EXHIBIT 13
<PAGE>

                               GFSB BANCORP, INC.

                              ANNUAL REPORT - 1997






<PAGE>









                                 C O N T E N T S


                                                                PAGE

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

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

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

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS..........................6-17

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

CONSOLIDATED FINANCIAL STATEMENTS

  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION..................19

  CONSOLIDATED STATEMENTS OF EARNINGS.........................20-21

  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
    EQUITY.......................................................22

  CONSOLIDATED STATEMENTS OF CASH FLOWS.......................23-24

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................25-52

OFFICE LOCATION AND OTHER CORPORATE INFORMATION..................53





<PAGE>



To Our Stockholders:

We are pleased to present to you our third  annual  stockholders'  report.  This
report covers the second 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").

Unfortunately,  net  earnings  for the  Company for the year ended June 30, 1997
were  $635,000,  a  decrease  of  $153,000  or 19.4% over net  earnings  for the
previous  year. On a per share basis the Company earned $0.77 per share compared
with $0.88 per share last year.

On the positive  side,  the Company's  total assets  increased to $93,793,000 at
June 30, 1997,  representing  growth of  $20,542,000 or 28% from total assets of
$73,250,000 at June 30, 1996. Deposits also increased  $11,882,000 or 25.8% from
$45,990,000 at June 30, 1996 to $57,872,000 at June 30, 1997.

A significant negative impact on earnings resulted from the adoption by Congress
of a plan to mitigate the effect of the BIF/SAIF insurance premium disparity. As
a result,  $250,000 was charged to earnings in the quarter  ended  September 30,
1996. The Bank will recover these earnings over several years due to a reduction
of approximately 70% in the assessment rate for deposit insurance  following the
one-time assessment.

Earnings  were also  negatively  impacted  by a  substantial  increase  in other
non-interest  expense,  particularly  compensation  and benefits  and  occupancy
expense.  These  increases  were the result of the Bank's  growth and  equipment
purchases to support  expanded retail banking  delivery  services.  We are doing
this of course to provide  the best  possible  service on a local  basis that we
feel  our  community  needs,  and  ultimately  to also  enhance  our  return  on
stockholders' equity.

We have some exciting plans for 1997-1998,  and we are optimistic that the steps
we have taken during this fiscal year to prepare for growth will have a positive
effect on our operating results for the coming year.

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

September 15, 1997



                                      -1-



<PAGE>



GFSB Bancorp, Inc.

Corporate Profile

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

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

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

Stock Market Information

Since its issuance on June 29, 1995, the Company's  $0.10 par value common stock
has been traded in the over-the-counter market. The following table reflects the
stock prices as published by the Nasdaq Small-Cap Market for the most recent two
fiscal  years.  The  quotations  reflect  inter-dealer  prices,  without  retail
mark-up, mark-down, or commission, and may not represent actual transactions.


                                                       Bid Prices
------------------------------------        --------------------------------
            Quarter Ended                          High             Low
------------------------------------        --------------------------------

September 30, 1995                                 14.00               12.75
December 31,1995                                   14.25               13.25
March 31, 1996                                     14.50               13.50
June 30, 1996                                      15.00               13.50
September 30, 1996                                 14.25               13.25
December 31, 1996                                  16.00               13.75
March 31, 1997                                     17.50               15.50

June 30, 1997                                      19.00               16.75

The  number of  stockholders  of record of common  stock as of the  record  date
September  15,  1997  ("Record  Date"),  was  approximately  221 . 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 800,708
shares outstanding.



                                      -2-


<PAGE>



GFSB Bancorp, Inc.

Corporate Profile - Continued


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 years
ended June 30, 1997 and June 30, 1996 were $321,303 and $626,233, respectively.











                                      -3-

<PAGE>

GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
================================================================================

Financial Condition (Dollars in Thousands)
<TABLE>
<CAPTION>
================================================================================
At June 30,                                           1997       1996      1995
================================================================================
<S>                                                  <C>       <C>       <C>    
Assets                                               $93,793   $73,250   $52,905
Loans receivable, net                                 52,022    38,728    32,339
Mortgage-backed securities                            32,070    25,246    10,739
Stock of FHLB                                          1,060       551       442
Investment securities                                  4,342     4,573     3,677
Cash and cash equivalents                              2,994     3,167     4,915
Deposits                                              57,872    45,990    36,603
Advances from the FHLB                                20,930    10,854      --
Retained earnings (substantially restricted)           7,514     7,199     7,038
Unrealized gain on available  for sale                   557       128       162
   securities, net

</TABLE>

Summary of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
================================================================================
Year ended June 30,
================================================================================
<S>                                                     <C>      <C>      <C>        
Interest income                                         $6,079   $4,876   $3,559
Interest expense                                         3,389    2,403    1,664
                                                        ------   ------   ------
         Net interest income                             2,690    2,473    1,895
Provision for loan losses                                   21       28      101
                                                        ------   ------   ------
        Net interest income after provision for          2,669    2,445    1,794
        loan losses
Non-interest income:
Income from real estate operations                          --        3        8
Other                                                       49       40        7
                                                        ------   ------   ------
       Total non-interest income                            49       43       15
Non-interest expense:
  Compensation and benefits                                835      614      455
  Professional fees                                         92      123      126
  Occupancy                                                146      108       71
  Advertising                                               46       34       11
  Data processing                                           98       93       75
  Insurance and SAIF premiums                              330      105       97
  Other and stock subscription services                    252      191      129
                                                        ------   ------   ------
       Total non-interest expense                        1,799    1,268      964
                                                        ------   ------   ------
Earnings before income taxes                               919    1,220      845
Income tax expense                                         283      432      339
                                                        ------   ------   ------
       Net earnings                                     $  636   $  788   $  506
                                                       ======   ======   ======
</TABLE>

                                      -4-
<PAGE>

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

Selected Operating Ratios
<TABLE>
<CAPTION>
====================================================================================
Year ended June 30,                                      1997       1996      1995
====================================================================================
<S>                                                     <C>       <C>       <C>  
Performance ratios:
  Return on average assets (net income
      divided by average total assets)                    0.76%     1.23%     1.12%
  Return on average equity (net income
     divided by average equity)                           4.34      4.88      6.75
  Average interest earning assets to average
      interest-bearing liabilities                        1.19X     1.32X     1.19X
  Net interest income after provision for
      loan losses, to total other expenses              148.36%   192.85%   186.16%
  Net interest rate spread                                2.52      2.75      3.58
  Net yield on average interest-earnings                  3.34      3.97      4.30
      assets
Equity ratios:
  Average equity to average assets ratio
      (average equity divided by average total           17.54     25.11     16.63
      assets)
  Equity to assets at period end                         14.87     20.97     29.78
Assets quality ratios:                                                   .
  Non-performing assets to total assets                    .15       .21      0.14
  Non-performing loans to total assets                     .15       .21      0.14
  Non-performing loans to net loans                        .26       .39      0.23
  Allowance for loan losses, REO and other
      repossessed assets to non-performing
      assets                                            247.63    204.14    421.33
  Allowance for loan losses to total loans,
      net                                                  .65       .80      0.98

</TABLE>



                                      -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 noninterest  income derived primarily
from fees.  Consequently,  the Bank's  earnings are  dependent on its ability to
originate  loans,  and the  relative  amounts  of  interest-earning  assets  and
interest-bearing  liabilities.  The Bank's net earnings is also  affected by its
provision  for loan  losses  as well as the  amount  of other  expense,  such as
compensation  and benefit expense,  occupancy and equipment  expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive  conditions,  particularly changes in market
interest rates, government policies and actions of regulatory  authorities.  The
disparity  in premiums  paid by Bank  Insurance  Fund  ("BIF") and SAIF  insured
institutions have also adversely impacted the Bank.

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

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


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  

                                      -6-
<PAGE>

origination of traditional  one-to-four-family  mortgage loans primarily secured
by one-to-four-family  residences in the Bank's primary market area. These loans
typically  have fixed  rates.  The Bank also  invests a portion of its assets in
construction,  consumer,  commercial business,  multi-family and commercial real
estate loans as a method of  enhancing  earnings  and  profitability  while also
reducing  interest  rate risk.  Since  1994,  the Bank has  actively  originated
commercial  business  loans and increased  its  origination  of commercial  real
estate loans and  construction  loans.  These loans  typically  have  adjustable
interest rates and are for shorter terms than residential  first mortgage loans.
The Bank has  limited  experience  with these  types of loans,  and this type of
lending generally has more risk than residential lending. The Bank's purchase of
participations in adjustable rate, one-to-four-family mortgage loans is designed
to increase  earnings and reduce interest rate risk.  These loans have more risk
than loans  originated by the Bank,  therefore,  they have adjustable rates that
are  higher  than  standard.  Management  is  currently  considering  purchasing
automobile loans from dealers.  These loans would have risk and terms comparable
to automobile loans originated in the Bank.  Investment securities in the Bank's
portfolio  typically  have  shorter  terms to maturity  than  residential  first
mortgage loans. As part of its  asset/liability  management  strategy,  the Bank
sells its fixed rate mortgage  loans with terms over 15 years into the secondary
market.  The Bank has sought to remain  competitive  in its market by offering a
variety of products. Automatic Teller Machine access and commercial and consumer
credit life insurance are additional  products now offered by the Bank. The Bank
attempts to manage the interest  rates it pays on deposits  while  maintaining a
stable deposit base and providing quality services to its customers.

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


Asset and Liability Management

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

The Bank, like many other thrift institutions,  is exposed to interest rate risk
as a result of the  difference in the maturity of  interest-bearing  liabilities
and  interest-earning  assets and the volatility of interest rates. Most deposit
accounts  react  more  quickly to market  interest  rate  movements  than do the
existing  mortgage  loans  because of their  shorter  terms to  maturity;  sharp
decreases  in  interest  rates  would  typically  positively  affect  the Bank's
earnings.  Conversely,  this same mismatch will generally  adversely  affect the
Bank's earnings during periods of increasing interest rates.  Generally,  market
interest  rates  declined  between  1991 and 1993.  By the latter  part of 1993,
interest  rates on U.S.  treasury  bonds and home mortgage loans had declined to
lower  levels  than had been  

                                      -7-
<PAGE>

experienced in the prior ten years. Following a substantial increase in 1994 and
a slight drop in 1995, general market interest rates, including rates charged on
mortgage loans and rates paid on deposits, have remained relatively stable.

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

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 March 31, 1997 (the most recent date
available) as calculated by the OTS, based on information provided to the OTS by
the Bank. Actual experience may differ from the components of this table.

