EXHIBIT 13
<PAGE>



                                C O N T E N T S


                                                                     PAGE

LETTER TO STOCKHOLDERS..................................................1

CORPORATE PROFILE AND STOCK MARKET INFORMATION........................2-3

SELECTED FINANCIAL AND OTHER DATA.....................................4-5

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS................................6-20

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.....................21

CONSOLIDATED FINANCIAL STATEMENTS

  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION.....................22-23

  CONSOLIDATED STATEMENTS OF EARNINGS...............................24-25

  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'    
    EQUITY..........................................................26-27

  CONSOLIDATED STATEMENTS OF CASH FLOWS.............................28-29

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................30-57

OFFICE LOCATION AND OTHER CORPORATE INFORMATION........................58


<PAGE>




To Our Stockholders:

We are pleased to present to you our fourth annual  stockholders'  report.  This
report covers the third full year of operations since the successful  completion
on June 29, 1995 of the conversion of Gallup  Federal  Savings Bank (the "Bank")
from a federally  chartered mutual savings  association to a federally chartered
stock  savings  bank and the  acquisition  of all of the issued and  outstanding
capital stock of the Bank by GFSB Bancorp, Inc. (the "Company").

Net earnings for the Company for the year ended June 30, 1998 were $877,209,  an
increase of $241,730 or 38% over net earnings for the  previous  year.  On a per
share basis the Company  earned $0.785 per share  compared with $0.514 per share
last year, adjusted for the stock dividend declared this year.

The  Company's  total  assets  increased  to  $123,209,000  at  June  30,  1998,
representing  growth of  $29,416,000  or 31% from total assets of $93,793,000 at
June 30, 1997.  Deposits also increased  $11,507,000 or 20% from  $57,872,000 at
June 30, 1997 to $69,379,000 at June 30, 1998.

We do appreciate the confidence you share in our Company. We are going through a
tremendous  growth period.  Our Directors and employees are doing  everything we
can to build customer loyalty,  customer base and continue to make a substantial
positive impact on our community.  Thank you very much for your support,  and we
certainly appreciate your banking with us.

Sincerely,

Jerry R. Spurlin            W.R. Phillips, D.D.S.      Richard C. Kauzlaric
President of the Company    Chairman of the Board      Chairman of the
and the Bank                of the Company             Board of the Bank

October 14, 1998



<PAGE>



GFSB Bancorp, Inc.

Corporate Profile

GFSB Bancorp,  Inc. (the "Company") is a Delaware corporation organized in March
1995 at the direction of the Board of Directors of Gallup  Federal  Savings Bank
(the  "Bank") to acquire all of the capital  stock that the Bank issued upon its
conversion from the mutual to stock form of ownership.  The Company is a unitary
savings and loan holding  company which,  under existing laws,  generally is not
restricted in the types of business activities in which it may engage,  provided
that the Bank  retains  a  specified  amount of its  assets  in  housing-related
investments.  At the present  time,  because  the  Company  does not conduct any
active business,  the Company does not employ any persons other than officers of
the Bank, but utilizes the support staff of the Bank from time to time.

The Bank is a federally  chartered stock savings bank  headquartered  in Gallup,
New Mexico.  The Bank was founded in 1934. Its deposits are federally insured by
the Savings  Association  Insurance Fund ("SAIF"),  administered  by the Federal
Deposit Insurance Corporation, and the Bank is a member of the Federal Home Loan
Bank ("FHLB")  System.  The Bank is a community  oriented,  full service  retail
savings institution offering primarily traditional mortgage loan products. It is
the Bank's intent to remain an  independent  community  savings bank serving the
local banking needs of its community.

The Bank  attracts  deposits  from the  general  public  and uses such  deposits
primarily to invest in  residential  lending on owner occupied  properties.  The
Bank also makes consumer, commercial real estate, commercial,  construction, and
multi-family loans.

Stock Market Information

Since its issuance on June 29, 1995, the Company's  $0.10 par value common stock
has been traded in the over-the-counter market. The following table reflects the
stock prices as published by the Nasdaq Small-Cap Market for the most recent two
fiscal  years.  The  quotations  reflect  inter-dealer  prices,  without  retail
mark-up, mark-down, or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
                                                 Bid Prices
<S>                                         <C>          <C>   
         Quarter Ended                       High         Low
         September 30, 1996                  14.250       13.250
         December 31, 1996                   16.000       13.750
         March 31, 1997                      17.500       15.500
         June 30, 1997                       19.000       16.750
         September 30, 1997                  21.000       22.000
         December 31, 1997                   20.250       21.125
         March 31, 1998                      22.500       23.500
         June 30, 1998*                      15.250       16.750
</TABLE>
                                   
*  Reflects 50% stock split effective March 31, 1998

<PAGE>

GFSB Bancorp, Inc.

Corporate Profile (continued)

The  number of  stockholders  of record of common  stock as of the  record  date
September 15, 1998 ("Record Date"), was approximately 215. This does not reflect
the number of persons or  entities  who held stock in nominee or  "street"  name
through various  brokerage  firms.  As of the Record Date,  there were 1,107,261
shares outstanding.

The  Company's  ability  to pay  dividends  to  stockholders  is  subject to the
requirements  of Delaware law. No dividend may be paid by the Company unless its
board of directors  determines that the Company will be able to pay its debts in
the ordinary course of business after payment of the dividend. In addition,  the
Company's ability to pay dividends is dependent,  in part, upon the dividends it
receives  from the Bank.  The Bank may not declare or pay a cash dividend on any
of its  stock if the  effect  thereof  would be to cause the  Bank's  regulatory
capital to be reduced below (1) the amount required for the liquidation  account
established in connection with the Bank's  conversion from mutual to stock form,
or (2) the  regulatory  capital  requirements  imposed  by the  Office of Thrift
Supervision  ("OTS").  Total  dividends  declared by the Company during the year
ended June 30, 1998 were $309,102.










                The balance of this page intentionally left blank


<PAGE>
<TABLE>
<CAPTION>

         GFSB BANCORP, INC.
         SELECTED FINANCIAL AND OTHER  DATA

         Financial Condition (Dollars in Thousands)

At June 30,                                                      1998                 1997                  1996
<S>                                                          <C>                  <C>                 <C>        
Assets                                                        $123,209             $  93,793           $    73,250
Loans receivable, net                                           75,837                52,022                38,728
Mortgage-backed securities                                      33,551                32,070                25,246
Stock of FHLB                                                    1,965                 1,060                   551
Investment securities                                            5,188                 4,342                 4,573
Cash and cash equivalents                                        4,538                 2,994                 3,167
Deposits                                                        69,379                57,872                45,990
Advances from the FHLB                                          38,248                20,930                10,854
 Retained earnings (substantially restricted)                    8,042                 7,514                 7,199
Unrealized gain on available  for sale
   Securities, net                                                 692                   557                   128
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations
(Dollars in Thousands)

Year ended June 30,

<S>                                                        <C>                   <C>                 <C>    
Interest income                                             $    8,259            $    6,079          $ 4,876
Interest expense                                                 5,009                 3,389            2,403
         Net interest income                                     3,340                 2,690            2,473
Provision for loan losses                                           63                    21               28
        Net interest income after provision for
        Loan losses                                              3,187                 2,669            2,445
Non-interest income:
Income from real estate operations                                   -                     -                3
Other                                                              104                    49               40
       Total non-interest income                                   104                    49               43
Non-interest expense:
  Compensation and benefits                                        973                   835              614
  Professional fees                                                104                    92              123
  Occupancy                                                        166                   146              108
  Advertising                                                       50                    46               34
  Data processing                                                  137                    98               93
  Insurance and SAIF premiums                                       55                   330              105
  Other and stock subscription services                            389                   252              191
       Total non-interest expense                                1,874                 1,799            1,268
Earnings before income taxes                                     1,416                   919            1,220
Income tax expense                                                 539                   283              432
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>                                                       <C>                   <C>                 <C>    
       Net earnings                                        $       877           $        636        $    788
</TABLE>
<TABLE>
<CAPTION>

GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA - CONTINUED

Selected Operating Ratios
Year ended June 30,                                          1998                 1997                1996
<S>                                                        <C>                   <C>                 <C>    
Performance ratios:
  Return on average assets (net income
      divided by average total assets)                       0.81%                0.76%               1.23%
  Return on average equity (net income
     divided by average equity)                              6.09                 4.34                4.88
   Average interest earning assets to average
      interest-bearing liabilities                           1.16X                1.19X               1.32X

  Net interest income after provision for
      loan losses, to total other expenses                 170.06%              148.36%             192.85%
  Net interest rate spread                                   2.46%                2.52%               2.75%
   Net yield on average interest-earnings
      Assets                                                 3.25%                3.34%               3.97%
  Equity ratios:
  Average equity to average assets ratio
      (average equity divided by average total
      assets)                                               13.95                17.54               25.11
   Equity to assets at period end                           11.54                14.87               20.97
  Assets quality ratios:                                                          
  Non-performing assets to total assets                       .57                  .15                 .21
    Non-performing loans to total assets                      .57                  .15                 .21
     Non-performing loans to net loans                        .93                  .26                 .39
      Allowance for loan losses, REO and other
      repossessed assets to non-performing
      assets                                                54.74               247.63              204.14
      Allowance for loan losses to total loans,
      Net                                                     .51                 .65                  .80
</TABLE>




<PAGE>



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

General

GFSB  Bancorp,  Inc.  is the 100%  owner of Gallup  Federal  Savings  Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an  ownership  interest.  The Bank is  primarily  engaged in the business of
accepting  deposit  accounts  from the  general  public  and using such funds to
originate  mortgage loans for the purchase and refinancing of one-to-four family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate,  construction,  consumer and commercial  business loans,
and purchases participations in one-to-four family mortgage loans. The Bank also
purchases  mortgage-backed and investment securities.  The largest components of
the Bank's net earnings are net interest income, which is the difference between
interest income and interest expense,  and non-interest income derived primarily
from fees.  Consequently,  the Bank's  earnings are  dependent on its ability to
originate  loans,  and the  relative  amounts  of  interest-earning  assets  and
interest-bearing  liabilities.  The Bank's net earnings is also  affected by its
provision  for loan  losses  as well as the  amount  of other  expense,  such as
compensation  and benefit expense,  occupancy and equipment  expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive  conditions,  particularly changes in market
interest rates, government policies and actions of regulatory  authorities.  The
disparity  in premiums  paid by Bank  Insurance  Fund  ("BIF") and SAIF  insured
institutions have also adversely impacted the Bank.

In  September  1996,  Congress  enacted  a plan to  mitigate  the  effect of the
BIF/SAIF  insurance  premium  disparity.  This  plan  required  all SAIF  member
institutions,  including the Bank, to pay a one-time assessment to re-capitalize
the SAIF.  The effect of this  reduced  the capital of the Bank by the amount of
the fee, and such amount was charged to earnings in the quarter ended  September
30, 1996. The  assessment  amount the Bank paid was $250,000 which is 65.7 basis
points on the amount of deposits held by the Bank at March 31, 1995.

Beginning January 1, 1997, deposit insurance assessments for SAIF members are to
be .064% of deposits on an annual  basis.  This rate is expected to be effective
through the end of 1999.  During this same  period,  BIF members  (predominantly
composed  of  commercial  banks)  are to be  assessed  .013%  of most  deposits.
Thereafter,  assessments for BIF and SAIF members should be the same and BIF and
SAIF may be merged. As a result of these changes, beginning January 1, 1997, the
rate of deposit  insurance  assessed the Bank declined by approximately 70% from
the rate in effect prior to September 30, 1996.

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 its exhibits),  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
<PAGE>

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 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 and  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;
acquisitions;  changes in consumer spending and savings habits;  and the success
of the Company at managing the risks described above.

The Company cautions that these important factors are 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.

Management Strategy

Management's  strategy  has been to monitor  interest  rate  risk,  by asset and
liability  management,  and maintain asset quality while enhancing  earnings and
profitability.   The  Bank's   strategy  has  been   primarily  to  make  loans,
secondarily,  to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase  participations in adjustable rate,  one-to-four family
mortgage loans primarily secured by one-to-four  family  residences.  The Bank's
purchase of  mortgage-backed  securities and  investment  securities is designed
primarily for safety of principal and secondarily for rate of return. The Bank's
lending  strategy has  historically  focused on the  origination  of traditional
one-to-four-family   mortgage  loans  primarily  secured  by  one-to-four-family
residences in the Bank's primary market area.

These loans  typically have fixed rates.  The Bank also invests a portion of its
assets  in  construction,   consumer,  commercial  business,   multi-family  and
commercial real estate loans as a method of enhancing earnings and profitability
while also  reducing  interest  rate risk.  Since  1994,  the Bank has  actively
originated commercial business loans and increased its origination of commercial
real estate loans and construction  loans. These loans typically have adjustable
interest rates and are for shorter terms than residential  first mortgage loans.
The Bank has  limited  experience  with these  types of loans,  and this type of
lending generally has more risk than residential lending. The Bank's purchase of
participations in adjustable rate, one-to-four-family mortgage loans is designed
to increase  earnings and reduce interest rate risk.  These loans have more risk
than loans  originated by the Bank,  therefore,  they have adjustable rates that
are  higher  than  standard.  Management  is  currently  considering  purchasing
automobile loans from dealers.  These loans would have risk and terms comparable
to automobile loans originated in the Bank.  Investment securities in the Bank's
portfolio  typically  have  shorter
<PAGE>

terms  to  maturity  than  residential  first  mortgage  loans.  As  part of its
asset/liability  management  strategy,  the Bank sells its fixed  rate  mortgage
loans with terms over 15 years into the secondary market. The Bank has sought to
remain  competitive  in its market by offering a variety of products.  Automatic
Teller  Machine  access and  commercial  and consumer  credit life insurance are
additional  products  now offered by the Bank.  The Bank  attempts to manage the
interest rates it pays on deposits  while  maintaining a stable deposit base and
providing quality services to its customers.

During the past few years the competing financial institutions located in Gallup
have all been acquired by statewide and regional  bank holding  companies.  As a
result,  as of 1995, the Bank is the only local  institution  headquartered  and
managed in Gallup, New Mexico.  The Bank believes that its "hometown"  advantage
will  provide  an  opportunity  to  expand  its  operations  as the  only  local
independent  financial  institution and that the  reorganization  to the holding
company format and the capital raised from the conversion will enable it to take
advantage of this opportunity. The new structure and capital has already enabled
the Bank to  expand  both  the  amount  and  scope of its  current  lending  and
investment  activities.  The Bank also believes that it has a unique  ability to
grow as a result of the  relatively  large number of local retail and  wholesale
businesses  specializing in Indian jewelry.  In addition,  the Bank is exploring
methods of  increasing  its business with the large Native  American  population
located in the nearby Navajo and Zuni Pueblo Indian reservations.

Asset and Liability Management

In an effort to reduce  interest  rate  risk and  protect  it from the  negative
effect  of  rapid  increases  and  decreases  in  interest  rates,  the Bank has
instituted certain asset and liability management measures.
(See "Management Strategy" discussed above).

