  
2013 and following..................         600       9.92           109,347      7.98  
                                         -------                     --------            
  Total.............................     $14,710       9.64%         $191,937      8.12% 
                                         =======                     ========            

</TABLE>

--------------------
(1)      Includes  demand loans,  loans having no stated  maturity and overdraft
         loans.
<PAGE>
         The  total  amount  of  loans  due  after  June  30,  1998  which  have
predetermined  interest rates is $59.7 million,  while the total amount of loans
due after such dates which have floating or adjustable  interest rates is $129.8
million.

         One- to Four-Family  Residential  Mortgage  Lending.  Residential  loan
originations  are  generated by the  Company's  marketing  efforts,  its present
customers, walk-in customers and referrals from real estate agents and builders.
The Company  focuses its lending  efforts  primarily on the origination of loans
secured by first mortgages on owner-occupied, one- to four-family residences. At
June 30, 1997,  the  Company's  one- to  four-family  residential  mortgage loan
portfolio totaled $163.6 million,  or approximately 85.3% of the Company's gross
loan portfolio. Approximately 9.7% of the Company's one- to four-family mortgage
loan portfolio has been purchased,  generally from other financial institutions.
See "--Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities."

         The Company currently offers fixed-rate and ARM loans.  During the year
ended June 30, 1997, the Company  originated  $25.7 million of ARM loans secured
by one- to  four-family  residential  real estate.  During the same period,  the
Company originated $11.9 million of fixed-rate real estate loans secured by one-
to four-family residential real estate.  Substantially all the Company's one- to
four-family  residential  mortgage  originations are in its primary market area.
See  "--   Originations,   Purchases,   Sales   and   Servicing   of  Loans  and
Mortgage-Backed Securities."

         The  Company  currently  originates  one-  to  four-family  residential
mortgage  loans  with  terms  of up to 30  years  in  amounts  up to  95% of the
appraised value of the security  property.  The Company generally  requires that
private  mortgage  insurance be obtained in an amount  sufficient  to reduce the
Company's  exposure to 80% or less of the  loan-to-value  level.  Interest rates
charged  on  fixed-rate  loans  are  competitively  priced  according  to market
conditions. Residential loans generally do not include prepayment penalties.

         Most of the Company's  fixed-rate  mortgage  loans conform to secondary
market standards (i.e., Federal National Mortgage Association ("FNMA") and FHLMC
standards).  The Company  typically  retains  fixed-rate  loans with terms of 20
years or less for its loan portfolio.  Fixed-rate mortgage loans originated with
terms in excess of 20 years may be either sold without recourse in the secondary
market with servicing retained or retained in portfolio.  The Company, at times,
retains fixed-rate loans with terms in excess of 20 years for its portfolio. The
Company's  decision to retain such loans depends upon the current  interest rate
environment  and the Company's  desired  ratio of fixed-rate to  adjustable-rate
loans as may be consistent  with its asset liability  objectives.  During fiscal
1997,  the Bank  originated  $4.9  million  of  fixed-rate  one- to  four-family
residential  loans with terms in excess of 20 years,  all of which were retained
in portfolio.

         The Company  currently offers one, three, five and seven year ARM loans
with  monthly  principal  and  interest  payments  typically  based on a 30 year
amortization schedule.  These loans generally have a stated interest rate margin
over the yields on comparable U.S. Treasury securities. The three year ARM loans
adjust every three years. The five and seven year ARM loans are fixed-rate loans
for the initial  stated term and then  automatically  convert  into one year ARM
loans. These loans provide for periodic and lifetime caps over the initial rate.
As a consequence of using an initial  fixed-rate and caps, the interest rates on
these loans may not be as rate sensitive as is the Company's cost of funds.  The
Company's  ARMs do not permit  negative  amortization  of principal  and are not
convertible  into a fixed  rate  loan,  but may be  assumable  in the  case of a
qualified  borrower.  The ARM loans offered by the Company sometimes provide for
initial  rates of interest  below the rates which would  prevail  were the index
used for pricing applied initially. These loans are subject to increased risk of
delinquency   or  default  as  the  higher,   fully-indexed   rate  of  interest
subsequently  comes  into  effect;  however,  the  Company  generally  qualifies
borrowers at the fully indexed  rate.  The Company has not  experienced  greater
delinquency rates on its ARM loans compared to its fixed-rate residential loans.

         In  underwriting  one- to  four-family  residential  real estate loans,
Capital Savings  evaluates both the borrower's  ability to make monthly payments
and the value of the property securing the loan. Properties securing real estate
loans made by Capital  Savings  are  appraised  by  independent  fee  appraisers
approved by the Board of Directors. Capital Savings generally requires borrowers
to obtain an attorney's title opinion or title insurance,  and fire and property
insurance  (including flood insurance,  if necessary) in an amount not less than
the amount of the loan.  Real estate loans  originated by the Company  generally
contain a "due on sale"  clause  allowing  the  Company  to  declare  the unpaid
principal balance due and payable upon the sale of the security property.

         Commercial  and  Multi-Family  Real Estate  Lending.  The Company  also
engages in a limited amount of commercial and  multi-family  real estate lending
in its  primary  market area and  purchases  a limited  number of whole loan and
participation interests in loans primarily from other financial institutions. At
June 30, 1997, the Company had loans secured by commercial and multi-family real
estate  totaling  $6.0  million  and $6.2  million,  respectively,  which in the
aggregate  represented  6.3% of the Company's  gross loan portfolio  compared to
4.4% of the  Company's  gross  loan  portfolio  at June 30,  1996.  The  Company
intends, subject to market conditions,  to continue to place additional emphasis
on this type of lending.

         The Company's commercial and multi-family real estate loan portfolio is
secured primarily by small office buildings and apartment buildings.  Commercial
and  multi-family  real estate loans  generally have terms that do not exceed 25
years and a variety of rate adjustment features and other terms. Generally,  the
loans  are made in  amounts  up to 80% of the  appraised  value of the  security
property.  Adjustable rate commercial and multi-family real estate loans provide
for a margin over a designated  index,  which is generally the one year Treasury
Bill rate.  In  underwriting  these loans,  the Company  currently  analyzes the
financial  condition of the borrower,  the borrower's  credit  history,  and the
reliability  and  predictability  of the cash  flow  generated  by the  property
securing the loan. The Company  generally  requires  personal  guaranties of the
borrowers.  Appraisals  on  properties  securing  commercial  real estate  loans
originated by the Company are performed by independent appraisers.

         The largest  multi-family real estate loan outstanding at June 30, 1997
was a $1.2 million loan participation  secured by apartment buildings located in
the State of Missouri.  At June 30, 1997, this loan was performing in accordance
with its terms.

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

         Construction  Lending.  The  Company  engages  in  limited  amounts  of
construction  lending to individuals for the construction of their residences as
well as to builders for the construction of single-family homes in the Company's
primary  market area.  At June 30,  1997,  the Company had $1.5 million of gross
construction  loans, of which  approximately  $1.3 million were to borrowers who
indicated  that  they  intended  to live in the  residence  upon  completion  of
construction.

         Construction  loans to individuals for their  residences are structured
to be converted to permanent  loans at the end of the  construction  phase which
typically runs from six months to one year. These  construction loans have rates
and terms which match one- to  four-family  loans then  offered by the  Company,
except that during the  construction  phase the borrower pays interest only. The
maximum  loan-to-value  ratio of owner occupied single family construction loans
is typically  80%, and in a very limited number of situations  90%.  Residential
construction  loans are generally  underwritten  pursuant to the same guidelines
used for originating permanent one- to four-family residential loans.

         Construction  loans are obtained  primarily from builder references and
individuals  who have  previously  borrowed  from the  Company,  as well as from
referrals from existing customers. The application process includes a submission
to the  Company of the plans and costs of the project to be  constructed.  These
items  are used as a basis  to  determine  the  appraised  value of the  subject
property.  Loans are based on the lesser of current  appraised value or the cost
of construction (land plus building).

         Consumer Lending.  Capital Savings offers a variety of secured consumer
loans, including automobile,  home equity, home improvement,  student loans, and
loans secured by savings deposits. In addition, Capital Savings offers unsecured
consumer  loans,  including an overdraft  checking  line-of-credit.  The Company
currently  originates  substantially  all of its  consumer  loans in its primary
market area. The Company  originates  consumer loans on a direct basis where the
Company extends credit  directly to the borrower.  Almost all consumer loans are
made on a  fixed-rate  basis,  except for home equity  loans,  which are tied to
third party indices.  Management  considers  consumer lending to be an important
component of its business strategy and has been placing  increasing  emphasis on
such lending.  In addition,  management  believes  that  offering  consumer loan
products helps expand and create stronger ties to its existing customer base.

         At June 30, 1997, the Company's  consumer loan portfolio  totaled $14.7
million,  or 7.7% of its  gross  loan  portfolio.  At June  30,  1997,  73.1% of
consumer  loans were short- and  intermediate-term,  fixed-rate  loans and 26.9%
were adjustable rate loans.