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

<S>                   <C>            <C>          <C>         <C>          <C>       
+400     bp            7,290         -5,935       -45%         9.03%       -595     bp
+300     bp            8,992         -4,232       -32%        10.86%       -412     bp
+200     bp           10,662         -2,603       -20%        12.52%       -246     bp
+100     bp           12,082         -1,143       -9 %        13.93%       -105     bp
   0     bp           13,225             --        --         14.98%
-100     bp           13,992            768        +6%        15.63%        +65     bp
-200     bp           14,215            990        +7%        15.76%        +78     bp
-300     bp           14,244          1,019        +8%        15.70%        +72     bp
-400     bp           14,425          1,201        +9%        15.78%        +80     bp

</TABLE>


* 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, 1997                        Year ended June 30, 1996
                               =============================================    ==============================================
                                 Average                          Average         Average                          Average
                                 Balance        Interest         Yield/Cost       Balance         Interest        Yield/Cost
                               ===========     ==========     ==============    =============    ===========    ==============
                                           (Dollars in Thousands)                          (Dollars in Thousands)
<S>                            <C>             <C>                 <C>            <C>             <C>                   <C>  
Interest-earning assets:
Loans receivable (1)           $ 44,246        $  3,893            8.79%          $ 34,934        $  3,160              9.05%
Investment securities and
 mortgage-backed securities      33,918           2,054            6.06%            25,037           1,569              6.27%
Other interest-earning
  assets (2)                      2,647             132            5.00%             2,255             147              6.52%
                              ---------      ----------      -----------     -------------     -----------     --------------

Total interest-earning assets    80,811           6,079            7.52%            62,226           4,876              7.84%
                                             ----------      -----------                       -----------     --------------
Non-interest earning assets       2,560                                              2,060               -                  -
                              ---------                                      -------------

Total assets                   $ 83,371                                           $ 64,286               -                  -
                              =========                                      =============

Interest-bearing liabilities:
  Transaction accounts        $   3,609      $       34             .94%         $   1,501      $       10               .67%
  Passbook savings                2,896              87            3.00%             2,544              77              3.03%
  Money market accounts           8,295             335            4.04%             7,153             278              3.89%
  Certificates of deposit        37,534           2,140            5.70%            29,711           1,708              5.75%
  Other liabilities              15,375             793            5.16%             6,321             330              5.22%
                              ---------      ----------      -----------     -------------     -----------     --------------

Total interest-bearing
   liabilities                   67,709           3,389            5.00%            47,230           2,403              5.09%
                                             ----------      -----------                       -----------     --------------
Non-interest bearing
  liabilities                     1,056                                                910
                              ---------                                      -------------

Total liabilities                68,765                                             48,140

Stockholders' equity             14,606                                             16,146
                              ---------                                      -------------

Total liabilities and
  stockholders' equity         $ 83,371                                           $ 64,286
                              =========                                      =============

Net interest income                            $  2,690                                           $  2,473
                                             ==========                                        ===========
Interest rate spread (3)                                           2.52%                                                2.75%
                                                                                                               ==============
Net yield on interest-
  earning  assets (4)                                              3.34%                                                3.97%
                                                             ===========
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities                                     1.19X                                                1.32X
                                                             ===========                                       ==============
</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,
                                         -----------------------------------------       -------------------------------------------
                                                         1997 vs. 1996                               1996 vs. 1995
                                         -----------------------------------------       -------------------------------------------
                                                      Increase (Decrease)                         Increase (Decrease)
                                                             Due to                                     Due to
                                         -----------------------------------------       -------------------------------------------
                                                                   Rate/                                          Rate/
                                           Volume       Rate      Volume       Net       Volume        Rate       Volume       Net
                                           ------       ----      ------       ---       ------        ----       ------       ---
                                                      (Dollars in Thousands)                         (Dollars in Thousands)
<S>                                       <C>          <C>       <C>          <C>        <C>          <C>         <C>        <C>   
Interest income:
  Loans receivable                        $     843    $   (91)  $     (24)   $    728   $     395    $   (64)    $     9    $  340
  Mortgage-backed securities                    580        (71)        (30)        479         700          79        123       902
  Investment securities                           3          8           0          11          38           5          1        44
  Other interest-earning  assets                 26         (3)         (1)         22          37          21         10        68
                                          ---------    -------   ---------    --------   ---------    -------     -------    ------
     Total interest-earning assets            1,452       (157)        (55)      1,240       1,170          41        143     1,354

Interest expense:
  Savings accounts                               53        (12)         (7)         34        (33)         (2)        (1)      (36)
  Money markets                                  44         11           2          57        (45)         33         (5)      (17)
  Certificates of deposit                       450        (15)         (4)        431        238         185         35       458
  Other liabilities                             473         (4)         (5)        464        373          (1)       (49)      323
                                          ---------    -------   ---------    --------   ---------    -------     -------    ------
     Total interest-bearing
       liabilities                             1020        (20)        (14)        986         533        215        (20)      728
                                          ---------    -------   ---------    --------   ---------    -------     -------    ------

Net change in interest income             $     432     $ (137)  $     (41)    $   254  $      637     $ (174)    $  163     $ 626
                                          =========     ======   =========     =======  ==========     ======     ======     =====

</TABLE>

Financial Condition

General.  The Company's  total assets  increased $20.5 million or 28% from $73.3
million at June 30, 1996 to $93.8  million at June 30, 1997.  This  increase was
primarily the result of a $6.8 million increase in  mortgage-backed  securities,
and a $13.3 million  increase in the Bank's net loan portfolio.  The majority of
the  increases  are  primarily  attributable  to the  efforts of  management  to
effectively  utilize  the  increased  capital  infusion  made as a result of the
conversion  from a mutual to stock  form of  ownership,  the  increased  lending
strategies  of  management,  and some  leveraged  transactions  whereby the Bank
borrowed funds from the Federal Home Loan Bank of Dallas to purchase  adjustable
rate  mortgage-backed  securities.  During the same period,  deposits  increased
$11.9  million from $45.9  million at June 30, 1996 to $57.8 million at June 30,
1997.  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 $9.9 million from $10.8 million at June
30, 1996 to $20.9 million at June 30, 1997. These additional  borrowings  funded
purchases of loans,  securities and mortgage loan  participations.  The Bank had
$557,000 and $128 000 in  unrealized  gains (net of deferred  taxes) at June 30,
1997 and 1996, 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.


                                      -10-

<PAGE>

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

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

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

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

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

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

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


                                      -11-

<PAGE>


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

Comparison of Operating Results for Years Ended June 30, 1996 and 1995

General.  Net earnings  increased  $282,000 or 55.7% for the year ended June 30,
1996 from the year ended June 30, 1995.  This  increase was primarily the result
of an  increase  in  interest  income  of $1.3  million  and a  decrease  in the
provision for loan losses of $73,000  offset by an increase in interest  expense
of $739,000 and an increase in non-interest expense of $304,000.

Total Interest  Earnings.  Total interest income increased $1.3 million or 37.0%
from $3.6  million for the year ended June 30, 1995 to $4.9 million for the year
ended June 30, 1996.  The increase was primarily due to a $6.4 million  increase
in the average  balance of the loan  portfolio and a $14.5  million  increase in
mortgage-backed securities activities.

Interest Expense.  Total interest expense increased  $739,000 or 44.4% from $1.7
million for the year ended June 30, 1995 to $2.4 million for the year ended June
30, 1996.  This increase was  primarily due to $324,000 of interest  incurred on
Federal Home Loan Bank advances of $10.9  million and a general  increase in the
deposit base.

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
$309,000 and $316,000 at June 30, 1996 and 1995, respectively. The provision for
loan losses was $28,000 and $101,000 for the years ended June 30, 1996 and 1995,
respectively.  The $73,000  decrease  was due  primarily  to the  addition of an
additional reserve of $75,000 in the prior year to account for the higher volume
of commercial  real estate and commercial  business  loans, as these loans carry
higher credit risk than traditional  mortgage lending,  and the Bank has limited
prior  experience  with this type of  lending.  Based on a  historical  trend of
limited  losses on  residential  loans,  the  amount of the loan loss  provision
allocated to residential  loans 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  $28,000 or 196% from
$14,500  for the year ended June 30, 1995 to $43,000 for the year ended June 30,
1996. This was primarily due to an increase in service charge income of $20,000,
recovery of some prior year legal fees for $10,000,  and an increase in the gain
on sold  loans of  $2,500,  offset  by a  decrease  in income  from real  estate
operations  consisting of rental  income from the office space  available on the
second  floor  of the  Bank's  building.  During  fiscal  year  1995,  the  Bank
terminated  a  month-to-month  lease of  several  of its  available  offices  in
anticipation of growth within the Bank.


                                      -12-


<PAGE>

Non-Interest Expense.  Total non-interest expense increased $304,000 or 32% from
$964,000  for the year ended June 30,  1995 to $1.3  million  for the year ended
June 30, 1996.  This increase was  primarily due to an increase in  compensation
expense of $159,000 from the hiring of additional staff to handle growth and the
offering of new deposit  products and  including  adding a chief  administrative
officer. Other factors were increases in occupancy costs of $37,000, advertising
costs of $23,000, data processing costs of $18,000, and other operating costs of
$62,000,  due  to an  overall  increase  in  printing  and  office  supplies  to
accommodate  the  name  change  for the  Bank  as a  result  of the  conversion,
introduction of checking accounts, and general regulatory and stock matters.

Income Tax Expense.  Income tax expense  increased  $93,000 or 28% from $339,000
for the year ended June 30, 1995 to $432,000  for the year ended June 30,  1996.
This increase was attributable to the increase in pre-tax earnings of $375,000.

Liquidity and Capital Resources

The  Company is  required  under  applicable  federal  regulations  to  maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency,  and other investments  having maturities of five years or less.
Current OTS  regulations  require  that a savings  institution  maintain  liquid
assets of not less than 5% of its  average  daily  balance  of net  withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid  assets must  consist of not less than 1%. At June 30,  1997,  the Bank's
liquidity,  as measured for regulatory  purposes,  was 10.15%.  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, 1997,  cash and cash  equivalents  totaled
$2.9 million.  The Bank has another source of liquidity if a need for additional
funds should arise,  that being FHLB of Dallas  advances.  The Bank also has the
ability to borrow  against  mortgage-backed  and other  securities.  At June 30,
1997,  the Bank had  outstanding  borrowings  from the FHLB of  Dallas  of $20.9
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,  1997,  the Bank
originated $23 million in total loans (including loan participations purchased),
of which $14 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.