The Bank, like many other thrift institutions,  is exposed to interest rate risk
as a result of the  difference in the maturity of  interest-bearing  liabilities
and  interest-earning  assets and the volatility of interest rates. Most deposit
accounts  react  more  quickly to market  interest  rate  movements  than do the
existing  mortgage  loans  because of their  shorter  terms to  maturity;  sharp
decreases  in  interest  rates  would  typically  positively  affect  the Bank's
earnings.  Conversely,  this same mismatch will generally  adversely  affect the
Bank's earnings during periods of increasing interest rates.  Generally,  market
interest  rates  declined  between  1991 and 1993.  By the latter  part of 1993,
interest  rates on U.S.  treasury  bonds and home mortgage loans had declined to
lower  levels  than had been  experienced  in the prior ten years.  Following  a
substantial  increase in 1994 and a slight drop in 1995, general market interest
rates,  including  rates  charged on mortgage  loans and rates paid on deposits,
have remained  relatively  stable  through June,  1997.  This year saw long-term
interests rates fall to historically low rates.

As during the low interest rate environment that existed from 1991 through 1993,
the Bank, like other financial institutions,  experienced a significant increase
in homeowners seeking to refinance their existing mortgages.  The trend resulted
in a decrease in the yield on the Bank's  interest  earning  assets,  namely the
loan portfolio and mortgage-backed and investment securities portfolios. The net
interest rate spread may decrease if deposits  re-price upward more rapidly than
interest earning assets.

<PAGE>

Net Portfolio Value Tables

In order to encourage  institutions  to reduce their interest rate risk, the OTS
adopted a final rule in August 1993  incorporating an interest rate risk ("IRR")
component  into the  risk-based  capital  rules.  The IRR  component is a dollar
amount that will be deducted from total  capital for the purpose of  calculating
an institution's  risk-based capital requirement and is measured in terms of the
sensitivity  of its NPV to  changes in  interest  rates.  NPV is the  difference
between  incoming and outgoing  discounted cash flows from assets,  liabilities,
and off-balance sheet contracts.  An institution's IRR is measured as the change
to its NPV as a result  of a  hypothetical  200  basis  point  change  in market
interest rates divided by the estimated economic value (i.e.,  present value) of
its assets.  A resulting  change in NPV of more than 2% of the estimated  market
value of its assets will require the  institution to deduct from its capital 50%
of that  excess  change.  The OTS  calculates  an  institution's  NPV  based  on
financial data submitted by the institution pursuant to its required reports and
using a complex computer model that the OTS has devised.  The rules provide that
the OTS will  calculate the IRR component  quarterly for each  institution.  The
Bank, based on asset size and risk-based  capital, is exempt from this rule. The
following  table  presents the Bank's NPV at June 30, 1998 as  calculated by the
OTS, based on information provided to the OTS by the Bank. Actual experience may
differ from the components of this table.
<TABLE>
<CAPTION>

* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
    Change in                                               NPV 
    Rates       $ Amount  $ Change  % Change      Ratio    Change
                             (Dollars in Thousands)
<S>           <C>        <C>         <C>         <C>      <C>   
     +400  bp  $  10,384  -4,923      -32%         8.92%   -324 bp
     +300  bp     12,036  -3,270      -21%        10.11%   -205 bp
     +200  bp     13,514  -1,793      -12%        11.11%   -106 bp
     +100  bp     14,669    -638       -4%        11.83%    -33 bp
        0  bp     15,037                          12.16%
     -100  bp     15,421     114       +1%        12.12%     -5 bp
     -200  bp     15,155    -152       -1%        11.80%    -36 bp
     -300  bp     14,987    -319       -2%        11.56%    -60 bp
     -400  bp     14,891    -416       -3%        11.36%    -80 bp

</TABLE>

* Denotes rate shock used to compute interest rate risk capital component.


<PAGE>



Average Balance Sheet

The  following  table  sets forth  certain  information  relating  to the Bank's
average  balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid.  Such yields and costs are  derived by  dividing  income or expense by the
average  balance  of  assets  or  liabilities,  respectively,  for  the  periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>

                                   Year ended June 30, 1998            Year ended June 30, 1997
                                ------------------------------     -------------------------------
                                Average                Average      Average              Average
                                Balance    Interest   Yield/Cost    Balance   Interest  Yield/Cost
                                -------    --------   ----------    -------   --------  ----------
                                     (Dollars in Thousands)            (Dollars in Thousands)
<S>                           <C>          <C>          <C>        <C>       <C>          <C>  
Interest-earning assets:
Loans receivable (1)          $  60,042     $5,590       9.31%      $44,246   $ 3,893      8.79%
Investment securities and
 mortgage-backed securities      36,401      2,493       8.08%       33,918     2,054      6.06%
Other interest-earning
  assets (2)                      3,551        176       4.96%        2,647       132      5.00%

Total interest-earning assets    99,994      8,259       8.26%       80,811     6,079      7.52%

Non-interest earning assets       3,272                               2,560


Total assets                   $103,266                            $ 83,371        -        -


Interest-bearing liabilities:
  Transaction accounts         $  3,609         62       1.72%     $  3,609   $    34       .94%
  Passbook savings                3,563        107       3.00%        2,896        87      3.00%
  Money market accounts           7,633        324       4.24%        8,295       335      4.04%
  Certificates of deposit        43,017      2,598       6.04%       37,534     2,140      5.70%
  Other liabilities              26,811      1,917       7.15%       15,375       793      5.16%

Total interest-bearing
   liabilities                   86,318      5,009       5.80%       67,709     3,389      5.00%
Non-interest bearing
  liabilities                     2,540                               1,056

Total liabilities               $88,858                              68,765

Stockholders' equity             14,606                              14,606

Total liabilities and
  stockholders' equity         $103,266                             $83,371

Net interest income                         $3,250                            $ 2,690
Interest rate spread (3)                                 2.46%                             2.52%
Net yield on interest-
  earning  assets (4)                                    3.25%                             3.34%
Ratio of average interest- 
  earning assets to average
  interest-bearing liabilities                           1.16X                             1.19X
</TABLE>
<PAGE>
(1)  Average balances include non-accrual loans.

(2)  Includes interest-bearing deposits in other financial institutions.

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

(4)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.


Rate/Volume Analysis

The table below sets forth  certain  information  regarding  changes in interest
income and  interest  expense of the Bank for the  periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes  in  average  volume  multiplied  by old rate);  (ii)  changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes  in rate  multiplied  by the change in  average  volume).  The  changes
attributable  to the  combined  impact  of volume  and rate have been  allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
                                             Year Ended June 30,                     Year Ened June 30,
                                             1998 vs. 1997                           1997 vs. 1996
                                             Increase (Decrease)                     Increase (Decrease)
                                                  Due to                                  Due to
                                       -----------------------------------------  ---------------------------------------
                                                              Rate/                                     Rate/
                                         Volume     Rate      Volume     Net       Volume     Rate      Volume      Net
                                       --------   --------  ---------  ---------  --------  --------   --------   -------
                                                  (Dollars in Thousands)                   (Dollars in Thousands)
<S>                                   <C>         <C>       <C>       <C>        <C>       <C>        <C>        <C>  
Interest income:
  Loans receivable                     $  1,388      230          82    1,700     $   843   $  (91)    $   (24)    $ 728
  Mortgage-backed securities and                                                      580      (71)        (30)      479
     investment securities                  150      685          50      885           3        8           0        11
  Other interest-earning  assets             45       (1)          -       44          26       (3)         (1)       22
                                         ------   ------      ------   ------      ------    ------     ------     -----
     Total interest-earning assets        1,583      914         132    2,629       1,452     (157)        (55)    1,240
                                                              
   
Interest expense:
  Savings accounts                           20        -         667      687          53      (12)         (7)       34
  Money markets                             (27)      17          (1)     (11)         44       11           2        57
  Certificates of deposit                   313      128          19      460         450      (15)         (4)      431
  Other liabilities                         590      306         228    1,124         473       (4)         (5)      464
                                        -------   ------     -------  -------      ------    ------     -------    -----
     Total interest-bearing liabilities  ^  896   ^  451     ^   913  ^ 2,260     1,020      (20)        (14)      986
                                       ^-------  ^------    ^------- ^-------      ------    ------     -------    -----

Net change in interest income           $   687  $   463     $  (781)  $^ 369     $   432   $ (137)    $   (41)   $  254
                                         ======   ======      ======    =====      ======    ======     =======    =====
    
</TABLE>
<PAGE>


Financial Condition

General.  The Company's  total assets  increased $29.4 million or 31% from $93.8
million at June 30, 1997 to $123.2  million at June 30, 1998.  This increase was
primarily the result of a $4 million increase in cash and investment securities,
and a $23.8 million  increase in the Bank's net loan portfolio.  The majority of
the  increases  are  primarily  attributable  to the  efforts of  management  to
effectively  utilize  the  increased  capital  infusion  made as a result of the
conversion  from a mutual to stock  form of  ownership,  the  increased  lending
strategies  of  management,  and some  leveraged  transactions  whereby the Bank
borrowed funds from the Federal Home Loan Bank of Dallas to purchase  adjustable
rate  mortgage-backed  securities.  During the same period,  deposits  increased
$11.5  million from $57.8  million at June 30, 1997 to $69.3 million at June 30,
1998.  This increase is primarily due to an increase in the Bank's volume of NOW
accounts, business checking accounts, local (non-brokered) jumbo certificates of
deposit and public (state and city) certificates of deposits.  Advances from the
Federal Home Loan Bank (FHLB) increased $17.3 million from $20.9 million at June
30, 1997 to $38.2 million at June 30, 1998. These additional  borrowings  funded
purchases of loans,  securities and mortgage loan  participations.  The Bank had
$692,000 and $557 000 in  unrealized  gains (net of deferred  taxes) at June 30,
1998  and   1997,   respectively,   from  net   market   gains  on  the   Bank's
available-for-sale   investment  and   mortgage-backed   securities   portfolio.
Unrealized  gains and losses do not impact  the Bank's  earnings  until they are
realized.

Comparison of Operating Results for Years Ended June 30, 1998 and 1997

General. Net earnings increased $241,000 or 38% for the year ended June 30, 1998
from the year ended June 30, 1997.  This increase was primarily the result of an
increase  in net  interest  earnings  of  approximately  $518,000  offset  by an
increase in interest expense of $76,000 and income tax expense of $256,000.

Total Interest  Earnings.  Total interest earnings increased $2.2 million or 36%
from $6.1  million for the year ended June 30, 1997 to $8.3 million for the year
ended  June 30,  1998.  The  increase  was  primarily  due to the $23.8  million
increase in the loan portfolio.

Interest Expense. Total interest expense increased $1.6 million or 47% from $3.4
million for the year ended June 30, 1997 to $5.0 million for the year ended June
30,  1998.  This  increase was  primarily  due to an increase of  $1,124,000  of
interest  incurred on increased  Federal  Home Loan Bank  advances and a general
increase in the deposit base of $11.5 million.

Provision for Losses on Loans.  The Bank  maintains an allowance for loan losses
based upon management's  periodic  evaluation of known and inherent risks in the
loan portfolio,  past loss  experience,  adverse  situations that may affect the
borrowers' ability to repay loans, estimated value of the underlying collateral,
and current and expected  market  conditions.  The allowance for loan losses was
$387,000 and $338,000 at June 30, 1998 and 1997, respectively. The provision for
loan  losses was $63,000 and $21,000 for the years ended June 30, 1998 and 1997,
respectively. Based on a historical trend of limited losses on residential loans
and nonresidential loans, the amount of the loan loss provision allocated to all
loan types has
<PAGE>

remained  relatively  stable for the two periods.  While the Bank  maintains its
allowance for losses at a level which it considers to be adequate,  there can be
no assurance that further  additions will not be made to the loss allowances and
that such losses will not exceed the estimated  amounts.  The establishment of a
loan loss provision each period adversely impacts the Company's net earnings.

Non-Interest  Earnings.  Non-interest  earnings  increased  $55,000 or 112% from
$49,000 for the year ended June 30, 1997 to $104,000 for the year ended June 30,
1998.  This was primarily due to an increase in service charge income of $48,000
and miscellaneous income of $5,000.

Non-Interest  Expense.  Total non-interest expense increased $100,000 or 6% from
$1.8 million for the year ended June 30, 1997 to $1.9 million for the year ended
June 30, 1998.  This increase was  primarily due to an increase in  compensation
expense  of  $138,000  from the  hiring of  additional  staff to handle  growth,
general  salary   increases  and  increases  due  to  accruals  for  stock-based
compensation  programs.  Other  factors were  increases  in  occupancy  costs of
$20,000,  advertising  costs of $14,000,  data processing costs of $40,000,  and
other  operating  costs of $124,000,  offset by a decrease in insurance costs of
275,000.  The decrease in insurance costs is due to the BIF\SAIF  assessment for
the year ended June 30, 1997, discussed earlier. The increase in occupancy costs
is the  result of  increased  small  building  repairs.  The  increase  in other
operating costs is due to placing into service automatic teller machines.

Non-interest  expense is  expected  to  materially  increase  in future  periods
primarily due to the expansion by the Bank in staffing,  marketing and supplying
the main office  expansion,  the ATM machine  and the  drive-up  teller that all
became  operational  within three months of the end of the 1998 fiscal year. The
increase  in non-  interest  expense  may result in a decrease  in net income in
future periods due to this expansion and its related costs. The Company believes
that this  expansion  should  enhance long term  shareholder  value and does not
expect the  decrease  in earnings  to be as great in the  future,  assuming  the
expansion begins to result in increased interest income and non-interest income.
The lag in time between the  expansion  and the hoped for  increases in interest
income and non-interest  income could be approximately two years. This statement
of beliefs  concerning  this  expansion and the impact of this  expansion on the
Company is a forward looking statement. The Private Securities Litigation Reform
Act of 1995 (the "Act")  provides  protection  to the Company in making  certain
forward  looking  statements  that  are  accompanied  by  meaningful  cautionary
statements  that identify  important  factors that could cause actual results to
differ  materially from the forward looking  statement.  It is expected that the
expansion will result in both increased net interest  income after provision for
loan losses and increased other income.  However, the increase in other expenses
will more than offset these other  increases  during the next two years.  If the
expansion is successful, net interest income after provision for loan losses and
other income will increase in greater dollar amounts than the expected  increase
in  other  expense.  However,  as  with  any  expansion,  if the new  office  or
additional  personnel do not ultimately result in sufficient  increased loan and
deposit  activity and increased net interest and other  income,  these  expenses
would continue to have an adverse effect on net income in future periods.

Income Tax Expense.  Income tax expense increased  $256,000 or 90% from $283,000
for the year ended June 30, 1997 to $539,000  for the year ended June 30,  1998.
This increase was primarily  attributable to the increase in pre-tax earnings of
$497,000.

Comparison of Operating Results for Years Ended June 30, 1997 and 1996

General. Net earnings decreased $153,000 or 19% for the year ended June 30, 1997
from the year ended June 30, 1996.  This decrease was primarily the result of an
increase  in  interest  expense of  approximately  $1 million and an increase in
non-interest  expense of $531,000 offset by an increase in interest  earnings of
$1.2 million.

