SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One):

[X]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999, OR

|_|      TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the transition period from to .

Commission File Number:  0-25854

                               GFSB BANCORP, INC.
                 ---------------------------------------------
                 (Name of Small Business Issuer in its Charter)

Delaware                                                             04-2095007
---------------------------------------------                -------------------
(State or Other Jurisdiction of Incorporation                  (I.R.S. Employer
or Organization)                                             Identification No.)

221 West Aztec Avenue, Gallup, New Mexico                             87301
-----------------------------------------                         --------------
(Address of Principal Executive Offices)                           (Zip Code)

Issuer's Telephone Number, Including Area Code:              (505) 722-4361
                                                             --------------

Securities Registered Under Section 12(b) of the Exchange Act:       None

Securities Registered Under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.10 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  Exchange  Act 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 is not contained in this form, 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. |_|

         State issuer's revenues for its most recent fiscal year. $9,893,090.

         The aggregate  market value of the voting stock held by  non-affiliates
of the Registrant,  based upon the average bid and asked prices of such stock on
September 15, 1999, was $6.8 million.

         As of September  15, 1999,  there were issued and  outstanding  981,308
shares of the registrant's Common Stock.

         Transitional Small Business Disclosure format (check one):

                  Yes               No    X
                      ------            ------

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Annual  Report to  Stockholders  for Fiscal Year ended June 30,
     1999. (Part II)
2.   Portions of Proxy  Statement for the 1999 Annual  Meeting of  Stockholders.
     (Part III)


<PAGE>



                                     PART I

         GFSB Bancorp,  Inc. (the  "Company") may from time to time make written
or oral "forward- looking  statements",  including  statements  contained in the
Company's  filings with the Securities and Exchange  Commission  (including this
annual  report on Form  10-KSB  and the  exhibits  thereto),  in its  reports to
stockholders and in other communications by the Company,  which are made in good
faith by the Company  pursuant to the "safe  harbor"  provisions  of the Private
Securities Litigation Reform Act of 1995.

         These forward-looking statements involve risks and uncertainties,  such
as statements of the Company's plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the Board of  Governors of the
Federal  Reserve  System,   inflation,   interest  rate,   market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes;  disruptions caused by computer malfunctions
resulting from the year 2000 issue;  acquisitions;  changes in consumer spending
and saving habits; and the success of the Company at managing these risks.

         The  Company  cautions  that  this  list of  important  factors  is not
exclusive.  The  Company  does  not  undertake  to  update  any  forward-looking
statement,  whether written or oral, that may be made from time to time by or on
behalf of the Company.

Item 1.  Description of Business
--------------------------------

General

         GFSB  Bancorp,  Inc.  (the  "Company")  is a unitary  savings  and loan
holding company that was  incorporated in March 1995 under the laws of the State
of  Delaware  for the  purpose of  acquiring  all of the common  stock of Gallup
Federal Savings Bank (the "Bank").  This  acquisition  occurred June 29, 1995 at
which time the Bank simultaneously  converted from a mutual to stock institution
(the "Conversion"), sold all of its outstanding capital stock to the Company and
the Company made its initial public  offering of its common stock.  The expenses
associated  with the  Conversion  were  charged  to paid-in  capital  while $4.5
million of the net proceeds of $9.1 million from the public offering was used to
purchase all of the issued and outstanding  stock of the Bank issued pursuant to
the  Conversion  with the remaining  $4.5 million being retained by the Company.
This  transaction  was  accounted  for  in a  manner  similar  to a  pooling  of
interests,  consequently  no goodwill or other  intangibles  were  recorded as a
result of this transaction.


                                       -1-

<PAGE>



         Since the primary activities of the Company are those of the Bank, much
of the discussion  herein  pertains to the Bank,  however,  comparisons to total
assets, liabilities, etc. are based on the Company's consolidated numbers. As of
June 30, 1999,  the Company had total assets of $151 million,  total deposits of
$81 million and stockholders'  equity of $12 million or 8% of total assets under
generally accepted accounting  principles  ("GAAP").  The only subsidiary of the
Company is the Bank. The Bank currently has no subsidiaries.

         The Bank is a federally chartered capital stock savings bank located in
Gallup,  New  Mexico.  The Bank was  founded  in 1934  under the name the Gallup
Federal Savings and Loan  Association.  In connection with the Bank's conversion
from a federally  chartered mutual savings  association to a federally chartered
stock savings bank,  the Bank changed its name to Gallup  Federal  Savings Bank.
The Bank's deposits are federally insured by the Savings  Association  Insurance
Fund ("SAIF"),  as  administered by the Federal  Deposit  Insurance  Corporation
("FDIC").

         The  Company's  business  activities  to date have been  limited to its
investment  in the Bank,  loans made to the Bank for use in the normal course of
the Bank's business, and a loan made to the Gallup Federal Savings Bank Employee
Stock  Ownership  Plan  ("ESOP")  to enable the ESOP to  purchase  shares of the
Company's common stock in the initial public offering.

         The Bank  offers a variety of  financial  services to meet the needs of
the communities it serves. The Bank's principal business is attracting  deposits
from the  general  public and  investing  those  deposits,  together  with funds
generated from  operations,  to originate first mortgages on one- to four-family
residences  in its market area.  The Bank also  originates  a limited  number of
multi-family,  commercial  real estate,  construction,  commercial  business and
consumer loans.

         The principal  sources of funds for the Bank's  lending  activities are
deposits,  the  amortization,  repayment and maturity of loans,  mortgage-backed
securities,  investment  securities  and  borrowings  from the  FHLB.  Principal
sources of income are  interest and fees on loans,  mortgage-backed  securities,
investment securities,  and deposits held in other financial  institutions.  The
Bank's principal expense is interest paid on deposits and FHLB borrowings.

Market Area and Competition

         The City of Gallup,  New Mexico is considered to be the Bank's  primary
market  area.  The county  where  Gallup is located  is  McKinley  County and is
considered  to be the Bank's  secondary  market.  McKinley  County is located in
northwestern New Mexico,  and occupies a part of the Colorado Plateau called the
San Juan  Plateau.  More  than  half of the  people  in the  County  are  Native
Americans; including Navajos and Zunis. McKinley County includes the trading and
service  center  of  Gallup  and  the  southeastern  edge of the  Navajo  Indian
Reservation.  In January 1995, McKinley County had a population of approximately
67,000.  The Bank  intends  to expand  its  secondary  market  area to  adjacent
counties,  which will include a major portion of Apachie County, Arizona and the
Navajo Indian  Reservation.  However,  recent attempts to originate loans on the
reservation have been stymied due to regulatory barriers.