         The largest component of Capital Savings' consumer  portfolio  consists
of home equity and home  improvement  loans.  Home  equity and home  improvement
loans  secured by second  mortgages,  together  with loans  secured by all prior
liens,  are  generally  limited  to 85% or less of the  appraised  value  of the
property securing the loan.  Generally,  such loans have a maximum term of up to
10 years. As of June 30, 1997, home equity and home improvement loans totaled to
$7.3 million or 3.8% of the Company's gross loan portfolio.

         Automobile  loans totaled $4.8 million or 2.5% of the  Company's  gross
loan portfolio at June 30, 1997.  Automobile  loans typically are made for up to
60 months for new vehicles, and up to 48 months for used vehicles. Loans secured
by  automobiles  are  generally  originated  for 90% of the lesser of the retail
sales price or NADA  Official  Used Car Guide's  Retail Price of the  automobile
securing  the loan.  The  dollar  volume  of new and used  vehicle  lending  has
generally been about the same over the past several years.

         Consumer loan terms vary according to the type and value of collateral,
length of  contract  and  creditworthiness  of the  borrower.  The  underwriting
standards  employed by the Company for consumer loans include an application,  a
determination  of  the  applicant's  payment  history  on  other  debts  and  an
assessment of ability to meet existing  obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.

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

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

         The Company  originated  $51.4  million of loans  during  fiscal  1997,
compared  to  $60.8   million  and  $44.5  million  in  fiscal  1996  and  1995,
respectively. Management attributes the higher originations during 1997 and 1996
to increased  marketing  efforts and increased  demand in the Company's  primary
lending  area.  The higher loan  originations  during  fiscal 1996 were somewhat
offset by a higher level of repayments during that period. In fiscal 1997, $34.7
million of loans were  repaid,  compared to $41.7  million and $26.7  million in
fiscal  1996 and 1995,  respectively.  In periods of economic  uncertainty,  the
Company's  ability to originate large dollar volumes of real estate loans may be
substantially  reduced or restricted,  with a resultant decrease in related loan
fee income and operating earnings.

         Capital Savings also sells whole real estate loans without  recourse to
the FHLMC.  Sales of whole loans  generally are  beneficial to the Company since
these sales may generate  income at the time of sale,  produce future  servicing
income,  provide funds for additional lending and other investments and increase
liquidity. The Company sold whole loans in aggregate amounts of $3.5 million and
$12.3 million  during the years ended June 30, 1995 and 1996,  respectively.  No
loans were sold during fiscal 1997 as a result of management's  decision to hold
higher  yielding  long  term  loans  during  the  period.  See  "Asset\Liability
Management" in the Annual Report.

         When loans are sold, the Company typically  retains the  responsibility
for servicing  the loans.  The Company  receives a servicing fee for  performing
these  services.  The Company  serviced for others  mortgage loans  amounting to
$41.9 million,  $47.1 million and $41.0 million at June 30, 1995, 1996 and 1997,
respectively.

         During fiscal 1995, 1996 and 1997, the Company  purchased $2.7 million,
$8.3 million, and $6.0 million of loans and loan  participations.  The Company's
portfolio of purchased  whole loans and loan  participations  secured by one- to
four-family  residences  totaled $15.8  million at June 30, 1997.  Approximately
$12.9 million and $2.2 million of such loans are secured by  properties  located
in Missouri and Texas, respectively, with the remainder of such loans secured by
properties located throughout the United States.

         Capital Savings also has a portfolio of fixed-rate and  adjustable-rate
mortgage-backed  securities.  At June  30,  1997,  mortgage-backed  and  related
securities  totaled $23.4 million,  or 11.0% of Capital  Savings' total loan and
mortgage-backed  and related securities  portfolio.  See "- Mortgage-Backed  and
Related Securities."
<PAGE>
         The  following  table shows the loan  origination,  purchase,  sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
                                                          Year Ended June 30,
                                                   --------------------------------
                                                     1995        1996        1997
                                                   --------    --------    --------
                                                            (In Thousands)
<S>                                                <C>         <C>         <C>     
Originations by type:
 Adjustable rate:
  Real estate - one- to four-family ............   $ 24,624    $ 26,275    $ 25,675
              - commercial .....................        157         867         575
              - multi-family ...................        802         225       1,117
  Non-real estate - consumer ...................       --          --          --
                                                   --------    --------    --------
          Total adjustable-rate ................     25,583      27,367      27,367
                                                   --------    --------    --------
 Fixed rate:
  Real estate - one- to four-family ............      8,613      21,541      11,872
              - commercial .....................        134         303          97
              - multi-family ...................       --            86       1,513
              - construction or development ....      4,342       4,720       1,761
  Non-real estate - consumer ...................      5,809       6,766       8,768
                                                   --------    --------    --------
          Total fixed-rate .....................     18,898      33,416      24,011
                                                   --------    --------    --------
          Total loans originated ...............     44,481      60,783      51,378
                                                   --------    --------    --------

Purchases:
  Real estate - one- to four-family ............      1,656       5,773       4,153
                commercial .....................      1,012       2,494         600
                multi-family ...................       --          --         1,200
  Mortgage-backed securities ...................      8,331      14,610       1,357
                                                   --------    --------    --------
          Total purchases ......................     10,999      22,877       7,310
                                                   --------    --------    --------

Sales and Repayments:
  Real estate - one- to four-family sales ......      3,466      12,287        --
  Loans and mortgage-backed securities principal
   repayments ..................................     29,080      46,802      40,680
                                                   --------    --------    --------
          Total reductions .....................     32,526      59,089      40,680
                                                   --------    --------    --------
Increase (decrease) in other items, net ........        (61)       (314)        681
                                                   --------    --------    --------
          Net increase (decrease) ..............   $ 22,893    $ 24,257    $ 18,689
                                                   ========    ========    ========
</TABLE>
<PAGE>
Non-Performing Assets and Classified Assets

         Generally,  when a borrower  fails to make a  required  payment on real
estate  secured  loans and  consumer  loans the  Company  institutes  collection
procedures by mailing a computer generated  delinquency  notice. The customer is
contacted  again,  by notice or telephone,  when the delinquency is not promptly
cured.  In most cases,  delinquencies  are cured  promptly;  however,  if a loan
secured by real estate or other  collateral has been delinquent for more than 60
days, a final letter is sent demanding  payment and the customer is requested to
make  arrangements to bring the loan current.  At 90 days past due, a thirty day
foreclosure  notice  is  sent,  and if the  loan  is 120  days  overdue,  unless
satisfactory  arrangements have been made, immediate repossession or foreclosure
procedures will commence.

         The following  table sets forth the  Company's  loan  delinquencies  by
type, by amount and by percentage of type at June 30, 1997.

<TABLE>
<CAPTION>
                                                                Loans Delinquent For:
                                          -----------------------------------------------------------        Total Delinquent
                                                    60-89 Days                  90 Days and Over                   Loans
                                          ----------------------------   ----------------------------   ----------------------------
                                                              Percent                        Percent                        Percent
                                                              of Loan                        of Loan                        of Loan
                                           Number     Amount  Category   Number      Amount  Category   Number      Amount  Category
                                           ------     ------  --------   ------      ------  --------   ------      ------  --------
                                                                       (Dollars in Thousands)

<S>                                            <C>    <C>        <C>       <C>       <C>        <C>      <C>        <C>        <C>  
One- to four-family ..................         21     $1,040     .64%       9        $  627     .38%      30        $1,667     1.02%
Commercial and
  multi-family real estate ...........         --         --      --        1            46     .38        1            46      .38
Consumer .............................          5         39     .27        3            15     .10        8            54      .37
                                               --     ------     ---       --        ------     ---       --        ------     ---- 
     Total ...........................         26     $1,079     .57       13        $  688     .36       39        $1,767      .93
                                               ==     ======     ===       ==        ======     ===       ==        ======     ====
</TABLE>
<PAGE>
         The table below sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio.  Loans are placed on non-accrual  status
when the collection of principal  and/or  interest become  doubtful.  Foreclosed
assets include assets acquired in settlement of loans.

