Washington Bancorp



                               1997 Annual Report



<PAGE>



                               WASHINGTON BANCORP







                               TABLE OF CONTENTS


Letter to Stockholders........................................
Selected Consolidated Financial Information...................
Management's Discussion and Analysis of Financial Condition
  and Results of Operations...................................
Report of Independent Auditors ...............................
Consolidated Financial Statements.............................
Directors and Executive Officers .............................
Stockholder Information.......................................



                       CONSOLIDATED FINANCIAL HIGHLIGHTS

                                 June 30, 1997
                             (Dollars in Thousands)


Total assets .........................................      $64,875
Total loans, net .....................................       52,530
Investment securities and other earning assets .......       10,890
Deposits .............................................       44,754
Borrowings ...........................................        8,652
Net income ...........................................          565
Stockholders' equity .................................       10,675
Stockholders' equity as a percent of assets ..........       16.45%


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

                                 ANNUAL MEETING

The Annual Meeting of Stockholders of Washington Bancorp will be held on October
15,  1997 at 4:30 P.M.  at the office of the  Company,  located at 102 East Main
Street, Washington, Iowa.

--------------------------------------------------------------------------------
<PAGE>


                               WASHINGTON BANCORP
                              102 East Main Street
                             Washington, Iowa 52353



                                                              September 15, 1997



Dear Fellow Stockholders:


It is with  pleasure  that  the  board  of  directors,  officers,  and  staff of
Washington  Bancorp and our wholly owned subsidiary,  Washington Federal Savings
Bank, provide you with our second annual report.

Washington  Federal Savings has served the mortgage and consumer credit needs of
Southeast Iowa for over sixty years as a mutual  company.  In our two years as a
stock company,  and  specifically a public company,  our goals have not changed.
Our  mission is to  continue  as a strong,  customer-driven,  community-involved
financial  institution  providing  diversified  services for both depositors and
borrowers, with attention to present and future needs.

Net income for the year ended June 30, 1997 was $564,677.  This  represented  an
increase of 28% over last year.  Capital levels grew to $10,675,431  compared to
$10,548,165 at June 30, 1996.  This results in a capital ratio of 16.45% at June
30, 1997 compared to 17.32% at June 30, 1996. Total assets grew from $60,890,943
to  $64,875,034,  an increase of  $3,984,091  or 6.5% when  compared to June 30,
1996.

Our directors,  officers and staff have strong ties to our  community.  Numerous
local civic and charitable  organizations  flourish  because of their enthusiasm
and participation. Washington Federal Savings Bank is committed to future growth
and performance and will  demonstrate this commitment  within our community.  We
have a sixty year history of stability and quality of service to the communities
we serve. Due to our high quality, dedicated personnel, coupled with the support
of you, our stockholders,  we embrace the future with confidence and enthusiasm.
We thank our customers for their loyalty,  our directors and employees for their
dedication, and our stockholders for their support and confidence.

Sincerely,



Stan Carlson
President and Chief Executive Officer
<PAGE>





                  SELECTED CONSOLIDATED FINANCIAL INFORMATION



The following consolidated financial information does not purport to be complete
and is qualified in its entirety by reference to the more detailed  consolidated
financial information contained elsewhere herein.
<TABLE>

                                                                            At June 30,
                                                      --------------------------------------------------------
                                                        1997        1996        1995         1994        1993
                                                      --------------------------------------------------------
                                                                         (in Thousands)
<S>                                                   <C>         <C>          <C>          <C>        <C>  

Selected Financial Condition Data:

Total assets ....................................     $64,875     $60,891      $55,100     $52,985     $48,253
Loans receivable, net ...........................      52,530      40,906       40,435      37,461      33,239
Cash and cash equivalents .......................         808       1,903        1,658         735       2,346
Investment securities ...........................       9,850      14,628       11,517      13,280      11,531
Investment in Federal Home Loan Bank ("FHLB") 
  stock .........................................         466         369          362         320         320
Deposits ........................................      44,754      44,176       42,950      43,872      44,268
Borrowed funds ..................................       8,652       5,505        7,230       4,489         ---
Stockholders' equity ............................      10,675      10,548        4,400       4,141       3,562