         The general  economy of Gallup is  centered  around the  wholesale  and
retail  trade,  public  administration,  transportation  services,  tourism  and
mining. The production of Indian arts and crafts by

                                       -2-

<PAGE>



smaller  businesses also constitutes a significant part of the County's economic
base.  The largest  single  employer in McKinley  County is the Bureau of Indian
Affairs.

         During its sixty-five year  existence,  the Bank has focused on serving
its  customers  located in the New Mexico  community  of Gallup and  surrounding
communities  in  McKinley  County.  Economic  growth in the Bank's  market  area
remains  dependent  upon the local  economy.  In addition,  the deposit and loan
activity of the Bank is  significantly  affected by economic  conditions  in its
market area. The Bank's  principal  competitors are financial  institutions  and
mortgage  banking  companies,  many of which are  significantly  larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes  principally  from commercial  banks,  mortgage
brokers,  banking and  insurance  companies.  Its  competition  for deposits has
historically  come from commercial  banks.  Moreover,  the Bank faces increasing
competition for deposits from non-bank institutions, such as brokerage firms and
insurance  companies in such areas as short-term  money market funds,  corporate
and government securities funds, mutual funds and annuities.  The Bank is one of
five  savings  associations  and  commercial  banks having an office in McKinley
County.   The  Bank  is  the  only  savings   association  or  commercial   bank
headquartered  in Gallup.  The Bank also competes with several  mortgage banking
companies located outside of McKinley County and three credit unions.

Lending Activities

         General.  The Bank's loan portfolio  consists of mortgage loans secured
by one- to four-family  residences,  and  multi-family,  commercial real estate,
construction, consumer and commercial business loans.

         At June 30, 1999, the Bank's loan portfolio totaled $97 million.  Loans
secured  by  first  mortgages  on one- to  four-family  residences  totaled  $72
million,  or 75% of the Bank's loan portfolio at June 30, 1999. For its mortgage
loan  portfolio,  the Bank  primarily  originates  fixed-rate  loans  with up to
15-year terms. As part of its asset liability strategy,  the Bank recently began
offering  more  adjustable-rate  loan  products.  In  addition,  the Bank  sells
conventional  one- to  four-family  fixed rate  mortgage  loans over 15 years in
maturity into the secondary market.

         Analysis of Loan Portfolio.  The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
loan participations, deferred loan origination fees and costs and allowances for
losses) as of the dates indicated.

                                       -3-

<PAGE>

<TABLE>
<CAPTION>

                                                             At June 30,
                                           ---------------------------------------------
                                                    1999                    1998
                                           ----------------------  ---------------------
                                                 $           %          $          %
                                                        (Dollars in Thousands)
<S>                                         <C>          <C>        <C>        <C>
Type of Loans:
Residential................................   $72,290      74.86%     $55,297    72.92%
Commercial real estate.....................    17,199      17.81       14,750    19.45
Construction:
  Residential..............................       828        .86        1,125     1.48
  Commercial...............................     2,733       2.83        1,848     2.44
Commercial business .......................     4,460       4.62        4,748     6.26
Consumer:
  Savings account .........................     1,067       1.10          955     1.26
  Automobile and other.....................     3,459       3.58        2,839     3.74
Less:
  Loans in process.........................    (1,443)     (1.49)      (1,755)   (2.31)
  Loan participations sold.................    (2,938)     (3.04)      (3,065)   (4.04)
 Deferred loan origination fees and costs..      (647)      (.67)        (520)    (.69)
  Allowance for loan losses................      (443)      (.46)        (387)    (.51)
                                            ---------    -------       ------    -----
Total loans, net...........................  $ 96,565        100%     $75,837      100%
                                              =======    =======       ======    =====
Type of Security:
----------------
  Residential real estate
    1-4 family.............................  $ 72,174      74.74%     $56,422    74.39%
    Multi-family dwelling units............       944        .98          908     1.20
  Commercial real estate...................    19,844      20.55       15,717    20.72
  Commercial business .....................     4,548       4.71        4,722     6.23
  Consumer:
    Savings accounts.......................     1,067       1.10          955     1.26
    Automobile and other...................     3,459       3.58        2,839     3.74
Less:
  Loan participations sold.................    (2,938)     (3.04)      (3,065)   (4.04)
  Loans in process.........................    (1,443)     (1.49)      (1,755)   (2.31)
  Deferred loan origination fees and costs.      (647)      (.67)        (519)    (.68)
  Allowance for loan losses................      (443)      (.46)        (387)    (.51)
                                              -------    -------       ------    -----
  Total loans, net.........................  $ 96,565        100%     $75,837      100%
                                              =======    =======       ======    =====
</TABLE>


                                       -4-

<PAGE>



Loan Maturity Tables

         The  following  table  sets  forth  the  maturity  of the  Bank's  loan
portfolio at June 30, 1999. The table does not include  prepayments or scheduled
principal  repayments.  Prepayments and scheduled principal  repayments on loans
totaled $27.3 million and $16.1  million,  for the years ended June 30, 1999 and
1998,  respectively.  Adjustable-rate mortgage loans are shown as maturing based
on contractual maturities.
<TABLE>
<CAPTION>
                                         Multi-family                  Consumer and
                             1-4 Family  and Commercial                 Commercial
                            Real Estate   Real Estate   Construction     Business         Total
                            -----------   -----------   ------------     --------         -----

                                                        (In Thousands)
<S>                        <C>          <C>           <C>            <C>             <C>
Amounts Due:
Within 3 months........... $         20   $      823    $      178    $      1,103   $     2,124
3 months to 1 Year........          665          462           296           2,157         3,580

After 1 year:
  1 to 3 years............        1,181        5,323            --           1,755         8,259
  3 to 5 years............          837        2,361           233           1,598         5,029
  5 to 10 years...........       36,930        2,361           160           1,052        40,503
  10 to 20 years..........       22,363        6,683         2,617           1,343        33,006
  Over 20 years...........        9,314          --             --              --         9,314
                             ----------   ----------    ----------     -----------    ----------

Total due after one year..       70,625       16,728         3,010           5,748        96,111
                              ---------   ----------    ----------       ---------     ---------

Non-performing............           36           42            77              66           221
                             ----------   ----------    ----------     -----------    ----------

Total amount due..........   $   71,346   $   18,055    $    3,561     $     9,074     $ 102,036
                              =========    =========     =========      ==========      ========

Less:
Loan participations sold..                                                               (2,938)
Allowance for loan loss...                                                                 (443)
Loans in process..........                                                               (1,443)
Deferred loan fees........                                                                 (647)
                                                                                      ---------
  Loans receivable, net...                                                            $   96,565
                                                                                       =========
</TABLE>



                                       -5-

<PAGE>



         The following table sets forth the dollar amount, before deductions for
loans in process,  deferred  loan  origination  fees and costs and allowance for
loan losses,  at June 30, 1999 of all loans due after June 30, 2000,  which have
pre-determined  interest  rates and which have floating or  adjustable  interest
rates.