<TABLE>
<CAPTION>
                                                                              June 30,
                                                   ----------------------------------------------------------------
                                                     1993          1994         1995           1996          1997
                                                   --------      --------      --------      --------      --------
                                                                       (Dollars in Thousands)
<S>                                                <C>           <C>           <C>           <C>           <C>     
Non-accruing loans:
  One- to four-family ........................     $     61      $     34      $     66      $    252      $    328
                                                   --------      --------      --------      --------      --------
        Total ................................           61            34            66           252           328
                                                   --------      --------      --------      --------      --------

Accruing loans delinquent more than 90 days:
  One- to four-family ........................          101            65            59           159           299
  Commercial and multi-family real estate ....         --            --            --              48            46
  Consumer ...................................            8          --            --               4            15
                                                   --------      --------      --------      --------      --------
        Total ................................          109            65            59           211           360
                                                   --------      --------      --------      --------      --------

Foreclosed assets:
  One- to four-family ........................           62           107            93            27            55
  Construction ...............................           46            14            14            14            14
  Consumer ...................................         --            --            --               3          --
                                                   --------      --------      --------      --------      --------
        Total ................................          108           121           107            44            69
                                                   --------      --------      --------      --------      --------

Troubled debt restructurings .................        1,657         1,433          --            --            --
                                                   --------      --------      --------      --------      --------
Total non-performing assets ..................     $  1,935      $  1,653      $    232      $    507      $    757
                                                   ========      ========      ========      ========      ========

Total non-performing assets as a percentage of
  total assets ...............................         1.19%          .97%          .12%          .23%          .31%
                                                   ========      ========      ========      ========      ========

Total assets .................................     $163,060      $170,235      $186,677      $217,954      $242,518
                                                   ========      ========      ========      ========      ========
</TABLE>
<PAGE>

         For the year ended June 30, 1997 gross interest income which would have
been recorded had the  non-accruing  loans been current in accordance with their
original  terms  amounted to $57,000.  The amount that was  included in interest
income on such loans totaled $47,000.

         As of June 30, 1997,  except as  discussed  below under "Other Loans of
Concern" and "Classified  Assets," there were no other loans not included in the
table  above where  known  information  about the  possible  credit  problems of
borrowers caused  management to have doubts as to the ability of the borrower to
comply with present loan  repayment  terms and which may result in disclosure of
such loans in the future.

         Other Loans of Concern.  In addition to the  non-performing  assets set
forth in the  table  above,  as of June 30,  1997,  there  was an  aggregate  of
$1,079,000 in net book value of loans (21 loans aggregating  $1,040,000  secured
by single family residences and 5 loans aggregating  $39,000 secured by consumer
property)  with respect to which known  information  about the  possible  credit
problems  of the  borrowers  have  caused  management  to have  doubts as to the
ability of the borrowers to comply with present loan  repayment  terms and which
may result in the future  inclusion  of such items in the  non-performing  asset
categories.  These loans have been considered in management's  determination  of
the adequacy of the Company's allowance for loan losses.

         Classified Assets.  Federal  regulations provide for the classification
of loans and other assets such as debt and equity  securities  considered by the
OTS to be of lesser quality as "substandard,"  "doubtful" or "loss." An asset is
considered  "substandard"  if it is  inadequately  protected  by the current net
worth and paying capacity of the obligor or of the collateral  pledged,  if any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the savings  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.

         When  a  savings  institution   classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets.  When a savings  institution  classifies
problem  assets as  "loss,"  it is  required  either  to  establish  a  specific
allowance for losses equal to 100% of that portion of the asset so classified or
to  charge-off  such  amount.   An   institution's   determination   as  to  the
classification  of its  assets  and the amount of its  valuation  allowances  is
subject to review by the  institution's  District  Director at the  regional OTS
office,  who may order the establishment of additional  general or specific loss
allowances.

         In connection with the filing of its periodic  reports with the OTS and
in accordance  with its  classification  of assets  policy,  the Bank  regularly
reviews  the loans in its  portfolio  to  determine  whether  any loans  require
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's  review of its assets,  at June 30, 1997, the Bank had classified a
total of $708,000 of its assets as  substandard,  46,000 as doubtful and none as
loss.

         At June 30,  1997,  total  classified  assets  (including  real  estate
owned),  totaled $754,000,  or 3.5% of the Bank's capital, or .31% of the Bank's
total assets.

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity,  including  those  loans  which are being  specifically  monitored  by
management.  Such  evaluation,  which  includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral,  economic  conditions,  historical loan loss  experience,  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.

         Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value.  If fair value at the date of  foreclosure is lower
than the balance of the related loan, the difference  will be charged-off to the
allowance for loan losses at the time of transfer.  Valuations are  periodically
updated by management and if the value declines, a specific provision for losses
on such property is established by a charge to operations.

         Although   management  believes  that  it  uses  the  best  information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.  Future additions to the Company's  allowances will be the result
of periodic loan,  property and collateral  reviews and thus cannot be predicted
in advance. In addition, federal regulatory agencies, as an integral part of the
examination  process  periodically  reviews  the  Company's  allowance  for loan
losses.  Such  agencies  may require the Company to  recognize  additions to the
allowance level upon their judgment of the information  available to them at the
time of their  examination.  At June 30, 1997, the Company had a total allowance
for loan losses of $739,000,  representing 107.4% of total  non-performing loans
and 97.6% of  non-performing  assets.  See Note 3 of the  Notes to  Consolidated
Financial Statements.
<PAGE>
         The following  table sets forth an analysis of the Company's  allowance
for loan losses.
<TABLE>
<CAPTION>
                                                                              Year Ended June 30,
                                                                 ------------------------------------------
                                                                 1993      1994      1995     1996     1997
                                                                 ----      ----      ----     ----     ----
                                                                            (Dollars in Thousands)
<S>                                                              <C>       <C>       <C>      <C>      <C> 
Balance at beginning of period .............................     $409      $425      $454     $514     $634

Charge-offs:
  Consumer .................................................       10        --        --       --       17
  One- to four-family ......................................       24        11        --       --       --
  Multi-family .............................................       --        --        --       --       --
                                                                 ----      ----      ----     ----     ----
Total charge-offs ..........................................       34        11        --       --       17
                                                                 ----      ----      ----     ----     ----

Recoveries:
  Consumer .................................................        3        --        --       --        2
                                                                 ----      ----      ----     ----     ----
Total recoveries ...........................................        3        --        --       --        2
                                                                 ----      ----      ----     ----     ----

Net charge-offs ............................................       31        11        --       --       15
Provisions charged to income ...............................       47        40        60      120      120
                                                                 ----      ----      ----     ----     ----
Balance at end of period ...................................     $425      $454      $514     $634     $739
                                                                 ====      ====      ====     ====     ====

Ratio of net charge-offs during the  period to average loans
outstanding during the period ..............................      .02%      .01%      --%      --%      .01%
                                                                 ====      ====      ====     ====     ====

Ratio of net charge-offs during the period to average non-
performing assets ..........................................     1.21%      .63%      --%      --%     2.69%
                                                                 ====      ====      ====     ====     ====

</TABLE>
<PAGE>
         The  distribution  of the  Company's  allowance  for loan losses at the
dates indicated is summarized as follows:

<TABLE>
<CAPTION>
                                                                             June 30,
                               -----------------------------------------------------------------------------------------------------
                                     1993                  1994                1995                1996                 1997
                               ------------------   ------------------   ------------------  -------------------   -----------------
                                         Percent              Percent              Percent              Percent             Percent
                                         of Loans             of Loans             of Loans             of Loans            of Loans
                                         in Each              in Each              in Each              in Each             in Each
                                         Category             Category             Category             Category            Category
                                         to Total             to Total             to Total             to Total            to Total
                               Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans     Amount     Loans
                               ------     -----     ------     -----     ------     -----     ------     -----     ------     -----
                                                                            (In Thousands)

<S>                             <C>      <C>         <C>      <C>         <C>      <C>         <C>      <C>         <C>      <C>    
One- to four-family .......     $352      93.03%     $366      91.76%     $377      89.18%     $409      86.71%     $461      85.23%
Multi-family ..............       16        .85        16        .68        26       1.05        55       1.05        65       3.22
Commercial real estate ....       16       1.65        16       1.34        26       1.71        55       3.33        65       3.12
Consumer ..................       41       3.85        56       4.90        85       6.32       115       7.18       148       7.66
Unallocated ...............      --         .62        --       1.32        --       1.74        --       1.74        --        .77
                                ----     ------      ----     ------      ----     ------      ----     ------      ----     ------
     Total ................     $425     100.00%     $454     100.00%     $514     100.00%     $634     100.00%     $739     100.00%
                                ====     ======      ====     ======      ====     ======      ====     ======      ====     ======
</TABLE>
<PAGE>

Investment Activities

         The Bank must maintain  minimum levels of  investments  that qualify as
liquid  assets  under  OTS  regulations.  Liquidity  may  increase  or  decrease
depending upon the  availability of funds and comparative  yields on investments
in  relation  to the  return  on  loans.  Historically,  the Bank has  generally
maintained its liquid assets above the minimum  requirements  imposed by the OTS
regulations  and at a level  believed  adequate to meet  requirements  of normal
daily activities,  repayment of maturing debt and potential deposit outflows. As
of June 30, 1997, the Bank's  liquidity  ratio (liquid assets as a percentage of
net  withdrawable  savings  deposits  and  current  borrowings)  was  7.1%.  See
"Regulation - Liquidity."

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

         Generally,  the  investment  policy of the  Company is to invest  funds
among various  categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize  yield, to provide  collateral for borrowings,  and to fulfill
the Company's asset/liability management policies.

