GFSB BANCORP, INC.

                              ANNUAL REPORT - 1999




<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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS.....................................6-17

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..........................18

CONSOLIDATED FINANCIAL STATEMENTS

 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION...........................19-20

 CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS..........21-22

 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY..............23-24

 CONSOLIDATED STATEMENTS OF CASH FLOWS...................................25-26

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..............................27-55

OFFICE LOCATION AND OTHER CORPORATE INFORMATION.............................56


<PAGE>

To Our Stockholders:

We are pleased to present to you our fourth annual  stockholders'  report.  This
report covers the fourth 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, 1999 were  $1,015,547,
an increase of $138,338 or 16% over net earnings for the previous year. On a per
share basis the Company  earned $.99 per share compared with $.78 per share last
year.

The  Company's  total  assets  increased  to  $150,753,849  at  June  30,  1999,
representing  growth of $27,544,768 or 22% from total assets of  $123,209,801 at
June 30, 1998.  Deposits also increased  $11,850,180 or 17% from  $69,379,141 at
June 30, 1998 to $81,229,321 at June 30, 1999.

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,


/s/ W.R. Phillips, D.D.S.                  /s/ Richard C. Kauzlaric
--------------------------------------     -----------------------------------
W.R. Phillips, D.D.S.                      Richard C. Kauzlaric
Chairman of the Board                      Chairman of the
of the Company                             Board of the Bank


/s/ Jerry R. Spurlin                       /s/ Richard P. Gallegos
--------------------------------------     -----------------------------------
Jerry R. Spurlin                           Richard P. Gallegos
President of the Company                   President of the Bank



September 15, 1999

<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, markdown, or commission, and may not represent actual transactions.

                                               Bid Prices
       Quarter Ended                  High                   Low
       -------------------            ------                 ------
       September 30, 1997*            14.670                 14.000
       December 31, 1997*             14.080                 13.500
       March 31, 1998*                15.670                 15.000
       June 30, 1998*                 16.750                 15.250
       September 30, 1998             16.750                 13.000
       December 31, 1998              15.500                 13.625
       March 31, 1999                 15.250                 14.250
       June 30, 1999                  14.750                 13.125

*  Table reflects a 50% stock dividend effective March 31, 1998

                                       2

<PAGE>

GFSB Bancorp, Inc.
Corporate Profile (continued)

The  number of  stockholders  of record of common  stock as of the  record  date
September 15, 1999 ("Record Date"), was approximately 214. 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 981,308
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,  1999 were  $297,732.  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>

GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER  DATA
Financial Condition (Dollars in Thousands)

At June 30,                                         1999       1998       1997

Assets                                            $150,754   $123,209   $ 93,793
Loans receivable, net                               96,565     75,837     52,022
Mortgage-backed securities                          31,712     33,551     32,070
Stock of FHLB                                        2,815      1,965      1,060
Investment securities                               11,973      5,188      4,342
Cash and cash equivalents                            5,147      4,538      2,994
Deposits                                            81,229     69,379     57,872
Advances from the FHLB                              55,541     38,248     20,930
Retained earnings (substantially restricted)         8,759      8,042      7,514
Unrealized gain on available  for sale
securities, net (other comprehensive income)           515        692        557

Summary of Operations
(Dollars in Thousands)

Year ended June 30,

Interest income                                   $  9,651   $  8,259   $  6,079
Interest expense                                     5,599      5,009      3,389
        Net interest income                          4,052      3,340      2,690
Provision for loan losses                              138         63         21
        Net interest income after provision for
        loan losses                                  3,913      3,187      2,669
Non-interest income:
        Income from real estate operations            --         --           --
        Other                                          243        104         49
             Total non-interest income                 243        104         49
Non-interest expense:
        Compensation and benefits                    1,363        973        835
        Professional fees                               66        104         92
        Occupancy                                      283        166        146
        Advertising                                     71         50         46
        Data processing                                202        137         98
        Insurance and SAIF premiums                     65         55        330
        Other and stock subscription services          451        389        252
             Total non-interest expense              2,501      1,874      1,799
Earnings before income taxes                         1,655      1,416        919
Income tax expense                                     639        539        283
             Net earnings                         $  1,016   $    877   $    636

                                       4

<PAGE>

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

Selected Operating Ratios

Year ended June 30,                                  1999      1998      1997

Performance ratios:
Return on average assets (net income
    divided by average total assets)                  .75%     0.81%     0.76%
Return on average equity (net income
   divided by average equity)                        7.76      6.09      4.34
 Average interest earning assets to average
    interest-bearing liabilities                     1.13X     1.16X     1.19X

Net interest income after provision for
    loan losses, to total other expenses           156.46%   170.06%   148.36%
Net interest rate spread                             2.53%     2.46%     2.52%
Net yield on average interest-earnings
    assets                                           3.11%     3.25%     3.34%
Equity ratios:
 Average equity to average assets ratio
    (average equity divided by average total
    assets)                                          9.70     13.95     17.54
 Equity to assets at period end                      8.25     11.54     14.87
 Assets quality ratios:
      Non-performing loans to total assets            .15       .57       .15
      Non-performing loans to net loans               .23       .93       .26
      Allowance for loan losses, REO and other
      Repossessed assets to non-performing
      assets                                       271.43    129.47    247.63
      Allowance for loan losses to total loans,
      net                                             .46       .51       .65

 Dividend payout ratio:                              31.9%     37.4%     53.7%

                                       5

<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.

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

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

The Company cautions that this list of important  factors in 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.

                                       6
<PAGE>

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. The Bank also purchases automobile loans from dealers.
These loans have risk and terms comparable to automobile loans originated in the
Bank. Investment securities in the Bank's portfolio typically have shorter 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.  Automated
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
provides an opportunity  to expand its operations as the only local  independent
financial  institution.  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

                                       7
<PAGE>

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.

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, 1999 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.

* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
   Change                                                     NPV
    in Rates     $ Amount           $ Change      % Change   Ratio      Change
                                  (Dollars in Thousands)


   +400  bp      $       -                 -           -%         -%       - bp
   +300  bp         11,372            (5,110)        -31%      7.86%    -285 bp
   +200  bp         13,367            (3,115)        -19%      9.03%    -168 bp
   +100  bp         15,137            (1,345)         -8%     10.02%     -69 bp
      0  bp         16,482                                    10.71%
   -100  bp         17,272               790          +5%     11.06%     +35 bp
   -200  bp         17,570             1,089          +7%     11.11%     +40 bp
   -300  bp         17,823             1,341          +8%     11.14%     +43 bp
   -400  bp              -                 -           -%         -%       - bp



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

                                       8
<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, 1999                      Year ended June 30, 1998
                                Average                      Average          Average                      Average
                                Balance        Interest      Yield/Cost       Balance        Interest      Yield/Cost
                                 (Dollars in Thousands)                        (Dollars in Thousands)
Interest-earning assets:
<S>                             <C>            <C>             <C>          <C>            <C>               <C>
Loans receivable (1)             $  88,355      $7,465          8.45%        $  60,042      $5,590           9.31%
Investment securities and
 Mortgage-backed securities         38,333       1,977          5.16%           36,401       2,493           8.08%
Other interest-earning
  assets (2)                         3,542         207          5.84%            3,551         176           4.96%

Total interest-earning assets      130,230       9,651          7.41%           99,994       8,259           8.26%
Non-interest-earning assets          4,759                                       3,272

Total assets                      $134,989                                    $103,266

Interest-bearing liabilities:
  Transaction accounts               4,853          99          2.04%         $  3,609          62           1.72%
  Passbook savings                   4,450         107          2.40%            3,563         107           3.00%
  Money market accounts              9,964         333          3.34%            7,633         324           4.24%
  Certificates of deposit           49,678       2,689          5.41%           43,017       2,598           6.04%
  Other liabilities                 45,802       2,371          5.18%           26,811       1,917           7.15%

Total interest-bearing
   liabilities                     114,747       5,599          4.88%           86,318       5,009           5.80%
Non-interest bearing
   liabilities                       7,151                                       2,540

Total liabilities                 $121,898                                     $88,858

Stockholders' equity                13,091                                      14,606

Total liabilities and
  stockholders' equity            $134,989                                    $103,266

Net interest income                             $4,052                                      $3,250
Interest rate spread (3)                                        2.53%                                        2.46%
Net yield on interest-
  earning  assets (4)                                           3.11%                                        3.25%
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities                                  1.13X                                        1.16X
</TABLE>

(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.