                                                Floating or
                            Fixed Rates       Adjustable Rates        Total
                            -----------       ----------------        -----
                                               (In Thousands)
One- to four-family(1)...... $      62,405  $       8,610      $      71,015
Multi-family and
  commercial real estate(1).        14,680          4,823             19,503
Consumer and commercial
  business..................         3,708          2,106              5,814
                                ----------     ----------         ----------

    Total...................    $   80,793     $   15,539        $    96,332
                                 =========      =========         ==========
---------------
(1)      Includes construction loans.


         One-  to   Four-Family   Residential   Loans.   The   Bank   originates
multi-family,  commercial  business,  commercial real estate and consumer loans.
The Bank generally  originates  one- to four-family  residential  mortgage loans
without private  mortgage  insurance in amounts up to 80% of the appraised value
of the  mortgaged  property,  or up to  95% if  private  mortgage  insurance  is
obtained to reduce the Bank's exposure to 80% or below of the appraised value of
the properties.  To a lesser extent,  the Bank makes loans on nonowner  occupied
one- to  four-family  properties  acquired as an  investment by the borrowers in
amounts up to 80% of the appraised value of the property. In addition,  the Bank
originates FHA and VA loans.

         The Bank primarily  originates  fixed-rate  mortgage loans for its loan
portfolio with up to 15 year terms. In addition,  the Bank originates loans with
terms over 15 years for sale in the secondary  market.  The Bank offers  various
loan  programs  with  varying  interest  rates and fees which are  competitively
priced based on market conditions and the Bank's cost of funds.  Generally,  the
Bank's  underwriting  guidelines for fixed-rate  mortgage loans conform to FHLMC
and  FNMA  guidelines.   In  March  1995,  the  Bank  began  offering   one-year
adjustable-rate  mortgage  ("ARM")  loans which adjust  annually  based upon the
one-year  treasury rate. The program is structured so that such loans  generally
may not adjust more than 2% in any one year.  The Bank will not originate  loans
below the fully  indexed  rate.  Generally,  during  periods of rising  interest
rates,  the risk of default on an ARM loan is  considered to be greater than the
risk of default on a fixed-rate  loan due to the upward  adjustment  of interest
costs to the  borrower.  The Bank will not  originate  ARM loans  with  negative
amortization or with initial  "teaser" rates.  The Bank also offers a variety of
loan  products  for low and  moderate  income  housing.  The Bank offers  second
mortgage  loans on one- to  four-family  residences  if the Bank holds the first
mortgage loan for such property and the combined loan to value ratio will be 90%
or lower.

         Commercial Real Estate and Multi-Family  Loans. The Bank actively seeks
to increase its origination of commercial real estate and multi-family loans and
expects to continue  to do so. The Bank became  involved in these types of loans
due to a perceived  need in the Bank's market area and in an attempt to increase
the Bank's net interest margin.  Commercial real estate and multi-family secured
loans are  originated in amounts  generally up to 80% of the appraised  value of
the property.  Such appraised  value is determined by an  independent  appraiser
previously  approved by the Bank.  The Bank's  commercial  real estate loans are
permanent  loans secured by approved  property such as churches,  motels,  small
office

                                       -6-

<PAGE>



buildings,   retail  stores,  small  strip  plazas,  and  other  non-residential
buildings. The Bank generally originates fixed-rate commercial real estate loans
with balloon maturities of five years and with amortization  periods of up to 25
years, and to a lesser extent,  adjustable-rate loans based on a margin over the
New York prime rate. At June 30, 1999, the Bank's largest commercial real estate
loan consisted of a $1,400,000  performing  loan secured by a retail  commercial
property,  of which  $470,000,  has been sold to another bank as a  non-recourse
participation.  At June 30, 1999, the Bank's largest multi-family loan consisted
of a $580,000 performing loan secured by two multi-family apartment buildings in
Gallup, New Mexico.

         Loans secured by  commercial  real estate and  multi-family  properties
generally  involve a greater degree of risk than residential  mortgage loans and
carry larger loan balances.  This  increased  credit risk is a result of several
factors,  including the  concentration of principal in a limited number of loans
and borrowers,  the effects 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 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, the borrower's ability to
repay the loan may be  impaired.  The Bank  intends  to  continue  to  emphasize
commercial real estate lending and accordingly, its credit risk may increase.

         Consumer and Commercial Business Loans. In response to a perceived need
in the local community and to provide for diversification of its asset portfolio
and improved  interest rate risk management,  the Bank continues  increasing the
amount of consumer and  commercial  business  loans it  originates.  The Bank is
attempting to increase its level of consumer lending through new products,  such
as home equity lines of credit,  second  mortgage loans and automobile  loans, a
competitive  pricing  structure,   promotional  activities,   and  cross-selling
consumer  products through its office,  without  incurring  unacceptable  credit
risk. The home equity lines of credit are made with  adjustable  rates with loan
to value  ratios  of 90% if the Bank has the first  mortgage  and 80% if it does
not. The Bank also offers  automobile and other consumer loans offered primarily
on a fixed-rate,  short-term basis. The underwriting  standards  employed by the
Bank for consumer  loans  include a  determination  of the  applicant's  payment
history  on other  debts and an  assessment  of the  borrower's  ability to make
payments  on the  proposed  loan and  other  indebtedness.  In  addition  to the
creditworthiness  of the  applicant,  the  underwriting  process also includes a
comparison  of the value of the  security,  if any, in relation to the  proposed
loan amount.  The Bank's  consumer loans tend to have higher  interest rates and
shorter  maturities  than one- to  four-family  first  mortgage  loans,  but are
considered to entail a greater risk of default than mortgage loans.

         The Bank  intends to  continue  to  actively  increase  its  commercial
business  loan  originations.  Revolving  lines of  credit,  short-term  working
capital loans, and term loans up to seven years are originated to meet the needs
of local  small  businesses.  Some loans are  unsecured,  but the  majority  are
secured by inventory,  equipment,  accounts receivable,  marketable  securities,
savings deposits,  real estate,  personal guaranties,  or a combination of these
types of  collateral.  Commercial  business  loans  generally  involve a greater
degree of risk than residential  mortgage loans and frequently carry larger loan
balances.   The  Bank   offers   fixed-rate   commercial   business   loans  and
adjustable-rate  loans  which  adjust  daily  based  upon New York  prime.  This
increased   credit  risk  is  a  result  of  several   factors,   including  the
concentration  of  principal  in a limited  number of loans and  borrowers,  the
effects of general economic conditions on business cash flow, and the difficulty
of evaluating and monitoring these types of loans.