         Investment Securities. At June 30, 1997, the Company's interest-bearing
deposits in other  financial  institutions  totaled  $4.5 million or 1.8% of its
total assets, and investment  securities (including a $3.0 million investment in
the common stock of the FHLB of Des Moines) totaled $16.7 million or 6.9% of its
total assets.  It is the Company's  general  policy to purchase U.S.  Government
securities  and  federal  agency   obligations,   state  and  local   government
obligations,   commercial  paper,   short-term  corporate  debt  securities  and
overnight  federal  funds.  The  Company  also  has  invested  in  mutual  funds
consisting   primarily  of  U.S.   Government   securities  and  federal  agency
obligations.  At June  30,  1997,  the  weighted  average  term to  maturity  or
repricing of the investment  securities  portfolio (excluding the FHLB stock and
other marketable securities) was 5.69 years.

         OTS  regulations  restrict  investments  in  corporate  debt and equity
securities  by  the  Bank.  These  restrictions   include  prohibitions  against
investments  in the debt  securities  of any one  issuer in excess of 15% of the
Bank's  unimpaired   capital  and  unimpaired  surplus  as  defined  by  federal
regulations,  which totaled $2.9 million as of June 30, 1997, plus an additional
10% if the investments are fully secured by readily marketable  collateral.  See
"Regulation - Federal  Regulation of Savings  Associations"  for a discussion of
additional restrictions on the Company's investment activities.
<PAGE>
         The  following  table  sets  forth  the  composition  of the  Company's
investment portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                     June 30,
                                       --------------------------------------------------------------------
                                               1995                    1996                    1997
                                       --------------------    --------------------    --------------------
                                       Carrying    Percent     Carrying    Percent     Carrying    Percent
                                         Value     of Total      Value     of Total      Value     of Total
                                       --------    --------    --------    --------    --------    --------
                                                                 (Dollars in Thousands)
<S>                                     <C>         <C>         <C>         <C>         <C>         <C>    
Investment Securities:
  U.S. government securities ......     $ 5,853      57.15%     $   799       4.98%     $    --         --%
  Federal agency obligations ......       2,499      24.40       12,968      80.82       12,475      74.63
  Equity securities(1) ............          32        .31          179       1.12        1,215       7.27
                                        -------     ------      -------     ------      -------     ------
     Subtotal .....................       8,384      81.86       13,946      86.92       13,690      81.90
FHLB stock ........................       1,857      18.14        2,100      13.08        3,025      18.10
                                        -------     ------      -------     ------      -------     ------
     Total investment securities
      and FHLB stock ..............     $10,241     100.00%     $16,046     100.00%     $16,715     100.00%
                                        =======     ======      =======     ======      =======     ======
Average remaining life of
 investment securities ............           1 year                  6 years                  6 years

Other Interest-Earning Assets:
  Interest-bearing deposits
   with banks .....................     $   269     100.00%     $   309     100.00%     $ 4,468     100.00%
                                        -------     ------      -------     ------      -------     ------
     Total ........................     $   269     100.00%     $   309     100.00%     $ 4,468     100.00%
                                        =======     ======      =======     ======      =======     ======
Average remaining life or term to
 repricing of investment securities
 and other interest-earning assets,
 excluding FHLB stock .............         1.28 years               5.26 years               5.69 years

</TABLE>
---------------

(1)      At June 30, 1995,  equity securities  consisted  primarily of an equity
         investment in a mutual fund which contained  primarily U.S.  Government
         securities and agency  obligations.  At June 30, 1996 and 1997,  equity
         securities  consisted  primarily of investments in other thrift holding
         companies.
<PAGE>
         The composition and maturities of the Company's  investment  securities
portfolio,  excluding  FHLB of Des Moines stock,  are indicated in the following
table.

<TABLE>
<CAPTION>
                                                                         June 30, 1997
                                       ------------------------------------------------------------------------------
                                        1 Year      Over 1 to 5    Over 5 to 10     Over 10        Total Investment 
                                        or less         Years          Years          Years           Securities
                                       ---------     ----------    ------------    ---------   -----------------------    
                                       Carrying       Carrying       Carrying       Carrying   Amortized       Market
                                         Value          Value          Value          Value      Cost          Value
                                       --------      ----------    ------------    ---------   ---------      -------
                                                                     (Dollars in Thousands)
<S>                                      <C>            <C>           <C>             <C>       <C>           <C>    
Federal agency obligations......         $  497         $4,987        $6,991          $ ---     $12,444       $12,494
Equity securities...............          1,215            ---           ---            ---       1,047         1,215
                                         ------         ------        ------          -----     -------       -------

Total investment securities.....         $1,712         $4,987        $6,991          $ ---     $13,491       $13,709
                                         ======         ======        ======          =====     =======       =======

Weighted average yield..........          1.38%          6.95%         7.75%           ---%       7.00%         7.00%
</TABLE>

         Except for  obligations of state and local  governments,  the Company's
investment  securities  portfolio at June 30, 1997, contained neither tax-exempt
securities  nor  securities of any issuer with an aggregate book value in excess
of 10% of the Company's retained earnings,  excluding those issued by the United
States Government, or its agencies.

         Mortgage-Backed  Securities.  Capital Savings generally has a portfolio
of   mortgage-backed   securities   which  it   holds   for   investment.   Such
mortgage-backed  securities can serve as collateral for borrowings and,  through
repayments, as a source of liquidity. For information regarding the carrying and
market values of Capital Savings' mortgage-backed securities portfolio, see Note
[2]  of the  Notes  to  Consolidated  Financial  Statements.  Under  the  Bank's
risk-based capital requirement, mortgage-backed securities have a risk weight of
20% (or 0% in the case of GNMA  securities)  in  contrast to the 50% risk weight
carried by residential loans. See "- Regulation."

         The  following  table sets forth the  carrying  value of the  Company's
mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>
                                                             June 30,
                                                 -------------------------------
                                                   1995        1996        1997
                                                 -------     -------     -------
                                                          (In Thousands)
<S>                                              <C>         <C>         <C>    
Issuers:
 Federal Home Loan Mortgage Corporation ....     $13,703     $17,797     $14,375
 Federal National Mortgage Association .....       1,166       3,555       4,078
 Government National Mortgage Association ..       3,994       6,987       4,996
                                                 -------     -------     -------
     Total .................................     $18,863     $28,339     $23,449
                                                 =======     =======     =======
</TABLE>
<PAGE>
         The  following  table  sets  forth the  contractual  maturities  of the
Company's  mortgage-backed  securities at June 30, 1997.  Not  considered in the
preparation of the table below is the effect of prepayments,  periodic principal
repayments and the adjustable-rate nature of these instruments.

<TABLE>
<CAPTION>
                                                                               Due in
                                              ------------------------------------------------------------------------
                                                            After          After                         June 30, 1997
                                              1 Year        1 to 5         5 to 10        After 10           Balance
                                              or less       Years          Years           Years           Outstanding
                                              -------       ------         -------        -------        -------------
                                                                            (In Thousands)
<S>                                            <C>          <C>            <C>            <C>                <C>    
Federal Home Loan
  Mortgage Corporation.................        $ ---        $2,177         $1,419         $10,779            $14,375

Federal National
  Mortgage Association.................          ---           ---            ---           4,078              4,078

Government National
  Mortgage Association.................          ---           ---          1,009           3,987              4,996
                                               -----        ------        -------         -------            -------

     Total.............................        $ ---        $2,177         $2,428         $18,844            $23,449
                                               =====        ======         ======         =======            =======

Weighted average yield.................         --- %         6.90%          8.33%           7.23%              7.31%
</TABLE>
<PAGE>

         Capital Savings' investment and mortgage-backed  securities  portfolios
are managed in accordance with a written  investment policy adopted by the Board
of  Directors  of the  Bank  which  is  implemented  by  members  of the  Bank's
Investment  Committee.  The  Investment  Committee  is  comprised  of  President
Schepers and Executive Vice President Wankum.

         The  OTS has  issued  guidelines  regarding  management  oversight  and
accounting  treatment for securities,  including investment  securities,  loans,
mortgage-backed  securities and derivative  securities.  The guidelines  require
thrift  institutions to reduce the carrying value of securities to the lesser of
cost or market value unless it can be demonstrated that a class of securities is
intended to be held to  maturity.  As of June 30,  1997,  the Company held $37.1
million of  mortgage-backed  and investment  securities,  of which $28.1 million
were  available for sale and the remaining  balance the Company  intends to hold
until maturity.

Sources of Funds

         General.  The  Company's  principal  sources  of  funds  are  deposits,
borrowings,  payment of  principal  and  interest  on loans and  mortgage-backed
securities,  interest  earned on or  maturation  of  investment  securities  and
short-term investments, and funds provided from operations.

         Borrowings,  including FHLB advances and reverse repurchase agreements,
have been used at times to  compensate  for seasonal  reductions  in deposits or
deposit  inflows at less than  projected  levels,  may be used on a  longer-term
basis to support expanded lending  activities,  and may also be used to purchase
assets with similar repricing or maturity features.