                                       9
<PAGE>

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 ended June 30,
                                                           1999 vs. 1998                      1998 vs. 1997
                                                         Increase (Decrease)               Increase (Decrease)
                                                              Due to                             Due to
                                        --------------------------------------------------------------------------------
                                                             Rate/                                    Rate/
                                        Volume     Rate      Volume     Net       Volume    Rate      Volume     Net
                                        ------     ----      ------     ---       ------    ----      ------     ---
                                                 (Dollars in Thousands)                   (Dollars in Thousands)
Interest income:
<S>                                    <C>      <C>       <C>        <C>       <C>       <C>       <C>        <C>
  Loans receivable                      $2,636   $ (516)   $   (243)  $1,877    $  1,388  $   230   $ 82       $1,700
  Mortgage-backed securities and
     investment securities                 156   (1,063)        (56)    (963)        150      685     50          885
  Other interest-earning  assets             -       31           -       31          45       (1)     -           44
                                        ------   -------     ------    -----     -------   ------    ---        -----
     total interest-earning assets       2,792   (1,548)       (299)     945       1,583      914    132        2,629

Interest expense:
  Savings accounts                          27      (21)         (5)       1          20       --    667          687
  Money markets                             99      (69)        (21)       9         (27)      17     (1)         (11)
  Certificates of deposit                  402     (271)        (41)      90         313      128     19          460
  Other liabilities                      1,358     (528)       (374)     456         590      306    228        1,124
                                        ------   -------     ------    -----     -------   ------    ---        -----
   Total interest-bearing liabilities    1,886     (889)       (441)     556         896      451    913        2,260
                                        ------   -------     ------    -----     -------   ------    ---        -----

Net change in interest income          $   906   $ (659)   $    142  $   389   $     687  $   463  $(781)       $ 369
                                        ======    =====      ======   ======     =======   ======   ====        =====
</TABLE>


Financial Condition

General. The Company's total assets increased $27.5 million or 22.4% from $123.2
million at June 30, 1998 to $150.8  million at June 30, 1999.  This increase was
primarily  the  result  of a  $7.2  million  increase  in  cash  and  investment
securities,  offset by a decrease in mortgage-backed securities of $1.8 million,
and a $20.7 million  increase in the Bank's net loan portfolio.  The majority of
the increases are directly attributable to the efforts of management to increase
investment  and lending  activity.  During the same period,  deposits  increased
$11.9  million from $69.3  million at June 30, 1998 to $81.2 million at June 30,
1999.  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 $38.2 million at June
30, 1998 to $55.6 million at June 30, 1999. These additional  borrowings  funded
purchases of loans,  securities and mortgage loan  participations.  The Bank had
$515,000 and $692,000 in  unrealized  gains (net of deferred  taxes) at June 30,
1999  and   1998,   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.  Unrealized  gains and  losses  are  presented  as  accumulated  other
comprehensive earnings for financial statement purposes.

                                       10
<PAGE>
Comparison of Operating Results for Years Ended June 30, 1999 and 1998

General.  Net earnings  increased $138,000 or 15.8 % for the year ended June 30,
1999 from the year ended June 30, 1998.  This  increase was primarily the result
of an  increase  in net  interest  earnings of  approximately  $802,000,  and an
increase  in  non-interest  earnings  of  $139,000  offset  by  an  increase  in
non-interest  expense of $627,000,  an increase in provision  for loan losses of
$75,000 an increase in provision for income tax expense of $100,000.
Other comprehensive earnings decreased by $176,586.

Total Interest Earnings. Total interest earnings increased $1.4 million or 16.9%
from $8.3  million for the year ended June 30, 1998 to $9.7 million for the year
ended June 30, 1999. The increase was primarily due to the $1.9 million increase
in the loan portfolio.

Interest Expense.  Total interest expense increased  $590,000 or 11.8% from $5.0
million for the year ended June 30, 1998 to $5.6 million for the year ended June
30, 1999. This increase was primarily due to an increase of $454,000 of interest
incurred on increased  Federal Home Loan Bank advances and a general increase in
the deposit base of $11.9 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
$443,000 and $387,000 at June 30, 1999 and 1998, respectively. The provision for
loan losses was $138,000 and $63,000 for the years ended June 30, 1999 and 1998,
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 $139,000 or 133.4% from
$104,000  for the year ended June 30, 1998 to  $243,000  for the year ended June
30, 1999.  This was  primarily  due to an increase in service  charge  income of
$81,000 and an increase in net gains from sales of loans of $45,000.

Non-Interest  Expense.  Total  non-interest  expense increased $627,000 or 33.5%
from $1.9  million for the year ended June 30, 1998 to $2.5 million for the year
ended  June  30,  1999.  This  increase  was  primarily  due to an  increase  in
compensation  and benefits of $390,000  from the hiring of  additional  staff to
handle  growth,  general  salary  increases,  and  increases  due to accrual for
stock-based  programs.  Other  expenses in  compensation  and  benefits  include
expenses for  performance  bonuses and an increase in education and training due
to employee  training for the new  operating  system and  application  software.
Other factors were  increases in occupancy  costs of $117,000,  data  processing
costs of  $64,000,  advertising  costs of $22,000,  an  increase in  stationery,
printing and office supplies of $17,000,  an increase in postage of $13,000,  an
increase in supervisory  exam fees of $4,000,  an increase in operating costs of
$18,000,  an increase in stock services of $8,000,  and an increase in insurance
expense of $10,000,  offset by a decrease in professional  fees of $38,000.  The
increase in  occupancy  cost is  primarily  due to lease  expense and  leasehold
improvement  expense  on the  new  Loan  Center  and  furniture,  fixtures,  and
equipment  depreciation  for the new Drive-up  facility and new Automated Teller
Machine and  computer  equipment  purchases.  The  increase  in data  processing
expense is primarily due to year 2000 expense and an increase in  organizational
dues and subscriptions. The increase in advertising costs is a result of efforts
of the Bank to achieve growth in deposits through attracting new customers.  The
increase in stock services is primarily

                                       11
<PAGE>

due to a fee paid to the OTS for  filing a change of  control  application.  The
decrease in  professional  fees is primarily due to a decrease in legal fees and
audit and accounting accruals.

Non-interest  expense is  expected  to  materially  increase  in future  periods
primarily due to growth of the Bank and the  resulting  expansion by the Bank in
staffing and  marketing.  The increase in  non-interest  expense may result in a
decrease in net income in future  periods due to this growth and  expansion  and
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 may more 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
additional  personnel and related costs 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 $100,000 or 18.5% from $539,000
for the year ended June 30, 1998 to $639,000  for the year ended June 30,  1999.
This increase was primarily  attributable to the increase in pre-tax earnings of
$238,000.   Deferred  tax  liabilities   decreased  by  $161,237  as  unrealized
investment gains (other comprehensive earnings) decreased.

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
savings  institutions  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 qualifying investments limited to those having maturities of 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, 1999 the
Bank's  liquidity,  as measured for  regulatory  purposes,  was 5.69%.  The Bank
adjusts liquidity as appropriate to meet its asset/liability objectives.

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, 1999,  cash and cash  equivalents  totaled
$5.1 million. The Bank has another source of liquidity if a need for additional

                                       12
<PAGE>

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,
1999,  the Bank had  outstanding  borrowings  from the FHLB of  Dallas  of $55.4
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,  1999,  the Bank
originated  $56.3  million  in  total  loans   (including  loan   participations
purchased),  of which  $36  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  net  earnings,
provision  for loan losses,  amortization  of  investment  and  mortgage  backed
securities  premiums and discounts,  stock based  compensation  costs and income
taxes less  disbursements of interest and dividends,  and loan origination fees,
were $1 million for the years  ended June 30,  1999 and 1998.  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 $27  million  and $28  million  for the years ended June 30, 1999 and 1998,
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 $27  million  and $28 million for the years ended June 30,
1999 and 1998, respectively.

Cash flows from  operating  activities  increased  $70,000 or 6.5% from the year
ended June 30, 1998 to the year ended June 30, 1999. This increase was primarily
due  to an  increase  in net  earnings,  an  increase  in  the  amortization  of
investment and mortgage backed securities premiums  (discounts),  an increase in
the provision for loan losses and the decrease of loan origination fees. For the
same  periods,  cash  flows  used by  investing  activities  decreased  $499,000
primarily  due to an decrease in net loan  originations  and the decrease in the
purchase of FHLB stock,  offset by an increase in purchases  of mortgage  backed
and  investment  securities.  Cash  flows  provided  from  financing  activities
decreased  $1.5 million from the year ended June 30, 1998 to the year ended June
30, 1999  primarily  due to an the  repurchase  of company stock under the stock
repurchase program.

The Bank  anticipates  that it will have sufficient  funds available to meet its
current commitments. As of June 30, 1999, the Bank had commitments to fund loans
of $7 million.  Certificates of deposit  scheduled to mature in one year or less
totaled $34 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, 1999,  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 "95".  Similarly,  the
year 2000, being read as "00", may be treated as the year 1900, thereby causing

                                       13

<PAGE>

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 and a testing plan for
addressing the Year 2000 issue. 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.