                                                                         Year Ended June 30,
                                                      --------------------------------------------------------
                                                        1997        1996        1995         1994        1993
                                                      --------------------------------------------------------
                                                                         (in Thousands)

Selected Operations Data:

Total interest income ..........................       $4,990      $4,207      $ 3,939     $ 3,854     $ 3,850
Total interest expense .........................        2,553       2,499        2,181       2,043       2,248
                                                       -------------------------------------------------------
  Net interest income (expense) ................        2,437       1,708        1,758       1,811       1,602
Provision for loan losses ......................           40          15          ---          --         133
                                                       -------------------------------------------------------
                                                        2,397       1,693        1,758       1,811       1,469
Total noninterest income .......................          231         197          138         209         153
Total noninterest expense ......................        1,712       1,206        1,278       1,149         989
                                                       -------------------------------------------------------

Income before income taxes .....................          916         684          618         871         633
Income tax expense .............................          351         243          259         291         170
                                                       -------------------------------------------------------
Net income .....................................       $  565    $    441      $   359     $   580     $   463
                                                       =======================================================

</TABLE>
<PAGE>

<TABLE>
                                                                          Year Ended June 30,
                                                         ------------------------------------------------------
                                                         1997        1996         1995        1994        1993
                                                         ------------------------------------------------------
<S>                                                      <C>         <C>          <C>         <C>         <C>  
Selected Financial Ratios and Other Data:

Performance Ratios:
  Return on assets (ratio of  net  earnings to          
    average total assets) ..........................     0.90%       0.78%        0.67%       1.14%       0.98%
Interest rate spread information:
  Average during period ............................     3.09        2.55         3.04        3.44        3.29
  End of period ....................................     3.09        2.96         2.91        3.47        3.42
Net interest margin(1) .............................     3.97        3.13         3.38        3.70        3.54
Ratio of operating expense to  average total assets.     2.72        2.15         2.38        2.27        2.10
Return on equity (ratio of net  income to average 
  equity) ..........................................     5.34        6.94         8.41       15.06       13.90


Quality Ratios:
  Non-performing assets to total  assets at end 
    of period(2) ...................................     0.35        0.07         0.54        0.39        0.72
  Allowance for loan losses to non-performing loans.    98.52      475.00        68.81       98.07       57.93

Capital Ratios:
  Equity to total assets at end of period...........    16.45       17.32         7.99        7.82        7.38
  Average equity to average assets .................    16.80       11.31         7.96        7.60        7.08
  Ratio of average interest-earning assets to          
    average  interest-bearing liabilities ..........   121.22      112.79       108.01      106.24      105.20
  
Number of full service offices .....................        1           1            1           1           1

---------------------
<FN>

(1)  Net interest income divided by average interest-earning assets.

(2)  Non-performing assets consist of nonaccruing loans, accruing loans past-due
     90 or more days and foreclosed assets.
</FN>
</TABLE>

Capital Requirements.  The following table sets forth Washington Federal Savings
Bank's compliance with its capital requirements at June 30, 1997.


                                                              Capital Level
                                  OTS Requirement         at June 30, 1997(1)
                                  ---------------     --------------------------
                                   % of                % of             Amount
                                  Assets   Amount     Assets   Amount  of Excess
                                  ---------------     --------------------------
                                            (Dollars in Thousands)
Capital Standard
----------------
Tangible Capital ...........       1.5%   $  972       13.4%   $8,693     $7,721
Core Capital ...............       3.0%   $1,945       13.4%   $8,693     $6,748
Risk-based Capital .........       8.0%   $3,415       20.8%   $8,898     $5,483

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

(1)  Tangible  and core  capital  figures  are  determined  as a  percentage  of
     adjusted  total  assets;  risk-based  capital  figures are  determined as a
     percentage of risk-weighted assets in accordance with OTS regulations.