                                      -13-


<PAGE>

The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities,  investing activities and financing activities.  Cash
flows  from  operating  activities,   consisting  principally  of  interest  and
dividends  received  less  interest  paid on  deposits,  were  $517,000 and $1.3
million for the years ended June 30, 1997 and 1996, respectively.  Net cash used
for  investing   activities   consisting   primarily  of  disbursement  of  loan
originations and investment and mortgage-backed  security  purchases,  offset by
principal  collections  on loans and proceeds from the  maturities of investment
securities,  were $20  million and $22 million for the years ended June 30, 1997
and 1996,  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 $19 million for both years ended June 30, 1997
and 1996, respectively.

Cash flows from  operating  activities  decreased  $818,000 or 61% from the year
ended June 30, 1996 to the year ended June 30, 1997. This decrease was primarily
due  to a  decrease  in  net  earnings  of  $153,000  and  the  decrease  in the
declaration of dividends to stockholders.  For the same periods, cash flows used
by  investing  activities  decreased $2 million  primarily  due to a decrease in
purchases of  investments  and  mortgage-backed  securities,  and an increase in
principal repayments on mortgage-backed securities of $2.8 million, offset by an
increase in net loan originations of $6.8 million.  Purchases of investments and
mortgage-backed  securities decreased $8 million over the prior year. Cash flows
provided from financing  activities have increased  $325,000 from the year ended
June 30,  1996 to the year  ended  June 30,  1997  primarily  due to an  overall
increase in deposits of $2.5 million,  and a net increase in FHLB  borrowings of
$10  million,  offset  by 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, 1997, the Bank had commitments to fund loans
of $10.5  million.  Certificates  of deposit  scheduled to mature in one year or
less totaled $28 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, 1997,  the Bank exceeded each of the three OTS capital  requirements
on a fully-phased in basis.

Stock Repurchase Program

During the fiscal  year ended June 30,  1997,  the Company  repurchased  148,042
shares of its $0.10 common stock under a stock  repurchase  program  approved by
the OTS.  All of the shares  purchased  under the program  have been  retired as
authorized  but unissued.  The Company  believes  that even with the  repurchase
program,  the Company has  sufficient  capital and that the Bank will be able to
continue to meet its regulatory capital requirements.

Impact of Inflation and Changing Prices

The  consolidated  financial  statements  of  the  Company  and  notes  thereto,
presented  elsewhere  herein,  have been prepared in accordance  with  Generally
Accepted  Accounting  Principles  ("GAAP"),  which  require the  measurement  of
financial  position  and  operating  results  primarily  in terms of  historical
dollars without considering the change in the relative purchasing power of money
over time and due to  inflation.  The impact of  inflation  is  reflected in the
increased cost of the Company's  operations.  Unlike most industrial  companies,
nearly all the assets and liabilities of


                                      -14-



<PAGE>

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,  1997,  the Bank had  $55,936 of post 1987  bad-debt  reserves of which
1/6th or $9,323 was  recaptured  into taxable income for the year ended June 30,
1997.  Future recapture of the Bank's bad-debt reserves will not have an adverse
effect on future net earnings.

New Accounting Standards

In  March  1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed of."
This  Statement was effective for the Company for the fiscal year ended June 30,
1997.  This  Statement  establishes  standards  for the  impairment  of an asset
whenever events or changes in circumstances  indicate that the carrying value of
an asset may not be  recoverable.  The Statement  also requires that  long-lived
assets to be disposed  of be  reported  at the lower of  carrying  value or fair
value less cost to sell.  This  Statement did not have a material  impact on the
Company's June 30, 1997 financial condition.

In May 1995,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standards  No. 122,  "Accounting  for Mortgage  Servicing
Rights".  This Statement  amends FASB No. 65,  "Accounting for Certain  Mortgage
Banking  Activities".  This Statement requires that mortgage banking enterprises
recognize  as separate  assets the right to service  mortgage  loans for others,
however those servicing rights are acquired.  Mortgage banking  enterprises that
acquire mortgage  servicing rights through either the purchase or origination of
mortgage  loans and sells or  securitizes  those  loans  with  servicing  rights
retained  should  allocate the total cost of the mortgage  loans to the mortgage
servicing rights and the loans (without the mortgage  servicing rights) based on
their  relative fair values if it is  practicable to estimate those fair values.
This  Statement was effective for the Company for the fiscal year ended June 30,
1997.  The Company  currently  does not retain  servicing  rights on sold loans,
therefore,  this Statement did not have a material  impact on the Company's June
30, 1997 financial condition.

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



                                      -15-

<PAGE>

value based method,  compensation  cost is the excess of the market price of the
stock at the grant date over the  amount an  employee  must pay to  acquire  the
stock.  However,  most stock option  plans have no intrinsic  value at the grant
date and, as such, no compensation  cost is recognized under APB Opinion No. 25.
Entities electing to continue use of the accounting treatment of APB Opinion No.
25 must make certain pro forma disclosures as if the fair value based method had
been applied.  The Bank has continued to use the "intrinsic  value based method"
as prescribed by APB Opinion No. 25.

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

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

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

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income".
This Statement  establishes standards for reporting and display of comprehensive
income on its components (revenues,  expenses, gains and losses).  Comprehensive
income is defined as the  change in equity of a  business  enterprise,  during a
period, from transactions and other events and


                                      -16-


<PAGE>

circumstances  from  nonowner  sources.  The  Statement  requires  that entities
classify  items of other  comprehensive  income by their  nature in a  financial
statement  and display the  accumulated  balance of other  comprehensive  income
separately from retained earnings and additional  paid-in-capital  in the equity
section of a statement of financial  position.  This  Statement is effective for
fiscal years beginning after December 31, 1997.

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











                                      -17-
<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



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


We have  audited the  consolidated  statement  of  financial  condition  of GFSB
Bancorp,  Inc. and Subsidiary as of June 30, 1997, and the related  consolidated
statements of earnings, changes in stockholders' equity, and cash flows for each
of the two years in the period ended June 30, 1997.  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 audits.

We  conducted  our  audits  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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of GFSB
Bancorp,  Inc.  and  Subsidiary  as of June 30,  1997,  and the  results  of its
consolidated  operations  and its  consolidated  cash  flows for each of the two
years in the period ended June 30, 1997 in conformity  with  generally  accepted
accounting principles.



                                                       /s/ Atkinson & Co., Ltd.
                                                       Atkinson & Co., Ltd.

Albuquerque, New Mexico
August 11, 1997





                                      -18-


<PAGE>



                               GFSB Bancorp, Inc.

                  CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

                                  June 30, 1997

<TABLE>
<CAPTION>
                                     ASSETS

<S>                                                                                                       <C>               
Cash and due from banks (notes A3, A14, and T)                                                            $        1,772,937
Interest-bearing deposits with banks (notes A3, A14, and T)                                                        1,121,191
Federal funds sold (notes A3, A14, and T)                                                                            100,000
Available-for-sale investment securities (notes A4, A14, C, and T)                                                 4,342,042
Available-for-sale mortgage-backed securities (notes A5, A14, B, and T)                                           32,069,501
Stock of Federal Home Loan Bank, at cost, restricted (note A17)                                                    1,060,300
Loans receivable, net, substantially pledged (notes A6, A7, A14, D, J, K, R, and T)                               52,021,929
Accrued interest and dividends receivable (notes A14, E, and T)                                                      551,783
Premises and equipment (notes A9 and F)                                                                              677,250
Prepaid and other assets                                                                                              55,290
Deferred tax asset (notes A10 and L)                                                                                  20,671
                                                                                                          ------------------

     TOTAL ASSETS                                                                                         $       93,792,894
                                                                                                          ==================
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Transaction accounts (notes A14, G, J, and T)                                                             $        4,488,475
Savings and now deposits (notes A14, G, J, and T)                                                                 10,606,993
Time deposits (notes A14, G, J, and T)                                                                            42,777,018
Accrued interest payable (notes A14 and T)                                                                           153,049
Advances from borrowers for taxes and insurance                                                                      175,748
Accounts payable and accrued liabilities                                                                             181,970
Deferred income taxes (notes A10 and L)                                                                              287,000
Dividends declared and payable                                                                                        75,415
Advances from the Federal Home Loan Bank (notes A14, R, and T)                                                    20,930,000
Income taxes payable                                                                                                 174,090
                                                                                                          ------------------

     TOTAL LIABILITIES                                                                                            79,849,758

COMMITMENTS AND CONTINGENCIES (notes D and M)                                                                           -

STOCKHOLDERS' EQUITY
  Common stock, $.10 par value, 1,500,000
    shares authorized; 800,708 issued and outstanding                                                                 76,684
  Preferred stock, $.10 par value, 500,000
    shares authorized; no shares issued or outstanding                                                                  -
  Additional paid-in-capital                                                                                       6,260,680
  Unearned ESOP stock (note N)                                                                                      (464,881)
  Retained earnings, substantially  restricted (note I)                                                            7,513,536
  Unrealized gain on available for sale
    securities, net of taxes (note A4)                                                                               557,117
                                                                                                          ------------------

     TOTAL STOCKHOLDERS' EQUITY                                                                                   13,943,136
                                                                                                          ------------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                           $       93,792,894
                                                                                                          ==================
</TABLE>

       These accompanying notes are an integral part of these statements.

                                      -19-

<PAGE>


                               GFSB Bancorp, Inc.

                       CONSOLIDATED STATEMENTS OF EARNINGS

                              Years ended June 30,

<TABLE>
<CAPTION>


                                                              1997         1996
                                                           ----------   ----------
<S>                                                        <C>          <C>       
Interest income Loans receivable (notes A6 and D)
    Mortgage loans                                         $3,493,788   $2,838,874
    Commercial loans                                          220,280      202,259
    Share and consumer loans                                  178,877      118,411
  Available-for-sale investment securities and
     mortgage-backed securities                             2,053,688    1,569,434
  Other interest-earning assets                               132,071      146,847
                                                           ----------   ----------

        TOTAL INTEREST EARNINGS                             6,078,704    4,875,825

Interest expense
  Deposits (note G)                                         2,595,886    2,072,621
  Advances from Federal Home Loan Bank                        793,124      330,050
                                                           ----------   ----------

                                                            3,389,010    2,402,671
                                                           ----------   ----------

        NET INTEREST EARNINGS                               2,689,694    2,473,154

Provision for loan losses (note D)                             20,794       28,099
                                                           ----------   ----------

        NET INTEREST EARNINGS AFTER
          PROVISION FOR LOAN LOSSES                         2,668,900    2,445,055

Non-interest earnings
  Service charge income                                        38,464       21,039
  Income from real estate operations                             --          3,300
  Miscellaneous income                                          5,196       10,454
  Net gains from sales of loans                                 4,979        8,063
                                                           ----------   ----------

        TOTAL NON-INTEREST EARNINGS                            48,639       42,856

Non-interest expense
  Compensation and benefits                                   835,312      614,058
  Insurance (note H)                                          330,170      104,731
  Other                                                       239,240      166,852
  Occupancy                                                   146,252      108,305
  Data processing                                              97,582       92,522
  Professional fees                                            91,775      122,720
  Advertising                                                  45,942       34,358
  Stock services                                               12,680       24,323
                                                           ----------   ----------

        TOTAL NON-INTEREST EXPENSE                          1,798,953    1,267,869
                                                           ----------   ----------

</TABLE>

       These accompanying notes are an integral part of these statements.