The Bank has identified and evaluated 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.

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.   The  Bank  and
substantially  all of the service  bureau's  clients  have  completed  intensive
two-week testing periods with the service bureau with excellent results.

Contact has been made with the Bank's other outside  servicers and major vendors
to ascertain their individual  levels of Year 2000  compliance.  The Bank and/or
its major service bureau have conducted extensive Year 2000 testing of hardware,
software and communications these vendors.  From test results,  vendor responses
and/or   certifications   of  Year  2000  compliance  the  Bank  has  reasonable
expectations that it should not be severely impacted by the Year 2000 from these
systems.   This  effort  will  continue  and  will  include  additional  testing
procedures.

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.
Based on  responses  received 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 the  Bank's  residential  borrowers  are not
dependent on their computers for income. The Bank also believes that none of its
commercial  borrowers  are so large or complex  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.

The Bank has experienced substantial growth in recent years, which,  independent
of the Year 2000 issue,  created the need to upgrade some hardware and software.
The major  upgrade,  including new servers and  operating  system for the Bank's
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 was completed during the fiscal year ended June 30, 1999. A side benefit
of this upgrade was 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 an emergency preparedness/business recovery plan
for  continuation of services to the Bank's customers in the event of systems or
communication  failures  at the  beginning  of the Year 2000.  The plan is being
continually  refined,  and  management  believes  that the Bank  will be able to
continue to operate in the Year 2000 even if some systems fail.  Near the end of
December  1999,  the bank  will  generate  paper and  spreadsheet  backup of all
customer and general ledger  accounts.  Due to the size of the Bank,  management
believes  that the Bank  will be able to  operate  with  transactions  processed
manually until normal  operations can be restored.  This

                                       14
<PAGE>

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  period of time,  or if the bank  ultimately  had to  change  data
service providers, the cost could be material.

Year 2000  expense  for the year ended  June 30,  1999 was  $48,000.  The Bank's
operating budget for the fiscal year ending June 30, 2000,  includes $78,000 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 are Year 2000 administration,  testing,  remediation,  and contingency
planning,  and  his  salary  is  allocated  to Year  2000  expense.  The  budget
allocation for Year 2000 expense is expected to cover personnel and other costs,
including  some  contingency  costs for operation  under the  contingency  plan.
Should the Bank have to resort to alternative  operating procedures due to major
systems or communication  failures at the beginning of the Year 2000, additional
costs could be material.

In its initial  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.

As of June 30,  1999,  the Bank has  completed  more  than 97% of its Year  2000
project compliance efforts.

Stock Repurchase Program

During the fiscal  year ended June 30,  1999,  the Company  repurchased  176,234
shares of its $0.10 common stock under a stock  repurchase  program.  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.

On May 20, 1999, the Company issued a press release  announcing its intention to
repurchase up to 5 percent (49,965 shares) of the Company's  common stock. As of
July 21, 1999, 22,270 shares have been repurchased and 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.


Impact of Inflation and Changing Prices


                                       15
<PAGE>

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,  1999,  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,
1999.  Future recapture of the Bank's bad-debt reserves will not have an adverse
effect on future net earnings.

Impact of Certain 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 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, except for interim financial  statements in the initial
year of application.

In February 1998,  the FASB issued SFAS No. 132,  Employer's  Disclosures  about
Pensions and Other Postretirement  Benefits. This statements revises disclosures
about pension and other  postretirement  benefit  plans.  It does not change the
measurement  or recognition of those plans.  This statement  eliminates  certain
disclosures  from SFAS No.'s 87, 88, and 106.  This  statement is effective  for
fiscal years  beginning after December 15, 1997. This statement is currently not
applicable to the Bank.

                                       16
<PAGE>

In  June  1998,  the  FASB  issued  SFAS  No.  133,  Accounting  for  Derivative
Instruments and Hedging Activities.  This statement  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives) and for hedging activities.  This statement is effective for fiscal
years  beginning after June 15, 1999.  Earlier  application of this statement is
encouraged. This statement is currently not applicable to the Bank.

In October 1998, the FASB issued SFAS No. 134,  Accounting  for  Mortgage-Backed
Securities  Retained After the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement amends SFAS No. 65 to require that
after the  securitization  of a  mortgage  loan an entity  engaged  in  mortgage
banking activities  classify the resulting mortgage backed security as a trading
or  held-for-sale  based on the  intent  to sell or hold the  investments.  This
statement is effective for the first fiscal quarter beginning after December 15,
1998. This statement is currently not applicable to the Bank.


                                       17
<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,
1999,  and the related  consolidated  statements  of earnings and  comprehensive
earnings,  changes in  stockholders'  equity,  and cash flows for the year ended
June  30,  1999.  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
of GFSB Bancorp,  Inc. as of June 30, 1998,  were audited by Neff & Company LLP,
who merged with Ricci and Ricci,  LLC, as of January 1, 1999,  and whose  report
dated August 14, 1998, 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 provides 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, 1999,  and the results of their  operations  and
their cash flows for the year ended June 30, 1999 in conformity  with  generally
accepted accounting principles.



/s/ Neff & Ricci, LLP
--------------------------------------
Albuquerque, New Mexico
July 30, 1999



<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, 1999



ASSETS
    Cash and due from banks (Note 19)                          $   2,839,479
    Interest-bearing deposits with banks (Note 19)                 2,307,736
    Available-for-sale investment securities (Notes 3 and 19)     10,295,919
    Available-for-sale mortgage-backed
        securities (Notes 2 and 19)                               31,711,838
    Hold-to-maturity investment securities (Notes 3 and 19)        1,677,144
    Stock of Federal Home Loan Bank,
        at cost, restricted                                        2,815,100
    Loans receivable, net, substantially
        pledged (Notes 4 and 19)                                  96,564,840
    Accrued interest and dividends
        receivable (Notes 5 and 19)                                  863,975
    Premises and equipment (Note 6)                                1,404,616
    Prepaid and other assets                                         204,825
    Deferred tax asset (Note 11)                                      68,377
                                                                ------------


              Total assets                                    $  150,753,849
                                                                ============

                                       19
<PAGE>

<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                              <C>
    Transaction and NOW accounts (Notes 7 and 19)                                  $       12,874,979
    Savings deposits (Notes 7 and 19)                                                      16,962,513
    Time deposits (Notes 7 and 19)                                                         51,391,829
    Accrued interest payable (Note 19)                                                        276,328
    Advances from borrowers for taxes and insurance                                           329,298
    Accounts payable and accrued liabilities                                                  426,634
    Deferred income taxes (Note 11)                                                           265,317
    Dividends declared and payable                                                             74,748
    Advances from the Federal Home
        Loan Bank (Notes 17 and 19)                                                        55,540,826
    Income taxes payable                                                                      180,069
                                                                                   ------------------
               Total liabilities                                                          138,322,541

COMMITMENTS AND CONTINGENCIES
    (Notes 4, 10, and 22)                                                                           -

STOCKHOLDERS' EQUITY
    Common stock,  $.10 par  value,  1,500,000  shares  authorized;  issued  and
        outstanding  993,578  shares,  adjusted for 40,035 shares of unallocated
        Management Stock Bonus Plan shares held by the
        Company's wholly owned subsidiary                                                      95,354
    Preferred stock, $.10 par value, 500,000
        shares authorized; no shares issued or outstanding                                          -
    Additional paid-in-capital                                                              3,432,687
    Unearned ESOP stock (Note 13)                                                           (371,183)
    Retained earnings, substantially restricted (Note 8)                                    8,759,425
    Accumulated other comprehensive earnings (Note 14)                                        515,025
                                                                                   ------------------
               Total stockholders' equity                                                  12,431,308
                                                                                   ------------------
               Total liabilities and stockholders' equity                          $      150,753,849
                                                                                   ==================

</TABLE>

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

                                       20

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF
EARNINGS AND COMPREHENSIVE EARNINGS
Years Ended June 30, 1999 and 1998


                                                            1999       1998
INTEREST EARNINGS Loans receivable (Note 4)
        Mortgage loans                              $     6,312,252   4,846,416
        Commercial loans                                    444,158     262,132
        Share and consumer loans                            393,918     302,561
        Service fee income                                  314,833     178,993
    Investment and mortgage-backed securities             1,978,827   2,492,849
    Other interest-earning assets                           206,549     175,959
                                                    ---------------------------
               Total interest earnings                    9,650,537   8,258,910

INTEREST EXPENSE
    Deposits (Note 7)                                     3,227,770   3,092,086
    Advances from Federal Home Loan Bank                  2,370,969   1,916,851
                                                    ---------------------------
                                                          5,598,739   5,008,937