         Deposits. Capital Savings offers a variety of deposit accounts having a
wide  range of  interest  rates and terms.  The  Company's  deposits  consist of
statement,   passbook  and  money  market  savings  accounts,  regular  checking
accounts, and certificate accounts currently ranging in terms from 91 days to 60
months. The Company only solicits deposits from its market area and does not use
brokers to obtain deposits.  The Company relies primarily on competitive pricing
policies, advertising and customer service to attract and retain these deposits.

         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 Company has allowed it
to be competitive in obtaining funds and to respond with  flexibility to changes
in  consumer  demand.  The Company has become  more  susceptible  to  short-term
fluctuations  in deposit  flows,  as customers  have become more  interest  rate
conscious.  The  Company  endeavors  to manage the  pricing of its  deposits  in
keeping  with  its  asset/liability  management,   liquidity  and  profitability
objectives.  Based on its experience,  the Company  believes that its statement,
passbook and money market  savings  accounts and regular  checking  accounts are
relatively  stable sources of deposits.  However,  the ability of the Company to
attract  and  maintain  certificates  of  deposit  and the  rates  paid on these
deposits  has been and will  continue  to be  significantly  affected  by market
conditions.
<PAGE>
         The following  table sets forth the savings flows at the Company during
the periods indicated.

<TABLE>
<CAPTION>
                                                 Year Ended June 30,
                                     -----------------------------------------
                                        1995            1996            1997
                                     ---------       ---------       ---------
                                               (Dollars in Thousands)
<S>                                  <C>             <C>             <C>      
Opening balance ................     $ 143,053       $ 145,688       $ 152,345
Deposits .......................        95,983         107,376         162,784
Withdrawals ....................       (97,358)       (105,733)       (149,768)
Interest credited ..............         4,010           5,014           5,678
                                     ---------       ---------       ---------

Ending balance .................     $ 145,688       $ 152,345       $ 171,039
                                     =========       =========       =========

Net increase (decrease) ........     $   2,635       $   6,657       $  18,694
                                     =========       =========       =========

Percent increase (decrease) ....          1.84%           4.57%          12.27%
                                     =========       =========       =========
</TABLE>
<PAGE>
         The following table sets forth the dollar amount of savings deposits in
the  various  types of deposit  programs  offered by the Company for the periods
indicated.
<TABLE>
<CAPTION>
                                                                                  Year Ended June 30,
                                                    --------------------------------------------------------------------------------
                                                             1995                        1996                         1997
                                                    ----------------------       -----------------------      ----------------------
                                                                  Percent                       Percent                     Percent
                                                     Amount       of Total        Amount        of Total       Amount       of Total
                                                    --------      --------       --------       --------      --------      --------
                                                                                 (Dollars in Thousands)
<S>                                                 <C>            <C>           <C>            <C>           <C>            <C>    
Transaction and Savings Deposits(1):

Savings Accounts (2.71%) ....................       $ 16,957        11.64%       $ 16,928        11.11%       $ 17,808        10.41%
Checking Accounts (1.55%) ...................         10,113         6.94          11,804         7.75          17,719        10.36
Money Market Accounts (3.97%) ...............          7,229         4.96           7,299         4.79          11,438         6.69
                                                    --------       ------        --------       ------        --------       ------

Total Non-Certificates ......................         34,299        23.54          36,031        23.65          46,965        27.46
                                                    --------       ------        --------       ------        --------       ------

Certificates:

0.00 - 3.99% ................................            712          .49             219          .14              76          .04
4.00 - 5.99% ................................         87,435        60.02          89,432        58.71         103,976        60.79
6.00 - 7.99% ................................         23,002        15.79          26,636        17.48          20,022        11.71
8.00 - 9.99% ................................            240          .16              27          .02             --           --
                                                    --------       ------        --------       ------        --------       ------

     Total Certificates .....................        111,389        76.46         116,314        76.35         124,074        72.54
                                                    --------       ------        --------       ------        --------       ------
     Total Deposits .........................       $145,688       100.00%       $152,345       100.00%       $171,039       100.00%
                                                    ========       ======        ========       ======        ========       ======
</TABLE>

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

(1)  Rates shown are at June 30, 1997.                                     
<PAGE>
         The  following  table  shows  rate  and  maturity  information  for the
Company's certificates of deposit as of June 30, 1997.

<TABLE>
<CAPTION>
                                                 0.00-       4.00-         6.00-        8.00-                        Percent
                                                 3.99%       5.99%         7.99%        9.99%        Total           of Total
                                                 -----     --------       -------     --------      --------         --------
                                                                     (Dollars in Thousands)
<S>                                              <C>       <C>            <C>         <C>           <C>               <C>    
Certificate accounts maturing
in quarter ending:

September 30, 1997......................         $  25     $ 28,465       $ 5,391     $    ---      $ 33,881           27.31%
December 31, 1997.......................            51       20,161         3,858          ---        24,070           19.40
March 31, 1998..........................           ---       16,552         2,412          ---        18,964           15.28
June 30, 1998...........................           ---       14,413         1,693          ---        16,106           12.98
September 30, 1998......................           ---        7,788         1,076          ---         8,864            7.14
December 31, 1998.......................           ---        4,029           731          ---         4,760            3.84
March 31, 1999..........................           ---        2,882           130          ---         3,012            2.43
June 30, 1999...........................           ---        2,452           290          ---         2,742            2.21
September 30, 1999......................           ---        1,141           547          ---         1,688            1.36
December 31, 1999.......................           ---        1,576           633          ---         2,209            1.78
March 31, 2000..........................           ---          998           621          ---         1,619            1.30
June 30, 2000...........................           ---          898           941          ---         1,839            1.48
Thereafter..............................           ---        2,621         1,699          ---         4,320            3.48%
                                                 -----     --------       -------     --------      --------          ------ 

     Total..............................         $  76     $103,976       $20,022     $    ---      $124,074          100.00%
                                                 =====     ========       =======     ========      ========          ======

     Percent of total...................         0.06%       83.80%        16.14%        0.00%
                                                 ====        =====         =====         ====

</TABLE>
<PAGE>
         The following table indicates the amount of the Company's  certificates
of deposit and other  deposits by time  remaining  until maturity as of June 30,
1997.

<TABLE>
<CAPTION>
                                                                              Maturity
                                                    ---------------------------------------------------------------
                                                                   Over         Over
                                                    3 Months      3 to 6       6 to 12         Over
                                                    or Less       Months       Months        12 months      Total
                                                    -------       -------      -------        -------      --------
<S>                                                 <C>           <C>          <C>            <C>          <C>     
Certificates of deposit less
 than $100,000..............................        $31,226       $20,816      $29,062        $29,450      $110,554

Certificates of deposit of
 $100,000 or more (1).......................          2,112         3,406        6,044          1,958        13,520
                                                    -------       -------      -------        -------      --------
 Total certificates of deposit..............        $33,338       $24,222      $35,106        $31,408      $124,074
                                                    =======       =======      =======        =======      ========
</TABLE>

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

(1)      Deposits  from  governmental  and other  public  entities  totaled $6.9
         million at June 30, 1997.
<PAGE>
         Borrowings.  Although  deposits  are the  Company's  primary  source of
funds, the Company's policy has been to utilize  borrowings when they are a less
costly  source of funds,  can be invested at a positive  interest rate spread or
when the Company desires additional capacity to fund loan demand.

         Capital  Savings'  borrowings  historically  have consisted of advances
from the FHLB of Des  Moines.  Such  advances  can be made  pursuant  to several
different credit programs,  each of which has its own interest rate and range of
maturities. At June 30, 1997, the Company had $46.5 million of advances.

         From time to time,  Capital Savings has entered into reverse repurchase
agreements.  These agreements are accounted for as borrowings by the Company and
are  secured  by  certain  of  the  Company's   investment  and  mortgage-backed
securities. The lender takes possession of the securities during the period that
the reverse  repurchase  agreement is  outstanding.  The terms of the agreements
have  typically  ranged  from 30 days to a maximum of 90 days.  The  proceeds of
these transactions are used to meet cash flow needs of the Company.  At June 30,
1997, the Company had no repurchase agreements outstanding.

         The  following  table  sets forth the  maximum  month-end  balance  and
average  balance of  borrowings,  consisting  solely of FHLB  advances,  for the
periods indicated.  See Note 8 of the Notes to Consolidated Financial Statements
for additional information on borrowed funds.

<TABLE>
<CAPTION>
                                                   Year Ended June 30,
                                       -----------------------------------------
                                        1995              1996             1997
                                       -------          -------          -------
                                                     (In Thousands)
<S>                                    <C>              <C>              <C>    
Maximum Balance:
  FHLB advances .............          $18,500          $42,000          $53,000

Average Balance:
  FHLB advances .............          $11,513          $22,656          $49,125
</TABLE>

         The following table sets forth certain  information as to the Company's
borrowings, consisting of solely FHLB advances, at the dates indicated.