<PAGE>


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


General


Washington Bancorp ("Washington" or the "Company"), an Iowa corporation,  became
the holding company of Washington Federal Savings Bank (the "Bank") on March 11,
1996.  The Bank is a federally  chartered  stock savings bank  headquartered  in
Washington, Iowa. The principal asset of the Company is the outstanding stock of
the Bank, its  wholly-owned  subsidiary.  The Company  presently has no separate
operations  and its  business  consists  only of the  business of the Bank.  All
references to the Company,  unless otherwise  indicated,  at or before March 11,
1996 refer to the Bank.

The earnings of Washington depend primarily on its level of net interest income,
which is the difference  between  interest  earned on  interest-earning  assets,
consisting  primarily of mortgage  loans,  and  investment  securities,  and the
interest paid on interest-bearing liabilities, consisting primarily of deposits.
Net interest income is a function of Washington's  "interest rate spread," which
is the difference  between the average yield earned on  interest-earning  assets
and the average rate paid on  interest-bearing  liabilities.  The interest  rate
spread  is  affected  by  regulatory,  economic  and  competitive  factors  that
influence interest rates, loan demand and deposit flows. Washington,  like other
financial institutions,  is subject to interest-rate risk to the degree that its
interest-earning  assets mature or reprice at different times, or on a different
basis, than its interest-bearing  liabilities.  To a lesser extent, Washington's
operating  results are also affected by the amount of its  non-interest  income,
including  service  charges  and loan  fees,  and other  income  which  includes
commissions  from  sales  of  insurance  by  the  Bank's  service   corporation.
Non-interest expense consists primarily of compensation and benefits,  occupancy
and equipment,  federal insurance premiums, data processing, and other operating
expenses.  Washington's  operating results are significantly affected by general
economic  conditions,  in  particular,  the  changes  in market  interest  rate,
government policies and actions by regulatory authorities.

Washington's  basic mission is to originate mortgage loans on a profitable basis
to the communities it serves.  In seeking to accomplish this mission,  the Board
of Directors and  management  have adopted a business  strategy  designed (i) to
maintain Washington's capital level in excess of regulatory  requirements;  (ii)
to maintain  Washington's  asset quality;  (iii) to control operating  expenses;
(iv) to maintain,  and if possible,  increase  Washington's interest rate spread
and other income; and (v) to manage Washington's exposure to changes in interest
rates.   Washington  has  attempted  to  achieve  these  goals  by  focusing  on
originating  first  mortgage home loans,  consumer  loans and by offering a full
range of deposit products.

On June 24, 1997,  the Company  entered  into a definitive  agreement to acquire
Rubio  Savings  Bank of  Brighton  ("Rubio")  pursuant  to a merger in which the
Company will pay Rubio  stockholders  a total of  approximately  $4.6 million in
cash (the "Rubio Merger").  Rubio is  headquartered in Brighton,  Iowa and as of
June  30,  1997  had  assets  of  approximately   $21.3  million,   deposits  of
approximately  $17.9  million and  stockholder's  equity of  approximately  $3.2
million.  The Rubio  Merger will be accounted  for as a purchase,  is subject to
regulatory  and  stockholder  approval and is expected to close by calendar year
end.

Financial Condition

Total  Assets.  Total assets  increased  from $55.1  million at June 30, 1995 to
$60.9  million  at June 30,  1996 to $64.9  million  at June 30,  1997.  The net
increase  from 1995 to 1996 was  primarily  funded by the net proceeds  from the
Company's  initial public offering  ("IPO").  The net increase from 1996 to 1997
was primarily  funded by $3.1 million in  borrowings  from the Federal Home Loan
Bank ("FHLB") of Des Moines and a $4.8 million decrease in investment securities
due to the maturity and call of certain of such securities.

Loans Receivable. Loans receivable, net increased from $40.4 million at June 30,
1995 to $42.9  million at June 30, 1996 to $52.5  million at June 30, 1997.  The
increases  have been  primarily  due to  increased  loan demand in  Washington's
market area. The Company's  non-performing assets were $229,000 or .35% of total
assets at June 30, 1997 as  compared to $44,000 or .07% of total  assets at June
30,  1996.  Management  feels  that  non-performing  assets to total  assets was
unusually  low at June 30, 1996 and that the  increase at June 30, 1997  remains
within   industry   standards.   Management  is  committed  to  maintaining  the
non-performing assets to total asset ratio within industry standards.