               Net interest earnings                      4,051,798   3,249,973

Provision for loan losses (Note 4)                          138,417      63,217
                                                    ---------------------------

               Net interest earnings after
                  provision for loan losses               3,913,381   3,186,756

NON-INTEREST EARNINGS
    Service charge income                                   166,668      85,796
    Miscellaneous income                                     23,692      10,422
    Net gains from sales of loans                            52,193       7,685
                                                    ---------------------------
               Total non-interest earnings                  242,553     103,903

NON-INTEREST EXPENSE
    Compensation and benefits                             1,362,562     972,663
    Insurance                                                65,130      54,860
    Stationery, printing, and office supplies                69,532      52,281
    ATM expense                                              41,789      41,432
    Supervisory exam fees                                    36,474      31,698
    Postage                                                  32,836      20,302
    Other                                                   246,348     227,966
    Occupancy                                               282,943     166,125
    Data processing                                         201,694     137,317


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

                                       21

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF
EARNINGS AND COMPREHENSIVE EARNINGS (CONTINUED)
Years Ended June 30, 1999 and 1998



                                                           1999         1998

    Professional fees                                  $   66,332     103,894
    Advertising                                            71,461      49,845
    Stock services                                         24,141      15,785
                                                       ----------------------
               Total non-interest expense               2,501,242   1,874,168
                                                       ----------------------

Earnings before income taxes                            1,654,692   1,416,491

INCOME TAX EXPENSE (Note 11)
    Currently payable                                     663,037     586,988
    Deferred provision (benefit)                          (23,892)    (47,706)
                                                       ----------------------
                                                          639,145     539,282
                                                       ----------------------
               Net earnings                             1,015,547     877,209

OTHER COMPREHENSIVE EARNINGS
    Unrealized investment gain (loss), net of tax
    of ($161,237) in 1999 and $139,553 in 1998           (176,586)    134,494
                                                       ----------------------
               Net comprehensive earnings              $  838,961   1,011,703
                                                       ======================

Basic net earnings per share                                  .99         .78

Dilutive net earnings per share                               .97         .76

Weighted average number of common
    shares outstanding - basic                          1,020,932   1,117,647

Weighted average number of common
    shares outstanding - dilutive                       1,046,558   1,153,244



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

                                       22

<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
                                                               Common Stock
                                                           --------------------
                                                            Shares      Amount

Balances, June 30, 1997                                    800,708    $  76,684

Comprehensive Earnings
    Net earnings                                                 -            -
    Unrealized gain on  available for sale
        securities, net of taxes                                 -            -
           Total comprehensive earnings

Distribution of stock vested under the
    management stock bonus plan (Note 15)                        -          348
Acquisition of common stock by the Company
    under the stock repurchase plan (Note 15)              (35,500)      (3,550)
Issuance of stock dividend (Note 20)                       400,329       40,033
Released and committed to be released 11,130.0965
    of shares of common stock owned by the
    ESOP (Note 13)                                               -            -
Dividends declared and paid to stockholders                      -            -
                                                         ----------------------
Balances, June 30, 1998                                  1,165,537      113,515

Comprehensive earnings
    Net earnings                                                 -            -
    Unrealized gain on available for sale securities,
        net of taxes                                             -            -
           Total comprehensive earnings

Distribution of stock vested under the management
        stock bonus plan (Note 15)                               -          555
Adjustment of prior stock dividend on management
        stock bonus plan                                         -       (1,521)
Acquisition of common stock by the Company
    under the stock repurchase plan (Note 15)             (176,234)     (17,623)
Released and committed to be released 10,574.5950
    of shares of common stock owned by the
    ESOP (Note 13)                                               -            -
Stock issued upon exercise of stock options                  4,275          428
Dividends declared and paid to stockholders                      -            -
                                                         ----------------------
Balances, June 30, 1999                                    993,578    $  95,354
                                                         ======================

                                       23
<PAGE>
<TABLE>
<CAPTION>
                                                                         Accumulated
             Additional            Unearned                                 Other
               Paid-in               ESOP              Retained         Comprehensive
               Capital               Stock             Earnings           Earnings              Total
               -------               -----             --------           --------              -----
<S>         <C>                    <C>                <C>                   <C>              <C>
             $  6,260,680           (464,881)          7,513,536             557,117          13,943,136


                        -                  -             877,209                   -             877,209

                        -                  -                   -             134,494             134,494
                                                                                        ----------------
                                                                                               1,011,703


                   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


                        -                  -           1,015,547                   -           1,015,547

                        -                  -                   -            (176,586)           (176,586)
                                                                                        ----------------
                                                                                                 838,961


                   49,510                  -                   -                   -              50,065

                    1,521                  -                   -                   -                   -

               (2,492,289)                 -                   -                   -          (2,509,912)


                   56,949             44,512                   -                   -             101,461
                   39,115                  -                   -                   -              39,543
                        -                  -            (297,732)                  -            (297,732)
--------------------------------------------------------------------------------------------------------

             $  3,432,687           (371,183)          8,759,425             515,025          12,431,308
========================================================================================================
</TABLE>

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

                                       24
<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                               1999                1998

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                        <C>                <C>
    Net earnings  $                                          1,015,547           877,209
    Adjustments to reconcile net earnings to
        net cash provided by operations:
           Deferred loan origination fees                     (314,834)         (178,892)
           Gain on sale of loans                               (52,193)           (7,685)
           Provision for loan losses                           138,417            63,217
           Depreciation of premises and equipment              134,408            79,240
           Amortization of investment and mortgage
               backed securities premiums                      367,012           302,500
           Stock dividend on FHLB stock                       (128,098)         (106,527)
           Release of ESOP stock                               101,462            94,885
           Stock compensation                                   61,185            51,704
           Provision (benefit) for deferred income taxes        (5,190)          (47,706)
    Net changes in operating assets and liabilities:
        Accrued interest and dividends receivable             (188,490)         (123,702)
        Prepaid and other assets                                   599          (150,132)
        Accrued interest payable                                52,626            70,653
        Accounts payable and accrued and other liabilities     (50,928)          166,211
        Income taxes payable                                    25,312           (19,333)
        Dividends declared and payable                          (7,698)            7,031
                                                          ------------------------------

               Net cash provided by operating activities     1,149,137         1,078,673
                                                          ------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchases of premises and equipment                       (503,356)         (437,658)
    Loan origination and principal repayment
        on loans, net                                      (20,499,588)      (23,691,353)
    Principal payments on mortgage-backed securities        10,304,171        10,028,831
    Principal payments on available-for-sale-securities         70,000                 -
    Purchases of mortgage-backed securities                 (8,999,907)      (11,678,555)
    Purchases of available-for-sale securities              (7,826,305)       (3,181,046)
    Purchases of hold-to-maturity securities                (1,532,151)                -
    Maturities and proceeds from sale of available-
        for-sale securities                                  2,010,000         2,190,000
    Purchase of FHLB stock                                     (91,802)         (798,373)
                                                          ------------------------------

               Net cash applied to investing activities    (27,068,938)      (27,568,154)
                                                          ------------------------------
</TABLE>


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

                                       25
<PAGE>

GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
                                                                                 1999             1998

CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                                     <C>                    <C>
    Net increase in transaction accounts, passbook savings
        money market accounts, and certificates of deposit               $    11,850,180        11,506,655
    Net increase in mortgage escrow funds                                        103,698            49,849
    Proceeds from FHLB advances                                              299,595,527       469,270,950
    Repayments on FHLB advances                                             (282,302,332)     (451,953,319)
    Purchase of GFSB Bancorp stock under the
        stock repurchase plan in cash                                         (2,509,912)         (581,313)
    Dividends paid or to be paid in cash                                        (297,733)         (309,102)
    Proceeds from exercise of stock options                                       39,543                 -
    Price paid for vested management bonus stock
        plan stock                                                                50,065            49,613
                                                                         ---------------------------------
               Net cash provided by financing activities                      26,529,036        28,033,333
                                                                         ---------------------------------

Increase in cash and cash equivalents                                            609,235         1,543,852

Cash and cash equivalents at beginning of year                                 4,537,980         2,994,128
                                                                         ---------------------------------

Cash and cash equivalents at end of year                                 $     5,147,215         4,537,980
                                                                         =================================

Supplemental disclosures Cash paid during the year for:
        Interest on deposits and advances                                $     5,546,291         4,939,577
        Income taxes                                                             564,957           651,769

    Change in unrealized gain, net of deferred taxes
        on available-for-sale securities (other comprehensive
        earnings)                                                               (176,586)          134,494

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

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

                                       26

<PAGE>

GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

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. Effective June 29, 1995, Gallup Federal Savings and
Loan Association (the "Association") converted from a federal mutual savings and
loan association to a federal stock savings bank with the formation of a holding
company (GFSB Bancorp,  Inc.). 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
incorporated  under the laws of the State of Delaware.  The Company acquired all
of the common  stock of the Bank on June 29, 1995 and the Company  also made its
initial public offering of common stock.