<TABLE>
<CAPTION>
                                                                                    June 30,
                                                                  ------------------------------------------
                                                                    1995              1996             1997
                                                                  -------           -------          -------
                                                                                 (In Thousands)
<S>                                                               <C>               <C>              <C>    
FHLB advances ................................................    $18,500           $42,000          $46,500
                                                                  =======           =======          =======

Weighted average interest rate of FHLB advances...............       6.50%             5.65%            5.68%
</TABLE>
<PAGE>
Subsidiary Activities

         As a federally  chartered  savings  bank,  the Bank is permitted by OTS
regulations to invest up to 2% of its assets,  or $4.9 million at June 30, 1997,
in the stock of, or loans to service corporation subsidiaries.  As of such date,
the net book value of the  Banks'  investment  in its  service  corporation  was
approximately  $1.4 million.  The Bank may invest an additional 1% of its assets
in service  corporations  where such additional funds are used for inner-city or
community  development purposes and up to 50% of its total capital in conforming
loans to  service  corporations  in which it owns more  than 10% of the  capital
stock. In addition to investments in service corporations,  federal associations
are permitted to invest an unlimited  amount in operating  subsidiaries  engaged
solely in activities which a federal association may engage in directly.

         The Bank  organized a single  service  corporation  in 1971,  which was
known as CEMO Service Corporation ("CEMO"). CEMO had a wholly-owned  subsidiary,
Capital  Savings  Financial  Services,  Inc.  ("CSFS")  through which it offered
mutual funds, annuity and brokerage services through a registered  broker-dealer
to the Company's customers and members of the general public. In July 1994, CSFS
was merged  into CEMO and CEMO  changed  its name to Capital  Savings  Financial
Services, Inc. CSFS recognized net income of $29,000 during fiscal 1997.

Regulation

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

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

         Federal  Regulation  of  Savings  Associations.  The OTS has  extensive
authority  over  the  operations  of  savings  associations.  As  part  of  this
authority, Capital Savings is required to file periodic reports with the OTS and
is subject to periodic  examinations  by the OTS.  When these  examinations  are
conducted by the OTS, the  examiners  may require the Bank to provide for higher
general or specific loan loss reserves.  The last regular OTS examination of the
Bank was as of March  18,  1996.  All  savings  associations  are  subject  to a
semi-annual  assessment,  based upon the savings  association's total assets, to
fund the  operations of the OTS. The Bank's OTS  assessment  for the fiscal year
ended June 30, 1997, was $62,340.

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

         In addition,  the  investment,  lending and branching  authority of the
Bank is  prescribed  by federal laws and it is  prohibited  from engaging in any
activities not permitted by such laws. For instance,  no savings institution may
invest in  non-investment  grade  corporate debt  securities.  In addition,  the
permissible  level of  investment  by federal  associations  in loans secured by
non-residential real property may not exceed 400% of total capital,  except with
approval of the OTS. Federal savings  associations are also generally authorized
to branch  nationwide.  At June 30, 1997,  the Bank was in  compliance  with the
noted restrictions.

         The Bank's general permissible lending limit for  loans-to-one-borrower
is equal to the  greater of $500,000  or 15% of  unimpaired  capital and surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1997, the Bank's lending limit under this restriction was approximately
$2.9  million.  The  Bank  is  in  compliance  with  the   loans-to-one-borrower
limitation.

         The OTS, as well as the other  federal  banking  agencies,  has adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  asset quality,  earnings  standards,  internal
controls and audit  systems,  interest rate risk exposure and  compensation  and
other  employee  benefits.  Any  institution  which  fails to comply  with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an  approved  plan will  subject  the  institution  to further  enforcement
action.

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

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

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

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

         In order to eliminate this disparity and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation to  recapitalize  the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to  recapitalize  the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings  associations  then exist.  The special  assessment  rate has been
established  at .657% of deposits by the FDIC and the  resulting  assessment  of
$959,000  was paid in  November  1996.  This  special  assessment  significantly
increased  noninterest  expense and adversely  affected Company's and the Bank's
results  of  operations  for the year ended  June 30,  1997.  As a result of the
special assessment,  Bank's deposit insurance premiums was reduced to zero based
upon its current risk  classification  and the new assessment  schedule for SAIF
insured institutions. These premiums are subject to change in future periods.

         Prior  to the  enactment  of the  legislation,  a  portion  of the SAIF
assessment imposed on savings  associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift  crisis in the 1980s.  Although the FDIC has  proposed  that the SAIF
assessment be equalized with the BIF assessment  schedule,  effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing  obligation.  Although the  legislation  also now
requires  assessments  to be made on  BIF-assessable  deposits for this purpose,
effective  January 1, 1997,  that  assessment will be limited to 20% of the rate
imposed on SAIF  assessable  deposits  until the earlier of December 31, 1999 or
when no  savings  association  continues  to exist,  thereby  imposing a greater
burden  on SAIF  member  institutions  such as the  Bank.  Thereafter,  however,
assessments  on BIF-  member  institutions  will be made on the  same  basis  as
SAIF-member  institutions.  The rates to be established by the FDIC to implement
this  requirement for all  FDIC-insured  institutions is uncertain at this time,
but are  anticipated to be about a 6.5 basis points  assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions  participate
fully in the assessment.

         Regulatory    Capital    Requirements.    Federally   insured   savings
associations,  such as the Bank,  are  required to  maintain a minimum  level of
regulatory  capital.  The OTS has  established  capital  standards,  including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations.  These
capital  requirements  must be generally as stringent as the comparable  capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements in excess of these  standards on individual  associations on a case
by case basis.

         The capital  regulations  require  tangible capital of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the requirement. At June 30, 1997, the Bank did not have any intangible assets.

         The OTS regulations establish special  capitalization  requirements for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and  capital.  All of the  subsidiaries  of the Bank are  includable
subsidiaries.

         At June 30, 1997, the Bank had tangible  capital of $19.0  million,  or
7.9% of adjusted total assets,  which is  approximately  $15.4 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

         The capital standards also require core capital equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however, a savings  association must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997, the Bank
had no intangibles which were subject to these tests.

         At June 30, 1997, the Bank had core capital equal to $19.0 million,  or
7.9% of adjusted total assets, which is $11.8 million above the minimum leverage
ratio requirement of 3% as in effect on that date.

          The OTS risk-based  requirement  requires savings associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of  non-traditional  activities.  At June 30, 1997, the Bank had no
capital  instruments  that  qualify as  supplementary  capital  and  $739,000 of
general loss reserves, which was less than 1.0% of risk-weighted assets.

         Certain  exclusions from capital and assets are required to be made for
the purpose of calculating  total  capital.  Such  exclusions  consist of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments. The Bank did not have any
exclusions from capital and assets at June 30, 1997.

         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the OTS has assigned a risk weight of 50% for  prudently  underwritten
permanent  one- to  four-family  first lien mortgage loans not more than 90 days
delinquent  and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         OTS regulations  also require that every savings  association with more
than normal  interest rate risk exposure to deduct from its total  capital,  for
purposes of determining compliance with such requirement, an amount equal to 50%
of its  interest-rate  risk  exposure  multiplied  by the  present  value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings  association,  greater  than 2% of the  present  value of its
assets,  based upon a  hypothetical  200 basis  point  increase  or  decrease in
interest rates (whichever results in a greater decline).  Net portfolio value is
the  present  value  of  expected  cash  flows  from  assets,   liabilities  and
off-balance  sheet  contracts.  The rule will not become effective until the OTS
evaluates the process by which savings  associations may appeal an interest rate
risk deduction determination.  It is uncertain as to when this evaluation may be
completed.  Any savings  association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement  unless the
OTS determines otherwise.

         At June  30,  1997,  the  Bank  had  total  capital  of  $19.8  million
(including  $19.0  million in core capital and  $739,000 in  allowance  for loan
losses) and  risk-weighted  assets of $119.1  million (no converted  off-balance
sheet assets were included);  or total capital of 16.6% of risk-weighted assets.
This amount was $10.3 million above the 8.0% requirement in effect on that date.

         The OTS and the FDIC are authorized  and,  under certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be one with less than either a 4% core capital  ratio, a 4% Tier 1 risk-based
capital ratio or an 8% risked-based  capital ratio).  Any such  association must
submit a capital restoration plan and until such plan is approved by the OTS may
not  increase its assets,  acquire  another  institution,  establish a branch or
engage in any new activities,  and generally may not make capital distributions.
The OTS is authorized to impose the additional  restrictions that are applicable
to significantly undercapitalized associations.

         As a condition to the  approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  association  must agree that it will
enter  into  a  limited  capital  maintenance  guarantee  with  respect  to  the
institution's achievement of its capital requirements.