                                      -20-

<PAGE>

                               GFSB Bancorp, Inc.

                 CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED

                              Years ended June 30,

<TABLE>
<CAPTION>
                                                         1997         1996
                                                     ----------    ----------
<S>                                                  <C>           <C>      
        EARNINGS BEFORE INCOME TAXES                    918,586     1,220,042

Income tax expense (note L)
  Currently payable                                     319,159       431,663
  Deferred provision (benefit)                          (36,052)          343
                                                     ----------    ----------

                                                        283,107       432,006
                                                     ----------    ----------

        NET EARNINGS                                 $  635,479    $  788,036
                                                     ==========    ==========

WEIGHTED AVERAGE NUMBER OF
  SHARES OUTSTANDING (note A12)                         822,154       893,684

EARNINGS PER COMMON SHARE AND
  COMMON SHARE EQUIVALENT                            $      .77    $      .88
                                                     ==========    ==========

</TABLE>











       These accompanying notes are an integral part of these statements.

                                      -21-


<PAGE>

                               GFSB Bancorp, Inc.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                          Unrealized
                                                                                                           Gain On
                                     Common Stock            Additional     Unearned                    Available For
                                   ----------------------     Paid-in         ESOP         Retained    Sale Securities
                                   Shares        Amount       Capital        Stock         Earnings          Net           Total
                                   --------  ------------   -----------   ------------  -------------   --------------  -----------
<S>                                <C>       <C>            <C>           <C>           <C>             <C>             <C>        
Balance, June 30, 1995             948,750   $     94,875   $ 9,020,623   $   (560,000) $   7,037,557   $   161,698     $15,754,753

    Net earnings                      -              -             -              -           788,036          -            788,036

    Unrealized (loss) on
      available for sale
      securities, net of taxes        -              -             -              -              -          (34,151)        (34,151)

    Acquisition of common
      stock by the Bank for
      the management stock
      bonus plan (note P)             -            (3,795)     (541,736)          -              -             -           (545,531)

    Release of 1866.6667
      shares of common stock
      owned by the ESOP (note N)      -              -            7,935         18,667           -             -             26,602

    Dividends declared and
      paid to stockholders            -              -             -              -          (626,233)         -           (626,233)
                                   -------   ------------   -----------   ------------  -------------   -----------     -----------

Balance, June 30, 1996             948,750         91,080     8,486,822       (541,333)     7,199,360       127,547      15,363,476

    Net earnings                      -              -             -              -           635,479          -            635,479

    Unrealized gain on
      available for sale
      securities, net of taxes        -              -             -              -              -          429,570         429,570

    Distribution of stock
      vested under  the
      management stock
      bonus plan (note P)             -               408        52,683           -              -             -             53,091

    Acquisition of common
      stock by the Company under
      the stock repurchase plan
      (note P )                   (148,042)       (14,804)   (2,322,262)          -              -             -         (2,337,066)

    Released and committed to be
      released 7575.1762 of  
      shares of common stock 
      owned by the ESOP (note 
      N)                              -              -           43,437         76,452           -             -            119,889

Dividends declared and
   paid to stockholders               -              -             -              -          (321,303)         -           (321,303)
                                   -------   ------------   -----------   ------------  -------------   -----------     -----------

Balance, June 30, 1997             800,708   $     76,684   $ 6,260,680   $   (464,881) $   7,513,536   $   557,117     $13,943,136
                                   =======   ============   ===========   ============  =============   ===========     ===========

</TABLE>

        The accompanying notes are an integral part of these statements.

                                      -22-



<PAGE>

                               GFSB Bancorp, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                              Years ended June 30,

                Increase (decrease) in cash and cash equivalents

<TABLE>
<CAPTION>
                                                          1997            1996
                                                      ------------    ------------
<S>                                                   <C>             <C>         
Cash flows from operating activities
  Net earnings                                        $    635,479    $    788,036
  Adjustments to reconcile net earnings to
    net cash provided by operations
      Deferred loan origination fees                      (128,265)       (111,893)
      Gain on sale of sold loans                            (4,979)         (8,063)
      Provision for loan losses                             20,794          28,099
      Depreciation of premises and equipment                69,933          54,175
      Amortization of investment and mortgage-
        backed securities premiums (discounts)             195,936         111,875
      Stock dividend on FHLB stock                         (48,200)        (29,900)
      Release of ESOP stock                                119,889          28,280
      Stock compensation                                    53,091          26,602
      Provision (benefit) for deferred income taxes        (36,052)            343
  Net changes in operating assets and liabilities
    Accrued interest and dividends receivable             (151,467)       (180,352)
    Prepaid taxes                                             --            61,825
    Prepaid and other assets                                (5,885)        (11,211)
    Accrued interest payable                                49,542          45,364
    Accounts payable and accrued liabilities                 9,253          20,221
    Income taxes payable                                    65,161         108,929
    Dividends declared and payable                        (327,162)        402,577
                                                      ------------    ------------

        Net cash provided by operating activities          517,068       1,334,907

Cash flows from investing activities
  Purchases of premises and equipment                     (210,141)       (117,798)
  Loan originations and principal
    repayment on loans, net                            (13,181,944)     (6,296,554)
  Principal payments on mortgage-backed securities       6,078,761       3,280,383
  Purchases of mortgage-backed securities              (12,790,892)    (18,060,661)
  Purchases of available-for-sale securities              (125,941)     (3,020,859)
  Maturities and proceeds from sale of available-
    for-sale securities                                    700,000       2,235,000
  Purchase of FHLB stock                                  (461,500)        (79,000)
                                                      ------------    ------------

        Net cash used by investing activities          (19,991,657)    (22,059,489)

</TABLE>

       These accompanying notes are an integral part of these statements.
                                      -23-


<PAGE>



                               GFSB Bancorp, Inc.

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                              Years ended June 30,

                Increase (decrease) in cash and cash equivalents

<TABLE>
<CAPTION>
                                                                                   1997              1996
                                                                               --------------   -------------
<S>                                                                          <C>                 <C>
Cash flows from financing activities
  Net increase in transaction accounts,
    savings and NOW deposits and time deposits                                    11,882,676        9,387,305
  Net increase (decrease) in advances from borrowers
    for taxes and insurance                                                            1,216          (92,282)
  Proceeds from FHLB advances                                                    106,463,375       10,854,000
  Repayments on FHLB advances                                                    (96,387,375)            --
  Purchase of GFSB Bancorp stock under the
    stock repurchase plan in cash                                                 (2,337,066)            --
  Dividends paid or to be paid in cash                                              (321,303)        (626,233)
  Purchase of GFSB Bancorp stock under the
    management stock bonus plan in cash                                                 --           (545,531)
                                                                               --------------   -------------

        Net cash provided by
          financing activities                                                    19,301,523       18,977,259
                                                                               --------------   -------------

  Decrease in cash and cash equivalents                                             (173,066)      (1,747,323)

  Cash and cash equivalents at beginning of year                                   3,167,194        4,914,517
                                                                               --------------   -------------

  Cash and cash equivalents at end of year                                     $   2,994,128    $   3,167,194
                                                                               =============    =============

Supplemental disclosures Cash paid during the year for:
    Interest on deposits and advances                                          $   3,339,468    $   2,357,307
    Income taxes                                                                     253,998          235,198

  Change in unrealized gain (loss), net of deferred taxes
    on available-for-sale securities                                                 429,570          (34,151)

</TABLE>


        The accompanying notes are an integral part of these statements.
                                      -24-


<PAGE>



                               GFSB Bancorp, Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                             June 30, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

   1. Organization and Operations
      ---------------------------

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

   GFSB  Bancorp,  Inc.  (the  Company) is a unitary  savings  and loan  holding
   company  that was  incorporated  in March 1995 under the laws of the State of
   Delaware.  The Company  acquired  all of the common stock of GFSB on June 29,
   1995 and the Company also made its initial  public  offering of common stock.
   The Company  issued  948,750 shares of $.10 par value common stock at $10 per
   share.  Net proceeds,  after deducting  conversion  expenses of $372,002 were
   $9,115,498 and were reflected as common stock and additional  paid in capital
   in the accompanying consolidated statement of financial condition.

   2. Basis of Presentation
      ---------------------

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

   3. Cash and Cash Equivalents
      -------------------------

   Cash and cash equivalents include cash on hand, cash items,  amounts due from
   banks,  amounts held with the Federal Reserve Bank, interest bearing deposits
   with the Federal Home Loan Bank, and federal funds sold.  Generally,  federal
   funds sold are  purchased and sold for one-day  periods.  For purposes of the
   statements  of cash  flows,  the  Company  considers  all highly  liquid debt
   instruments  with  original  maturities  of three  months  or less to be cash
   equivalents. The amounts in each of these above categories are as follows:


                                      -25-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   3.  Cash and Cash Equivalents - Continued
       -------------------------------------

                                             June 30,
                                              1997
                                       -------------------

   Cash on hand                        $           374,957
   Cash items                                        1,341
   Amounts due from banks                        1,074,096
   Interest bearing deposits                     1,121,191
   Federal funds sold                              100,000
   Federal Reserve Bank deposits                   322,543
                                       -------------------

                                       $         2,994,128
                                       ===================

   The amounts due from banks includes  $25,856 held in trust by the Company for
   the employees awarded stock under the Management Stock Bonus Plan. The amount
   represents dividends earned on non-vested shares. See Note P.