Deposits.  Deposits increased  $600,000 or 1.36 % to $44.8 million,  at June 30,
1997 from $44.2 million at June 30, 1996.  Transaction and savings deposits rose
as a percentage  of total  deposits from $13.9 million or 31.2% at June 30, 1996
to $14.3 million or 32.0% at June 30, 1997. Certificates of deposit dropped as a
percentage  of total  deposits  from $30.3  million or 68.3% at June 30, 1996 to
$30.4 million or 68.0% at June 30, 1997.
<PAGE>

Deposits increased $1.3 million or 2.9% to $44.2 million,  at June 30, 1996 from
$42.9  million at June 30,  1995.  Transaction  and savings  deposits  rose as a
percentage  of total  deposits  from $12.6  million or 29.3% at June 30, 1995 to
$13.9 million or 31.2% at June 30, 1996.  Certificates  of deposit  dropped as a
percentage  of total  deposits  from $30.3  million or 70.5% at June 30, 1995 to
$30.3 million or 68.3% at June 30, 1996.

Stockholders'  Equity.  Stockholders' equity increased from $4.4 million at June
30, 1995 to $10.5  million at June 30, 1996 to $10.7  million at June 30,  1997.
The increase  from June 30, 1995 to June 30, 1996 was  primarily  due to the net
proceeds  from the IPO.  The  increase  from June 30,  1996 to June 30, 1997 was
primarily due to net income of $565,000,  the amortization of compensation under
the Recognition  and Retention Plan of $72,000,  the net reduction in unrealized
losses on available for sale securities of $65,000, and the allocation of shares
in the Employee Stock Ownership Plan of $57,000 partially offset by the $349,000
payment for the  repurchase  of 26,300 shares of  Washington's  common stock and
dividends  paid of $214,000.  The portfolio of available for sale  securities is
comprised primarily of investment  securities carrying fixed interest rates. The
fair value of these  securities is subject to changes in interest  rates and the
fair value of these  securities is less than their carrying value as of June 30,
1997 due to an increase in interest rates since the purchase date of securities.
<PAGE>

Net Interest Income Analysis

The following  table presents for the periods  indicated the total dollar amount
of  interest  income  from  average  interest-earning  assets and the  resultant
yields,  as well as the total  dollar  amount of  interest  expense  on  average
interest-bearing   liabilities  and  the  resultant  rates.  No  tax  equivalent
adjustments were made. All average balances are monthly average balances.
<TABLE>

                                                                           Year Ended June 30,
                                      -------------------------------------------------------------------------------------------
                                                    1997                           1996                          1995
                                      ------------------------------ ----------------------------  ------------------------------
                                        Average    Interest            Average   Interest            Average    Interest
                                      Outstanding  Earned/    Yield/ Outstanding Earned/   Yield/  Outstanding  Earned/    Yield/
                                        Balance     Paid       Rate    Balance    Paid      Rate     Balance     Paid       Rate
                                      -----------  --------   ------ ----------- --------  ------  -----------  --------   ------
                                                                                  (Dollars in Thousands)
<S>                                   <C>          <C>        <C>    <C>         <C>       <C>     <C>          <C>        <C>

Interest-earning assets:
  Loans receivable(1) ...............   $47,538    $ 4,128     8.68%   $41,329   $3,446     8.34%    $39,077    $ 3,183     8.15%
  Investment securities .............    11,528        757     6.57      9,580      632     6.60      12,044        710     5.90
  FHLB stock ........................       411         29     7.01        366       26     7.10         338         26     7.69
  Other interest-earning assets .....     1,822         76     4.18      3,311      103     3.11         572         20     3.50
                                        -------    -------    ------   -------   ------   -------    -------    -------   -------
    Total interest-earning assets (1)   $61,299    $ 4,990     8.14%   $54,586   $4,207     7.71%    $52,031    $ 3,939     7.57%
                                        =======    =======   =======   =======   ======   =======    =======    =======   =======