         Any savings  association  that fails to comply with its capital plan or
is  "significantly  undercapitalized"  (i.e.,  Tier 1 risk-based or core capital
ratios of less than 3% or a  risk-based  capital  ratio of less than 6%) must be
made  subject  to one or more of  additional  specified  actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general enforcement  authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

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

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

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

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

         Savings  associations  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  associations  that do not,  or would  not meet  their  current  minimum
capital requirements  following a proposed capital  distribution,  however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns. See "Regulatory Capital Requirements."

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

         Liquidity.  All savings associations,  including the Bank, are required
to  maintain  an  average  daily  balance  of liquid  assets  equal to a certain
percentage of the sum of its average daily balance of net  withdrawable  deposit
accounts  and  borrowings  payable in one year or less.  This liquid asset ratio
requirement  may vary  from time to time  (between  4% and 10%)  depending  upon
economic  conditions  and  savings  flows of all  savings  associations.  At the
present time, the minimum liquid asset ratio is 5%.

         In  addition,  short-term  liquid  assets  (e.g.,  cash,  certain  time
deposits,  certain  bankers  acceptances  and short-term  United States Treasury
obligations)  currently must constitute at least 1% of the association's average
daily  balance of net  withdrawable  deposit  accounts  and current  borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio  requirement.  At June 30,  1997,  the Bank was in  compliance  with  both
requirements, with an overall liquid asset ratio of 7.1% and a short-term liquid
assets ratio of 3.5%.

         Accounting.   An  OTS  policy  statement   applicable  to  all  savings
associations  clarifies and  re-emphasizes  that the investment  activities of a
savings   association  must  be  in  compliance  with  approved  and  documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement,  management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with  appropriate  documentation.  The Company is in compliance with
these amended rules.

         OTS accounting regulations,  which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must  incorporate any other accounting  regulations or orders  prescribed by the
OTS.

         Qualified Thrift Lender Test. All savings  associations,  including the
Bank,  are  required to meet a qualified  thrift  lender  ("QTL")  test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal  Revenue Code of 1986,  as amended  (the  "Code").  Under either
test,  such assets  primarily  consist of residential  housing related loans and
investments. At June 30, 1997, the Bank met the test and has always met the test
since its effectiveness.

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

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

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  the Bank may be required to devote  additional funds for
investment  and lending in its local  community.  The Bank was  examined for CRA
compliance in April 1996 and received a rating of "satisfactory."

         Transactions with Affiliates. Generally, transactions between a savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain of these  transactions,  such as loans to an  affiliate,  are
restricted to a percentage of the association's capital.  Affiliates of the Bank
include  the  Company and any company  which is under  common  control  with the
Company or the Bank.  In  addition,  a savings  association  may not lend to any
affiliate  engaged in activities not  permissible  for a bank holding company or
acquire the  securities  of most  affiliates.  The Bank's  subsidiaries  are not
deemed affiliates;  however, the OTS has the discretion to treat subsidiaries of
savings associations as affiliates on a case by case basis.

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

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

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

         If the Bank  fails  the QTL  test,  Capital  Savings  must  obtain  the
approval of the OTS prior to continuing after such failure,  directly or through
its other  subsidiaries,  any business  activity  other than those  approved for
multiple savings and loan holding companies or their subsidiaries.  In addition,
within one year of such  failure the Company  must  register as, and will become
subject  to,  the  restrictions  applicable  to  bank  holding  companies.   The
activities  authorized for a bank holding  company are more limited than are the
activities  authorized  for a  unitary  or  multiple  savings  and loan  holding
company. See "--Qualified Thrift Lender Test."

         Capital  Savings  must obtain  approval  from the OTS before  acquiring
control of any other SAIF-insured  association.  Such acquisitions are generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

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

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

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking  accounts).  At June 30, 1997,  the Bank was in  compliance  with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the OTS. See "- Liquidity."

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

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

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines.  At June 30, 1997,  the Bank had $3.0 million in FHLB stock,
which was in  compliance  with this  requirement.  In past  years,  the Bank has
received  substantial  dividends on its FHLB stock.  Over the past five calendar
years  such  dividends  have  averaged  7.93%  and were  7.0% for the  first two
quarters of calendar 1997.

         Under  federal  law the FHLBs are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in value of the  Bank's  FHLB  stock may  result  in a  corresponding
reduction in the Bank's capital.

Federal and State Taxation

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

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

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

         Under the percentage of taxable income method,  the percentage bad debt
deduction  could not exceed the amount  necessary to increase the balance in the
reserve for  "qualifying  real property  loans" to an amount equal to 6% of such
loans  outstanding  at the end of the  taxable  year or the  greater  of (i) the
amount  deductible  under the  experience  method or (ii) the amount  which when
added to the bad debt deduction for "non-qualifying loans" equaled the amount by
which 12% of the amount comprising savings accounts at year-end exceeded the sum
of surplus, undivided profits and reserves at the beginning of the year.

         In August  1996,  legislation  was enacted  that  repealed  the reserve
method of accounting (including the percentage of taxable income method) used by
many thrift to calculate their bad debt reserve for federal income tax purposes.
Thrift  institutions with $500 million or less in assets may, however,  continue
to use the experience  method. As a result, the Bank must recapture that portion
of the  reserve  that  exceeds  the amount  that could have been taken under the
experience  method  for  post-1987  tax  years.  At June 30,  1997,  the  Bank's
post-1987 excess reserves amounted to approximately $553,000. The recapture will
occur over a six-year  period,  the  commencement of which will be delayed until
the  first  taxable  year  beginning  after  December  31,  1997,  provided  the
institution meets certain  residential  lending  requirements.  The Bank did not
meet  these  requirements  for the year  ended  June 30,  1997,  and  recaptured
one-sixth  of  the  excess  reserves.   The  legislation  also  requires  thrift
institutions  to account  for bad debts for federal  income tax  purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.

         In addition to the regular income tax, corporations,  including savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental  tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.

         To the extent earnings appropriated to a savings association's bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of June 30,  1997,  the  Bank's  Excess  for tax  purposes  totaled
approximately $624,000.

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

         The tax returns of the Bank and its subsidiary have been audited by the
IRS for the years ended June 30, 1988, 1989 and 1990 and have executed a closing
agreement with the IRS with respect to these periods.  The Company's tax returns
have  never  been  audited  by  the  IRS.  In the  opinion  of  management,  any
examination  of still  open  returns  (including  returns  of  subsidiaries  and
predecessors  of, or entities  merged into,  the Company)  would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Company and its consolidated subsidiaries.

         Missouri  Taxation.  Missouri-based  thrift  institutions,  such as the
Bank, are subject to a special  financial  institutions tax, based on net income
without  regard to net operating  loss  carryforwards,  at the rate of 7% of net
income. This tax is in lieu of all other state taxes on thrift institutions,  on
their property,  capital or income,  except taxes on tangible  personal property
owned  by the  Bank  and on real  estate,  contributions  paid  pursuant  to the
Unemployment  Compensation law of Missouri,  social security taxes,  sales taxes
and use taxes. In addition,  the Bank is entitled to credit against this tax all
taxes paid to the State of Missouri or any political subdivision except taxes on
tangible  personal  property  owned by the Bank and held for  lease of rental to
others and on real  estate,  contributions  paid  pursuant  to the  Unemployment
Compensation  Law of Missouri,  social security taxes,  sales and use taxes, and
taxes imposed by the Missouri  Financial  Institutions Tax Law.  Missouri thrift
institutions are not subject to the regular state corporate income tax.

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

Competition

         Capital  Savings faces strong  competition,  both in  originating  real
estate and other loans and in attracting  deposits.  Competition  in originating
real  estate  loans  comes  primarily  from  other  commercial  banks,   savings
associations,  mortgage  brokers and credit  unions making loans secured by real
estate located in the Company's market area. Commercial banks, credit unions and
finance companies provide vigorous  competition in consumer lending. The Company
competes for real estate and other loans principally on the basis of the quality
of services it provides to borrowers,  interest  rates and loan fees it charges,
and the types of loans it originates.

         The Company attracts all of its deposits through its branch and limited
service  offices,  primarily  from the  communities  in which those  offices are
located;  therefore,  competition  for those deposits is principally  from other
commercial  banks,  savings  associations,  credit  unions and  brokerage  firms
located in the same  communities.  The Company  competes  for these  deposits by
offering a variety of deposit accounts at competitive rates, convenient business
hours and branch locations with interbranch deposit and withdrawal privileges.

         The  Company  primarily  serves  all or a portion  of Boone,  Callaway,
Camden, Cole, Crawford,  Franklin,  Gasconade, Maries, Miller, Moniteau, Morgan,
Osage, Phelps and Pulaski counties in Missouri. There are 35 commercial banks, 7
savings  institutions,  other than Capital  Savings,  and 15 credit unions which
compete for deposits and loans in Capital Savings' primary
market area.

Employees

         At June 30,  1997,  the  Company and its  subsidiary  had a total of 83
employees,  including six part-time  employees.  The Company's employees are not
represented  by  any  collective  bargaining  group.  Management  considers  its
employee relations to be good.