Total Interest  Earnings.  Total interest earnings increased $1.2 million or 25%
from $4.9  million for the year ended June 30, 1996 to $6.1 million for the year
ended June 30, 1997. The increase was primarily due to a $13.3 million  increase
in the loan portfolio and a $6.8 million increase in mortgage-backed  securities
activity.
<PAGE>

Interest  Expense.  Total interest expense  increased  $986,000 or 41% from $2.4
million for the year ended June 30, 1996 to $3.4 million for the year ended June
30, 1997. This increase was primarily due to an increase of $463,000 of interest
incurred on increased  Federal Home Loan Bank advances and a general increase in
the deposit base of $11.8 million.

Provision for Losses on Loans.  The Bank  maintains an allowance for loan losses
based upon management's  periodic  evaluation of known and inherent risks in the
loan portfolio,  past loss  experience,  adverse  situations that may affect the
borrowers' ability to repay loans, estimated value of the underlying collateral,
and current and expected  market  conditions.  The allowance for loan losses was
$339,000 and $309,000 at June 30, 1997 and 1996, respectively. The provision for
loan  losses was $21,000 and $28,000 for the years ended June 30, 1997 and 1996,
respectively. Based on a historical trend of limited losses on residential loans
and nonresidential loans, the amount of the loan loss provision allocated to all
loan types has remained  relatively  stable for the two periods.  While the Bank
maintains its allowance for losses at a level which it considers to be adequate,
there can be no assurance  that further  additions  will not be made to the loss
allowances  and that such  losses  will not exceed the  estimated  amounts.  The
establishment  of a loan  loss  provision  each  period  adversely  impacts  the
Company's net earnings.

Non-Interest  Earnings.  Non-interest  earnings  increased  $5,800  or 13%  from
$43,000  for the year ended June 30, 1996 to $49,000 for the year ended June 30,
1997. This was primarily due to an increase in service charge income of $17,400,
offset by  decreases  in income from real estate  operations  and  miscellaneous
income of $8,600 and a decrease in the gain on sold loans of $3,000.

Non-Interest Expense.  Total non-interest expense increased $531,000 or 42% from
$1.3 million for the year ended June 30, 1996 to $1.8 million for the year ended
June 30, 1997.  This increase was  primarily due to an increase in  compensation
expense  of  $221,000  from the  hiring of  additional  staff to handle  growth,
general  salary   increases  and  increases  due  to  accruals  for  stock-based
compensation  programs.  Other  factors were  increases  in  insurance  costs of
$225,000,  occupancy  costs  of  $38,000,  advertising  costs of  $11,000,  data
processing  costs of $5,000,  and other operating costs of $72,000,  offset by a
decrease in professional fees of $31,000. The increase in insurance costs is due
to the BIF\SAIF assessment discussed earlier. The increase in occupancy costs is
the result of increased small building repairs.  The increase in other operating
costs is due to placing into service automatic teller machines, and the decrease
in  professional  services is the result of a lesser need for services since the
completion of the conversion from mutual to stock ownership.

Income Tax Expense.  Income tax expense decreased  $149,000 or 35% from $432,000
for the year ended June 30, 1996 to $283,000  for the year ended June 30,  1997.
This decrease was primarily  attributable to the decrease in pre-tax earnings of
$153,000.

Liquidity and Capital Resources

The  Company is  required  under  applicable  federal  regulations  to  maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency,  and other  investments.  Prior OTS regulations  required that a
savings  institution  maintain  liquid assets of not less than 5% of its average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less, of which short-term liquid assets must consist of not less than 1%
with the  qualifiing  investments  limited to those having  maturities  or five
years or less.  Revised OTS regulations  effective November 13, 1997 lowered the
required  level of liquid  assets to 4%,  removed the  short-term  liquid  asset
requirement and deleted the five year or less maturity requirement.  At June 30,
1998 the Bank's liquidity,  as measured for regulatory purposes,  was 5.49%. The
Bank adjusts liquidity as appropriate to meet its asset/liability objectives.

<PAGE>

The Bank's primary sources of funds are deposits,  borrowings,  amortization and
prepayment  of loans and  mortgage-backed  securities,  maturities of investment
securities, and funds provided from operations.  While scheduled loan repayments
are a  relatively  predictable  source  of  funds,  deposit  flows  and loan and
mortgage-backed  security  prepayments are  significantly  influenced by general
interest rates,  economic  conditions,  and competition.  In addition,  the Bank
invests  excess  funds in overnight  deposits  which  provide  liquidity to meet
lending requirements and deposit fluctuations.

The Bank's  most  liquid  assets are cash and cash  equivalents,  which  include
investments in highly liquid short-term  investments.  The level of these assets
are  dependent on the Bank's  operating,  financing,  and  investing  activities
during any given period.  At June 30, 1998,  cash and cash  equivalents  totaled
$4.5 million.  The Bank has another source of liquidity if a need for additional
funds should arise,  that being FHLB of Dallas  advances.  The Bank also has the
ability to borrow  against  mortgage-backed  and other  securities.  At June 30,
1998,  the Bank had  outstanding  borrowings  from the FHLB of  Dallas  of $38.2
million.   These  outstanding   borrowings  were  used  to  purchase  additional
mortgage-backed  securities  and  mortgage  loan  participations  as a means  of
enhancing earnings.

The  primary  investment  activity  of the  Bank is the  origination  of  loans,
primarily  mortgage  loans.  During  the  year  ended  June 30,  1998,  the Bank
originated $63 million in total loans (including loan participations purchased),
of which $51 million were mortgage  loans.  Another  investment  activity of the
Bank  is the  investment  of  funds  in U.S.  Treasury  and  agency  securities,
mortgage-backed securities, federal funds, readily marketable equity securities,
and FHLB of Dallas overnight  funds.  During periods when the Bank's loan demand
is limited,  the Bank may purchase short term investment  securities to obtain a
higher yield than otherwise available.

The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities,  investing activities and financing activities.  Cash
flows  from  operating  activities,   consisting  principally  of  interest  and
dividends received less interest paid on deposits,  were $1 million and $517,000
for the years  ended  June 30,  1998 and 1997,  respectively.  Net cash used for
investing  activities  consisting primarily of disbursement of loan originations
and  investment  and  mortgage-backed  security  purchases,  offset by principal
collections on loans and proceeds from the maturities of investment  securities,
were $28  million  and $20  million  for the years ended June 30, 1998 and 1997,
respectively.  Net cash provided from financing activities  consisting primarily
of net activity in deposit and escrow  accounts and the proceeds  received  from
FHLB  advances,  were $28  million  and $19 million for the years ended June 30,
1998 and 1997, respectively.

Cash flows from  operating  activities  increased  $483,000 or 93% from the year
ended June 30, 1997 to the year ended June 30, 1998. This increase was primarily
due to an  increase  in  net  earnings  of  $241,000  and  the  decrease  in the
declaration of dividends to stockholders.  For the same periods, cash flows used
by investing activities increased $9 million primarily due to an increase in net
loan originations.  Cash flows provided from financing  activities  increased $9
million  from the year  ended  June 30,  1997 to the year  ended  June 30,  1998
primarily  due to an overall  increase  in deposits  and a net  increase in FHLB
borrowings  of $8 million,  offset by the  repurchase of company stock under the
stock repurchase program.
<PAGE>

The Bank  anticipates  that it will have sufficient  funds available to meet its
current commitments. As of June 30, 1998, the Bank had commitments to fund loans
of $4 million.  Certificates of deposit  scheduled to mature in one year or less
totaled $30 million.  Based on historical  withdrawals and outflows, on internal
monthly deposit reports monitored by management, and the fact that the Bank does
not  accept any  brokered  deposits,  management  believes  that a  majority  of
deposits will remain with the Bank. As a result,  no adverse  liquidity  effects
are expected.

At June 30, 1998,  the Bank exceeded each of the three OTS capital  requirements
on a fully-phased in basis.

The Year 2000 Issue

By now almost  everyone has heard about the Year 2000  computer  problem.  Every
major company has a potential  problem caused by computer  hardware and software
developed to use two digits to identify the year instead of four,  i.e. 1995 is,
in many cases, input, stored,  sorted, and calculated as "A95".  Similarly,  the
year 2000, being read as "A00", may be treated as the year 1900, thereby causing
a variety of  problems  such as the  inability  to compute  payment due dates or
interest  correctly.  Rapid and  accurate  data  processing  is essential to the
operation of the Bank.

The Bank's Board of Directors has adopted an action plan for addressing the Year
2000 issue.  The Board has also  recently  adopted a testing  plan.  An internal
committee has been  appointed by the Board to manage these  efforts.  Management
has been charged with the responsibility of assuring Year 2000 compliance within
time  frames  dictated by sound  business  practice  and the  Federal  Financial
Institutions  Examination Council.  Management reports to the Board of Directors
monthly on Year 2000 progress.

We have identified  equipment and systems that may potentially be impacted.  The
identification process included information technology and communication systems
such as personal  computers,  local area  networks  and servers,  ATM's  modems,
printers,  copy  machines,  facsimile  machines,  telephones  and the  operating
systems  and  software  for  these  systems.  It also  included  non-information
technology systems, such as heating, air conditioning and vault controls,  alarm
systems,  surveillance  systems,  time clocks,  coin and currency counters,  and
postage  meters.  Contact  has been made with all  outside  servicers  and major
vendors to  ascertain  their  individual  levels of Year 2000  compliance.  From
vendor  responses  and/or  certifications  of  Year  2000  compliance  we  have
determined  that the Bank should not be severely  impacted by the Year 2000 from
these systems.  This effort will continue and will include  substantial  testing
procedures.

The  Bank is  dependent  on a  service  bureau  for its  major  data  processing
functions.  Management is monitoring the service  bureau's Year 2000  compliance
efforts closely. This monitoring includes membership and active participation in
a user group made up of client  institutions of the service bureau.  The service
bureau is already  running Year 2000  compliant  software.  Four groups of other
users have completed  intensive two-week testing periods with the service bureau
with  excellent  results.  The Bank began its  two-week  testing  period of this
software on September 28, 1998.

The Bank has  contacted  major  borrowers  in order to help them be aware of the
Year 2000 issue and to determine their state of readiness for the Year 2000. All
customers  contacted have  responded.  At this point,  the Bank has no reason to
doubt the ability of any of these  customers to continue to operate  effectively
in the Year 2000. Management believes that most of our residential borrowers are
not  dependent on their  computers  for income.  We also believe that non of our
commercial  borrowers  are so large that a Year 2000  problem  would render them
unable to collect  revenue or rent and in turn continue to make loan payments to
the Bank.
<PAGE>

The Bank has experienced  considerable growth in recent years, which independent
of the Year 2000  issue,  has  created  the need to upgrade  some  hardware  and
software.  The major  upgrade,  including new servers and  operating  system for
Banks local area network,  personal computers,  and off-the-shelf  software,  is
considered a normal  result of the growth and rapid changes in  technology.  The
upgrade is in process  and should be  completed  early in October  1998.  A side
benefit of this upgrade will be a major  improvement in Year 2000  compliance of
the  systems  being  upgraded.  The  upgrade is not  expected to have a material
effect on the financial performance of the Bank.

Senior  management  has  developed  and  presented  to the Board of Directors an
outline  for  a  contingency   plan  to  provide   operating   alternatives  for
continuation  of  services  to the Bank's  customers  in the event of systems or
communication  failures at the beginning of the Year 2000. We expect to complete
the contingency plan by the end of October,  1998. Based on preliminary planning
during  development of the contingency plan,  management  believes that the Bank
will be able to continue to operate in the Year 2000 even if some systems  fail.
We expect to have available a back-up  generator for use in the event of a power
failure.  At the end of December  1999, we will generate  paper and  spreadsheet
backup of all customer and general ledger accounts. Due to the size of the Bank,
we believe  that we would be able to  operate  with all  transactions  processed
manually until normal  operations can be restored.  This procedure could require
changing of schedules and hiring of temporary  staff,  which would increase cost
of operations.  If this  procedure were to continue for any extended  per8iod of
time, or if we ultimately had to change data service  providers,  the cost could
be material.

No funds  were spent for Year 2000  expense  in the  fiscal  year ended June 30,
1998.  The budget for the fiscal year ending June 30, 1999 includes  $75,000 for
Year 2000 expense. In September 1998, the bank hired a full time data processing
systems  administrator.  Although he will have other duties,  his primary duties
initially will be Year 2000  administration and testing,  and his salary will be
allocated to Year 2000 expense. 

We  have  identified  some  personal  computers  and  software  to be  upgraded.
Management  believes the $75,000  budget  allocation  for Year 2000 expense will
cover  these  costs  as well as those  for the  systems  administrator.  Because
management  expects to be Year 2000  compliant  in almost all risk areas by June
30,  1999,  Year 2000 costs for the fiscal  year  ending  June 30,  2000 are not
expected to be material. Should the Bank have to resort to alternative operating
procedures  due to major systems or  communication  failures at the beginning of
the Year 2000, the extra costs could be material.

In its Year 2000 Action Plan, the Bank  identified  seven phases as necessary to
implement  a Year  2000  compliant  system.  The Bank is a  federally  chartered
financial institution regulated by the Office of Thrift Supervision ("OTS"). The
OTS  identified  five  phases  for Year  2000  compliance.  The  following  list
describes the five phases as identified by the OTS with  comparable  phases from
the Bank's Year 2000 Action Plan identified in parentheses, if different:

1.   Awareness  -- Inform  senior  management  of Year 2000 issues and  possible
     impact to the overall organization.

2.   Assessment  (Inventory,  Assessment) -- Estimate the scope of the Year 2000
     project and develop  the budget for project  execution.  Develop a complete
     inventory of hardware, software and systems, and categorize by importance.

3.   Renovation  (Analysis,  Renovation)  --  Perform a  detailed  analysis  and
     develop detailed plans for correction,  testing and reimplementing critical
     applications. Correct and replace all critical applications.

4.   Validation  (Testing)  -- Test all  critical  applications  unit and system
     level.

5.   Implementation  -- Implement all critical  applications  and databases in a
     production environment. Integration test.
<PAGE>

As of September  28, 1998 the  following  chart shows the current and  projected
status of the Bank's Year 2000 compliance efforts:


Phase                   9/28/98    10/15/98   12/31/98   3/31/99    6/30/99
-----                   -------    --------   --------   -------    -------


Awareness               100%       --         --         --         --

Assessment              100%       --         --         --         --

Renovation               85%       100%       --         --         --

Validation               10%        60%        85%       100%       --

Implementation           10%        60%        85%        95%       100%


Subsequent Events

In June, 1998,the Bank opened a newly constructed  drive-up teller and automated
teller machine facility on a lot previously  purchased for this purpose adjacent
to the present  bank  building.  On  September  14, 1998 the Bank moved its loan
operations  into a new Loan Center  across the street from its office.  The 7000
sq. ft.  building  was leased for ten years with an option to  purchase at a set
price.  Management believes the additions will provide the Bank growth potential
by improving its ability to deliver  retail  banking  services to the community.
Neither or these  additions had a material  impact on financial  performance for
the Bank for the  fiscal  year  ended June 30,  1998,  but they will  materially
increase  non-  interest  expense for the Company  during the fiscal year ending
June 30, 1999 and subsequent years.