   4. Available-for-Sale Investment Securities
      ----------------------------------------

   Investment  securities  consist  of stock  owned  in the  Federal  Home  Loan
   Mortgage  Corporation  ("FHLMC"),  Federal  Home Loan Bank  debentures,  U.S.
   Government  Securities,  and  mutual  funds.  The  Company  accounts  for its
   investments under Statement of Financial Accounting Standards (SFAS) No. 115,
   " Accounting for Certain Investments in Debt and Equity Securities." SFAS 115
   expands the use of fair value accounting for debt and equity  securities.  It
   requires that entities  classify their debt and equity securities into one of
   three  categories:  held-to-maturity,  available  for sale,  or trading.  The
   Company has  classified  its  investment  portfolio  and all  mortgage-backed
   securities as available for sale, and, accordingly,  as required by SFAS 115,
   accounted for its investments at fair value.  (See also note A5). The Company
   has  recorded a net  unrealized  gain,  net of deferred  income  taxes,  of $
   557,117  and  $127,547  as an  increase  to equity at June 30, 1997 and 1996,
   respectively.  The net change in the net  unrealized  gain for the year ended
   June 30, 1997 was $429,570.

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



                                      -26-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   5.  Available-for-Sale Mortgage-Backed Securities
       ---------------------------------------------

   All  mortgaged-backed and related securities are stated at fair value as they
   are classified as available-for-sale securities.

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

   At June 30,  1997,  the Company had no  outstanding  commitments  to sell any
   securities.

   6.  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.  One mortgage loan was held for sale at June
   30, 1997 in the amount of $83,436, which approximates market value. This loan
   has not been  separately  disclosed on the  statement of financial  condition
   given the minimal dollar amount in relation to the total loan portfolio.

   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 adopted SFAS No. 114,  "Accounting by Creditors for Impairment of
   a Loan" on July 1, 1995.  SFAS No. 114 requires that the Company  establish a
   specific  loan  allowance  on an impaired  loan if the  present  value of the
   future cash flows discounted using the loan's effective interest rate is less
   than the  carrying  value of the loan.  An impaired  loan can be valued based
   upon its fair value or the market value of the  underlying  collateral if the
   loan is primarily collateral  dependent.  The Company assesses for impairment
   all loans delinquent more than 90 days.

   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.




                                      -27-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   Mortgage loans sold to others are not included in the accompanying statements
   of financial condition.  For the years ended June 30, 1997 and 1996, $398,510
   and $490,118, respectively, of loans have been sold. No servicing rights were
   retained on these loans. Gains on the sale of these loans were $4,979 in 1997
   and $8,063 in 1996.

   7.  Loan Origination Fees and Related Costs
       ---------------------------------------

   Loan fees are accounted for in  accordance  with FASB  Statement of Financial
   Accounting  Standards No. 91,  "Accounting for  Nonrefundable  Fees and Costs
   Associated  with  Originating or Acquiring  Loans and Initial Direct Costs of
   Leases." 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.

   8.  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.  The
   Company had no foreclosed real estate at June 30, 1997.

   9.  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.

   10. 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, income and expense
   on foreclosed real estate,  depreciation,  delinquent interest,  compensation
   cost, and the bad debt reserve.



                                      -28-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE A - 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 as prescribed in FASB Statement No. 109,  "Accounting for
   Income Taxes". The principal  differences  between assets and liabilities for
   financial statement and tax purposes are accumulated depreciation of premises
   and equipment,  the reserve for delinquent interest, bad debt reserves, stock
   compensation  plans, the recognition of loan origination fees, and unrealized
   holding gains and losses on available-for-sale  securities. As changes in tax
   laws or rates are enacted,  deferred tax assets and  liabilities are adjusted
   through the provision for income taxes in the period of enactment.

   The Small  Business  Job  Protection  Act of 1996  equalized  the taxation of
   thrifts and banks.  The bill no longer  allows  thrifts a choice  between the
   percentage of taxable income method and the experience  method in determining
   additions to bad debt reserves.  Small thrifts (such as the Company) are only
   allowed to use the experience  method.  Any reserve  amounts added after 1987
   are now taxed over a six year  period.  At June 30,  1997,  the  Company  had
   $55,936 of post 1987 bad debt reserves. Of this amount, $9,323 was recaptured
   into taxable income for 1997.

   11. Reclassifications
       -----------------

   Certain  reclassifications have been made to the 1996 financial statements to
   conform to the 1997 presentation.

   12. 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.  Stock options are included in primary  earnings per share for 1997
   because  they are  dilutive.  Stock  options are not included in earnings per
   share in 1996 because they were  antidilutive.  The Company  accounts for the
   shares  acquired by its ESOP in accordance  with  Statement of Position 93-6;
   shares  controlled  by the ESOP are not  considered  in the weighted  average
   shares  outstanding  until the  shares are  committed  for  allocation  to an
   employee's individual account.

   13. Advertising
       -----------

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



                                      -29-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   14. 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  securities  - Fair  values  for  securities  are based on
   quoted market prices.

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

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

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

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

   15. 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.



                                      -30-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

   16. 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.

   17. Investment in Federal Home Loan Bank Stock
       ------------------------------------------

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


NOTE B - AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES

   The  carrying   values  and  estimated  fair  values  of   available-for-sale
   mortgage-backed securities are summarized as follows:

<TABLE>
<CAPTION>
                                                                                      Gross           Gross
                                                                                    Unrealized      Unrealized
                            Principal           Unamortized         Amortized        Holding         Holding
June 30, 1997:                Balance             Premiums          Cost              Gains          Losses          Fair Value
--------------             --------------      --------------     ------------      ----------     -----------     ------------
<S>                        <C>                 <C>                <C>               <C>            <C>             <C>          
FNMA ARM
    Certificates           $ 21,002,861        $     667,808      $ 21,670,669      $  146,497     $   (80,203)    $  21,736,963
  FHLMC ARM
    Certificates              2,747,717               77,744         2,825,461          24,649          (7,137)        2,842,973
  GNMA ARM
    Certificates              7,297,319              216,064         7,513,383            -            (23,818)        7,489,565
                           ------------        -------------      ------------      ----------     -----------     -------------

                           $ 31,047,897        $     961,616      $ 32,009,513      $  171,146     $  (111,158)    $  32,069,501
                           ============        =============      ============      ==========     ===========     =============
</TABLE>

   During the year ended June 30,  1997 and 1996,  the  Company did not have any
   proceeds from the sales of mortgage-backed  securities. At June 30, 1997, the
   Company  had  pledged   $5,093,764   (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   $801,602  in
   mortgage-backed  securities to the Federal  Reserve Bank for its Treasury Tax
   and Loan Account.



                                      -31-



<PAGE>

                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE C - AVAILABLE-FOR-SALE INVESTMENTS

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

<TABLE>
<CAPTION>
                                                                        June 30, 1997
                                         -----------------------------------------------------------------------
                                                                  Gross             Gross
                                                                Unrealized        Unrealized
                                           Amortized              Holding          Holding              Fair
                                             Cost                  Gains            Losses              Value
                                         ----------------      -------------      -----------      -------------

<S>                                      <C>                   <C>                <C>              <C>          
   Mutual funds                          $      2,153,206      $       9,466      $     -          $   2,162,672
   FHLB Debentures                                400,000               -             (2,625)            397,375
   FHLMC Stock                                      7,786            772,646            -                780,432
   U.S. Treasury bill                             996,921              4,642            -              1,001,563
                                         ----------------      -------------      ----------       -------------
                                         $      3,557,913      $     786,754      $   (2,625)      $   4,342,042
                                         ================      =============      ==========       =============
</TABLE>

   The  amortized  cost and fair  value of all  debt and  equity  securities  by
   contractual  maturity,  are shown below. Expected maturities will differ from
   contractual maturities because borrowers may have the right to call or prepay
   obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                       June 30, 1997
                                                        -----------------------------------------
                                                             Amortized                Fair
                                                             Cost                     Value
                                                        -----------------        ----------------
<S>                                                     <C>                      <C>            
   Available for sale:
     Due within one year                                $         996,921        $     1,001,563
     Due after one year through five years                        400,000                397,375
     FHLMC stock                                                    7,786                780,432
     Mortgage-backed securities                                32,009,513             32,069,501
                                                        -----------------        ---------------

                                                        $      33,414,220        $    34,248,871
                                                        =================        ===============
</TABLE>

   No  investments  were sold in 1997 or 1996.  The change in the net unrealized
   holding  gains and losses  recorded  through the equity  section for June 30,
   1997 is a net gain of $429,570.



                                      -32-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE D - LOANS RECEIVABLE

   Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                  June 30,
                                                                    1997
                                                              ----------------
<S>                                                           <C>             
   First mortgage loans (principally conventional)
     Principal balances
       Secured by one-to-four family residences               $     31,984,280
                                                              ----------------
       Secured by other properties                                  10,405,439
       Construction loans                                            3,811,079
   Loan Participations Purchased                                     6,153,249
   Share loans                                                       1,113,175
   Commercial loans                                                  1,960,765
   Consumer loans
     Unsecured                                                         117,518
     Secured by vehicles                                               522,902
     Home equity lines                                                 977,141
                                                                    57,045,548
   Less
     Undisbursed portion of loans                                   (1,382,895)
     Loan participations sold                                       (2,961,052)
     Net deferred loan origination fees                               (340,610)
     Allowance for loan losses                                        (339,062)
                                                              ----------------
                                                              $     52,021,929
                                                              ================
</TABLE>

   Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>
                                              June 30,          June 30,
                                                1997              1996
                                           ------------      -------------

<S>                                        <C>               <C>          
   Balance at beginning of year            $    309,117      $     316,520
   Provision charged to income                   20,794             28,099
   Charge-offs, recoveries and other              9,151            (35,502)
                                           ------------      -------------
   Balance at end of year                  $    339,062      $     309,117
                                           ============      =============
</TABLE>


                                      -33-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE D - LOANS RECEIVABLE

   The Company had commitments to fund new loans as follows:

                                                             June 30,
                                                               1997
                                                         ----------------

   Fixed rate                                            $      4,117,118
   Variable rate                                                2,070,468
   Commitments for new originations                             4,327,155
                                                         ----------------
   Total                                                 $     10,514,741
                                                         ================

   Fixed rate  commitments  for the years ended June 30, 1997 had interest rates
   that ranged from 8% to 10.25%.

   Nonaccrual and renegotiated loans for which interest has been reduced totaled
   $136,921  and  $149,324  at June 30,  1997 and 1996,  respectively.  Interest
   income that was foregone  amounted to $10,546 and $6,396 at June 30, 1997 and
   1996, respectively.

   The weighted average rate for the loan portfolio at June 30, 1997 is 8.98%.

   On July 1, 1995,  the  Company  adopted  Statement  of  Financial  Accounting
   Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan",
   as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan
   - Income  Recognition  and  Disclosure",  which  requires  that  the  Company
   establish  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  $136,921 at June 30,  1997.  Average  balances  for loans
   delinquent more than 90 days totaled approximately $27,384 for the year ended
   June 30,  1997.  These  loans  are all  primarily  collateral  dependent  and
   management has determined that the underlying  collateral is in excess of the
   carrying  amount.  As a result,  the Company  has  determined  that  specific
   allowances on these loans is not required.