Basis  of  Presentation.  The  accompanying  consolidated  financial  statements
include the accounts of the Company 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,  time deposits 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:
                                                      1999               1998

    Cash on hand  $                                   552,103           458,407
    Cash items                                          1,900             1,369
    Amounts due from banks                          2,094,031         1,344,454
    Interest bearing deposits                       1,713,736         2,490,120
    Time deposits                                     594,000                 -
    Federal Reserve Bank deposits                     191,445           243,630
                                              ---------------------------------
                                              $     5,147,215         4,537,980
                                              =================================

The amounts due from banks includes $44,694 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.

                                       27

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

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,  mutual funds, and Student Loan
Marketing  Association  ("SLMA")  asset-backed notes. The Company has recorded a
net  unrealized  gain  (loss),  net of deferred  income  taxes,  as  accumulated
comprehensive  income.  Realized  gains  and  losses  on the sale of  investment
securities are  determined  using the specific  identification  method when such
sales  occur.  The  amortization  of premiums and  accretion  of  discounts  are
recognized in interest  income using methods  approximating  the interest method
over the period of maturity.

Available-for-Sale  Mortgage-Backed Securities. All mortgaged-backed and related
securities  are stated at fair value.  The Company has recorded a net unrealized
gain (loss), net of deferred income taxes, as accumulated  comprehensive income.
Realized  gains  and  losses  on the  sale of  mortgage  backed  securities  are
determined using the specific  identification  method when such sales occur. All
sales are made without  recourse.  The amortization of premiums and accretion of
discounts are  recognized in interest  income using  methods  approximating  the
interest method over the remaining period of maturity.

Hold-to-Maturity  Securities.  Government,  Federal  agency,  and corporate debt
securities  that  management  has the  positive  intent  and  ability to hold to
maturity  are  reported at cost,  adjusted  for  amortization  of  premiums  and
accretion of discounts  that are  recognized  in interest  income using  methods
approximating   the   interest   method  over  the  period  to   maturity.   All
hold-to-maturity securities are recorded at amortized cost.

At June  30,  1999,  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.

                                       28
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

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.
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, 1999 and 1998, $3,000,000 and
$1,158,000,  respectively,  of loans have been sold.  No  servicing  rights were
retained on these  loans.  Gains on the sale of these loans were $52,193 in 1999
and $7,685 in 1998.

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 allowance for loan losses.

                                       29
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

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, allowance for loan losses, 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 Act 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, 1999, the Company had $46,613 of post 1987 bad debt
reserves. Of this amount, $9,323 was recaptured into taxable income for 1999.

Reclassifications.   Certain  reclassifications  have  been  made  to  the  1998
financial statements to conform to the 1999 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  number of shares  outstanding
until the  shares are  committed  for  allocation  to an  employee's  individual
account.

Advertising.  The Company expenses advertising costs as incurred as shown in the
consolidated statements of earnings. For the years ended June 30, 1999 and 1998,
advertising expense was $71,461 and $49,845, respectively.

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.

     Available-for-Sale  and  Hold-to-Maturity  Securities.  - Fair  values  for
     securities are based on quoted market prices.

                                       30

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
               (CONTINUED)

          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.

                                       31
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

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 its 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.

Segment Reporting. The Company is required to report information about operating
segments in and related  disclosures  about  products and  services,  geographic
areas and major customers. The Company only has one operating segment.


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
                                             Unamortized                        Unrealized        Unrealized
                            Principal         Premiums         Amortized          Holding           Holding           Fair
    June, 30 1999            Balance         (Discounts)         Cost              Gains            Losses            Value
<S>                  <C>                       <C>            <C>                  <C>             <C>             <C>
   FNMA ARM
     Certificates     $     22,091,800          711,709        22,803,509           20,470          (366,387)       22,457,592
   FHLMC ARM
     Certificates            1,542,849           42,700         1,585,549                -           (19,301)        1,566,248
   GNMA ARM
     Certificates            2,821,782           81,574         2,903,356                -           (40,590)        2,862,766
   Mortgage pass-
   through
   Certificates              4,949,119         (108,179)        4,840,940                -           (15,708)        4,825,232
                      --------------------------------------------------------------------------------------------------------

                      $     31,405,550          727,804        32,133,354           20,470          (441,986)       31,711,838
                      ========================================================================================================
</TABLE>

During the year  ended  June 30,  1999 and 1998,  the  Company  did not have any
proceeds from the sales of  mortgage-backed  securities.  At June 30, 1999,  the
Company had pledged $10,199,586 (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  $568,249  in  mortgage-backed
securities to the Federal Reserve Bank for its Treasury Tax and Loan Account.

                                       32
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

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:

                                                Gross        Gross
                                             Unrealized   Unrealized
                                 Amortized     Holding      Holding     Fair
                                   Cost         Gains       Losses      Value

    Mutual funds               $  2,409,362            -    (11,529)   2,397,833
    FHLB debentures               3,698,973            -    (56,348)   3,642,625
    FHLMC stock                       7,786    1,267,286          -    1,275,072
    Tax-exempt securities           986,582        3,064     (1,757)     987,889
    SLMA asset-backed note        1,991,357        1,143          -    1,992,500
                               -------------------------------------------------
                               $  9,094,060    1,271,493    (69,634)  10,295,919
                               =================================================

Hold-to-maturity securities:

    Tax-exempt securities      $    694,993            -    (15,305)     679,688
    Corporate debt securities       982,151        7,849          -      990,000
                               -------------------------------------------------

                                  1,677,144        7,849    (15,305)   1,669,688
                               =================================================

                                       33

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 3.        INVESTMENTS (CONTINUED)

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.

                                                          Amortized    Fair
                                                            Cost       Value
    Hold-to-maturity:
        Due after one year through five years       $       982,151     990,000
        Due after five years through ten years              144,993     143,014
        Thereafter                                          550,000     536,674
                                                    ---------------------------
                                                    $     1,677,144   1,669,688
                                                    ===========================
    Available-for-sale:
        Due within one year                         $       301,061     301,031
        Due after one year through five years             3,137,602   3,109,633
        Due after five years through ten years            1,246,892   1,219,850
        Mutual funds                                      2,409,362   2,397,833
        FHLMC stock                                           7,786   1,275,072
        SLMA asset-backed note                            1,991,357   1,992,500
        Mortgage-backed securities                       32,133,354  31,711,838
                                                    ---------------------------
                                                    $    41,227,414  42,007,757
                                                    ===========================

No investments were sold in 1999 or 1998.


                                       34
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 4.        LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable are summarized as follows:
<S>                                                        <C>                <C>
                                                                    1999         1998
    First mortgage loans (principally conventional)
        Principal balances
           Secured by one-to-four family residences         $    61,172,549    46,746,639
           Secured by other properties                           15,751,265    14,750,022
           Construction loans                                     3,560,949     2,973,700
        Loan participations purchased                            12,564,791     8,550,204
        Share loans                                               1,067,428       955,367
        Commercial loans                                          4,460,488     4,748,814
        Consumer loans:
           Unsecured                                                166,675       366,846
           Secured by vehicles                                    1,611,060     1,226,109
           Home equity lines                                      1,439,305     1,254,965
           Other consumer                                           241,763             -
                                                            -----------------------------
                                                                102,036,273    81,572,666

    Less
        Undisbursed portion of loans                             (1,443,236)   (1,755,115)
        Loan participations sold                                 (2,938,085)   (3,065,389)
        Net deferred loan origination fees                         (646,633)     (528,550)
        Allowance for loan losses                                  (443,479)     (386,970)
                                                            -----------------------------

                                                            $    96,564,840    75,836,642
                                                            =============================
</TABLE>

Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
                                                                      1999             1998

<S>                                                         <C>                       <C>
    Balance at beginning of year                             $       386,970           339,062
    Provision charged to income                                      138,417            63,217
    Charge-offs, recoveries and other                                (81,908)          (15,309)
                                                             ---------------------------------

        Balance at end of year                               $       443,479           386,970
                                                             =================================

The Company has commitments to fund new loans as follows:

                                                                     1999             1998

    Fixed rate    $                                                2,625,000         1,762,000
    Variable rate                                                  2,544,000           836,000
    Commitments for new originations                               1,443,000         1,741,000
                                                             ---------------------------------

           Total                                             $     6,612,000         4,339,000
                                                             =================================
</TABLE>

                                       35
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 4. LOANS RECEIVABLE (CONTINUED)

Fixed rate commitments at June 30, 1999 had interest rates that ranged from 6.63
percent to 10 percent.  Total loans with fixed rates were  $81,526,094 and total
loans with variable rates were $15,038,746.