The expected increase in non-interest expense due to the expansion of facilities
and  services  offered  by the bank may  result in a  decrease  in net income in
future periods. See "Non-interest Expense."

On August 18, 1998, the Company issued a press release  announcing its intention
to repurchase up to 5 percent (58,276 shares) of the Company's common stock. The
repurchase was completed on September 9, 1998. On September 9, 1998, the Company
issued a press  release  announcing  its intention to repurchase up to 5 percent
(55,363 shares) of the Company's common stock. As of September 24, 1998,  19,600
shares  have been  repurchased.  All  shares  repurchased  have been  retired as
authorized but unissued.  The Company believes that it has sufficient capital to
complete the repurchase and that the repurchase  will not cause the Bank to fail
to meet its regulatory capital requirements.

Stock Repurchase Program

During the fiscal  year ended June 30,  1998,  the  Company  repurchased  35,500
shares of its $0.10 common stock under a stock  repurchase  program  approved by
the OTS.  All of the shares  purchased  under the program  have been  retired as
authorized  but unissued.  The Company  believes  that even with the  repurchase
program,  the Company has  sufficient  capital and that the Bank will be able to
continue to meet its regulatory capital requirements.


<PAGE>

Impact of Inflation and Changing Prices

The  consolidated  financial  statements  of  the  Company  and  notes  thereto,
presented  elsewhere  herein,  have been prepared in accordance  with  Generally
Accepted  Accounting  Principles  ("GAAP"),  which  require the  measurement  of
financial  position  and  operating  results  primarily  in terms of  historical
dollars without considering the change in the relative purchasing power of money
over time and due to  inflation.  The impact of  inflation  is  reflected in the
increased cost of the Company's  operations.  Unlike most industrial  companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest  rates have a greater impact on the Company's  performance  than do the
effects of general levels of inflation.  Interest rates do not necessarily  move
in the same direction or to the same extent as the prices of goods and services.

Recent Legislation - Recapture of Post - 1987 Bad-Debt Reserves

The Small Business Job Protection Act of 1996, among other things, equalized the
taxation  of  thrifts  and  banks.  The bill no longer  allows  thrifts a choice
between the  percentage of taxable  income method and the  experience  method in
determining  additions  to their bad debt  reserves.  Smaller  thrifts with $500
million of assets or less are only allowed to use the experience  method,  which
is generally  available to small banks  currently.  Larger  thrifts must use the
specific  charge off method  regarding its bad debts.  Any reserve amounts added
after 1987 are taxed over a six year period beginning in 1996; however, bad debt
reserves set aside through 1987 will  generally not be taxed.  Institutions  can
delay these taxes for two years if they meet a  residential  - lending  test. At
June 30,  1998,  the Bank had  $46,613 of post 1987  bad-debt  reserves of which
1/6th or $9,323 was  recaptured  into taxable income for the year ended June 30,
1998.  Future recapture of the Bank's bad-debt reserves will not have an adverse
effect on future net earnings.

New Accounting Standards

In October  1995,  the FASB issued SFAS No. 123  "Statement  on  Accounting  for
Stock-Based   Compensation"  which  defines  a  "fair  value  based  method"  of
accounting for an employee stock option whereby compensation cost is measured at
the  grant  date  based on the value of the  award  and is  recognized  over the
service  period.  The FASB encouraged all entities to adopt the fair value based
method,  however, it allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting  Principles Board ("APB") Opinion No. 25.
Under the intrinsic value based method,  compensation  cost is the excess of the
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock.  However,  most stock option plans have no intrinsic value
at the grant date and, as such, no  compensation  cost is  recognized  under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma  disclosures as if the fair value
based method had been  applied.  The Bank has  continued  to use the  "intrinsic
value based method" as prescribed by APB Opinion No. 25.
<PAGE>

In June 1996,  the FASB  issued  SFAS No.  125,  "Statement  on  Accounting  for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
which will be effective,  on a  prospective  basis,  for fiscal years  beginning
after  December  31,  1996.  SFAS No.  125  provides  accounting  and  reporting
standards for transfers and servicing of financial assets and  extinguishment of
liabilities based on consistent application of a  financial-components  approach
that  focuses on  control.  SFAS No. 125 extends  the  "available  for sale" and
"trading" approach of SFAS No. 115 to non-security  financial assets that can be
contractually  prepaid or otherwise settled in such a way that the holder of the
asset  would  not  recover  substantially  all of its  recorded  investment.  In
addition,  SFAS No.  125 amends  SFAS No.  115 to prevent a security  from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover  substantially all of
its recorded  investment.  The extension of the SFAS No. 115 approach to certain
non-security  financial  assets and the  amendment to SFAS No. 115 are effective
for  financial  assets  held on or  acquired  after  January 1, 1997.  Effective
January 1, 1997,  SFAS No. 125 will  supersede  SFAS No. 122, which is discussed
above. In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of  Certain  Provisions  of SFAS  No.  125."  It  defers  for one  year the
effective  date of  certain  provisions  of  SFAS  125.  Management  has not yet
determined the effect, if any, SFAS No. 125 will have on the Company's financial
statements.

Recently the FASB issued  Statement of Financial  Accounting  Standards No. 128,
"Earnings  per Share".  It simplifies  the standards for computing  earnings per
share, superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual  presentation of basic and diluted earnings per
share on the face of the income  statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic  earnings per share  computation  to the numerator and  denominator of the
earnings  per share  computation.  This  Statement  will  affect  the  financial
statements issued by the Company after December 31, 1997.

The FASB recently issued  Statement of Financial  Accounting  Standards No. 129,
"Disclosure of Information about an Entity's Capital Structure".  This Statement
applies to all entities.  Its requirements are a consolidation of those found in
ABP Opinions 10 and 15, and Statement of Financial  Accounting Standards No. 47.
This statement will affect the financial  statements issued by the Company after
December 15, 1997.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income".
This Statement  establishes standards for reporting and display of comprehensive
income on its components (revenues,  expenses, gains and losses).  Comprehensive
income is defined as the  change in equity of a  business  enterprise,  during a
period,  from  transactions  and other events and  circumstances  from  nonowner
sources.   The  Statement   requires  that  entities  classify  items  of  other
comprehensive  income by their nature in a financial  statement  and display the
accumulated  balance of other  comprehensive  income  separately  from  retained
earnings and additional  paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 31, 1997.

Also in June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public entities  report  information  about  operating  segments in
annual  financial  statements  and  requires  that  selected  information  about
operating  segments be reported in interim  financial  reports as well.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas and major  customers.  This  Statement is effective for fiscal
years beginning after December 31, 1997.




<PAGE>






                               GFSB BANCORP, INC.




                                    CONTENTS

                                                                   Page

INDEPENDENT AUDITORS' REPORT                                         1

FINANCIAL STATEMENTS

               Consolidated Statements of Financial Condition        2

               Consolidated Statements of Earnings                   4

               Statements of Cash Flows                              6

               Notes to Financial Statements                         7



<PAGE>





                          Independent Auditors' Report


Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico


We have audited the accompanying  consolidated  statement of financial condition
of GFSB Bancorp,  Inc. (a Delaware  corporation)  and  Subsidiary as of June 30,
1998,  and  the  related  consolidated   statements  of  earnings,   changes  in
stockholders'  equity,  and cash flows for the year then ended.  These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.  The  consolidated  financial  statements  as of June 30,  1997  were
audited by other  auditors  whose report  dated  August 11,  1997,  expressed an
unqualified opinion on those statements.


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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of GFSB Bancorp,  Inc.
and  Subsidiary  as of June 30, 1998,  and the results of their  operations  and
their cash flows for the year then ended in conformity  with generally  accepted
accounting principles.



                                        /s/Neff & Company, LLP


Albuquerque, New Mexico
August 14, 1998



<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, 1998 

   


                                                                       1998     

ASSETS
    Cash and due from banks (Notes 1 and 20)                  $      2,047,860  
    Interest-bearing deposits with banks (Notes 1 and 20)            2,490,120  
    Federal funds sold (Note 1 and 20)                                       -  
    Available-for-sale investment securities (Notes 1 and 20)        5,188,095  
    Available-for-sale mortgage-backed
        securities (Notes 1, 2 and 20)                              33,551,219  
    Hold-to-maturity investment securities (Notes 3 and 20)            144,993  
    Stock of Federal Home Loan Bank,
        at cost, restricted (Note 1)                                 1,965,200  
    Loans receivable, net, substantially
        pledged (Notes 4 and 20)                                    75,836,642  
    Accrued interest and dividends
        receivable (Notes 5 and 20)                                    675,485  
    Premises and equipment (Note 6)                                  1,035,668  
    Prepaid and other assets                                           205,422  
    Deferred tax asset (Notes ^1 and 12)                                68,377  
                                                               -----------------

               Total assets                                   $    123,209,081  
                                                              ==================
    
     The Notes to Financial Statements are an integral part of these statements.



<PAGE>



                                                                         1998   
                                                                   -------------
                                                           
LIABILITIES AND STOCKHOLDERS' EQUITY                            
    Transaction accounts (Notes 7 and 20)                       $     6,979,785 
    Savings and now deposits (Notes 7 and 20)                        13,901,860 
    Time deposits (Notes 7 and 20)                                   48,497,496 
    Accrued interest payable (Notes 1 and 20)                           223,702 
    Advances from borrowers for taxes and insurance                     225,597 
    Accounts payable and accrued liabilities                            260,332 
    Deferred income taxes (Notes 1 and 12)                              426,553 
    Dividends declared and payable                                       82,446 
    Advances from the Federal Home                              
        Loan Bank (Notes 18 and 20)                                  38,247,631 
    Income taxes payable                                                154,757 
                                                                 ---------------
               Total liabilities                                    109,000,159 
                                                                
COMMITMENTS AND CONTINGENCIES                                   
    (Notes 4, 11, and 22)                                                     - 
                                                                
STOCKHOLDERS' EQUITY                                            
    Common stock, $.10 par value, 1,500,000                     
        shares authorized; issued and outstanding 1,165,537     
        shares in 1998 ^                                                113,515 
    Preferred stock, $.10 par value, 500,000                    
        shares authorized; no shares issued or outstanding                    - 
    Additional paid-in-capital                                        5,777,881 
    Unearned ESOP stock (Note 14)                                      (415,695)
    Retained earnings, substantially restricted (Note 9)              8,041,610 
    Unrealized gain on available-for-sale                       
        securities, net of taxes (Note 1)                               691,611 
                                                                 --------------
               Total stockholders' equity                            14,208,922 
                                                                 --------------
                                                                
               Total liabilities and stockholders' equity       $   123,209,081 
                                                                ===============
    
                                                            

<PAGE>


<TABLE>
<CAPTION>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30, 1998 and 1997



                                                            1998             1997
                                                     ----------------  ---------------
<S>                                                 <C>                     <C>      
INTEREST INCOME
    Loans receivable (Notes 1 and 4)
        Mortgage loans                              $     5,001,240         3,493,788
        Commercial loans                                    280,257           220,280
        Share and consumer loans                            308,605           178,877
    Investment and mortgage-backed securities             2,492,849         2,053,688
    Other interest-earning assets                           175,959           132,071
                                                    ---------------        ----------
               Total interest earnings                    8,258,910         6,078,704

INTEREST EXPENSE
    Deposits (Note 7)                                     3,092,086         2,595,886
    Advances from Federal Home Loan Bank                  1,916,851           793,124
                                                    ---------------        ----------
                                                          5,008,937         3,389,010
                                                    ---------------        ----------

               Net interest earnings                      3,249,973         2,689,694

Provision for loan losses (Note 4)                           63,217            20,794
                                                    ---------------        ----------

               Net interest earnings after
                  provision for loan losses               3,186,756         2,668,900

NON-INTEREST EARNINGS
    Service charge income                                    85,796            38,464
    Miscellaneous income                                     10,422             5,196
    Net gains from sales of loans                             7,685             4,979
                                                    ---------------        ----------
               Total non-interest earnings                  103,903            48,639

NON-INTEREST EXPENSE
    Compensation and benefits                               972,663           835,312
    Insurance (Note 8)                                       54,860           330,170
    Other                                                   373,679           239,240
    Occupancy                                               166,125           146,252
    Data processing                                         137,317            97,582
    Professional fees                                       103,894            91,775
    Advertising (Note 1)                                     49,845            45,942
    Stock services                                           15,785            12,680
                                                     --------------        ----------
               Total non-interest expense           $     1,874,168         1,798,953
                                                     --------------        ----------
</TABLE>

The Notes to Financial Statements are an integral part of these statements.


<PAGE>





GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
Years Ended June 30, 1998 and 1997

<TABLE>
<CAPTION>
                                                      1998             1997
                                               --------------    --------------

<S>                                         <C>                <C>      
Earnings before income taxes                  $     1,416,491           918,586

INCOME TAX EXPENSE (Note 12)
    Currently payable                                 586,988           319,159
    Deferred provision (benefit)                     (47,706)           (36,052)
                                              ---------------    --------------

                                                      539,282           283,107
                                              ---------------    --------------

               Net earnings                   $       877,209           635,479
                                              ===============    ==============

Basic net earnings per share                             .785              .514

Dilutive net earnings per share                          .761              .510

Weighted average number of common
    shares outstanding - basic                $     1,117,647         1,237,268
                                              ===============    ==============

Weighted average number of common
    shares outstanding - dilutive             $     1,153,244         1,246,273
                                              ===============    ==============
</TABLE>


The Notes to Financial Statements are an integral part of these statements.



<PAGE>


<TABLE>
<CAPTION>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1998 and 1997

                                                                Common Stock
                                                       -------------------------------
                                                            Shares           Amount

<S>                                                   <C>              <C>         
Balance, June 30, 1996                                 $     948,750      $     91,080

    Net earnings                                                   -                 -
    Unrealized gain on  available for sale
        securities, net of taxes                                   -                 -
    Distribution of stock vested under the
        management stock bonus plan (Note 16)                      -               408
    Acquisition of common stock by the Company
        under the stock repurchase plan (Note 16)           (148,042)          (14,804)
    Released and committed to be released 11362.76
        of shares of common stock owned by the
        ESOP (Note 14)                                             -                 -
    Dividends declared and paid to stockholders                    -                 -
                                                        ------------      ------------

Balance, June 30, 1997                                       800,708            76,684
                                                        ------------      ------------

    Net earnings                                                   -                 -
    Unrealized gain on available for sale securities,
        net of taxes                                               -                 -
    Distribution of stock vested under the management
        stock bonus plan (Note 16)                                 -               348
    Acquisition of common stock by the Company
        under the stock repurchase plan (Note 16)            (35,500)           (3,550)
    Issuance of stock dividend (Note 21)                     400,329            40,033
    Released and committed to be released 9431.66
        of shares of common stock owned by the
        ESOP (Note 14)                                             -                 -
    Dividends declared and paid to stockholders                    -                 -
                                                        ------------      ------------

Balance, June 30, 1998                                 $   1,165,537     $     113,515
                                                        ============      ============
</TABLE>


The Notes to Financial Statements are an integral part of these statements.