         Construction  Loans.  The Bank primarily  makes  construction  loans to
individuals to construct single-family,  owner-occupied homes for which the Bank
also provides permanent financing and to builders who have a proven track record
on either a pre-sold or speculative basis. Construction financing is

                                       -7-

<PAGE>



generally  considered to involve a higher degree of risk of loss than  long-term
financing on improved, occupied real estate. Risk of loss on a construction loan
is dependent largely upon the accuracy of the initial estimate of the property's
value at completion  of  construction  or  development  and the  estimated  cost
(including interest) of construction. During the construction phase, a number of
factors  could  result  in  delays  and  cost  overruns.   If  the  estimate  of
construction costs proves to be inaccurate,  the Bank may be required to advance
funds  beyond  the  amount  originally  committed  to permit  completion  of the
development.  If the estimate of value proves to be inaccurate,  the Bank may be
confronted,  at or prior to the  maturity of the loan,  with a project  having a
value which is insufficient to assure full repayment.

         Loan  Commitments.  The Bank issues written  commitments to prospective
borrowers on all real estate approved loans. Generally,  the commitment requires
acceptance  within ten days of the date of  issuance  and must be closed  within
thirty  days of  issuance.  At June 30,  1999,  the Bank  had  $6.6  million  of
commitments  to fund  new  loans  at  market  interest  rates  and to  fund  the
undisbursed portion of construction loans and home equity lines of credit.

         Loans to One  Borrower.  Savings  institutions  are subject to the same
limits as those  applicable to national banks,  which under current  regulations
limit loans-to-one  borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured  basis and an additional  amount equal to 10% of
unimpaired  capital  and  retained  income  if the loan is  secured  by  readily
marketable collateral  (generally,  financial  instruments,  not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.8 million as of June 30, 1999.

         At June 30, 1999, the Bank's largest lending relationship  consisted of
three performing  loans,  including two amortizing loans, and a fixed rate loan,
totaling  $3,210,000  of  which  $1,870,000  has  been  sold to  other  banks as
non-recourse  participations,  secured by three motel properties,  two in Gallup
and one in Grants, New Mexico. The next five largest lending relationships,  all
of which consist of performing loans, at June 30, 1999 consisted of a $1,400,000
commercial  property  loan of which  $470,000  has been  sold to other  banks as
non-recourse  participations,  two loans  totaling  $1,320,000  secured by motel
property  in  Gallup,  of  which  $610,000  has  been  sold to  another  bank as
non-recourse  participation,  sixteen loans totaling  $1,030,000  secured by 1-4
dwelling units, a commercial  revolving line of credit totaling $150,000 and two
construction loans totaling $2,100,000,  and two loans totaling $550,000 secured
by non-residential property.

Non-Performing and Problem Assets

         Loan  Delinquencies.  Loans are  reviewed  on a  monthly  basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent  and, in the opinion of  management,  the  collection  of  additional
interest is doubtful.  Interest  accrued and unpaid at the time a loan is placed
on non-accrual  status is charged against interest income.  Subsequent  interest
payments,  if any, are either applied to the  outstanding  principal  balance or
recorded  as  interest  income,  depending  on the  assessment  of the  ultimate
collectibility  of the loan.  At June 30,  1999,  the Bank had total  delinquent
loans of $1,710,000,  of which $1,270,000 were delinquent over 30 days, $220,000
were delinquent over 60 days, and $220,000 were delinquent 90 days or more.



                                       -8-

<PAGE>



         The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans.

                                                              At June 30,
                                                     --------------------------
                                                        1999           1998
                                                     ------------    ----------
                                                           (In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
  Permanent loans secured by 1-4 dwelling units......$       78      $    705
  All other mortgage loans...........................        75            --

Non-mortgage loans:
  Commercial real estate.............................        --            --
  Consumer...........................................        66             2
                                                        -------          ----
      Total.......................................... $     219         $ 707
                                                        =======          ====
Accruing loans which are contractually past
  due 90 days or more:
Mortgage loans:
  Permanent loans secured by 1-4 dwelling units......$       --        $   --
  All other mortgage loans...................                --            --
                                                      ---------          ----
      Total..........................................$       --        $   --
                                                      =========          ====

Total non-accrual and accrual loans.................. $     219         $ 707
Real estate owned....................................       150           159
                                                       --------          ----
Total non-performing assets.......................... $     369         $ 866
                                                       ========          ====
Total non-accrual and accrual loans to net loans.....     0.23%         1.14%
Total non-accrual and accrual loans to total assets..     0.15%         0.70%
Total non-performing assets to total assets..........     0.24%         0.70%

         Interest income that would have been recorded on loans accounted for on
a non-accrual  basis under the original  terms of such loans was  immaterial for
the year ended June 30, 1999. Amounts included in the Bank's interest income for
the year ended June 30, 1999 was, likewise, immaterial.

         Classified Assets. OTS regulations provide for a classification  system
for problem  assets of insured  institutions  which  covers all problem  assets.
Under this  classification  system,  problem assets of insured  institutions are
classified  as  "substandard,"  "doubtful,"  or "loss."  An asset is  considered
substandard if it is inadequately  protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include  those  characterized  by the  "distinct  possibility"  that the insured
institution  will sustain  "some loss" if the  deficiencies  are not  corrected.
Assets  classified  as  doubtful  have all of the  weaknesses  inherent in those
classified  substandard,  with the  added  characteristic  that  the  weaknesses
present  make  "collection  or  liquidation  in full," on the basis of currently
existing facts,  conditions and values,  "highly  questionable  and improbable."
Assets  classified  as loss are  those  considered  "uncollectible"  and of such
little value that their  continuance  as assets without the  establishment  of a
specific loss reserve is not warranted.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem

                                       -9-

<PAGE>



assets.  When an insured  institution  classifies  problem assets as loss, it is
required  either to establish a specific  allowance  for losses equal to 100% of
that  portion  of the asset so  classified  or to  charge  off such  amount.  An
institution's  determination  as to the  classification  of its  assets  and the
amount of its valuation  allowances  is subject to review by the OTS,  which may
order the  establishment of additional  general or specific loss  allowances.  A
portion of general loss allowances  established to cover possible losses related
to assets  classified as  substandard or doubtful may be included in determining
an institution's  regulatory  capital,  while specific valuation  allowances for
loan losses generally do not qualify as regulatory capital.