Non-accrual and  renegotiated  loans for which interest has been reduced totaled
$218,822 and $707,632 at June 30, 1999 and 1998,  respectively.  Interest income
that was  foregone  amounted  to $19,614  and $33,755 at June 30, 1999 and 1998,
respectively.

The  weighted  average rate for the loan  portfolio  at June 30,  1999,  is 8.59
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  $218,822  at June 30,  1999.  Average  balances  for  loans
delinquent  more than 90 days totaled  approximately  $31,260 for the year ended
June 30, 1999. 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 are not required.


NOTE 5.        ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

Accrued interest and dividends receivable is summarized as follows:

                                                           1999       1998

    Loans receivable                                  $  583,865     444,334
    Available-for-sale investment securities              98,821      23,823
    Available-for-sale mortgage-backed securities        178,803     207,328
    Time deposits                                          2,486           -
                                                      ----------------------
                                                      $  863,975     675,485
                                                      ======================

                                       36

<PAGE>

GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 6. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

                                                          1999        1998

    Buildings                                     $       866,746      522,400
    Furniture, fixtures, and equipment                    747,891      480,019
    Construction-in-progress                                    -      412,837
    Land                                                  158,550      158,550
    Parking lot improvements                                5,265        5,265
    Leasehold improvements                                328,163            -
                                                  ----------------------------
                                                        2,106,615    1,579,071
    Less allowance for depreciation                      (701,999)    (543,403)
                                                  ----------------------------

                                                  $     1,404,616    1,035,668
                                                  ============================


NOTE 7.        DEPOSITS

Deposits are summarized as follows:

                                     Weighted
                                      Average
                                      Rate at
                                      June 30,            June 30, 1999
                                        1999           Amount       Percent

    Passbook savings accounts          2.00%     $     4,764,788       5.87%
    Money market accounts              2.95           12,197,725      15.02
    Transaction and NOW accounts       1.50           12,874,979      15.85
                                                 --------------------------
                                                 $    29,837,492      36.74%
                                                 ==========================

                                       37
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 7.        DEPOSITS (CONTINUED)

Deposits are summarized as follows:

                                    Weighted
                                     Average
                                     Rate at
                                     June 30,           June 30, 1999
                                       1999          Amount       Percent
    Certificates of deposit:
        2.50%-6.00%                   5.01%    $    48,074,004      59.18%
        6.01%-7.00%                   6.40           2,557,591       3.15
        7.01%-8.00%                   7.24             760,234        .93
                                               --------------------------

                                                    51,391,829      63.26
                                               --------------------------

                                               $    81,229,321     100.00%
                                               ==========================

The  aggregate  amount  of jumbo  certificates  with a minimum  denomination  of
$100,000 was $24,073,858 at June 30, 1999.

Certificates of deposit by remaining maturity are as follows:
                                         1999         1998

    Less than one 1 year                        $    33,785,319    29,971,554
    1 year to 2 years                                12,114,701    15,433,404
    2 years to 3 years                                2,111,722     1,707,965
    3 years to 4 years                                1,051,522       430,741
    4 years to 5 years                                1,239,062       507,584
    Thereafter                                        1,089,503       446,248
                                                -----------------------------
                                                $    51,391,829    48,497,496
                                                =============================

Interest expense on deposits is summarized as follows:

                                                    1999             1998

    Certificates of deposit                 $     2,689,004         2,598,370
    Money market accounts                           332,892           324,341
    Passbook savings                                107,072           107,399
    Transaction and NOW deposits                     98,802            61,976
                                            ---------------------------------
                                            $     3,227,770         3,092,086
                                            =================================

                                       38
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 8.        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, 1999, 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.


                                       39
<PAGE>

GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 8.        REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
               EARNINGS (CONTINUED)

The Bank at June 30,  1999,  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 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, 1999:

<TABLE>
<CAPTION>
                                                                                      June 30, 1999
                                                            ---------------------------------------------------------------
                                    Tangible Capital                  Core Capital                  Risk-Based Capital
                           ------------------------------   ------------------------------     ----------------------------
                                Amount            Percent       Amount             Percent       Amount             Percent

<S>                       <C>                    <C>       <C>                     <C>        <C>               <C>
   GAAP Capital            $    12,174,283            -     $             -            -%        $12,174,283           -%

   Unrealized (gains)
   losses on available-
   for-sale securities
     (net of taxes)               (515,025)           -            (515,025)           -            (515,025)           -

   Qualifying general
   loan loss allowance                   -            -                   -            -            (443,479)           -
                           ----------------------------------------------------------------------------------------------
   Regulatory capital
   computed                     11,659,258        7.74%          11,659,258        7.74%          11,215,779       13.86%

   Minimum capital
   requirement                   2,258,422        1.50%           4,516,844        3.00%           6,689,520        8.00%
                           ----------------------------------------------------------------------------------------------
   Regulatory capital
   excess                  $     9,400,836        6.24%     $     7,142,414        4.74%     $     4,526,259        5.86%
                           ==============================================================================================
</TABLE>

                                       40

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 9.        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:

                                               1999             1998

    Balance, beginning of year         $       796,524         1,190,435
    New loans                                  306,358           181,956
    Repayments                                (172,916)         (575,867)
                                        --------------------------------
    Balance, end of year               $       929,966           796,524
                                        ================================

The Company also has several deposits from related parties. Outstanding deposits
from related  parties at June 30, 1999 amounted to $2,528,284.  The Company also
expensed  $197,746  and  $172,154  for the years  ended June 30,  1999 and 1998,
respectively,  for directors fees and  compensation  under the management  stock
bonus plan.

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


NOTE 10.       CONCENTRATIONS OF CREDIT RISK

The Company is active in originating primarily first mortgage loans primarily in
McKinley  County,  New Mexico.  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. At June 30, 1999, the Company's uninsured
cash balances totaled $1,949,337.

                                       41

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 11.       INCOME TAXES

Income tax expense consists of:

                                                 1999        1998
Current
    Federal                             $       558,211     505,046
    State                                       104,826      81,942
                                        ---------------------------
                                                663,037     586,988

Deferred provision (benefit)
    Federal                                    (22,798)     (41,982)
    State                                       (1,094)      (5,724)
                                        ---------------------------
                                               (23,892)     (47,706)
                                        ---------------------------
                                        $       639,145     539,282
                                        ============================

Deferred  taxes  consist  of  temporary   differences   arising  from  book  tax
differences in depreciation expense and allowance for loan losses.

The Company has  recorded a valuation  allowance  against the net  deferred  tax
receivable  in 1999  relating to the  receivable  arising from the allowance for
loan loss.  The change in the  valuation  allowance  from 1998 is a decrease  of
$14,752.

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.

The reconciliation of income tax attributable to continuing  operations computed
at the U.S. federal statutory rate to income tax expense is:

                                                       1999         1998

    Tax at statutory rate of 34 percent          $   528,829      481,607
    State income taxes, net of federal
        tax benefit                                   99,311       64,877
    Other - net                                       11,005       (7,202)
                                                 ------------------------
                                                 $   639,145      539,282
                                                 ========================
    Effective tax rate                                    39%          38%

                                       42

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 12.       FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The  Company  is a party to seven  irrevocable  letters  of credit  which  total
$179,650.  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 13.       EMPLOYEE STOCK OWNERSHIP PLAN

The Company has 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  (Note 1),  which  was  funded by a
$560,000  loan from the  Company.  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, 1999, 21,520.3394 ESOP
shares  were  released,  and for the year  ended  June  30,  1999,  $101,461  in
contributions  were  made to the  ESOP by the  Company.  As of  June  30,  1998,
17,747.9844 ESOP shares were released and  contributions of $94,875 were made to
the Plan by the Company. The remaining  unallocated ESOP shares at June 30, 1999
was 59,229.6606.  The fair value of the remaining unallocated shares at June 30,
1999  is  $799,600.  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.

                                       43

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 14.       NEW ACCOUNTING STANDARDS

During  the  year  ended  June 30,  1999,  the  Company  applied  the  following
Statements of Financial Accounting Standards "SFAS's":

         SFAS No. 125,  Statement on  Accounting  for Transfers and Servicing of
         Financial  Assets and  Extinguishment  of  Liabilities.  This statement
         provides  reporting  standards for transfers and servicing of financial
         assets, and certain  non-security  financial assets, and extinguishment
         of  liabilities  based  on a  consistent  application  of  a  financial
         components  approach  focused on control.  SFAS No. 129,  Disclosure of
         Information  about  an  Entity's  Capital  Structure.   This  statement
         requires a  consolidation  of  requirements  contained  in APB opinions
         No.'s 10 and 15 and SFAS 47.