Executive Officers of the Company and the Bank Who Are Not Directors

         The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and the
Bank who do not serve on either the  Company's or the Bank's Board of Directors.
There are no  arrangements or  understandings  between the persons named and any
other person pursuant to which such officers were selected.

         Charles  Wm.  Clark - Mr.  Clark,  Age 54, is the  Bank's  Senior  Vice
President - Savings and  Deposits.  Mr. Clark is primarily  responsible  for the
supervision  and operation of Capital  Savings'  deposit  operations.  Mr. Clark
joined Capital  Savings in 1970 as a Vice  President.  In 1986 he became head of
savings and  deposits,  and was  appointed  Senior Vice  President  in 1992.  In
addition, Mr. Clark serves as a Director of CSFS.

         Shannon  C.  Britt - Mr.  Britt,  Age 38,  serves as Vice  President  -
Lending Operations, and is responsible for the overall administration of lending
services  offered by the Bank,  including  compliance with lending  policies and
regulations,   development   of  loan  programs,   underwriting   of  loans  and
collections.   Mr.   Britt   joined   Capital   Savings  in  1990  as   Internal
Auditor/Compliance  Officer and was appointed Vice  President in 1992.  Prior to
joining Capital Savings,  Mr. Britt had served as a lending officer with another
Missouri financial institution since 1983. Mr. Britt received a B.S. in Business
Administration degree from Southeast Missouri State University.

Item 2.  Description of Property

         The  Company   conducts  its  business  at  its  main  office  and  two
supermarket  branches in Jefferson City,  Missouri,  and five other locations in
its primary market area. In addition,  the Company maintains one limited service
agency office in its primary market area.

         The Company  owns its main office and four of its branch  offices;  the
remaining three branch offices and the limited service agency office are leased.
The total net book value of the  Company's  premises  and  equipment  (including
land, building and leasehold improvements and furniture, fixtures and equipment)
at June 30, 1997 was $2.2 million. See Note 6 of Notes to Consolidated Financial
Statements.

         Capital  Savings  will  continue  to expand  and  improve  its  current
facilities as needed.  During April 1997, the Bank opened its second supermarket
branch  facility in Jefferson  City,  Missouri.  Management  believes that these
supermarket  branch offices are an effective way to service its customers due to
their size, efficiency and convenient high traffic locations.

         The  Company  maintains  an  on-line  data base  with a service  bureau
servicing financial institutions.  The net book value of the data processing and
computer equipment utilized by the Company at June 30, 1997 was $127,000.

Item 3.  Legal Proceedings

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

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

         No matter was  submitted  to a vote of  security  holders,  through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
<PAGE>
                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         Page  41  of  the  attached  1997  Annual  Report  to  Stockholders  is
incorporated herein by reference.

Item 6.  Management's Discussion and of Operation

         Pages 4 through 14 of the attached 1997 Annual  Report to  Stockholders
are incorporated herein by reference.

Item 7.  Financial Statements

         The following  information  appearing in the Company's Annual Report to
Stockholders is incorporated herein by reference.

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

Independent Accountants' Report                                    15

Consolidated Statements of Financial Condition as of               16
 June 30, 1996 and 1997

Consolidated Statements of Income for Years Ended                  17
  June 30, 1995, 1996 and 1997

Consolidated Statements of Changes in Stockholders' Equity        18-19
  for Years Ended June 30, 1995, 1996 and 1997

Consolidated Statements of Cash Flows for Years Ended             20-21
  June 30, 1995, 1996 and 1997

Notes to Consolidated Financial Statements                        22-40

         With the  exception of the  aforementioned  information,  the Company's
Annual  Report to  Stockholders  for the year ended June 30, 1997, is not deemed
filed as part of this Annual Report on Form 10-KSB.

Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

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

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

Directors

         Information  concerning Directors of the Company is incorporated herein
by reference  from the  definitive  Proxy  Statement  for the Annual  Meeting of
Stockholders to be held in October 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.

Executive Officers

         Information regarding the business experience of the executive officers
of the Company and the Bank who are not directors is contained in Part I of this
Form 10-KSB and incorporated herein by reference.

Compliance with Section 16(a)

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's directors and executive officers, and persons who own more than 10% of
a registered  class of the  Company's  equity  securities,  to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10%  stockholders  are  required by SEC  regulation  to furnish the Company with
copies of all Section 16(a) forms they file.

         To the Company's  knowledge,  based solely on a review of the copies of
such reports furnished to the Company and written  representations that no other
reports were required,  during the fiscal years ended June 30, 1997, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.

Item 10.  Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference  from  the  definitive  Proxy  Statement  for the  Annual  Meeting  of
Stockholders to be held in October 1997, a copy of which will be filed not later
than 120 days after the close of the fiscal year.

Item 11.  Security  Ownership of Certain Beneficial Owners and Management

         Information  concerning security ownership of certain beneficial owners
and management is  incorporated  herein by reference  from the definitive  Proxy
Statement for the Annual Meeting of  Stockholders  to be held in October 1997, a
copy of which  will be filed  not  later  than 120 days  after  the close of the
fiscal year.

Item 12.  Certain Relationships and Related Transactions

         Information  concerning certain  relationships and related transactions
is incorporated  herein by reference from the definitive Proxy Statement for the
Annual Meeting of  Stockholders to be held in October 1997, a copy of which will
be filed not later than 120 days after the close of the fiscal year.

Item 13.          Exhibits and Reports on Form 8-K

                  (a) Exhibits:  See Index to Exhibits

                  (b)  Reports  on Form 8-K:  No  reports on Form 8-K were filed
                  during the three-month period ended June 30, 1997.
<PAGE>
                                   SIGNATURES

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

                                       CAPITAL SAVINGS BANCORP, INC.



Date: September 25, 1997               By:     /s/ Larry V. Schepers
      ------------------               -----------------------------------------
                                       Larry V. Schepers, Chairman of the Board,
                                       President and Chief Executive Officer
                                       (Duly Authorized Representative)


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


/s/ Larry V. Schepers                            /s/ Frank A. Sloan
-----------------------------------------        -------------------------------
Larry V. Schepers, Chairman of the Board,        Frank A. Sloan, Director
President and Chief Executive Officer
(Principal Executive Officer)

Date: September 25, 1997                         Date: September 25, 1997
      ------------------                               ------------------


/s/ Ralph J. Kalberloh                           /s/ Wayne R. Walquist
-----------------------------------------        -------------------------------
Ralph J. Kalberloh, Director                     Wayne R. Walquist, Director

Date: September 25, 1997                         Date: September 25, 1997
      ------------------                               ------------------


/s/ Arthur F. Wankum                             /s/ Joseph E. Forck
-----------------------------------------        -------------------------------
Arthur F. Wankum, Director, Executive Vice       Joseph E. Forck, Director and 
President and Chief Financial Officer            Senior Vice President
(Principal Financial and Accounting Officer)

Date: September 25, 1997                         Date: September 25, 1997
      ------------------                               ------------------
<PAGE>
                                INDEX TO EXHIBITS


 Exhibit
 Number                               Document
 ------                               --------

   3        The Articles of  Incorporation  and Bylaws,  filed on September  24,
            1993  as  exhibits  3.1  and  3.2,  respectively,   to  Registrant's
            Registration  Statement  on  Form  S-1  (File  No.  33-69372),   are
            incorporated herein by reference.

   4        Registrant's Specimen Stock Certificate, filed on September 24, 1993
            as  Exhibit 4 to  Registrant's  Registration  Statement  on Form S-1
            (File No. 33-69372), is incorporated herein by reference.

 10.1       Employment Agreements between the Bank and Larry V. Schepers,  filed
            on September 24, 1993 as Exhibit 10.2 to  Registrant's  Registration
            Statement on Form S-1 (File No. 33-69372), is incorporated herein by
            reference.

 10.2       Registrant's  Employee Stock Ownership Plan,  filed on September 24,
            1993 as Exhibit 10.3 to Registrant's  Registration Statement on Form
            S-1 (File No. 33-69372), is incorporated herein by reference.

 10.3       Registrant's   1994  Stock  Option  and  Incentive  Plan,  filed  on
            September  24,  1993 as Exhibit  10.1 to  Registrant's  Registration
            Statement on Form S-1 (File No. 33-69372), is incorporated herein by
            reference.

 10.4       Registrant's  Recognition and Retention Plan, filed on September 24,
            1993 as Exhibit 10.4 to Registrant's  Registration Statement on Form
            S-1 (File No. 33-69372), is incorporated herein by reference.

 10.5       Registrant's  Executive  Salary  Continuation  Agreement,  filed  as
            Exhibit  10.4 to  Registrant's  Report on Form 10-KSB for the fiscal
            year ended June 30, 1995 (File No. 0-22656), are incorporated herein
            by reference.

 13         Annual Report to Stockholders

 21         Subsidiaries of the Registrant

 23         Consent of Accountants

 27         Financial Data Schedule (electronic filing only)