         At June 30,  1999,  there  were no loans with  respect  to which  known
information  about the  possible  credit  problems of the  borrowers or the cash
flows of the security  properties have caused  management to have concerns as to
the ability of the borrowers to comply with present loan repayment terms.

         The  following  table  provides  further  information  about the Bank's
problem assets as of June 30, 1999.

                                                              At
                                                           June 30,
                                                             1999
                                                          -------------

Substandard...........................................     $924,718
Doubtful .............................................           --
Loss .................................................           --
General loss allowance................................      443,479
Specific loss allowance - loans.......................           --
Specific loss allowance - real estate owned...........           --

         Real  Estate  Owned.  Real  estate  acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold.  When  property is acquired it is recorded at the lower of the
cost or fair value.  The Bank records loans as in substance  foreclosures if the
borrower  has  little or no equity in the  property  based  upon its  documented
current fair value,  the Bank can only expect repayment of the loan to come from
the sale of the property and if the borrower has effectively  abandoned  control
of the  collateral  or has  continued to retain  control of the  collateral  but
because of the current  financial  status of the  borrower  it is  doubtful  the
borrower will be able to repay the loan in the foreseeable  future. In substance
foreclosures  are accounted  for as real estate  acquired  through  foreclosure,
however, title to the collateral has not been acquired by the Bank. There may be
significant  other  expenses  incurred such as attorney and other  extraordinary
servicing costs involved with in substance foreclosures.
The Bank's real estate owned at June 30, 1999 was $150,000.

         Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on  unidentified  loans in its loan  portfolio and foreclosed
real  estate.  A  provision  for loan losses is charged to  operations  based on
management's  evaluation  of the  potential  losses  that may be incurred in the
Bank's loan portfolio. Such evaluation,  which includes a review of all loans of
which full  collectibility  of  interest  and  principal  may not be  reasonably
assured,  considers  the Bank's past loan loss  experience,  known and  inherent
risks in the  portfolio,  adverse  situations  that may  affect  the  borrower's
ability to repay,  estimated  value of any  underlying  collateral  and  current
economic  conditions.  The allowance for loan losses, as a ratio of total loans,
net, was 0.46% at June 30, 1999.

         Management  will  continue  to review  the  entire  loan  portfolio  to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the

                                      -10-

<PAGE>



allowance  for losses  will be  adequate  to cover  losses  which may in fact be
realized  in the future and that  additional  provisions  for losses will not be
required.

         While the Bank believes it has  established  an adequate  allowance for
loan losses, there can be no assurance that regulators,  in reviewing the Bank's
loan  portfolio,  will  not  request  the  Bank to  significantly  increase  its
allowance for loan losses,  thereby  negatively  affecting the Bank's  financial
condition  and  earnings or that the Bank may not have to increase  its level of
loan loss allowance in the future.

Allocation of Allowance for Loan Losses

         The following  table sets forth the allocation of the Bank's  allowance
for loan losses by loan  category  and the percent of loans in each  category to
total loans  receivable,  net, at the dates  indicated.  The portion of the loan
loss  allowance  allocated to each loan  category  does not  represent the total
available for future  losses which may occur within the loan category  since the
total loan loss allowance is a valuation  reserve  applicable to the entire loan
portfolio.



                                                 At June 30,
                         ------------------------------------------------------
                                    1999                      1998
                         -------------------------   --------------------------
                                        Percent of              Percent of
                                      Loans in Each            Loans in Each
                                       Category to              Category to
                         Amount        Total Loans     Amount   Total Loans
                         ------        -----------     ------   -----------
                                       (Dollars in Thousands)

Residential real estate.   $   273        72%           $214         55%
Commercial real estate..        71         20            109         28
Consumer and
  commercial business...       100          8             64         17
                          --------     ------           ----       ----

  Total................. $     443        100%         $ 387        100%
                          ========     ======           ====       ====




                                      -11-

<PAGE>



Analysis of the Allowance for Loan Losses

         The following table sets forth  information  with respect to the Bank's
allowance for loan losses at the dates indicated.


                                               At June 30,
                                         -------------------------
                                             1999         1998
                                         ----------   ------------
                                           (Dollars in Thousands)

Total loans outstanding, net...........    $ 96,565      $75,837
                                            =======       ======
Average loans outstanding..............    $ 88,355      $63,930
                                            =======       ======

Allowance balances (at beginning of
  period)..............................    $    387      $   339
Provision (credit):
  Residential..........................          14           68
  Consumer and commercial business.....         124           (5)

Charge-offs:
  Residential..........................         (64)          --
  Consumer and commercial business.....         (18)         (19)

Recoveries:
  Residential..........................          --           --
  Consumer and commercial business.....          --            4
Net (charge-offs) recoveries...........         (82)         (15)

Allowance balance (at end of period)...    $    443       $  387
                                            =======        =====

Allowance for loan losses as a percent
  of total loans outstanding, net......        .46%         .51%



                                      -12-

<PAGE>



Analysis of the Allowance for Real Estate Owned

         The following table sets forth  information  with respect to the Bank's
allowance for losses on real estate owned at the dates indicated.


                                                At June 30,
                                      ----------------------------
                                          1999            1998
                                     ---------------- ------------
                                          (Dollars in Thousands)

Total real estate owned and other
  repossessed assets, net...............  $   150          $ 159

Allowance balances - beginning..........       --             --
Provision...............................       --             --
Net charges-offs........................  $    --          $  --
                                           ======            ===

Allowance balances - ending.............       --%            --%
                                           ======            ===

Allowance  for losses on real estate
owned and other  repossessed  assets
to net real estate owned and other
repossessed assets......................       --%            --%

Mortgage-Backed Securities

         The  following   table  sets  forth  the   composition  of  the  Bank's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.


                                                     At June 30,
                                    ------------------------------------------
                                             1999                  1998
                                    --------------------   -------------------
                                                Percent                Percent
                                    Amount     of Total     Amount    of Total
                                    ------     --------     ------    --------
                                                (Dollars in Thousands)
Mortgage-backed securities:
  FNMA..............................  $ 21,746    68.57%   $25,581     76.25%
  GNMA..............................     2,781     8.77      4,695     13.99
  FHLMC.............................     1,524     4.81      2,201      6.56
Mortgage Pass-through certificates..     4,933     5.55         --        --
                                      --------  ------- ----------   -------
      Total.........................    30,984    97.70     32,477     96.80
  Net premiums......................       728     2.30      1,074      3.20
Net mortgage-backed securities...... $  31,712   100.00%   $33,551    100.00%
                                      ========   ======     ======    ======



                                      -13-

<PAGE>



         The following  table sets forth the Bank's  mortgage-backed  securities
activities information for the periods indicated.