<PAGE>

<TABLE>
<CAPTION>
                                               Unrealized Gain  
    Additional      Unearned                    on Available
      Paid-in         ESOP         Retained       For Sale
      Capital         Stock        Earnings    Securities, net     Total
      -------         -----        --------    ---------------     -----
<S>                  <C>           <C>               <C>         <C>       
$      8,486,822     (541,333)     7,199,360         127,547     15,363,476

               -            -        635,479               -        635,479

               -            -              -         429,570        429,570

          52,683            -              -               -         53,091

      (2,322,262)           -              -               -     (2,337,066)


          43,437       76,452              -               -        119,889
               -            -       (321,303)              -       (321,303)
---------------------------------------------------------------------------

       6,260,680     (464,881)     7,513,536         557,117     13,943,136
---------------------------------------------------------------------------

               -            -        877,209               -        877,209

               -            -              -         134,494        134,494

          49,265            -              -               -         49,613

        (577,763)           -              -               -       (581,313)
               -            -        (40,033)              -              -


          45,699       49,186              -               -         94,885
               -            -       (309,102)              -       (309,102)
---------------------------------------------------------------------------

$      5,777,881     (415,695)     8,041,610         691,611     14,208,922
===========================================================================
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997


                                                                        1998             1997

<S>                                                                 <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
    Net earnings                                                    $   877,209       $   635,479
    Adjustments to reconcile net earnings to
        net cash provided by operations:
           Deferred loan origination fees                              (178,892)         (128,265)
           Gain on sale of sold loans                                    (7,685)           (4,979)
           Provision for loan losses                                     63,217            20,794
           Depreciation of premises and equipment                        79,240            69,933
           Amortization of investment and mortgage
               backed securities premiums (discounts)                   302,500           195,936
           Stock dividend on FHLB stock                                (106,527)          (48,200)
           Release of ESOP stock                                         94,885           119,889
           Stock compensation                                            51,704            53,091
           Provision (benefit) for deferred income taxes                (47,706)          (36,052)
    Net changes in operating assets and liabilities:
        Accrued interest and dividends receivable                      (123,702)         (151,467)
        Prepaid and other assets                                       (150,132)           (5,885)
        Accrued interest payable                                         70,653            49,542
        Accounts payable and accrued and other liabilities              166,211             9,253
        Income taxes payable                                            (19,333)           65,161
        Dividends declared and payable                                    7,031          (327,162)
                                                                    ------------      -----------

               Net cash provided by operating activities              1,078,673           517,068
                                                                    ------------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of premises and equipment                                (437,658)         (210,141)
    Loan origination and principal repayment
        on loans, net                                               (23,691,353)      (13,181,944)
    Principal payments on mortgage-backed securities                 10,028,831         6,078,761
    Purchases of mortgage-backed securities                         (11,678,555)      (12,790,892)
    Purchases of available-for-sale securities                       (3,181,046)         (125,941)
    Maturities and proceeds from sale of available-
        for-sale securities                                           2,190,000           700,000
    Purchase of FHLB stock                                             (798,373)         (461,500)
                                                                    ------------      -----------

               Net cash applied to investing activities             (27,568,154)      (19,991,657)
                                                                    ------------      -----------
</TABLE>


The Notes to Financial Statements are an integral part of these statements.


<PAGE>


<TABLE>
<CAPTION>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 1998 and 1997


                                                                                 1998             1997

<S>                                                                     <C>                  <C>       
CASH FLOWS FROM FINANCING ACTIVITIES
    Net increase in transaction accounts, savings
        and NOW deposits and time deposits                               $    11,506,655        11,882,676
    Net increase (decrease) in advances from borrowers
        for taxes and insurance                                                   49,849             1,216
    Proceeds from FHLB advances                                              469,270,950       106,463,375
    Repayments on FHLB advances                                             (451,953,319)      (96,387,375)
    Purchase of GFSB Bancorp stock under the
        stock repurchase plan in cash                                           (581,313)       (2,337,066)
    Dividends paid or to be paid in cash                                        (309,102)         (321,303)
    Price paid for vested management bonus stock
        plan stock                                                                49,613                 -
                                                                          --------------      ------------- 

               Net cash provided by financing activities                      28,033,333        19,301,523
                                                                          --------------      -------------

Increase (decrease) in cash and cash equivalents                               1,543,852          (173,066)

Cash and cash equivalents at beginning of year                                 2,994,128         3,167,194
                                                                          --------------      ------------

Cash and cash equivalents at end of year                                 $     4,537,980         2,994,128
                                                                          ==============      ============

Supplemental disclosures Cash paid during the year for:
        Interest on deposits and advances                                $     4,939,577         3,339,468
        Income taxes                                                             651,769           253,998

Change in unrealized gain, net of deferred taxes
    on available-for-sale securities                                             134,494           429,570

Issuance of stock dividend                                                        40,033                 -
</TABLE>


The Notes to Financial Statements are an integral part of these statements.



<PAGE>



GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A  summary  of  significant  accounting  policies  consistently  applied  in the
preparation of the accompanying statements follows:

Organization  and  Operations.  On February 1, 1995,  the Board of  Directors of
Gallup Federal Savings and Loan Association (the Association), adopted a Plan of
Conversion ("the conversion"). The conversion allowed the Association to convert
from a federal  mutual  savings and loan  association to a federal stock savings
bank with the concurrent  formation of a holding  company (GFSB Bancorp,  Inc.).
The conversion was approved by the Office of Thrift Supervision,  the Securities
and Exchange  Commission,  and the members of the  Association,  and on June 29,
1995 the conversion  became effective.  The conversion was accomplished  through
amendment  of the  Association's  federal  charter  and the sale of the  holding
company's  common stock. The Association also changed its name to Gallup Federal
Savings Bank (the Bank).

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. The
Company  acquired  all of the  common  stock  of GFSB on June  29,  1995 and the
Company  also made its  initial  public  offering of common  stock.  The Company
issued  948,750  shares of $.10 par value  common  stock at $10 per  share.  Net
proceeds, after deducting conversion expenses of $372,002 were $9,115,498.

Basis  of  Presentation.  The  accompanying  consolidated  financial  statements
include the accounts of GFSB Bancorp and the Bank. All significant  balances and
transactions between entities have been eliminated.

Cash and Cash Equivalents.  Cash and cash equivalents include cash on hand, cash
items,  amounts due from banks,  amounts  held with the  Federal  Reserve  Bank,
interest  bearing  deposits  with the Federal Home Loan Bank,  and federal funds
sold. Generally,  federal funds sold are purchased and sold for one-day periods.
For purposes of the statements of cash flows,  the Company  considers all highly
liquid debt instruments  with original  maturities of three months or less to be
cash equivalents. The amounts in each of these above categories are as follows:
<TABLE>
<CAPTION>
                                                1998             1997
                                       -----------------  ---------------
<S>                                    <C>                  <C>      
    Cash on hand                       $       458,407           374,957
    Cash items                                   1,369             1,341
    Amounts due from banks                   1,344,454         1,074,096
    Interest bearing deposits                2,490,120         1,121,191
    Federal funds sold                               -           100,000
    Federal Reserve Bank deposits              243,630           322,543
                                       ---------------      ------------
                                       $     4,537,980         2,994,128
                                       ===============      ============

</TABLE>

<PAGE>



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

The amounts due from banks includes $36,076 held in trust by the Company for the
employees  awarded  stock under the  Management  Stock  Bonus  Plan.  The amount
represents dividends earned on non-vested shares. See Note 16.

Available-for-Sale Investment Securities. Investment securities consist of stock
owned in the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home Loan
Bank debentures,  U.S. Government Securities,  and mutual funds. The Company has
classified  its  investment  portfolio  and all  mortgage-backed  securities  as
available for sale,  and,  accordingly,  accounted for its  investments  at fair
value.  The Company has recorded a net unrealized  gain, net of deferred  income
taxes,  of $ 691,611 and  $557,117 as an increase to equity at June 30, 1998 and
1997, respectively.

Realized  gains and losses on the sale of investment  securities  are determined
using the specific identification method when such sales occur.

Available-for-Sale  Mortgage-Backed Securities. All mortgaged-backed and related
securities are stated at fair value as they are classified as available-for-sale
securities.

Realized gains and losses on the sale of mortgaged-backed  securities (when such
sales occur) are based on the specific identification method. All sales are made
without recourse.

At June  30,  1998,  the  Company  had no  outstanding  commitments  to sell any
securities.

Loans Receivable. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at unpaid
principal  balances,  less the allowance for loan losses,  and net deferred loan
origination fees and discounts.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs  (net  of  recoveries).  Management's  periodic  evaluation  of  the
adequacy  of the  allowance  is based on 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 Company  establishes  a specific  loan  allowance on an impaired loan if the
present  value of the future cash flows  discounted  using the loan's  effective
interest rate is less than the carrying  value of the loan. An impaired loan can
be  valued  based  upon its fair  value or the  market  value of the  underlying
collateral if the loan is primarily collateral  dependent.  The Company assesses
for impairment all loans delinquent more than 90 days.


<PAGE>



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Uncollectible  interest on loans that are contractually past due is charged off,
or  an  allowance  account  is  established   based  on  management's   periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued,  and income is subsequently  recognized only to
the extent cash payments are received,  until,  in  management's  judgment,  the
borrower's  ability to make periodic  principal and interest payments is back to
normal, in which case the loan is returned to accrual status.

Mortgage loans sold to others are not included in the accompanying statements of
financial  condition.  For the years ended June 30, 1998 and 1997,  $519,500 and
$398,510,  respectively,  of loans  have been sold.  No  servicing  rights  were
retained  on these  loans.  Gains on the sale of these loans were $7,685 in 1998
and $4,979 in 1997.

Loan  Origination  Fees and Related  Costs.  Loan fees and  certain  direct loan
origination  costs are deferred,  and the net fee is recognized as an adjustment
to interest income using the interest  method over the  contractual  life of the
loans.  Historical prepayment experience for the Company is minimal for purposes
of adjusting the contractual life of the loans.

Foreclosed Real Estate.  Real estate properties acquired through, or in lieu of,
loan  foreclosure  are  initially   recorded  at  fair  value  at  the  date  of
foreclosure. The Company generally holds foreclosed assets as held for sale, and
accordingly,  after  foreclosure,  such  assets are carried at the lower of fair
value  minus  estimated  costs to sell,  or cost.  Valuations  are  periodically
performed by management,  and an allowance for losses is established by a charge
to operations if the fair value of a property does not exceed its cost.

Premises and Equipment. Land is carried at cost. Building, furniture,  fixtures,
and  equipment are carried at cost,  less  accumulated  depreciation.  Building,
furniture,  fixtures, and equipment are depreciated using a straight-line method
over the  estimated  useful  lives of the  assets.  Maintenance  and repairs are
charged to earnings in the period incurred.

Income Taxes. Deferred income taxes are provided on temporary differences in the
recognition  of income and expense  for tax and  financial  reporting  purposes.
These  items  consist  principally  of  loan  origination  fees,   depreciation,
compensation cost, and the bad debt reserve.


<PAGE>



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Deferred  tax assets and  liabilities  are  determined  based on the  difference
between  the  financial  statement  and tax bases of assets and  liabilities  as
measured by the enacted tax rates that will be in effect when these  differences
reverse. The principal  differences between assets and liabilities for financial
statement  and  tax  purposes  are  accumulated  depreciation  of  premises  and
equipment,  the  reserve  for  delinquent  interest,  bad debt  reserves,  stock
compensation  plans,  the recognition of loan  origination  fees, and unrealized
holding  gains and losses on  available-for-sale  securities.  As changes in tax
laws or rates are  enacted,  deferred  tax assets and  liabilities  are adjusted
through the provision for income taxes in the period of enactment.

The Small  Business Job Protection Act of 1996 equalized the taxation of thrifts
and banks.  The bill no longer allows thrifts a choice between the percentage of
taxable income method and the experience method in determining  additions to bad
debt  reserves.  Small thrifts (such as the Company) are only allowed to use the
experience method. Any reserve amounts added after 1987 are now taxed over a six
year  period.  At June 30,  1998,  the Company had $46,613 of post 1987 bad debt
reserves. Of this amount, $9,323 was recaptured into taxable income for 1998.

Reclassifications.   Certain  reclassifications  have  been  made  to  the  1997
financial statements to conform to the 1998 presentation.

Earnings Per Share.  Earnings  per share have been  computed on the basis of the
weighted  average number of shares of common stock and common stock  equivalents
outstanding  for the year. The Company  accounts for the shares  acquired by its
ESOP in accordance  with  Statement of Position 93-6;  shares  controlled by the
ESOP are not  considered in the weighted  average shares  outstanding  until the
shares are committed for allocation to an employee's individual account.

Advertising.  The Company expenses advertising costs as incurred.  Such expenses
are shown in the consolidated  statements of earnings; no amounts of advertising
are carried as assets.

Fair Value of Financial Instruments.  The following methods and assumptions were
used by the  Company in  estimating  fair  values of  financial  instruments  as
disclosed herein:

Cash and cash  equivalents.  - The carrying amount of cash and cash  equivalents
approximate their fair value.


<PAGE>



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Available-for-sale and hold-to-maturity securities. - Fair values for securities
are based on quoted market prices.

Loans receivable.  - For variable-rate loans that reprice frequently and have no
significant  change in credit  risk,  fair values are based on carrying  values.
Fair  values for certain  mortgage  loans are based on quoted  market  prices of
similar loans sold in conjunction with securitization transactions.  Fair values
for commercial real estate and commercial  loans are estimated using  discounted
cash flow analyses,  using interest rates currently being offered for loans with
similar terms to borrowers of similar credit  quality.  Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.

Deposit  liabilities.  - The fair values  disclosed for demand  deposits are, by
definition,  materially  equal to the amount  payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of fixed-term money
market accounts approximate their fair values at the reporting date. Fair values
for fixed-rate  certificates  of deposits are estimated  using a discounted cash
flow  calculation  that  applies  interest  rates  currently  being  offered  on
certificates  to a schedule of aggregated  expected  monthly  maturities on time
deposits.

Short-term   borrowings.   -  The  carrying  amounts  of  short-term  borrowings
approximate  their  fair  values  given  that the  borrowings  are at the Bank's
current incremental borrowing rate.

Off-balance-sheet  instruments.  - Fair  values  for  off-balance-sheet  lending
commitments  are  based  on  fees  currently   charged  to  enter  into  similar
agreements,  taking into account the remaining  terms of the  agreements and the
counter parties' credit standings.

Financial  Instruments.  In the  ordinary  course of  business  the  Company has
entered into  off-balance-sheet  financial instruments consisting of commitments
to extend credit and commercial  letters of credit.  Such financial  instruments
are recorded in the  financial  statements  when they are funded or related fees
are incurred or received.

Estimates.  The preparation of financial statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions that effect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.

A substantial  estimate for the Company is the  allowance for loan losses.  This
estimate could change substantially within a year if borrowers' ability to repay
or the estimated value of underlying collateral should decline dramatically.