         SFAS No. 130, Reporting  Comprehensive Income.  Comprehensive income is
         defined as the change in equity during a period from  transactions  and
         other events and circumstances from non-owner sources.  The accumulated
         balance of other  comprehensive  income is to be  presented  separately
         from retained earnings and additional paid-in-capital. For the Company,
         this  accumulated  balance is entirely  composed of unrealized  gain on
         available-for-sale securities.

         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 and
         related  disclosures about products and services,  geographic areas and
         major customers. The Company only has one operating segment.

During  the year ended June 30,  1999,  the  following  Statement  of  Financial
Accounting  Standards "SFAS's" became effective but are not currently applicable
to the Company:

         SFAS  No.  132,   Employer's   Disclosures  about  Pensions  and  Other
         Postretirement  Benefits.  This  statement  revises  disclosures  about
         pension and other postretirement  benefit plans. It does not change the
         measurement or recognition  of those plans.  This statement  eliminates
         certain disclosures from SFAS No.'s 87, 88, and 106.

         SFAS  No.  133,  Accounting  for  Derivative  Instruments  and  Hedging
         Activities.   This  statement  establishes   accounting  and  reporting
         standards for  derivative  instruments,  including  certain  derivative
         instruments  embedded in other contracts  (collectively  referred to as
         derivatives) and for hedging activities.

         SFAS No. 134, Accounting for Mortgage-Backed  Securities Retained after
         the  Securitization  of  Mortgage  Loans  Held for  Sale by a  Mortgage
         Banking  Enterprise.  This statement amends SFAS No. 65 to require that
         after  the  securitization  of a  mortgage  loan an entity  engaged  in
         mortgage  banking  activities  classify the resulting  mortgage  backed
         security as a trading or  held-for-sale  based on the intent to sell or
         hold the investments.


                                       44
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 15.       STOCK PLANS

At June 30, 1999, 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.

                                                            1999          1998

    Net income                      As reported     $     1,015,547     877,209
      Pro forma                                             934,867     803,304

    Basic earnings per share        As reported     $           .99         .78
      Pro forma                                                 .92         .72

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 has granted 51,925 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  range from $9 1/4 per share to
$16 per share  depending on the grant date of the option.  The weighted  average
remaining life of common stock options is 6.6 years.

During the year, 10,000 incentive stock options were granted and 4,275 incentive
stock options were exercised.  Remaining  shares  available to be granted in the
future  amount to  47,695.  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 $0.075 per quarter;  expected  volatility of 50 percent;  risk-free
interest rate of 5.0 percent; and expected lives of 7 and 6 years.

                                       45
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 15.       STOCK PLANS (CONTINUED)

A summary of common stock options under the Stock Option Plan for the year ended
June 30, 1998 and June 30, 1999 follows:

                                                       Weighted
                                                        Average     Options
                                     Options            Price     Exercisable

    Balance, June 30, 1997            80,193         $   9.250
        Granted                       13,125            14.980
        Forfeited                     (8,700)            9.250
                                 -----------------------------
    Balance, June 30, 1998            84,618            10.138      36,497
                                                                   =======
        Granted                       10,000            13.625
        Exercised                     (4,275)            9.250
                                 -----------------------------
    Balance, June 30, 1999            90,343         $  11.234      50,145
                                 =========================================


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 for the shares upon exercise was $9 1/4 per
share. At June 30, 1999 and 1998, 21,102 and 27,852 shares, respectively, remain
to be awarded under the Plan in the future.

During the year, 6,000 shares were granted and 750 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, 1999 and 1998,  compensation cost in the amount of $61,185 and $51,704,
respectively, have been recorded under the provisions of the Plan.

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, 1999 and 1998, the Company
has repurchased  176,234 and 35,500 shares of its  outstanding  common stock for
$2,509,912 and $581,313, respectively.

                                       46
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 16.        SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selected  quarterly  financial data are presented below by quarter for the years
ended June 30, 1999 and 1998:

                                            1999 Quarter Ended
                               -------------------------------------------------
                               September 30 December 31  March 31    June 30

Net interest income after
 provision for loan losses      $ 874,233     936,689   1,012,967   1,089,492
Other income                       45,946      47,763      76,686      72,158
Other expenses                    599,341     631,286     647,435     623,180
Earnings before
    income taxes                  320,838     353,166     442,218     538,470
Net earnings                      204,271     217,443     276,058     317,775
Earnings per common
    share                            0.19        0.21        0.27        0.32


                                             1998 Quarter Ended
                                 -----------------------------------------------
                                 September 30 December 31 March 31  June 30

    Net interest income after
        provision for loan losse  $ 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                          0.16       0.21       0.22       0.19


                                       47
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 17.       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,  1999,  the  Bank  has
$55,540,826 in outstanding advances with the FHLB. The advances bear interest at
a fixed rate and mature as follows:

          Unpaid Principal Balance     Interest Rate          Maturity

                $      4,750,000             4.900%       July 01, 1999
                       4,700,000             4.880%       July 07, 1999
                       3,500,000             5.050%       July 14, 1999
                       1,650,000             5.000%       July 21, 1999
                       1,350,000             5.050%       July 21, 1999
                       1,350,000             4.969%       September 1, 1999
                         548,355             5.036%       September 10, 1999
                         587,172             5.036%       September 10, 1999
                       1,000,000             4.946%       September 27, 1999
                       8,500,000             5.390%       March 16, 2000
                          99,000             4.780%       July 10, 2000
                          99,000             5.813%       September 04, 2000
                       1,000,000             5.878%       June 18, 2001
                       4,250,000             4.770%       October 1, 2001
                          99,000             4.550%       October 2, 2001
                          99,000             4.650%       October 2, 2001
                       1,000,000             6.038%       June 18, 2002
                       5,000,000             5.663%       October 2, 2002
                         650,000             5.780%       December 16, 2002
                         500,000             6.198%       June 18, 2003
                       5,000,000             5.730%       July 1, 2003
                          99,000             4.910%       September 3, 2003
                          99,000             4.720%       October 2, 2003
                       1,000,000             6.285%       June 18, 2004
                         251,433             5.540%       February 1, 2005
                         642,364             5.518%       May 2, 2005
                         500,000             6.420%       June 19, 2006
                       6,000,000             4.960%       December 12, 2007
                         591,430             5.640%       February 3, 2014
                         626,072             5.790%       February 1, 2018
                ----------------
                $     55,540,826
                ================

                                       48

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 17.       FEDERAL HOME LOAN BANK ADVANCES (CONTINUED)

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  $2,185,100
and FNMA  mortgage-backed  securities in the amount of $8,715,407.  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.


NOTE 18.       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, 1999

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                 $              -    2,839,479             -       2,839,479
    Interest bearing deposits
        with banks                                         -    2,307,736             -       2,307,736
    Available-for-sale investment
        securities                                         -   10,295,919             -      10,295,919
    Hold-to-maturity investment
        Securities                                              1,677,144             -       1,677,144
    Mortgage-backed securities                             -   31,711,838             -      31,711,838
    Stock of Federal Home Loan
        Bank, at cost,                                     -    2,815,100             -       2,815,100
    Loans receivable, net                            852,389   96,564,840      (852,389)     96,564,840
    Accrued interest and dividends
        receivable                                         -      863,975             -         863,975
    Premises and equipment, net                            -    1,404,616             -       1,404,616
    Prepaid and other assets                           1,725      203,100             -         204,825
    Deferred tax asset                                     -       68,377             -          68,377
    Investment in subsidiary                       4,557,750      392,753    (4,950,503)              -
                                            -----------------------------------------------------------
               Total assets                 $      5,411,864  151,144,877    (5,802,892)    150,753,849
                                            ===========================================================
</TABLE>

                                       49
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 18.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Details of Consolidated Statement of Financial Condition (Continued)
June 30, 1999

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                          $        -       12,874,979                -           12,874,979
    Savings and now deposits                               -       16,992,107          (29,594)          16,962,513
    Time deposits                                          -       51,391,829                -           51,391,829
    Accrued interest payable                               -          276,328                -              276,328
    Advances from borrowers                                -          329,298                -              329,298
    Accounts payable and accrued
        liabilities                                  128,420          298,214                -              426,634
    Deferred income taxes                                  -          265,317                -              265,317
    Advances from parent company                           -          468,359         (468,359)                   -
    Dividends declared and payable                    74,748          354,436         (354,436)              74,748
    Advances from the Federal Home
        Loan Bank                                          -       55,540,826                -           55,540,826
    Income taxes payable                               1,168          178,901                -              180,069
                                            -----------------------------------------------------------------------
               Total liabilities                     204,336      138,970,594         (852,389)         138,322,541