                                       For the Year Ended June 30,
                                          1999          1998
                                              (In Thousands)
Mortgage-backed securities(1):
  Beginning balance:                   $ 33,551   $    32,070
    Mortgage-backed securities
      purchased.......................    8,969        11,678

    Fair value adjustments............     (504)         (168)
                                        -------     ---------
  Less:
    Mortgage-backed securities sold...       --            --
    Principal repayments..............  (10,304)      (10,029)
                                        -------      --------
Ending balance........................$  31,712   $    33,551
                                       =========    =========
------------------
(1)      Includes premiums and discounts.


         To  supplement  lending  activities,  the Bank  invests in  residential
mortgage-backed securities.  Mortgage- backed securities serve as collateral for
borrowings   and,   through   repayments,   as  a  source  of   liquidity.   The
mortgage-backed   securities   portfolio   at  June  30,   1999   consisted   of
adjustable-rate  certificates issued by the FHLMC, GNMA, FNMA, and Norwest Asset
Securities  Corporation.  At  June  30,  1999,  the  mortgage-backed  securities
portfolio classified as available for sale had a fair value of $31.7 million and
an amortized cost of $32.1 million and had contractual maturities between 10 and
30 years.

         Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages,  the principal and interest payments
on which  are  passed  from the  mortgage  originators,  through  intermediaries
(generally   quasi-governmental   agencies)   that   pool  and   repackage   the
participation  interests in the form of  securities,  to  investors  such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.

         Mortgage-backed  securities  typically are issued with stated principal
amounts,  and the  securities  are backed by pools of mortgages  that have loans
with  interest  rates that are within a range and have varying  maturities.  The
underlying pool of mortgages can be composed of either  fixed-rate  mortgages or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  are  generally
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages (i.e., fixed rate or adjustable rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security is equal to the life of the underlying mortgages.

Investment Activities

         At June 30, 1999, the Bank had an investment portfolio of approximately
$10.8 million,  consisting of mutual funds, tax-exempt securities,  FHLMC stock,
FHLB and FNMA  debentures,  Student Loan  Marketing  Association  ("SLMA") asset
backed notes and corporate debt  securities.  The Bank classifies its investment
securities,  as  available  for sale,  and held to  maturity.  The fair value of
available for sale securities and  held-to-maturity  securities at June 30, 1999
was  $12  million,   resulting  in  a  net  unrealized  gain  at  that  date  of
approximately $1.2 million.


                                      -14-

<PAGE>



Investment Portfolio

         The  following  table  sets  forth  the fair  value  of the  investment
securities portfolio of the Bank.



                                         At June 30,
                                  -----------------------
                                    1999             1998
                                  ------------  ---------
Debt securities:                       (In Thousands)
 Mutual funds....................  $     2,398     $2,283
 U.S. Treasury bills.............           --         --
 FHLB and FNMA debentures........        3,643      1,010
 FHLMC Stock.....................        1,275      1,035
 Tax-Exempt Securities...........        1,668      1,005
 SLMA asset backed note..........        1,992         --
 Corporate debt securities.......          990         --
                                      --------   --------
   Total investment securities...  $    11,966    $ 5,333
                                    ==========     ======




                                      -15-

<PAGE>



Investment Portfolio Maturities

         The  following  table  sets forth  certain  information  regarding  the
carrying values, weighted average yields and maturities of the Bank's investment
securities portfolio at June 30, 1999.
<TABLE>
<CAPTION>
                                                                                                         At June 30, 1999
                             One Year or Less    One to Five Years  Five to Ten Years  More than Ten Years Total Investment
                             ----------------    -----------------  -----------------  ------------------- ----------------
                                                                                                              Securities
                                                                                                              ----------
                              Carrying  Average   Carrying Average   Carrying  Average  Carrying Average    Carrying Average
                                Value    Yield      Value   Yield      Value    Yield     Value   Yield      Value    Yield
                               -------  -------    ------- -------    -------  -------   ------- -------    -------  ------
                                                                    (Dollars in Thousands)

<S>                          <C>        <C>    <C>        <C>     <C>         <C>    <C>         <C>    <C>          <C>
Tax-exempt Securities(1).....  $    --      --%  $    736   4.86%   $    395    4.63%  $    537   8.00%   $   1,668    5.82%
Mutual funds.................    2,398     5.41        --      --         --       --        --      --       2,398     5.41
FHLB and FNMA debentures.....      301     5.62     2,374    5.38        968     6.89        --      --       3,643     5.80
FHLMC stock..................       --       --        --      --         --       --     1,275    1.00       1,275     1.00
 SLMA asset backed note......       --       --        --      --         --       --     1,992    5.49       1,992     5.49
 Corporate debt securities...       --       --       990    5.83          -       --         -      --         990     5.83
                                ------  -------   -------  ------    -------   ------   -------  ------     -------  -------
  Total......................  $ 2,699    5.43%  $  4,100   5.40%   $  1,363    6.24%  $  3,804    4.34%  $  11,966    5.17%
                                ======  ======    =======  =====    ========   =====    =======  ======     =======  ======
</TABLE>
----------------------------------

(1) Average  yield is  computed on book value basis and not on a tax  equivalent
basis.

                                      -16-

<PAGE>



Sources of Funds

         General.  Deposits are the major source of the Bank's funds for lending
and other  investment  purposes.  The Bank derives funds from  amortization  and
prepayment  of loans and,  to a much lesser  extent,  maturities  of  investment
securities,  borrowings,  mortgage-backed  securities and operations.  Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and  outflows  and loan  prepayments  are  significantly  influenced  by
general interest rates and market conditions.  The Bank can obtain advances from
the FHLB as an alternative  to retail  deposit funds.  FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes.  These  advances are  collateralized  by the capital stock of the FHLB
held by the Bank and by certain of the Bank's mortgage loans. The Bank had $55.5
million in FHLB advances at June 30, 1999.

         Deposits.  The Bank currently  offers regular passbook  savings,  money
market deposit  accounts  (which are actually  statement  savings  accounts with
limited third party transfer or check writing provisions),  and term certificate
accounts, primarily to consumers within its primary market area. A full range of
demand and NOW accounts  are now  offered,  both for  consumers  and  commercial
customers. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the  interest  rate,  among
other factors. As of June 30, 1999, the Bank had no brokered deposits.

Jumbo Certificate Accounts

         The following table indicates the amount of the Bank's  certificates of
deposit of  $100,000  or more by time  remaining  until  maturity as of June 30,
1999.


                                   Certificates
                                    of Deposits
                                    -----------
Maturity Period                   (In Thousands)
---------------
Within three months...............  $     6,914
Three through six months..........        5,525
Six through twelve months.........        4,195
Over twelve months................        7,440
                                      ---------
                                    $    24,074
                                      =========
Personnel

         As of June 30, 1999,  the Bank  employed 36  employees  with 33 working
full-time.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining  group. The Bank believes that its relationship with its employees is
good.