<PAGE>



NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

Investment in Federal Home Loan Bank Stock. The Bank, as a member of the Federal
Home Loan Bank  System,  is required to maintain an  investment  in it's capital
stock of the Federal  Home Loan Bank (FHLB) in an amount equal to the greater of
1 percent of its outstanding  home loans or 5 percent of advances from the FHLB.
No ready  market  exists for the  Federal  Home Loan Bank  Stock,  and it has no
quoted market value.


NOTE 2.        AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES

The   carrying   values  and   estimated   fair  values  of   available-for-sale
mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
                                                                                   Gross             Gross
                                                                                Unrealized        Unrealized
                            Principal        Unamortized       Amortized          Holding           Holding           Fair
    June, 30 1998            Balance          Premiums           Cost              Gains            Losses            Value
    -------------            -------          --------           ----              -----            ------            -----

<S>                  <C>                     <C>              <C>                 <C>               <C>            <C>       
   FNMA ARM
     Certificates     $     25,490,114          875,564        26,365,678          145,831           (54,043)       26,457,466
   FHLMC ARM
     Certificates            2,180,880           60,117         2,240,997           23,277            (3,414)        2,260,860
   GNMA ARM
     Certificates            4,724,052          138,305         4,862,357                -           (29,464)        4,832,893
                       ---------------       ----------       -----------       ----------       ------------       ----------

                      $     32,395,046        1,073,986        33,469,032          169,108           (86,921)       33,551,219
                       ===============       ==========       ===========       ==========       ============       ==========
</TABLE>

During the year  ended  June 30,  1998 and 1997,  the  Company  did not have any
proceeds from the sales of  mortgage-backed  securities.  At June 30, 1998,  the
Company had pledged $7,505,626  (paid-down value) in mortgage-backed  securities
to public  entities  who have on  deposit  amounts  in  excess of the  federally
insured  limit.  The  Company  also  had  pledged  $682,729  in  mortgage-backed
securities to the Federal Reserve Bank for its Treasury Tax and Loan Account.



<PAGE>



NOTE 3.        INVESTMENTS

The  amortized  cost and fair  values of  available-for-sale  investment  equity
securities and investments in debt securities are summarized as follows:

Available-for-sale investment securities:
<TABLE>
<CAPTION>
                                                                        Gross              Gross
                                                                     Unrealized         Unrealized
                                                    Amortized          Holding            Holding          Fair
                                                      Cost              Gains             Losses           Value
<S>                                            <C>                     <C>                   <C>         <C>      
    Mutual funds                                     2,283,012              341                -         2,283,353
    FHLB Debentures                                  1,009,724                -              (29)        1,009,695
    FHLMC Stock                                          7,786        1,026,836                -         1,034,622
    Tax-exempt Securities                              840,000           20,425                -           860,425
                                               --------------------------------------------------------------------

                                               $     4,140,522         1,047,602             (29)        5,188,095
                                               ====================================================================

Hold-to-maturity securities:

    Tax-exempt Securities                      $       145,000                 -              (7)          144,993
                                               ====================================================================
</TABLE>

The  amortized  cost  and  fair  value of all  debt  securities  by  contractual
maturity,  are shown below.  Expected  maturities  will differ from  contractual
maturities  because  borrowers may have the right to call or prepay  obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                          Amortized          Fair
                                                            Cost             Value
<S>                                                 <C>                  <C>       
    Hold to maturity
        Due after one year through five years       $       145,000           144,993
                                                    =================================

    Available for sale:
        Due within one year                         $     1,009,724         1,009,695
        Due after one year through five years               840,000           860,425
        Mutual funds                                      2,283,012         2,283,353
        FHLMC stock                                           7,786         1,034,622
        Mortgage-backed securities                       33,469,032        33,551,219
                                                    ---------------------------------

                                                    $    37,609,554        38,739,314
                                                    =================================
</TABLE>

No investments  were sold in 1998 or 1997. The 1998 change in the net unrealized
holding gains and losses  recorded  through the equity  section is a net gain of
$134,494.


<PAGE>



NOTE 4.        LOANS RECEIVABLE

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                              1998             1997
                                                        --------------    --------------
<S>                                                     <C>                 <C>       
    First mortgage loans (principally conventional)
        Principal balances
           Secured by one-to-four family residences     $   46,746,639        31,984,280
           Secured by other properties                      14,750,022        10,405,439
           Construction loans                                2,973,700         3,811,079
        Loan participations purchased                        8,550,204         6,153,249
        Share loans                                            955,367         1,113,175
        Commercial loans                                     4,748,814         1,960,765
        Consumer loans:
           Unsecured                                           366,846           117,518
           Secured by vehicles                               1,226,109           522,902
           Home equity lines                                 1,254,965           977,141
                                                        --------------------------------
                                                            81,572,666        57,045,548

    Less
        Undisbursed portion of loans                        (1,755,115)       (1,382,895)
        Loan participations sold                            (3,065,389)       (2,961,052)
        Net deferred loan origination fees                    (528,550)         (340,610)
        Allowance for loan losses                             (386,970)         (339,062)
                                                        --------------------------------

                                                        $   75,836,642        52,021,929
                                                        ================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>

                                                               1998             1997
                                                      ----------------    --------------
<S>                                                  <C>                    <C>       

    Balance at beginning of year                      $       339,062           309,117
    Provision charged to income                               106,591            20,794
    Charge-offs, recoveries and other                         (58,683)            9,151
                                                       ---------------------------------

        Balance at end of year                        $       386,970           339,062
                                                       =================================
</TABLE>
The Company has commitments to fund new loans as follows:
<TABLE>
<CAPTION>

                                                           1998             1997
                                                     ----------------    --------------
<S>                                                  <C>                    <C>       
    Fixed rate                                        $    1,762,000          4,117,118
    Variable rate                                            836,000          2,070,468
    Commitments for new originations                       1,741,000          4,327,155
                                                       ---------------------------------

           Total                                       $   4,339,000         10,514,741
                                                       =================================
</TABLE>


<PAGE>



NOTE 4.        LOANS RECEIVABLE (CONTINUED)

Fixed rate commitments for the years ended June 30, 1998 had interest rates that
ranged from 6.83 percent to 11.50 percent.

Nonaccrual and  renegotiated  loans for which interest has been reduced  totaled
$707,632 and $136,921 at June 30, 1998 and 1997,  respectively.  Interest income
that was  foregone  amounted  to $33,755  and $10,546 at June 30, 1998 and 1997,
respectively.

The  weighted  average rate for the loan  portfolio  at June 30,  1998,  is 9.59
percent.

The Company establishes a specific allowance on impaired loans and disclosure of
the Company's  method of accounting for interest income on impaired  loans.  The
Bank assesses all loans  delinquent  more than 90 days for  impairment  and such
loans  amounted  to  $707,632  at June 30,  1998.  Average  balances  for  loans
delinquent  more than 90 days totaled  approximately  $53,956 for the year ended
June 30, 1998. These loans are all primarily collateral dependent and management
has  determined  that the  underlying  collateral  is in excess of the  carrying
amount.  As a result,  the Company has  determined  that specific  allowances on
these loans is not required.

NOTE 5.        ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

Accrued interest and dividends receivable is summarized as follows:
<TABLE>
<CAPTION>
                                                             1998             1997
                                                             ----             ----
<S>                                                 <C>                      <C>       

    Loans receivable                                 $       444,334           333,503
    Available-for-sale investment securities                  23,823            14,041
    Available-for-sale mortgage-backed securities            207,328           204,239
                                                     ---------------------------------
                                                     $       675,485           551,783
                                                     =================================
</TABLE>



<PAGE>



NOTE 6. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>

                                                  1998             1997
                                                  ----             ----
<S>                                      <C>                    <C>       

    Buildings                             $       522,400           522,400
    Furniture, fixtures, and equipment            480,019           453,008
    Construction-in-progress                      412,837             2,190
    Land                                          158,550           158,550
    Parking lot improvements                        5,265             5,265
                                          ---------------------------------
                                                1,579,071         1,141,413
    Less allowance for depreciation              (543,403)         (464,163)
                                          ---------------------------------

                                          $     1,035,668           677,250
                                          =================================
</TABLE>


NOTE 7.        DEPOSITS

Deposits are summarized as follows:
<TABLE>
<CAPTION>
                               Weighted
                                Average
                                Rate at                   June 30, 1998
                               June 30,       ----------------------------------
                                 1998                Amount             Percent
<S>                             <C>            <C>                      <C>  
    Passbook savings
        accounts                3.00%          $     4,229,908             6.10%
    Money market
        accounts                3.97                 9,671,952            13.94
    Transaction accounts        1.20                 6,979,785            10.06
                                               --------------------------------

                                               $    20,881,645            30.10
                                               ================================
</TABLE>


<PAGE>



NOTE 7.        DEPOSITS (CONTINUED)

Deposits are summarized as follows:
<TABLE>
<CAPTION>
                                 Weighted
                                  Average
                                  Rate at                   June 30, 1998
                                 June 30,         --------------------------------
                                   1998                Amount             Percent
<S>                             <C>            <C>                        <C>   
    Certificates of deposit:
        2.50%-6.00%               5.41%          $    41,661,400            60.05%
        6.00%-7.00%               6.27                 5,870,903             8.46
        7.00%-8.00%               7.21                   965,193             1.39
                                                 --------------------------------

                                                      48,497,496            69.90
                                                 --------------------------------

                                                 $    69,379,141           100.00%
                                                 ================================
</TABLE>
The  aggregate  amount  of jumbo  certificates  with a minimum  denomination  of
$100,000 was $21,799,145 at June 30, 1998.

Certificates of deposit by maturity dates are as follows:
<TABLE>
<CAPTION>
                                     1998                 1997
                                ---------------       ------------
<S>                             <C>                    <C>       
    3 months or less            $     8,528,450         7,242,578
    3 months to 6 months              6,768,370         6,611,010
    6 months to 1 year               14,674,734        14,951,461
    1 year to 2 years                15,433,404         8,305,334
    2 years to 3 years                1,707,965         1,906,082
    Thereafter                        1,384,573         3,760,553
                               ----------------------------------

                                $    48,497,496        42,777,018
                                =================================
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
                                         1998              1997
                                   ----------------    -------------
<S>                                <C>                     <C>      
    Certificates of deposit        $     2,598,370         2,140,115
    Money market accounts                  324,341           334,958
    Passbook savings                       107,399            86,648
    Transaction deposits                    61,976            34,165
                                   ---------------------------------

                                   $     3,092,086         2,595,886
                                   =================================

</TABLE>

<PAGE>



NOTE 8.        SAVINGS ASSOCIATION INSURANCE FUND

The Economic  Growth and Paperwork  Reduction Act of 1996 was signed into law on
September 30, 1996. The Act provided for the resolution of the premium disparity
between the Bank  Insurance Fund ("BIF") and the Savings  Association  Insurance
Fund ("SAIF"). In order to capitalize the SAIF, a one-time special assessment of
65.7 basis points had to be paid by SAIF insured institutions.  As a result, the
Company  paid a one-time  assessment  of  $250,257.  The  Company  recorded  the
one-time assessment as a charge to 1997 operations as "Insurance".


NOTE 9.        REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
               EARNINGS

The Bank is subject to certain  restrictions  on the amount of dividends that it
may declare  without  prior  regulatory  approval.  The Bank is also  subject to
various  regulatory  capital  requirements  administered  by the federal banking
agencies.  Failure to meet minimum  capital  requirements  can initiate  certain
mandatory and possibly additional  discretionary  actions by regulators that, if
undertaken,  could  have  a  direct  material  effect  on the  Bank's  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's assets,  liabilities,  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments  by the  regulators  about  components,  risk  weightings,  and  other
factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum  amounts and ratios set forth in the table
below.  Management believes, as of June 30, 1998 that the Bank meets all capital
adequacy requirements to which it is subject.

Current regulations  require  institutions to have a minimum regulatory tangible
capital  equal to 1.5  percent  of total  assets,  a minimum 3 percent  leverage
capital ratio and an 8 percent risk-based capital ratio.


<PAGE>



NOTE 9.        REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
               EARNINGS (CONTINUED)

The Bank at June 30,  1998,  meets  the  regulatory  tangible  capital  and core
capital  requirements  and the  risk-based  capital  requirement of 8 percent of
total  risk-adjusted  assets.  The following is a reconciliation of net worth to
regulatory  capital as  reported  in the June 30,  1998  report to the Office of
Thrift Supervision ("OTS"):
<TABLE>
<CAPTION>
                                                     1998
                                               -----------------
<S>                                              <C>        
    Regulatory net worth per report to OTS       $    12,350,868
    Audit adjustments
        Increase in income taxes                        (15,835)
        Increase in other operating expense              (4,591)
        Decrease in interest expense                      47,044
                                                 ---------------
           Net worth as reported per the
               accompanying financial
               statements (Bank only)            $    12,377,486
                                                 ===============
</TABLE>
The  following is a  reconciliation  of the Bank's  capital in  accordance  with
generally  accepted  accounting  principles  (GAAP) to the three  components  of
regulatory capital calculated under regulatory requirements at June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
                                                                          June 30, 1998
                                                           ----------------------------------------------
                                  Tangible Capital              Core Capital          Risk-Based Capital
                              --------------------------   ----------------------     -------------------
                                Amount        Percent       Amount        Percent       Amount    Percent
<S>                        <C>                <C>      <C>               <C>      <C>           <C>   
   GAAP Capital            $    12,377,486        -     $    12,377,486       -%    $12,377,486       %

   Unrealized (gains)
   losses on available-
   for-sale securities            (691,611)       -            (691,611)      -        (691,611)      -

   Qualifying general
   loan loss allowance                   -        -                   -                (386,970)      -
                           ----------------------------------------------------------------------------

   Regulatory capital
   computed                     11,685,875    9.51%          11,685,875   9.51%      11,298,905  18.59%

   Minimum capital
   requirement                   1,843,682    1.50%           3,687,364   3.00%       5,012,000   8.00%
                           ----------------------------------------------------------------------------

   Regulatory capital
   excess                  $     9,842,193    8.01%  $        7,998,511   8.01%    $  6,286,905  10.59%
                           ===================================================== ======================
</TABLE>


<PAGE>



NOTE 10.       RELATED PARTY TRANSACTIONS

The Company has several loans  receivable  from related  parties.  The Company's
policy  is that all such  loan  transactions  be on the  same  terms,  including
interest  rates  and  collateral,  as  those  prevailing  at the  same  time for
comparable transactions with others.

A summary of the activity for outstanding loans receivable to related parties is
as follows:
<TABLE>
<CAPTION>
                                             1998             1997
                                         ---------------    --------------
<S>                                    <C>                  <C>      
    Balance, beginning of year           $     1,190,435      1,426,679
    New loans                                    181,956        422,881
    Repayments                                  (575,867)      (659,125)
                                         ---------------------------------
    Balance, end of year                 $       796,524      1,190,435
                                         =================================
</TABLE>

The Company also has several deposits from related parties. Outstanding deposits
from related  parties at June 30, 1998 amounted to $1,079,393.  The Company also
expensed  $172,154  and  $156,623  for the years  ended June 30,  1998 and 1997,
respectively,  for directors fees and  compensation  under the management  stock
bonus plan.