COMMITMENTS AND
CONTINGENCIES                                              -                -                -                    -

STOCKHOLDERS' EQUITY
    Common stock                                      99,358           10,000          (14,004)              95,354
    Paid-in-capital                                3,821,437        4,547,750       (4,936,499)           3,432,688
    Unearned ESOP stock                             (371,183)               -                -             (371,183)
    Retained earnings, substantially
        restricted                                 1,657,916        7,101,508                -            8,759,424
    Unrealized gain on available
        for sale securities, net of taxes                  -          515,025                -              515,025
                                            -----------------------------------------------------------------------

               Total stockholders'
                  equity                           5,207,528       12,174,283       (4,950,503)          12,431,308
                                            -----------------------------------------------------------------------

           Total liabilities and
               stockholders' equity               $5,411,864      151,144,877       (5,802,892)         150,753,849
                                            =======================================================================
</TABLE>

                                       50
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999


NOTE 18.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Details of Consolidated Statement of Earnings
Year ended June 30, 1999
<TABLE>
<CAPTION>
                                                                    Gallup                                 GFSB
                                                    GFSB            Federal                              Bancorp,
                                                  Bancorp,          Savings                              Inc. and
                                                    Inc.             Bank          Eliminations         Subsidiary

INTEREST INCOME
<S>                                               <C>             <C>             <C>                   <C>
    Loans receivable
        Mortgage loans                            $        -        6,312,252                -            6,312,252
        Commercial loans                                   -          444,158                -              444,158
        Share and consumer loans                           -          393,918                -              393,918
        Service fee income                                 -          314,833                -              314,833
    Available-for-sale investment
        securities and mortgage-
        backed securities                                  -        1,978,827                -            1,978,827
    Other interest-earning assets                     73,100          206,549          (73,100)             206,549
                                            -----------------------------------------------------------------------
               Total interest earnings                73,100        9,650,537          (73,100)           9,650,537
                                            -----------------------------------------------------------------------

INTEREST EXPENSE
    Deposits                                               -        3,228,247            (477)            3,227,770
    Advances from Federal
        Home Loan Bank                                     -        2,370,969                -            2,370,969
    Advances to parent company                             -           36,466          (36,466)                   -
                                            -----------------------------------------------------------------------
                                                           -        5,635,682          (36,943)           5,598,739
                                            -----------------------------------------------------------------------

               Net interest earnings                  73,100        4,014,855          (36,157)           4,051,798

Provision for loan losses                                  -          138,417                -              138,417
                                            -----------------------------------------------------------------------

               Net interest earnings
                  after provision for
                  loan losses                         73,100        3,876,438          (36,157)           3,913,381
                                            -----------------------------------------------------------------------

NON-INTEREST EARNINGS
    Miscellaneous income                                  68           23,624                -               23,692
    Dividend income from subsidiary                1,166,579                -       (1,166,579)                   -
    Net gains from sales of loans                          -           52,193                -               52,193
Service charge income                                      -          166,668                -              166,668
                                            -----------------------------------------------------------------------
               Total non-interest
                  earnings                         1,166,647          242,485       (1,166,579)             242,553
                                            -----------------------------------------------------------------------
</TABLE>

                                       51
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 18.       DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Details of Consolidated Statement of Earnings (Continued)
Year ended June 30, 1999
<TABLE>
<CAPTION>
                                                                    Gallup                                 GFSB
                                                    GFSB            Federal                              Bancorp,
                                                  Bancorp,          Savings                              Inc. and
                                                    Inc.             Bank          Eliminations         Subsidiary

NON-INTEREST EXPENSE
<S>                                        <C>                     <C>             <C>                   <C>
    Compensation and benefits               $        136,333        1,262,386          (36,157)           1,362,562
    Stationery, printing, and office
        supplies                                           -           69,532                -               69,532
    ATM expense                                            -           41,789                -               41,789
    Supervisory exam fees                                  -           36,474                -               36,474
    Postage                                                -           32,836                -               32,836
    Insurance                                              -           65,130                -               65,130
    Other                                             14,390          231,958                -              246,348
    Occupancy                                              -          282,943                -              282,943
    Data processing                                        -          201,694                -              201,694
    Professional fees                                 22,718           43,614                -               66,332
    Advertising                                            -           71,461                -               71,461
    Stock services                                    24,141                -                -               24,141
                                            -----------------------------------------------------------------------
               Total non-interest
                  expense                            197,582        2,339,817          (36,157)           2,501,242
                                            -----------------------------------------------------------------------

Earnings before income taxes                       1,042,165        1,779,106       (1,166,579)           1,654,692

Income tax expense
    Currently payable                                      -          644,335                -              644,335
    Deferred (benefit)                                     -           (5,190)               -               (5,190)
                                            -----------------------------------------------------------------------

                                                           -          639,145                -              639,145
                                            -----------------------------------------------------------------------

               Net earnings                 $      1,042,165        1,139,961       (1,166,579)           1,015,547
                                            =======================================================================
</TABLE>

                                       52

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 19.       FAIR VALUE OF FINANCIAL INSTRUMENTS

The  estimated  fair  values  of the  Company's  financial  instruments  were as
follows:
<TABLE>
<CAPTION>
                                                                 June 30, 1999
                                                         ---------------------------
                                                             Carrying        Fair
                                                               Value         Value
    Financial Assets:
<S>                                                     <C>             <C>
        Cash and due from banks                           $ 2,839,479     2,839,479
        Interest-bearing deposits with banks                2,307,736     2,307,736
        Available-for-sale-investment securities           10,295,919    10,295,919
        Hold-to-maturity investment securities              1,677,144     1,669,688
        Available-for-sale mortgage-backed securities      31,711,838    31,711,838
        Loans receivable, net                              96,564,840    67,292,587
        Accrued interest receivable                           863,975       863,975

    Financial Liabilities:
        Transaction deposits                               12,874,979    12,874,979
        Savings and now deposits                           16,962,513    16,962,513
        Time deposits                                      51,391,829    49,937,869
        Accrued interest payable                              276,328       276,328
        Advances from the FHLB                             55,540,826    55,540,826

    Off-Balance-Sheet Liabilities:
        Commitments to extend credit                        6,612,000     6,612,000

</TABLE>

NOTE 20.       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.

                                       53

<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 21.       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  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:
<TABLE>
<CAPTION>
                                                                For the Year Ended June 30, 1999
                                                                   Income           Shares           Per-share
                                                                (Numerator)     (Denominator)          Amount
<S>                                                          <C>                    <C>         <C>
    Income available to common stockholders -
        basic earnings per share                              $     1,015,547        1,020,932   $             0.99
                                                                                                 ==================

    Effect of dilutive securities:
        Options                                                             -           25,626
                                                              --------------------------------

    Income available to common stockholders -
        diluted earnings per share                            $     1,015,547        1,046,558   $             0.97
                                                              =====================================================
</TABLE>

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

    Income available to common stockholders -
<S>                                                           <C>    <C>            <C>         <C>
        basic earnings per share                              $       877,209        1,117,647   $             0.78
                                                                                                 ==================

    Effect of dilutive securities:
        Options                                                             -           35,597
                                                               -------------------------------

    Income available to common stockholders -
        diluted earnings per share                            $       877,209        1,153,244   $             0.76
                                                              =====================================================
</TABLE>

                                       54
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999

NOTE 22.       LEASES

The Bank is obligated under a lease agreement entered into on December 30, 1997,
with a related  party (see Note 9) for the  building  across the street from its
offices.  For the years ended June 30, 1999 and 1998, rental expense was $30,000
and $15,000, respectively.

The following is a schedule of  non-cancelable  future  minimum  lease  payments
required under the operating lease:

        Years Ending June 30                 Amount

              2000                  $        30,000
              2001                           30,000
              2002                           30,000
              2003                           30,000
              2004                           30,000
           Thereafter                       105,000

The lease expires December 31, 2007. The Bank 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.

                                       55

<PAGE>
GFSB BANCORP, INC.
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.

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. and Gallup Federal Savings Bank

Jerry R.Spurlin, President of the Company and Chief Financial Officer of
the Bank
Richard P. Gallegos, President of the Bank
William W. Head, Jr., Chief Lending Officer
Marshall W. Coker, Chief Administrative Officer
Jennifer Hembd, Vice-President/Real Estate Loan Officer


Special Counsel:                                      Independent Auditors:
Malizia Spidi & Fisch, PC                             Neff & Ricci 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


The  Company's  Annual  Report for the year  ended June 30,  1999 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 October 27, 1999.