NOTE E - ACCRUED INTEREST AND DIVIDENDS RECEIVABLE

   Accrued interest and dividends receivable is summarized as follows:

                                                        June 30, 1997
                                                       ---------------

   Loans receivable                                    $       333,503
   Available-for-sale investment securities                     14,041
   Available-for-sale mortgage-backed securities               204,239
                                                       ---------------
                                                       $       551,783 
                                                       =============== 


                                      -34-



<PAGE>

                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE F - PREMISES AND EQUIPMENT

   Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                           June 30,
                                                            1997
                                                      ---------------
<S>                                                   <C>            
   Buildings                                          $       522,400
   Furniture, fixtures, and equipment                         455,198
   Land                                                       158,550
   Parking lot improvements                                     5,265

                                                            1,141,413
   Less allowance for depreciation                           (464,163)
                                                      ---------------
                                                      $       677,250
                                                      ===============
</TABLE>


NOTE G - DEPOSITS

   Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                Weighted
                                 Average
                                  Rate at
                                 June 30,                      June 30, 1997
                                   1997          ------------------------------------
                                ---------             Amount               Percent
                                                 -----------------       ------------
<S>                                <C>           <C>                           <C>  
   Passbook savings
     accounts                      3.00%         $       2,940,333              5.08%
   Money market
     accounts                      4.00%                 7,624,212             13.18
   Transaction accounts            1.07%                 4,488,474              7.77
                                                 -----------------            ------

                                                        15,053,019             26.03

</TABLE>


                                      -35-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE G - DEPOSITS - CONTINUED

   Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                Weighted
                                 Average
                                  Rate at
                                 June 30,                      June 30, 1997
                                   1997             ----------------------------------
                                ---------                Amount              Percent
                                                    ---------------        -----------
<S>                                <C>              <C>                         <C>   
   Certificates of deposit: 
     2.50%-6.00%                   5.51%            $    33,970,769             58.74%
                                                    ---------------             ----- 
     6.00%-7.00%                   6.55%                  8,136,920             14.07
     7.00%-8.00%                   7.21%                    669,329              1.16

                                                         42,777,018             73.97
                                                    ---------------             ----- 

                                                    $    57,830,037               100%
                                                    ===============             =====
</TABLE>

   The aggregate  amount of jumbo  certificates  with a minimum  denomination of
   $100,000 was $15,805,114 at June 30, 1997.

   Certificates of deposit by maturity dates are as follows:

<TABLE>
<CAPTION>
                                                    June 30, 1997
                                                   ---------------
<S>                                                <C>            
   3 months or less                                $     7,242,578
   3 months to 6 months                                  6,611,010
   6 months to 1 year                                   14,951,461
   1 year to 2 years                                     8,305,334
   2 years to 3 years                                    1,906,082
   Thereafter                                            3,760,553
                                                   ---------------

                                                   $    42,777,018
                                                   ===============
</TABLE>

   Interest expense on deposits is summarized as follows:


                                                        June 30,
                                      ---------------------------------------
                                               1997                 1996
                                      -----------------      ----------------
   Certificates of deposit            $       2,140,115      $      1,707,183
   Money market accounts                        334,958               278,238
   Passbook savings                              86,648                76,743
   Transaction deposits                          34,165                10,457
                                      -----------------      ----------------

                                      $       2,595,886      $      2,072,621
                                      =================      ================



                                      -36-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE H - SAVINGS ASSOCIATION INSURANCE FUND

   The Economic  Growth and Paperwork  Reduction Act of 1996 was signed into law
   on September  30, 1996.  The Act provided for the  resolution  of the premium
   disparity between the Bank Insurance Fund ("BIF") and the Savings Association
   Insurance Fund ("SAIF").  In order to capitalize the SAIF, a one-time special
   assessment of 65.7 basis points had to be paid by SAIF insured  institutions.
   As a result, the Company paid a one-time assessment of $250,257.  As required
   by Emerging  Issues Task Force Topic No.  D-47,  the Company has recorded the
   one-time  assessment as a charge to current year  operations.  The amount has
   been included under the caption "Insurance" on the consolidated statements of
   earnings.


NOTE I - 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, 1997 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.

   The Bank at June 30, 1997,  meets the  regulatory  tangible  capital and core
   capital  requirements and the risk-based capital  requirement of 8 percent of
   total risk-adjusted assets. The following is a reconciliation of net worth to
   regulatory  capital as  reported in the June 30, 1997 report to the Office of
   Thrift Supervision ("OTS"):


                                      -37-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE I - REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
         EARNINGS - CONTINUED

<TABLE>
<CAPTION>
                                                                         June 30,
                                                                           1997
                                                                      ------------
<S>                                                                   <C>         
Regulatory net worth per report to OTS                                $ 12,171,582
Audit adjustments
  Decrease in income taxes                                                  70,749
  Decrease in compensation costs and professional fees                       5,384
  Decrease in interest income                                              (28,525)
                                                                      ------------

    Net worth as reported per the
      accompanying financial statements (Bank only)                   $ 12,219,190
                                                                      ============
</TABLE>


   The following is a  reconciliation  of the Bank's capital in accordance  with
   generally  accepted  accounting  principles (GAAP) to the three components of
   regulatory capital calculated under regulatory requirements at June 30, 1997:

<TABLE>
<CAPTION>

                                                                      June 30, 1997
                             -----------------------------------------------------------------------------------------
                                    Tangible Capital                   Core Capital               Risk-Based Capital
                             ------------------------------   ----------------------------   -------------------------
                                   Amount       Percent            Amount        Percent         Amount       Percent
                             --------------   -------------   --------------   -----------   --------------  ---------
<S>                          <C>                   <C>        <C>                 <C>        <C>                  <C>  
   GAAP Capital              $   12,219,190           -       $  12,219,190         -        $  12,219,190           -

   Unrealized gains
     (losses) on available-
     for-sale securities           (557,117)          -            (557,117)        -             (557,117)          -

   Qualifying general
     loan loss allowance               -              -                -            -             (339,062)          -
                             --------------        -----      -------------       -----      -------------        ----- 

   Regulatory capital
     computed                    11,662,073        12.51%        11,662,073       12.51%        11,323,011        27.25%

   Minimum capital
     requirement                  1,398,537         1.50          2,797,073        3.00          3,324,240         8.00
                             --------------        -----      -------------       -----      -------------        ----- 

   Regulatory capital
     excess                  $   10,263,536        11.01%     $   8,865,000        9.51%     $   7,998,771        19.25%
                             ==============        =====      =============       =====      =============        ===== 
</TABLE>



                                      -38-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE J - 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:

                                                  June 30,
                                                    1997
                                              -----------------

   Balance, beginning of year                 $       1,426,679
   New loans                                            422,881
   Repayments                                          (659,125)
                                              -----------------

   Balance, end of year                       $       1,190,435
                                              =================

   The Company  also has several  deposits  from  related  parties.  Outstanding
   deposits from related  parties at June 30, 1997 amounted to  $1,897,729.  The
   Company also expensed $156,623 and $105,099 for the years ended June 30, 1997
   and  1996,  respectively,  for  directors  fees and  compensation  under  the
   management stock bonus plan.


NOTE K - CONCENTRATIONS OF CREDIT RISK

   The Company is active in originating primarily first mortgage loans primarily
   in McKinley County, New Mexico. At June 30, 1997, the Company had $52,701,601
   of loans  outstanding and unfunded  commitments of  $10,514,741.  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%.

   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.




                                      -39-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE L - INCOME TAXES

   Income tax expense consists of:

<TABLE>
<CAPTION>
                                                                  June 30,
                                                 -------------------------------------------
                                                        1997                      1996
                                                 -----------------        ------------------
<S>                                              <C>                      <C>              
   Current
     Federal                                     $         280,336        $         377,633
     State                                                  38,823                   54,030
                                                 -----------------        -----------------
                                                           319,159                  431,663
   Deferred provision (benefit)
     Federal                                               (30,645)                     291
     State                                                  (5,407)                      52
                                                 -----------------        -----------------

                                                           (36,052)                     343
                                                 -----------------        -----------------

                                                 $         283,107         $        432,006
                                                 =================         ================
</TABLE>

   Deferred taxes consists of the following:

<TABLE>
<CAPTION>
                                                                       June 30, 1997
                                                                    -----------------
<S>                                                                 <C>            
   Deferred tax receivable arising from reserve for
     delinquent interest                                            $         4,218

   Deferred tax liability arising from using accelerated
     depreciation for income tax purposes                                   (46,030)

   Deferred tax receivable arising from recognition
     of loan origination fees                                                47,192

   Deferred tax receivable arising from recognition of
     compensation cost for financial reporting not
     recognized for tax purposes                                             33,936

   Deferred tax liability arising from
     an excess bad debt tax reserve over
     the base year bad debt tax reserve                                     (18,645)

   Deferred tax receivable arising from the
     book bad debt reserve                                                  135,625

   Valuation allowance for deferred tax receivables                        (135,625)
                                                                    ---------------

   Net deferred tax asset                                           $        20,671
                                                                    ===============
 
</TABLE>


                                      -40-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE L - INCOME TAXES - CONTINUED

   The Company has recorded a valuation  allowance  against the net deferred tax
   receivable in 1997 relating to the receivable  arising from the book bad debt
   reserve. The change in the valuation allowance from 1996 was $11,979.

   The Company has also  recorded a deferred  tax  liability of $287,000 at June
   30, 1997 in connection with the adoption of Statement of Financial Accounting
   Standards  No. 115 (See note A4). The deferred tax liability is the result of
   the unrealized holding gains on available-for-sale  securities.  The deferred
   tax liability has been recorded as a reduction to the unrealized holding gain
   and reported as a separate  component of equity as required by Statement  No.
   115.

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

<TABLE>
<CAPTION>
                                                                          June 30,
                                                        -----------------------------------------
                                                              1997                    1996
                                                        ----------------        -----------------
<S>                                                     <C>                     <C>              
   Tax at U.S. statutory rate of 34%                    $        312,319        $         414,814

   State income taxes, net of federal
     tax benefit                                                  25,623                   35,694

   Other - net                                                   (54,835)                 (18,502)
                                                        ----------------        -----------------

                                                        $        283,107        $         432,006
                                                        ================        =================

   Effective tax rate                                                 31%                      35%
</TABLE>


NOTE M - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

   The  Company  is a party to six  irrevocable  letters of credit  which  total
   $178,192.  One of the letters of credit in the amount of $5,000 is for Vernon
   Hamilton  Construction Co., Inc., a company substantially owned by a director
   of the Company.  The letter of credit is secured by a $20,000  certificate of
   deposit issued by the Bank.  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.