As described in Note 22, the Company leases a building located across the street
from its office from a related party.


NOTE 11.       CONCENTRATIONS OF CREDIT RISK

The Company is active in originating primarily first mortgage loans primarily in
McKinley  County,  New Mexico.  At June 30, 1998, the Company had $76,752,162 of
loans outstanding and unfunded commitments of $4,339,000.  Significant loans are
approved by the Board of Directors  through its loan  committee.  Collateral  is
required on all real estate loans,  substantially  all commercial loans, and the
majority of consumer  loans.  Real estate  exposure is primarily  limited to the
county in which the Company operates.  The Company  generally  maintains loan to
value ratios of no greater than 80 percent.

The Company maintains its cash balances with other financial  institutions.  The
balances  on  deposit  with  other  banks are  insured  by the  Federal  Deposit
Insurance Corporation up to $100,000.


<PAGE>



NOTE 12.       INCOME TAXES

Income tax expense consists of:
<TABLE>
<CAPTION>
                                      1998            1997
                                    --------         ---------
<S>                                <C>               <C>      
Current
  Federal                           $505,046         $ 280,336
  State                               81,942            38,823
                                    --------          --------
                                     586,988           319,159

Deferred provision (benefit)
  Federal                          $ (41,982)        $ (30,645)
  State                               (5,724)           (5,407)
                                   ---------         ---------
                                     (47,706)          (36,052)
 
                                   $ 539,282         $ 283,107
                                   ---------         ---------
</TABLE>
Deferred  taxes  consist  of  temporary   differences   arising  from  book  tax
differences in depreciation,  recognition of loan origination fees, compensation
costs and reserve for bad debts.

The Company has  recorded a valuation  allowance  against the net  deferred  tax
receivable  in 1998  relating to the  receivable  arising from the book bad debt
reserve. The change in the valuation allowance from 1997 was $19,175.

The Company has also  recorded a deferred tax  liability of $426,553 at June 30,
1998 in  connection  with the  adoption of  Statement  of  Financial  Accounting
Standards  No. 115. The deferred tax  liability is the result of the  unrealized
holding gains on available-for-sale  securities.  The deferred tax liability has
been  recorded as a reduction to the  unrealized  holding gain and reported as a
separate component of equity as required by Statement No. 115.


<PAGE>



NOTE 12.       INCOME TAXES (CONTINUED)

The reconciliation of income tax attributable to continuing  operations computed
at the U.S. federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
<S>                                                <C>               <C>    
    Tax at U.S. statutory rate of 34 percent       $481,607          312,319
    State income taxes, net of federal
        tax benefit                                  64,877           25,623
    Other - net                                      (7,202)         (54,835)
                                                   ---------         -------

                                                   $539,282          281,107
                                                   =========         =======

    Effective tax rate                                   38%              31%
</TABLE>

NOTE 13.       FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The  Company  is a party  to six  irrevocable  letters  of  credit  which  total
$114,000.  The Bank's exposure to credit loss in the event of  nonperformance by
the other  party to the  letters of credit are  represented  by the  contractual
notional  amount of the  letters of credit.  The  Company  uses the same  credit
policies  in  making  commitments  and  conditional  obligations  as it does for
on-balance-sheet instruments.

NOTE 14.       EMPLOYEE STOCK OWNERSHIP PLAN

In connection  with the conversion (see Note 1), the Company adopted an Employee
Stock  Ownership Plan (ESOP) for the benefit of all of its full time  employees.
Contributions  to the Plan are  determined at the  discretion of the Company and
are limited to the maximum amount  deductible for income tax purposes.  Eligible
employees  include all full time employees with a minimum of one year of service
as of any anniversary  date of the Plan. The ESOP purchased  84,000 (as adjusted
for the stock  dividend)  common  shares of the  Company's  stock  issued in the
conversion,  which was funded by a $560,000 loan from the Company. In accordance
with  Statement of Position  93-6,  the unpaid balance of the ESOP loan has been
eliminated  on the  Company's  consolidated  statement of  financial  condition.
Stockholders'  equity has been reduced by the  aggregate  purchase  price of the
shares  owned  by  the  ESOP,  net  of  the  shares  committed  to be  released.
Contributions  to the ESOP by the  Company  are made to fund the  principal  and
interest payments on the debt of the ESOP. As of June 30, 1998, 17,747.9844 ESOP
shares  were  released,  and for the  year  ended  June  30,  1998,  $94,875  in
contributions  were  made to the  ESOP by the  Company.  As of  June  30,  1997,
7,575.1762 ESOP shares were released and  contributions of $122,644 were made to
the Plan by the Company. The remaining  unallocated ESOP shares at June 30, 1998
was 66,252.0156.  The fair value of the remaining unallocated shares at June 30,
1998 is $1,060,032.



<PAGE>



NOTE 14.       EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)

Dividends on unallocated ESOP shares are recorded as additional contributions to
the  ESOP by the  Company  to  prepay  principal  on the ESOP  loan and  release
additional  shares.  Dividends  on  allocated  shares are  charged  to  retained
earnings.


NOTE 15.       NEW ACCOUNTING STANDARDS

In October  1995,  the FASB issued SFAS No. 123  "Statement  on  Accounting  for
Stock-Based   Compensation"  which  defines  a  "fair  value  based  method"  of
accounting for an employee stock option whereby compensation cost is measured at
the  grant  date  based on the value of the  award  and is  recognized  over the
service  period.  The FASB encouraged all entities to adopt the fair value based
method,  however, it allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting  Principles Board ("APB") Opinion No. 25.
Under the intrinsic value based method,  compensation  cost is the excess of the
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock.  However,  most stock option plans have no intrinsic value
at the grant date and, as such, no  compensation  cost is  recognized  under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma  disclosures as if the fair value
based method had been  applied.  The Bank has  continued  to use the  "intrinsic
value based method" as prescribed by APB Opinion No. 25.

In June 1996,  the FASB  issued  SFAS No.  125,  "Statement  on  Accounting  for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
which will be effective,  on a  prospective  basis,  for fiscal years  beginning
after  December  31,  1996.  SFAS No.  125  provides  accounting  and  reporting
standards for transfers and servicing of financial assets and  extinguishment of
liabilities based on consistent application of a  financial-components  approach
that  focuses on  control.  SFAS No. 125 extends  the  "available  for sale" and
"trading" approach of SFAS No. 115 to non-security  financial assets that can be
contractually  prepaid or otherwise settled in such a way that the holder of the
asset  would  not  recover  substantially  all of its  recorded  investment.  In
addition,  SFAS No.  125 amends  SFAS No.  115 to prevent a security  from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover  substantially all of
its recorded  investment.  The extension of the SFAS No. 115 approach to certain
non-security  financial  assets and the  amendment to SFAS No. 115 are effective
for  financial  assets  held on or  acquired  after  January 1, 1997.  Effective
January 1, 1997,  SFAS No. 125 will  supersede  SFAS No. 122, which is discussed
above. In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of  Certain  Provisions  of SFAS  No.  125."  It  defers  for one  year the
effective  date of  certain  provisions  of  SFAS  125.  Management  has not yet
determined the effect, if any, SFAS No. 125 will have on the Company's financial
statements.


<PAGE>



NOTE 15.       NEW ACCOUNTING STANDARDS (CONTINUED)

Recently the FASB issued  Statement of Financial  Accounting  Standards No. 128,
"Earnings  per Share".  It simplifies  the standards for computing  earnings per
share, superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual  presentation of basic and diluted earnings per
share on the face of the income  statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic  earnings per share  computation  to the numerator and  denominator of the
earnings  per share  computation.  This  Statement  will  affect  the  financial
statements issued by the Company after December 31, 1997.

The FASB recently issued  Statement of Financial  Accounting  Standards No. 129,
"Disclosure of Information about an Entity's Capital Structure".  This Statement
applies to all entities.  Its requirements are a consolidation of those found in
ABP Opinions 10 and 15, and Statement of Financial  Accounting Standards No. 47.
This statement will affect the financial  statements issued by the Company after
December 15, 1997.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income".
This Statement  establishes standards for reporting and display of comprehensive
income on its components (revenues,  expenses, gains and losses).  Comprehensive
income is defined as the  change in equity of a  business  enterprise,  during a
period,  from  transactions  and other events and  circumstances  from  nonowner
sources.   The  Statement   requires  that  entities  classify  items  of  other
comprehensive  income by their nature in a financial  statement  and display the
accumulated  balance of other  comprehensive  income  separately  from  retained
earnings and additional  paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 31, 1997.

Also in June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public entities  report  information  about  operating  segments in
annual  financial  statements  and  requires  that  selected  information  about
operating  segments be reported in interim  financial  reports as well.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas and major  customers.  This  Statement is effective for fiscal
years beginning after December 31, 1997.



<PAGE>



NOTE 16.       STOCK PLANS

At June 30, 1998, the Company has two stock-based  compensation plans, which are
described below. The Company applies APB Opinion 25 and related  Interpretations
in  accounting  for its  plans.  Accordingly,  no  compensation  cost  has  been
recognized  for its  Stock  Option  Plan.  The  compensation  cost that has been
charged against income for the Management  Stock Bonus Plan is discussed  below.
Had compensation cost for the Company's two stock-based  compensation plans been
determined  based on the fair value at the grant  dates for awards  under  those
plans consistent with the method of FASB Statement 123, the Company's net income
and  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated below.
<TABLE>
<CAPTION>
                                                               1998             1997
                                                       ---------------     -------------
<S>                                 <C>               <C>                      <C>    
    Net income                      As reported        $       877,209          635,479
      Pro forma                                                803,304          563,286

    Earnings per share              As reported        $          .785             .514
      Pro forma                                                   .719             .455
</TABLE>

On January 5, 1996, the Board of Directors of the Company adopted a Stock Option
Plan. Pursuant to the Plan, an amount of stock equal to 10 percent of the shares
of common  stock  (142,313  shares as adjusted  for the stock  dividend)  of the
Corporation  issued and outstanding is reserved for issuance by the Company upon
exercise of stock options which may be granted to directors, officers, and other
key  employees  from time to time.  The Plan provides for both  Incentive  Stock
Options and  Non-Incentive  Stock Options.  The options have an exercise date of
ten years from the date of grant.  In connection  with the adoption of the Plan,
the Company  granted  37,500  incentive  stock options and 42,693  non-incentive
stock options to its directors,  officers,  and other key employees.  The option
price established for the shares upon exercise was $9 1/4 per share.  During the
year,  an  additional  13,125  incentive  stock  options  were granted and 8,700
incentive stock options were forfeited.  As of June 30, 1998 and 1997, no shares
have been  exercised.  Remaining  shares  available  to be granted in the future
amount to 57,695.  The fair value of each  option  grant for the above  proforma
disclosures  is  estimated  on  the  date  of  grant  using  the   Black-Scholes
option-pricing   model  with  the  following  weighted  -  average  assumptions:
dividends of $0.10 per quarter;  expected  volatility  of 54 percent;  risk-free
interest rate of 5.10 percent; and expected lives of 8 and 7 years.

The  Company  also  adopted a  Management  Stock  Bonus Plan on January 5, 1996.
Sufficient  funds were  contributed to the Plan  representing up to 4 percent of
the aggregate  number of shares issued in the conversion.  Awards under the Plan
are determined based on the position and responsibilities of the employees,  the
length and value of their services,  and the compensation paid to employees.  On
January 5, 1996,  the Company made awards under the Plan in the amount of 30,573
shares. The award price established

<PAGE>



NOTE 16.       STOCK PLANS (CONTINUED)

for the shares upon  exercise  was $9 1/4 per share.  At June 30, 1998 and 1997,
27,852 and 26,352 shares,  respectively,  remain to be awarded under the Plan in
the future. During the year, 1,500 shares were forfeited.  Awards under the Plan
are  earned at the rate of  one-fifth  of the award per year as of the  one-year
anniversary of the effective date of the Plan. For the years ended June 30, 1998
and 1997, compensation cost in the amount of $51,704 and $60,494,  respectively,
have been  recorded  under the  provisions  of the Plan.  The fair value of each
option  grant for the above  proforma  disclosures  is  estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted -
average  assumptions:  dividends of $0.10 per quarter  ($0.075 per quarter after
stock dividend);  expected volatility of 54 percent;  risk-free interest rate of
5.10 percent; and expected lives of 8 and 7 years.

During the 1997 fiscal year, the Company implemented a stock repurchase program.
The program was approved by the  Company's  Board of Directors  and the OTS. The
repurchase program authorized the Company to repurchase approximately 15 percent
of its currently  outstanding  shares. As of June 30, 1998 and 1997, the Company
has repurchased  35,500 and 148,042 shares of its  outstanding  common stock for
$581,312 and $2,377,066,  respectively. The shares purchased by the Company were
retired at the advice of special counsel.

NOTE 17.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected  quarterly  financial data are presented below by quarter for the years
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                                 1998 Quarter Ended
                                                      ---------------------------------------------------------------------
                                                           September 30       December 31       March 31           June 30
<S>                                                  <C>                        <C>            <C>               <C>    
    Net interest income after
        provision for loan losses                      $        706,339           783,871        846,270           850,276
    Other income                                                 19,177            22,065         23,070            39,591
    Other expenses                                              442,873           427,798        447,072           556,425
    Earnings before
        income taxes                                            282,643           378,138        406,509           349,201
    Net earnings                                                179,279           232,001        251,171           214,758
    Earnings per common 
        share                                                     0.160             0.208          0.225             0.192
</TABLE>
<TABLE>
<CAPTION>
                                                                                 1997 Quarter Ended
                                                       --------------------------------------------------------------------
                                                           September 30       December 31       March 31           June 30
<S>                                                    <C>                       <C>            <C>               <C>    
    Net interest income after
        provision for loan losses                      $        669,227           656,787        637,499           705,387
    Other income                                                 14,217             9,181         11,249            13,992
    Other expenses                                              625,051           422,513        371,503           379,886
    Earnings before
        income taxes                                             58,393           243,455        277,246           339,492
    Net earnings                                                 34,640           146,062        171,471           283,306
    Earnings per common
        share                                                      .028              .118           .139              .229

</TABLE>

<PAGE>



NOTE 18.       FEDERAL HOME LOAN BANK ADVANCES

In October  1995,  the Bank entered  into an  "Advances,  Collateral  Pledge and
Security  Agreement" (the Agreement) with the Federal Home Loan Bank (FHLB). The
purpose of the  Agreement  is to allow the Bank to obtain  extensions  of credit
from  the  FHLB to use in its  operations.  At  June  30,  1998,  the  Bank  has
$38,247,631  in  outstanding  advances with the FHLB. The advances bear interest
and mature as follows:
<TABLE>
<CAPTION>
              Unpaid principal balance     Interest Rate          Maturity
<S>                <C>                          <C>         <C> 
                    $        400,000              5.57%       July 01, 1998
                             600,000              5.62%       July 01, 1998
                           4,550,000              5.58%       July 01, 1998
                             400,000              5.62%       July 08, 1998
                             750,000              5.59%       July 08, 1998
                           4,600,000              5.52%       July 08, 1998
                             650,000              5.59%       July 15, 1998
                           4,900,000              5.59%       July 15, 1998
                           3,775,000              5.55%       July 22, 1998
                           3,775,000              5.55%       July 29, 1998
                             565,250              5.813%      September 09, 1998
                             700,000              5.813%      September 09, 1998
                           5,000,000              5.663%      October 02, 2002
                             650,000              5.78%       December 16, 2002
                           6,000,000              4.96%       December 12, 2007
                             288,192              5.54%       February 01, 2005
                             644,189              5.79%       February 01, 2018
                    ----------------

                    $     38,247,631
                    ----------------
</TABLE>

Several of the advances due in July were subsequently refinanced after year end.
The advances are secured by the Bank's  investment  in FHLB stock of  $1,965,200
and FNMA  mortgage-backed  securities in the amount of $6,486,829.  In addition,
the advances are secured under a "blanket  credit  facility"  whereby all of the
Bank's  1-4 family  real  estate  loans are also  collateral  under the  advance
agreement.