                                      -17-

<PAGE>



                                   REGULATION

         Set forth below is a brief  description of certain laws which relate to
the regulation of the Bank and the Company.  The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.


Regulation of the Company

         General.  The  Company is a unitary  savings and loan  holding  company
subject to regulatory  oversight by the OTS. As such, the Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Company and its non-savings association  subsidiaries,  should such subsidiaries
be formed,  which also permits the OTS to restrict or prohibit  activities  that
are determined to be a serious risk to the subsidiary savings association.  This
regulation  and  oversight  is  intended  primarily  for the  protection  of the
depositors of the Bank and not for the benefit of stockholders of the Company.

         Qualified  Thrift  Lender Test.  As a unitary  savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the Qualified  Thrift  Lender  ("QTL") test. 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  restrictions
applicable to bank holding  companies unless such other  associations  each also
qualify  as a QTL  and  were  acquired  in a  supervisory  acquisition.  See  "-
Regulation of the Bank - Qualified Thrift Lender Test."

Regulation of the Bank

         General. As a federally  chartered,  SAIF-insured  savings association,
the Bank is subject to extensive  regulation by the OTS and the Federal  Deposit
Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal statutory and regulatory  requirements.  The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

         Insurance of Deposit Accounts.  The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured  member (as defined by law
and  regulation).  Insurance  of deposits may be  terminated  by the FDIC upon a
finding that the institution has engaged in unsafe or unsound  practices,  is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's primary regulator.

         The FDIC  charges an annual  assessment  for the  insurance of deposits
based on the risk a particular  institution poses to its deposit insurance fund,
depending upon the institution's risk  classification.  This risk classification
is based on an institution's capital group and supervisory sub-group assignment.
In addition,  the FDIC is authorized to increase  deposit  insurance  rates on a
semi-annual  basis if it  determines  that such action is necessary to cause the
balance  in the  SAIF  to  reach  the  designated  reserve  ratio  of  1.25%  of
SAIF-insured  deposits  within a reasonable  period of time. The FDIC may impose
special  assessments  of SAIF members to repay  amounts  borrowed  from the U.S.
Treasury  or for any  other  reason  deemed  necessary  by the  FDIC.  Prior  to
September 30, 1996, savings  associations paid within a range of .23% to .31% of
domestic  deposits and the SAIF was  substantially  underfunded.  By comparison,
prior to

                                      -18-

<PAGE>



September 30, 1996,  members of the Bank Insurance  Fund ("BIF"),  predominantly
commercial  banks,  were required to pay  substantially  lower, or virtually no,
federal deposit insurance premiums.

         Effective  September  30,  1996,  federal  law was revised to mandate a
one-time  special  assessment on SAIF members such as the Bank of  approximately
 .657% of deposits held on March 31, 1995.  The Bank recorded a $250,000  pre-tax
expense for this assessment for the year ended June 30, 1997,  recognized in the
first fiscal quarter.  Beginning January 1, 1997, deposit insurance  assessments
for SAIF members were  reduced to  approximately  .064% of deposits on an annual
basis;  this rate may continue through the end of 1999. During this same period,
BIF  members  are  expected  to be  assessed  approximately  .013% of  deposits.
Thereafter, assessments for BIF and SAIF members should be the same and the SAIF
and BIF may be merged. It is expected that those continuing assessments for both
SAIF and BIF members  will be used to repay  outstanding  Financial  Corporation
bond obligations.  As a result of these changes,  beginning January 1, 1997, the
rate of deposit  insurance  assessed the Bank declined by approximately 70% from
rates in effect prior to September 30, 1996.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted  assets,  (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets, and (3) a risk-based  capital  requirement
equal to 8.0% of total  risk-weighted  assets.  The  Bank's  regulatory  capital
exceeded all minimum regulatory capital requirements applicable to it as of June
30,  1999.  Regulations  that  enable the OTS to take prompt  corrective  action
against savings  associations  effectively impose higher capital requirements on
savings associations.

         Interest-Rate Risk (IRR). As a financial  institution  regulated by the
OTS,  the Bank is required to measure  and monitor its  sensitivity  to interest
rate movements.  OTS-regulated  institutions meeting certain conditions have the
option of utilizing the  OTS-established IRR measurement model, or developing an
in-house  model.  The  Bank has  chosen  to meet  its IRR  sensitivity  modeling
requirements  through use of the OTS's Net Present Value (NPV) model. This model
measures how the net present value of an institution's  assets,  liabilities and
off-balance-sheet  items would change in the event of a range of assumed changes
in market interest  rates.  These  computations  estimate the effect on NPV of a
permanent and  instantaneous  change in market  interest  rates of plus or minus
100, 200, 300, and 400 basis points (bps). The Board has established  acceptable
ranges for the NPV changes across these various scenarios.

         The following  table sets forth the  interest-rate  risk  measures,  as
calculated  by the  OTS's NPV  model,  for the Bank at June 30,  1999,  given an
instantaneous and permanent increase in market interest rates.


         Risk Measures:                                         At June 30,
         --------------                                             1999
                                                                -----------
         200 Basis point rate shock
         Pre-shock NPV ratio: NPV as % of present value of         10.71%
         assets
         Exposure measure: Post-shock NPV ratio:                    9.03%
         Sensitivity measure: Change in NPV ratio:                   168 bps

         Calculations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  loan prepayments and deposit run-off,  and should not be relied
upon  as  indicative  of  actual  results.  Further,  the  calculations  do  not
contemplate  any  actions  the Bank may  undertake  in  response  to  changes in
interest rates.

                                      -19-

<PAGE>



         Savings  associations  with a greater than  "normal"  level of interest
rate exposure may, in the future,  be subject to a deduction from capital for an
interest  rate  risk  ("IRR")   component  for  purposes  of  calculating  their
risk-based capital requirement.

         Dividend and Other Capital Distribution Limitations. The Bank must give
the OTS 30 days advance  notice of any proposed  declaration of dividends to the
Company,  and the OTS has the authority under its supervisory powers to prohibit
the payment of dividends to the Company.  In addition,  the Bank may not declare
or pay a cash dividend on its capital stock if the dividend would (1) reduce the
regulatory  capital of the Bank below the amount  required  for the  liquidation
account  established in connection with the conversion from mutual to stock form
or (2) reduce the amount of capital of the Bank below the  amounts  required  in
accordance  with other OTS  regulations.  In  contrast,  the  Company  has fewer
restrictions on the payment of dividends.