                                      -41-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE N - EMPLOYEE STOCK OWNERSHIP PLAN

   In  connection  with the  conversion  (see note A1),  the Company  adopted an
   Employee Stock  Ownership Plan (ESOP) for the benefit of all of its full time
   employees.  Contributions to the Plan are determined at the discretion of the
   Company  and are  limited to the  maximum  amount  deductible  for income tax
   purposes.  Eligible  employees include all full time employees with a minimum
   of one year of  service  as of any  anniversary  date of the  Plan.  The ESOP
   purchased  56,000  common  shares  of  the  Company's  stock  issued  in  the
   conversion,  which  was  funded  by a  $560,000  loan  from the  Company.  In
   accordance  with  Statement of Position  93-6, the unpaid balance of the ESOP
   loan has been eliminated on the Company's consolidated statement of financial
   condition.  Stockholders'  equity has been reduced by the aggregate  purchase
   price of the  shares  owned by the ESOP,  net of the shares  committed  to be
   released.  Contributions  to the  ESOP by the  Company  are  made to fund the
   principal and interest payments on the debt of the ESOP. As of June 30, 1997,
   7,575.1762  ESOP shares were released,  and for the year ended June 30, 1997,
   $122,644 in  contributions  were made to the ESOP by the Company.  As of June
   30, 1996,  1866.667  ESOP shares were released and  contributions  of $54,473
   were made to the Plan by the Company.  The remaining  unallocated ESOP shares
   at June  30,  1997  amounted  to  46,488.  The fair  value  of the  remaining
   unallocated  shares at June 30, 1997 is $883,272.  Dividends  on  unallocated
   ESOP  shares are  recorded  as  additional  contributions  to the ESOP by the
   Company to prepay principal on the ESOP loan and release  additional  shares.
   Dividends on allocated shares are charged to retained earnings.


NOTE O - NEW ACCOUNTING STANDARDS

   In March 1995,  the Financial  Accounting  Standards  Board  ("FASB")  issued
   Statement of Financial  Accounting  Standards (SFAS) No. 121, "Accounting for
   the Impairment of Long-Lived  Assets and for Long-Lived Assets to be Disposed
   of." This  Statement  was effective for the Company for the fiscal year ended
   June 30, 1997. This Statement  establishes standards for the impairment of an
   asset whenever events or changes in circumstances  indicate that the carrying
   value of an asset may not be  recoverable.  The Statement  also requires that
   long-lived  assets to be  disposed  of be  reported  at the lower of carrying
   value or fair value less cost to sell. This Statement did not have a material
   impact on the Company's June 30, 1997 financial condition.

   In May 1995, the Financial  Accounting  Standards  Board issued  Statement of
   Financial  Accounting  Standards No. 122,  "Accounting for Mortgage Servicing
   Rights".  This Statement amends FASB No. 65, "Accounting for Certain Mortgage
   Banking   Activities".   This  Statement   requires  that  mortgage   banking
   enterprises  recognize as separate assets the right to service mortgage loans
   for others,  however those servicing  rights are acquired.  Mortgage  banking
   enterprises  that  acquire  mortgage  servicing  rights  through  either  the
   purchase or  origination  of mortgage  loans and sells or  securitizes  those
   loans with servicing  rights  retained  should allocate the total cost of the
   mortgage loans to the mortgage servicing rights and the loans (without the


                                      -42-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE O - NEW ACCOUNTING STANDARDS - CONTINUED

   mortgage  servicing  rights)  based on their  relative  fair  values if it is
   practicable to estimate  those fair values.  This Statement was effective for
   the Company for the fiscal year ended June 30,  1997.  The Company  currently
   does not retain servicing rights on sold loans, therefore, this Statement did
   not  have a  material  impact  on  the  Company's  June  30,  1997  financial
   condition.

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

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



                                      -43-



<PAGE>

                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE O - NEW ACCOUNTING STANDARDS - CONTINUED

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

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

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

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




                                      -44-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE P - STOCK PLANS

   At June 30, 1997, the Company has two stock-based  compensation  plans, which
   are  described  below.  The  Company  applies  APB  Opinion  25  and  related
   Interpretations  in accounting for its plans.  Accordingly,  no  compensation
   cost has been  recognized  for its Stock Option Plan. The  compensation  cost
   that has been charged  against income for the Management  Stock Bonus Plan is
   discussed  below.  Had  compensation  cost for the Company's two  stock-based
   compensation plans been determined based on the fair value at the grant dates
   for awards  under those plans  consistent  with the method of FASB  Statement
   123, the  Company's net income and earnings per share would have been reduced
   to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                1997                       1996
                                                          ------------------         -----------------
<S>                              <C>                      <C>                        <C>              
   Net income                    As reported              $          635,479         $         788,036
                                 Pro forma                           563,286                   764,748

   Earnings per share            As reported              $              .77         $             .88
                                 Pro forma                               .68                       .86
</TABLE>


   On January 5, 1996,  the Board of  Directors  of the Company  adopted a Stock
   Option  Plan.  Pursuant  to the Plan,  an amount of stock equal to 10% of the
   shares  of  common  stock  (94,875  shares)  of the  Corporation  issued  and
   outstanding  is reserved for  issuance by the Company upon  exercise of stock
   options which may be granted to directors,  officers, and other key employees
   from time to time.  The Plan  provides for both  Incentive  Stock Options and
   Non-Incentive  Stock Options.  The options have an exercise date of ten years
   from the date of grant.  In  connection  with the  adoption of the Plan,  the
   Company granted 25,000 incentive stock options and 28,462 non-incentive stock
   options  to its  directors,  officers,  and other key  employees.  The option
   priceestablished  for the shares upon  exercise was $13 7/8 per share.  As of
   June 30,  1997 and 1996,  no shares  have been  exercised.  Remaining  shares
   available  to be granted in the  future  amount to 41,413.  The fair value of
   each option grant for the above proforma disclosures is estimated on the date
   of grant  using the  Black-Scholes  option-pricing  model with the  following
   weighted - average  assumptions:  dividends  of $0.10 per  quarter;  expected
   volatility of 54%;  risk-free interest rate of 5.10%; and expected lives of 8
   and 7 years.

   The Company also  adopted a  Management  Stock Bonus Plan on January 5, 1996.
   Sufficient  funds were  contributed to the Plan  representing up to 4% 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 20,382  shares.  The shares were  awarded at a price of $13 7/8 per
   share.  At June 30, 1997 and 1996,  17,568  shares remain to be awarded under
   the Plan in the  future.  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

                                      -45-

<PAGE>


                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE P - STOCK PLANS - CONTINUED

   effective  date of the Plan.  For the  years  ended  June 30,  1997 and 1996,
   compensation  cost in the amount of $60,494 and $28,280,  respectively,  have
   been recorded under the provisions of the Plan. The fair value of each option
   grant for the above  proforma  disclosures  is estimated on the date of grant
   using the Black-Scholes  option-pricing  model with the following  weighted -
   average assumptions:  dividends of $0.10 per quarter;  expected volatility of
   54%; risk-free interest rate of 5.10%; and expected lives of 8 and 7 years.

   During the current  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% of its currently  outstanding  shares. As of June 30, 1997,
   the Company has repurchased  148,042 shares of its  outstanding  common stock
   for  $2,337,066.  The shares  purchased  by the Company  were  retired at the
   advice of special counsel.


NOTE Q - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

   Selected  quarterly  financial  data are  presented  below by quarter for the
   years ended June 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                       1997 Quarter Ended
                                     ---------------------------------------------------------------------------------
                                        September 30            December 31           March 31              June 30
                                     ------------------     ------------------     --------------     ----------------
<S>                                  <C>                    <C>                    <C>                <C>             
   Net interest income after
     provision for loan losses       $          669,227     $          656,787     $      637,499     $        705,387
   Other income                                  14,217                  9,181             11,249               13,992
   Other expenses                               625,051                422,513            371,503              379,886
   Earnings before
     income taxes                                58,393                243,455            277,246              339,492
   Net earnings                                  34,640                146,062            171,471              283,306
   Earnings per common
     share                                         .04                    .17                 .21                  .34
</TABLE>

<TABLE>
<CAPTION>
                                                                        1996 Quarter Ended
                                     ---------------------------------------------------------------------------------
                                       September 30            December 31           March 31              June 30
                                     ------------------     ------------------     --------------     ----------------
<S>                                  <C>                    <C>                    <C>                <C>             
   Net interest income after
     provision for loan losses       $          631,313     $          594,938     $      622,271     $        596,533
   Other income                                   1,985                 11,191              6,637               23,043
   Other expenses                               237,453                352,439            356,241              321,736
   Earnings before
     income taxes                               395,845                253,690            272,667              297,840
   Net earnings                                 266,480                136,248            159,683              225,625
   Earnings per common
     share                                         .30                    .15                 .18                  .25
</TABLE>

                                      -46-

<PAGE>


                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE R - 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, 1997, the Bank has
   $20,930,000 in outstanding advances with the FHLB. The advances bear interest
   and mature as follows:

<TABLE>
<CAPTION>

           Unpaid principal balance                         Interest Rate                  Maturity
           ------------------------                         -------------             ------------------
<S>           <C>                                                <C>                  <C>
              $         3,000,000                                5.53%                July 01, 1997
                        4,000,000                                5.53%                July 08, 1997
                        1,000,000                                5.51%                July 14, 1997
                        2,880,000                                5.54%                July 16, 1997
                        3,000,000                                5.53%                July 22, 1997
                        4,000,000                                5.53%                July 29, 1997
                          650,000                                5.48%                December 15, 1997
                        2,400,000                                5.89%                December 17, 1997
              -------------------

              $        20,930,000
              ===================
</TABLE>

   Several of the advances due in July were  subsequently  refinanced after year
   end.  The  advances  are  secured by the Bank's  investment  in FHLB stock of
   $1,060,300 and FNMA mortgage-backed  securities in the amount of $15,929,584.
   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.