<PAGE>



NOTE 19.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS

The  following  represents  the details of  consolidation  with  respect to GFSB
Bancorp, Inc. and the Bank:

Details of Consolidated Statement of Financial Condition
June 30, 1998

ASSETS
<TABLE>
<CAPTION>
                                                                    Gallup                                 GFSB
                                                    GFSB            Federal                              Bancorp,
                                                  Bancorp,          Savings                              Inc. and
                                                    Inc.             Bank          Eliminations         Subsidiary
<S>                                         <C>                   <C>               <C>                 <C>        
    Cash and due from banks                 $              -        2,047,860                -            2,047,860
    Interest-bearing deposits
        with banks                                         -        2,490,120                -            2,490,120
    Available-for-sale investment
        securities                                         -        5,188,095                -            5,188,095
    Mortgage-backed securities                             -       33,551,219                -           33,551,219
    Stock of Federal Home Loan
        Bank, at cost,                                     -        1,965,200                -            1,965,200
    Loans receivable, net                          2,409,454       75,836,642       (2,409,454)          75,836,642
    Accrued interest and dividends
        receivable                                         -          675,485                -              675,485
    Premises and equipment, net                            -        1,035,668                -            1,035,668
    Prepaid and other assets                             442          204,979                -              205,421
    Deferred tax asset                                     -           68,377                -               68,377
    Investment in subsidiary                       4,557,750          442,817       (5,000,567)                   -
                                            -----------------------------------------------------------------------

               Total assets                 $      6,967,646      123,651,456       (7,410,021)         123,209,081
                                            =======================================================================
</TABLE>



<PAGE>



NOTE 19.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Details of Consolidated  Statement of Financial  Condition  (Continued) June 30,
1998


LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                    Gallup                                 GFSB
                                                    GFSB            Federal                              Bancorp,
                                                  Bancorp,          Savings                              Inc. and
                                                    Inc.             Bank          Eliminations         Subsidiary

<S>                                       <C>                   <C>               <C>                 <C>        
    Transaction accounts                    $              -        6,979,785                -            6,979,785
    Savings and now deposits                               -       13,921,170          (19,310)          13,901,860
    Time deposits                                          -       48,497,496                -           48,497,496
    Accrued interest payable                               -          223,702                -              223,702
    Advances from borrowers                                -          225,597                -              225,597
    Accounts payable and accrued
        liabilities                                   52,029          208,303                -              260,332
    Deferred income taxes                                  -          426,553                -              426,553
    Advances from parent company                           -        2,170,359       (2,170,359)                   -
    Dividends declared and payable                    82,446          219,785         (219,785)              82,446
    Advances from the Federal Home
        Loan Bank                                          -       38,247,631                -           38,247,631
    Income taxes payable                               1,168          153,589                -              154,757
                                            -----------------------------------------------------------------------
               Total liabilities                     135,643      111,273,970       (2,409,454)         109,000,159

COMMITMENTS AND
CONTINGENCIES     -                                        -                -                -

STOCKHOLDERS' EQUITY
    Common stock                                     116,553           10,000          (13,038)             113,515
    Paid-in-capital                                6,217,660        4,547,750       (4,987,529)           5,777,881
    Unearned ESOP stock                             (415,695)               -                -             (415,695)
    Retained earnings, substantially
        restricted                                   913,485        7,128,125                -            8,041,610
    Unrealized gain on available
        for sale securities, net of taxes                  -          691,611                -              691,611
                                            -----------------------------------------------------------------------

               Total stockholders'
                  equity                           6,832,003       12,377,486       (5,000,567)          14,208,922
                                            -----------------------------------------------------------------------

           Total liabilities and
               stockholders' equity         $      6,967,646      123,651,456       (7,410,021)         123,209,081
                                            =======================================================================
</TABLE>


<PAGE>



NOTE 19.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Details of Consolidated Statement of Earnings
Year ended June 30, 1998
<TABLE>
<CAPTION>
                                                                   Gallup                                 GFSB
                                                    GFSB            Federal                              Bancorp,
                                                  Bancorp,          Savings                              Inc. and
                                                    Inc.             Bank          Eliminations         Subsidiary
<S>                                                  <C>            <C>               <C>                 <C>      
INTEREST INCOME
    Loans receivable
    Mortgage loans$                                        -        5,001,239                -            5,001,240
    Commercial loans                                       -          280,257                -              280,257
    Share and consumer loans                               -          308,605                -              308,605
    Available-for-sale investment
        securities and mortgage-
        backed securities                                  -        2,492,849                -            2,492,849
    Other interest-earning assets                    145,084          175,959         (145,084)             175,959
                                            -----------------------------------------------------------------------
               Total interest earnings               145,084        8,258,910         (145,084)           8,258,910

INTEREST EXPENSE
    Deposits                                               -        3,093,568           (1,482)           3,092,086
    Advances from Federal
        Home Loan Bank                                     -        1,916,851                -            1,916,851
    Advances to parent company                             -          102,736         (102,736)                   -
                                            -----------------------------------------------------------------------

                                                           -        5,113,155         (104,218)           5,008,937
                                            -----------------------------------------------------------------------

               Net interest earnings                 145,084        3,145,755          (40,866)           3,249,973

    Provision for loan losses                              -           63,217                -               63,217
                                            -----------------------------------------------------------------------

               Net interest earnings
                  after provision for
                  loan losses                        145,084        3,082,538          (40,866)           3,186,756

NON-INTEREST EARNINGS
    Miscellaneous income                                   -           10,422                -               10,422
    Dividend income from subsidiary                  943,066                -         (943,066)                   -
    Net gains from sales of loans                          -            7,685                -                7,685
    Service charge income                                  -           85,796                -               85,796
                                            -----------------------------------------------------------------------
               Total non-interest
                  earnings                           943,066          103,903         (943,066)             103,903
</TABLE>


<PAGE>



NOTE 19.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Details of Consolidated Statement of Earnings (Continued)
Year ended June 30, 1998

<TABLE>
<CAPTION>
                                                                    Gallup                                 GFSB
                                                    GFSB            Federal                              Bancorp,
                                                  Bancorp,          Savings                              Inc. and
                                                    Inc.             Bank          Eliminations         Subsidiary

<S>                                         <C>                   <C>                <C>                 <C>      
NON-INTEREST EXPENSE
    Compensation and benefits               $        133,462          880,067          (40,866)             972,663
    Insurance                                              -           54,860                -               54,860
    Other                                             47,519          326,160                -              373,679
    Occupancy                                              -          166,125                -              166,125
    Data processing                                        -          137,317                -              137,317
    Professional fees                                 37,979           65,915                -              103,894
    Advertising                                            -           49,845                -               49,845
    Stock services                                    15,785                -                -               15,785
                                             ----------------------------------------------------------------------
               Total non-interest
                  expense                            234,745        1,680,289          (40,866)           1,874,168

    Earnings before income taxes                     853,405        1,506,152         (943,066)           1,416,491

    Income tax expense
    Currently payable                                      -          539,282                -              586,988
    Deferred (benefit)                                     -         (47,706)                -             (47,706)
                                             ----------------------------------------------------------------------

                                                           -          539,282                -              539,282
                                             ----------------------------------------------------------------------

               Net earnings                 $        853,405          966,870         (943,066)             877,209
                                             =======================================================================
</TABLE>



<PAGE>



NOTE 20.       FAIR VALUE OF FINANCIAL INSTRUMENTS

The  estimated  fair  values  of the  Company's  financial  instruments  were as
follows:
<TABLE>
<CAPTION>
                                                                 June 30, 1998
                                                      ---------------------------------
                                                          Carrying            Fair
                                                            Value             Value
<S>                                                  <C>                     <C>      
    Financial Assets:
        Cash and due from banks                       $     2,047,860         2,047,860
        Interest-bearing deposits with banks                2,490,120         2,490,120
    Available-for-sale-investment securities                5,188,095         5,188,095
    Hold-to-maturity investment securities                    144,993           144,993
    Available-for-sale mortgage-backed securities          33,551,219        33,551,219
    Loans receivable, net                                  75,836,642        60,754,721
    Accrued interest receivable                               675,485           675,485

    Financial Liabilities:
        Transaction deposits                                6,979,785         6,979,785
        Savings and now deposits                           13,901,860        13,901,860
        Time deposits                                      48,497,496        47,209,079
        Accrued interest payable                              223,702           223,702
        Advances from the FHLB                             38,247,631        38,247,631

    Off-Balance-Sheet Liabilities:
        Commitments to extend credit                                          4,339,000
</TABLE>


NOTE 21.       COMMON STOCK DIVIDENDS DECLARED

On March 12, 1998, a fifty percent stock  dividend was declared to  shareholders
of record  as of March 31,  1998.  As a result  of the stock  dividend,  400,329
shares were issued.

Earnings per share amounts and weighted  average  shares  outstanding  have been
restated in 1997 to give effect of the stock dividend.




<PAGE>



NOTE 22.       LEASES

The Company is obligated  under a lease  agreement  entered into on December 30,
1997, with a related party (see Note 10) for the building across the street from
its offices. Rental expense for the year ended June 30, 1998, was $15,000.

The  following is a schedule of  noncancelable  future  minimum  lease  payments
required under the operating lease:
<TABLE>
<CAPTION>
        Years Ending June 30                   Amount

     <S>                              <C>            
              1999                      $        30,000
              2000                               30,000
              2001                               30,000
              2002                               30,000
              2003                               30,000
           Thereafter                           135,000
</TABLE>

The  lease  expires  December  31,  2007.  The  Company  has  an  option,   upon
notification  of the lessor by August 1, 2007,  to  purchase  the  building  for
$275,000 or to extend the lease for an additional 10 years.

Effective January 1, 2003, and each year thereafter during the term of the lease
or any renewals, there is a cost of living adjustment. In no event will the rent
be less than  30,000 a year.  The above  schedule  does not  contain any cost of
living increases.


NOTE 23.       SUBSEQUENT EVENTS

In June  1998,  the  Company  opened a newly  constructed  drive-up  teller  and
automated teller machine facility on a lot previously purchased for this purpose
adjacent to the present bank building.  The facility was completed in July 1998.
On September  14, 1998,  the Company moved its loan  operations  into a new Loan
Center  across the street  from its  office.  The Loan  Center is leased  from a
related  party (see Notes 10 and 22).  Management  believes the  additions  will
provide the Company growth  potential by improving its ability to deliver retail
banking  services to the  community.  Neither of these  additions had a material
impact on financial  performance  for the Company for the fiscal year ended June
30, 1998, but they will have a material impact on  non-interest  expense for the
Company during the fiscal year ending June 30, 1999 and subsequent years.

<PAGE>

NOTE 23.       SUBSEQUENT EVENTS (CONTINUED)

On August 18, 1998, the Company issued a press release  announcing its intention
to repurchase up to 5 percent (58,276 shares) of the Company's common stock. The
repurchase was completed on September 9, 1998. On September 9, 1998, the Company
issued a press  release  announcing  its intention to repurchase up to 5 percent
(55,363 shares) of the Company's common stock. As of September 24, 1998,  19,600
shares  have been  repurchased.  All  shares  repurchased  have been  retired as
authorized but unissued.  The Company believes that it has sufficient capital to
complete the repurchase and that the repurchase  will not cause the Bank to fail
to meet its regulatory capital requirements.

   
NOTE 24.       EARNINGS PER SHARE

Basic earnings per share are computed by dividing  earnings  available to common
stockholders  by the weighted  average  number of common share  outstanding  (as
adjusted for the stock dividend)  during the period.  Diluted earnings per share
reflect per share amounts that would have resulted if dilutive  potential common
stock had been  converted to common  stock.  The  following  reconciles  amounts
reported in the financial statements:

                                              For the Year Ended June 30, 1998
                                             -----------------------------------
                                               Income       Shares     Per-share
                                             (Numerator) (Denominator)  Amount

Income available to common stockholders -
  basic earnings per share                   $  877,209     1,117,647 $    0.785
                                                                      ==========
Effective of dilutive securities:
  Options                                             -        35,597
                                             ------------------------

Income available to common stockholders -
  diluted earnings per share                 $  877,209     1,153,244 $    0.761
                                             ===================================

                                              For the Year Ended June 30, 1997
                                             -----------------------------------
                                               Income       Shares     Per-share
                                             (Numerator) (Denominator)  Amount

Income available to common stockholders -
  basic earnings per share                   $  635,479     1,237,268 $    0.514
                                                                      ==========
Effective of dilutive securities:
  Options                                             -         9,005
                                             ------------------------

Income available to common stockholders -
  diluted earnings per share                 $  635,479     1,246,273 $    0.510
                                             ===================================
    


<PAGE>




OFFICE LOCATION AND OTHER CORPORATE INFORMATION

CORPORATE OFFICE

GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301

Board of Directors of GFSB Bancorp, Inc.
<TABLE>
<CAPTION>

<S>                                           <C>    


Wallace R. Phillips, D.D.S., Chairman
George S. Perce, Secretary                       Vernon I. Hamilton
Charles L. Parker, Jr., Treasurer                Richard C. Kauzlaric
James Nechero, Jr., Assistant Secretary          Michael P. Mataya


Executive Officers of GFSB Bancorp, Inc.

                                                 Jerry R. Spurlin, President
William W. Head, Jr., Chief Lending Officer      
Marshall W. Coker, Chief Administrative Officer  




Special Counsel:                                 Independent Auditors:
Malizia, Spidi, Sloane & Fisch, P.C.             Neff & Company LLP
One Franklin Square                              7001 Prospect Pl., NE
1301 K. Street, NW, Suite 700 East               Albuquerque, NM 87110
Washington, D.C. 20005

Transfer Agent and Registrar:
Registrar & Transfer Co.
10 Commerce Drive
Cranford, New Jersey 07016
</TABLE>

   
The  Company's  Annual  Report for the year  ended June 30,  1998 filed with the
Securities  and Exchange  Commission on Form 10-KSB is available  without charge
upon  written  request.  For a copy of the Form  10-KSB  or any  other  investor
information, please write or call the Secretary of the Company, at the Company's
corporate office in Gallup,  New Mexico. The annual meeting of stockholders will
be held on ^November 9, 1998.