         Loans to One  Borrower.  Savings  institutions  are subject to the same
limits as those  applicable to national banks,  which under current  regulations
limit loans to one borrower in an amount equal to 15% of unimpaired  capital and
unimpaired surplus, or $500,000,  whichever is greater.  The Bank's maximum loan
to one borrower limit was approximately $1.8 million as of June 30, 1999.

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue  to enjoy  full  borrowing  privileges  from the  FHLB of  Dallas.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus  intangible  assets,  property used by the  institution  in conducting its
business and liquid  assets equal to 20% of total  assets).  Certain  assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying  QTIs. As of June 30, 1999,  the Bank was in compliance  with its QTL
requirement.

         Liquidity  Requirements.  All  savings  associations  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. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.

         Federal  Home  Loan  Bank  System.  The Bank is a member of the FHLB of
Dallas,  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.

         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) and non-personal time deposits.  The balances  maintained
to meet the reserve  requirements  imposed by the Federal  Reserve  Board may be
used to satisfy the liquidity  requirements that are imposed by the OTS. At June
30, 1999, the Bank was in compliance with these requirements.

Item 2.  Description of Property.
---------------------------------

                                      -20-

<PAGE>



         The Bank owns its main office located at 221 West Aztec Avenue, Gallup,
New Mexico.  The Bank leases  additional office space across the street from its
main office.

Item 3.  Legal Proceedings
--------------------------

         Neither the  Company nor the Bank are engaged in any legal  proceedings
of a material  nature at the present time. From time to time the Bank is a party
to legal  proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.

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

         Not applicable.

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters
-----------------------------------------------------------------

         The  information  contained under the section  captioned  "Stock Market
Information" in the Company's  Annual Report to Stockholders for the fiscal year
ended June 30, 1999 (the "Annual Report") is incorporated herein by reference.

         The registrant  has declared the following  cash  dividends  during the
past 2 fiscal years.


              Quarter ended                       Cash dividend per share
              -------------                       -----------------------
               June 30, 1999                             $  0.08
               March 31, 1999                               0.075
             December 31, 1999                              0.075
             September 30, 1998                             0.075
               June 30, 1998                                0.075
               March 31, 1998                               0.10
             December 31, 1997                              0.10
             September 30, 1997                             0.10

Item 6.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item 7.  Financial Statements
-----------------------------

         The Company's  consolidated  financial  statements listed under Item 13
herein are incorporated herein by reference.


                                      -21-

<PAGE>



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

         There  were  no  changes  in  or  disagreements   with  accountants  on
accounting and financial disclosure during the two most recent fiscal years.

                                    PART III

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

         The information  contained under the section  captioned  "Section 16(a)
Beneficial   Ownership   Reporting   Compliance"  in  the  Proxy   Statement  is
incorporated herein by reference.

Item 10.  Executive Compensation
--------------------------------

         The  information  contained  under  the  section  captioned  "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         The  information   contained  under  the  section   captioned   "Voting
Securities  and  Principal  Holders  Thereof"  and  "Proposal  I -  Election  of
Directors" in the Proxy Statement is incorporated herein by reference.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The  information   contained  under  the  section  captioned   "Certain
Relationships  and Related  Transactions" in the Proxy Statement is incorporated
herein by reference.

Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

(a)      The Consolidated  Financial Statements and Independent Auditor's Report
         included in the Annual Report, listed below, are incorporated herein by
         reference.

          1.      Independent Auditor's Report

          2.      GFSB Bancorp, Inc.

                    (a)  Consolidated  Statement of Financial  Condition at June
                         30, 1999 and 1998.

                    (b)  Consolidated  Statements  of  Earnings  for each of the
                         years in the two-year period ended June 30, 1999

                    (c)  Consolidated  Statements  of  Stockholders'  Equity for
                         each of the years in the two-year period ended June 30,
                         1999

                    (d)  Consolidated  Statements  of Cash Flows for each of the
                         years in the two-year period ended June 30, 1999


                                      -22-

<PAGE>



                    (e)  Notes to Consolidated Financial Statements

                  The  following   exhibits  are  included  in  this  Report  or
incorporated herein by reference:

          3.      (a)      List of Exhibits

                    3.1  Certificate of Incorporation of GFSB Bancorp, Inc.*

                    3.2  Bylaws of GFSB Bancorp, Inc.*

                    10.1 1995 Stock Option Plan**

                    10.2 Management Stock Bonus Plan**

                    13   1999 Annual Report to Stockholders

                    21   Subsidiaries of the Issuer

                    23   Consent of Neff & Ricci LLP

                    27   Financial Data Schedule (in electronic filing only)

                  (b)    No  reports  on Form 8-K  were  filed  during  the last
                         quarter of the period covered by this Report.

*        Incorporated  herein  by  reference  to  exhibits  3(i)(Certificate  of
         Incorporation) and 3(ii)(Bylaws) to the Registration  Statement on Form
         S-1 of the  Registrant  (File No.  33-90400)  initially  filed with the
         Commission on March 17, 1995.
**       Incorporated by reference to the identically  numbered  exhibits of the
         Annual  Report on Form 10- KSB for the fiscal  year ended June 30, 1997
         (File No. 0-25854) filed with the SEC.



                                      -23-

<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.

                                          GFSB BANCORP, INC.


Date:  September 28, 1999                 By:  /s/Jerry R. Spurlin
                                              ----------------------------------
                                              Jerry R. Spurlin
                                              President
                                              (Duly Authorized Representative)

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



By: /s/Dr. Wallace R. Phillips            By:  /s/Jerry R. Spurlin
    ------------------------------             ---------------------------------
    Dr. Wallace R. Phillips                    Jerry R. Spurlin
    Chairman of the Board                      President
                                              (Principal Executive, Financial
                                                 and Accounting Officer)

Date:    September 28, 1999               Date:  September 28, 1999



By: /s/Richard C. Kauzlaric               By:  /s/James Nechero, Jr.
    -----------------------                    ---------------------------------
    Richard C. Kauzlaric                       James Nechero, Jr.
    Director                                   Director and Assistant Secretary

Date:    September 28, 1999               Date:  September 28, 1999



By: /s/ Vernon I. Hamilton                By:
    ----------------------                     ---------------------------------
    Vernon I. Hamilton                         Michael P. Mataya
    Director                                   Director

Date:    September 28, 1999               Date:    September ____, 1999



By: /s/ Charles L. Parker, Jr.            By:  /s/George S. Perce
    --------------------------                 ---------------------------------
    Charles L. Parker, Jr.                     George S. Perce
    Director and Treasurer                     Director and Secretary

Date:    September 28, 1999               Date:    September 28, 1999