                                      -47-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE S - 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, 1997

<TABLE>
<CAPTION>
                                     ASSETS

                                                                                  Gallup                                GFSB
                                                                 GFSB             Federal                              Bancorp,
                                                                 Bancorp,         Savings                              Inc. and
                                                                 Inc.              Bank            Eliminations       Subsidiary
                                                            ----------------   -------------      --------------    --------------
<S>                                                         <C>                <C>                <C>               <C>           
Cash and due from banks                                     $           -      $   1,772,937      $         -       $    1,772,937
Interest-bearing deposits with banks                                    -          1,121,191                -            1,121,191
Federal funds sold                                                      -            100,000                -              100,000
Available-for-sale investment securities                                -          4,342,042                -            4,342,042
Mortgage-backed securities                                              -         32,069,501                -           32,069,501
Stock of Federal Home Loan Bank, at cost, restricted                    -          1,060,300                -            1,060,300
Loans receivable, net                                              2,268,799      52,021,929          (2,268,799)       52,021,929
Accrued interest and dividends receivable                               -            551,783                -              551,783
Premises and equipment, net                                             -            677,250                -              677,250
Prepaid and other assets                                                 492          54,798                -               55,290
Deferred tax asset                                                      -             20,671                -               20,671
Investment in subsidiary                                           4,557,750         492,440          (5,050,190)             -
                                                            ----------------   -------------      --------------    --------------

     TOTAL ASSETS                                           $      6,827,041   $  94,284,842      $   (7,318,989)   $   93,792,894
                                                            ================   =============      ==============    ==============
</TABLE>




                                      -48-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE S - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

      Details of Consolidated Statement of Financial Condition - Continued

<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                               Gallup                                GFSB
                                                              GFSB             Federal                              Bancorp,
                                                              Bancorp,         Savings                              Inc. and
                                                              Inc.              Bank            Eliminations       Subsidiary
                                                        -----------------   -------------      --------------    --------------
<S>                                                     <C>                 <C>                <C>               <C>           
Transaction accounts                                    $            -      $   4,488,475      $         -       $    4,488,475
Savings and now deposits                                             -         10,608,969              (1,976)       10,606,993
Time deposits                                                        -         42,777,018                -           42,777,018
Accrued interest payable                                             -            153,049                -              153,049
Advances from borrowers for taxes and insurance                      -            175,748                -              175,748
Accounts payable and accrued liabilities                           21,770         160,200                -              181,970
Deferred income taxes                                                -            287,000                -              287,000
Advances from parent company                                         -          2,059,359          (2,059,359)             -
Dividends declared and payable                                     75,415         207,464            (207,464)           75,415
Advances from the Federal Home Loan Bank                             -         20,930,000                -           20,930,000
Income taxes payable                                              (44,280)        218,370                -              174,090
                                                        -----------------   -------------     --------------    --------------

     TOTAL LIABILITIES                                             52,905      82,065,652          (2,268,799)       79,849,758


COMMITMENTS AND CONTINGENCIES                                        -               -                   -                 -

STOCKHOLDERS' EQUITY
  Common stock                                                     80,071          10,000             (13,387)           76,684
  Paid-in-capital                                               6,749,733       4,547,750          (5,036,803)        6,260,680
  Unearned ESOP stock                                            (464,881)           -                   -             (464,881)
  Retained earnings, substantially restricted                     409,213       7,104,323                -            7,513,536
  Unrealized gain on available for sale
    securities, net of taxes                                         -            557,117                -              557,117
                                                        -----------------   -------------     --------------    --------------

     TOTAL STOCKHOLDERS' EQUITY                                 6,774,136      12,219,190          (5,050,190)       13,943,136
                                                        -----------------   -------------     --------------    --------------

TOTAL LIABILITIES AND STOCKHOLDERS'
       EQUITY                                           $       6,827,041   $  94,284,842     $   (7,318,989)   $   93,792,894
                                                        =================   =============     ==============    ==============
</TABLE>



                                      -49-



<PAGE>

                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


       NOTE S - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                  Details Of Consolidated Statement Of Earnings

<TABLE>
<CAPTION>
                            Year ended June 30, 1997
                                                                                     Gallup                         GFSB
                                                                      GFSB           Federal                       Bancorp,
                                                                     Bancorp,        Savings                       Inc. and
                                                                       Inc.           Bank       Eliminations     Subsidiary
                                                                    -----------   -----------    ------------   -------------
<S>                                                                 <C>           <C>            <C>            <C>        
Interest income
  Loans receivable
    Mortgage loans                                                  $      --     $ 3,493,788    $      --      $ 3,493,788
    Commercial loans                                                       --         220,280           --          220,280
    Share and consumer loans                                               --         178,877           --          178,877
  Available-for-sale investment securities
    and mortgage-backed securities                                         --       2,053,688           --        2,053,688
  Other interest-earning assets                                         185,595       132,071       (185,595)       132,071
                                                                    -----------   -----------    -----------    -----------

        TOTAL INTEREST EARNINGS                                         185,595     6,078,704       (185,595)     6,078,704

Interest expense
  Deposits                                                                 --       2,596,722           (836)     2,595,886
  Advances from Federal Home Loan Bank                                     --         793,124           --          793,124
Advances to parent company                                                 --         137,561       (137,561)          --
                                                                    -----------   -----------    -----------    -----------

                                                                           --       3,527,407       (138,397)     3,389,010
                                                                    -----------   -----------    -----------    -----------

        NET INTEREST EARNINGS                                           185,595     2,551,297        (47,198)     2,689,694

Provision for loan losses                                                  --          20,794           --           20,794
                                                                    -----------   -----------    -----------    -----------

        NET INTEREST EARNINGS AFTER
          PROVISION FOR LOAN LOSSES                                     185,595     2,530,503        (47,198)     2,668,900

Non-interest earnings
  Income from real estate operations                                       --            --             --             --
  Miscellaneous income                                                     --           5,196           --            5,196
Dividend income from subsidiary                                         587,863          --         (587,863)          --
Net gains from sales of loans                                              --           4,979           --            4,979
Service charge income                                                      --          38,464           --           38,464
                                                                    -----------   -----------    -----------    -----------

        TOTAL NON-INTEREST EARNINGS                                     587,863        48,639       (587,863)        48,639

</TABLE>

                                      -50-



<PAGE>

                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


       NOTE S - DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

            Details Of Consolidated Statement Of Earnings - Continued

<TABLE>
<CAPTION>
                            Year ended June 30, 1997

                                                                                       Gallup                          GFSB
                                                                        GFSB           Federal                        Bancorp,
                                                                       Bancorp,        Savings                        Inc. and
                                                                         Inc.           Bank        Eliminations     Subsidiary
                                                                    -----------      -----------    ------------    -----------
<S>                                                                 <C>            <C>            <C>            <C>        
Non-interest expense
  Compensation and benefits                                             132,250        750,260        (47,198)       835,312
  Insurance                                                                --          330,170           --          330,170
  Other                                                                  18,769        220,471           --          239,240
  Occupancy                                                                --          146,252           --          146,252
  Data processing                                                          --           97,582           --           97,582
  Professional fees                                                      53,022         38,753           --           91,775
  Advertising                                                              --           45,942           --           45,942
Stock services                                                           12,680           --             --           12,680
                                                                    -----------    -----------    -----------    -----------

        TOTAL NON-INTEREST EXPENSE                                      216,721      1,629,430        (47,198)     1,798,953
                                                                    -----------    -----------    -----------    -----------

      EARNINGS BEFORE INCOME TAXES                                      556,737        949,712       (587,863)       918,586

Income tax expense
  Currently payable                                                     (31,134)       350,293           --          319,159
  Deferred (benefit)                                                       --          (36,052)          --          (36,052)
                                                                    -----------    -----------    -----------    -----------

                                                                        (31,134)        314,241          --          283,107
                                                                    -----------    -----------    -----------    -----------

      NET EARNINGS                                                  $   587,871    $   635,471    $  (587,863)   $   635,479
                                                                    ===========    ===========    ===========    ===========

</TABLE>

                                      -51-



<PAGE>



                               GFSB Bancorp, Inc.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                             June 30, 1997 and 1996


NOTE T - FAIR VALUE OF FINANCIAL INSTRUMENTS

   The estimated  fair values of the  Company's  financial  instruments  were as
   follows:

<TABLE>
<CAPTION>
                                                                         June 30, 1997
                                                         --------------------------------------------
                                                           Carrying Value              Fair Value
                                                         ------------------       -------------------
<S>                                                      <C>                      <C>                
   Financial Assets:
     Cash and due from banks                             $       1,772,937        $         1,772,937
     Interest-bearing deposits with banks                        1,121,191                  1,121,191
     Federal funds sold                                            100,000                    100,000
     Available-for-sale-investment securities                    4,342,042                  4,342,042
     Available-for-sale mortgage-backed securities              32,069,501                 32,069,501
     Loans receivable, net                                      52,021,929                 53,192,981
     Accrued interest receivable

   Financial Liabilities:
     Transaction deposits                                        4,488,475                  4,488,475
     Savings and now deposits                                   10,606,993                 10,035,204
     Time deposits                                              42,777,018                 42,962,722
     Accrued interest payable                                      153,049                    153,049
     Advances from the FHLB                                     20,930,000                 20,930,474

   Off-Balance-Sheet Liabilities:
     Commitments to extend credit                                       -                       2,000

</TABLE>



                                      -52-



<PAGE>


                              OFFICE LOCATION AND OTHER CORPORATE INFORMATION

                                              CORPORATE OFFICE

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

                                      Board of Directors of GFSB Bancorp, Inc.

                                            Wallace R. Phillips, D.D.S.
                                               Chairman of the Board
                                                 (dentist, retired)
<TABLE>
<CAPTION>


<S>                                                                    <C> 
James Nechero, Jr.                                                     Richard C. Kauzlaric
(President, Eagle Energy, Inc.,                                        (President, Bubany Insurance Agency, Inc.)
a real estate investment company)                                      

George S. Perce                                                        Vernon I. Hamilton
(owner of Perce Engineering, a                                         (President, V.I.
professional engineering and surveying                                 Hamilton Construction Co. Inc.)
company, and Perce Farms of
Deming, a producing pecan grove)

Michael P. Mataya                                                      Charles L. Parker, Jr.
(President and CEO of Indian                                           (President of Sanders 
Capital Distributing Co., a                                            Trading Corp. and Twin Lakes Trading Corp.,
wholesale gasoline marketer)                                           and an employee of Thriftway Marketing Corp.

</TABLE>
                                  Executive Officers of GFSB Bancorp, Inc.

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

                                   ===========================================
<TABLE>
<CAPTION>

<S>                                                                    <C>
Special Counsel:                                                       Independent Auditors:
Malizia, Spidi, Sloane & Fisch, P.C.                                   Atkinson & Co., Ltd.
One Franklin Square                                                    707 Broadway, NE
1301 K. Street, NW, Suite 700 East                                     Suite 400
Washington, D.C. 20005                                                 Albuquerque, NM 87102
</TABLE>
                                           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,  1997 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 24, 1997.


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