Interest-bearing liabilities:
  Certificates of deposit ...........   $30,682    $ 1,741     5.68%   $30,658   $1,746     5.70%    $28,691    $ 1,499     5.22%
  NOW, money market and passbook
    savings .........................    13,226        472     3.57     12,955      496     3.83      14,546        432     2.97
  Advances from borrowers for taxes
    and insurance ...................       155          2     1.52        163        4     2.45         163          5     3.07
  FHLB advances .....................     6,504        337     5.19      4,621      253     5.48       4,773        245     5.13
                                        -------    -------             -------   ------              -------    -------      
    Total interest-bearing 
      liabilities ...................   $50,567    $ 2,553     5.05    $48,397   $2,499     5.16     $48,173    $ 2,181     4.53
                                        =======    =======             =======   ======              =======    =======

Net interest income .................              $ 2,437                       $1,708                         $ 1,758
                                                   =======                       ======                         =======
Net interest rate spread(2) .........                          3.09%                        2.55%                          3.04%
                                                             =======                      =======                         ====== 
Net interest-earning assets .........   $10,732                        $ 6,189                       $ 3,858
                                        =======                        =======                       =======

Net yield on average interest-
  earnings assets ...................                          3.97%                        3.13%                          3.38%
                                                             =======                      =======                         ====== 
                                                       
Net interest-earnings assets to
  average interest-earning 
  liabilities ......................                121.22%                     112.79%                         108.01%
                                                    =======                     =======                         =======
<FN>
(1)  Calculated net of deferred loan fees, loan discounts,  loans in process and
     loss reserves.

(2)  Net interest  rate spread  represents  the  difference  between the average
     yield on  interest-earning  assets and the average rate on interest-bearing
     liabilities.
</FN>
</TABLE>
<PAGE>

The following table presents the weighted  average yields on loans,  investments
and other  interest-earning  assets,  and the  weighted  average  rates  paid on
deposits and  borrowings  and the  resultant  interest rate spreads at the dates
indicated.

                                                             At June 30,
                                                       -------------------------
                                                       1997      1996      1995
                                                       -------------------------

Weighted average yield on:
  Loans receivable ...............................     8.55%     8.52%     8.30%
  Investment securities ..........................     6.61      6.87      6.85
  Other interest-earning assets ..................     5.96      5.33      5.92
Combined weighted average yield on interest-      
 earning assets ..................................     8.21      8.05      7.93

Weighted average rate paid on:
  Passbook savings accounts ......................     2.30      2.30      2.50
  NOW accounts ...................................     2.29      2.30      2.50
  Money market accounts ..........................     3.92      4.14      3.26
  Certificates of deposit ........................     5.74      5.67      5.62
  Advances from borrowers for taxes & insurance ..     2.30      2.30      2.50
  FHLB advances ..................................     5.50      5.46      5.85
Combined weighted average rate paid on interest-     
  bearing liabilities ............................     5.12      5.09      5.02
Spread ...........................................     3.09      2.96      2.91

Rate/Volume Analysis

The following  schedule presents the dollar amount of changes in interest income
and  interest  expense  for major  components  of  interest-earning  assets  and
interest-bearing  liabilities.  It  distinguishes  between  the  changes  due to
changes in outstanding  balances and those due to changes in interest rates. For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information is provided on changes  attributable to (i) changes in volume (i.e.,
changes in volume  multiplied by prior  interest  rate) and (ii) changes in rate
(i.e.,  changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume,  which cannot be segregated,  have
been allocated  proportionately to the changes due to the volume and the changes
due to rate.
<TABLE>
                                                                      Year Ended June 30,
                                                    -----------------------------------------------------
                                                           1997 vs. 1996               1996 vs. 1995
                                                    --------------------------- -------------------------
                                                       Increase                   Increase
                                                      (Decrease)                 (Decrease)
                                                        Due to         Total       Due to         Total
                                                    ---------------   Increase  -------------    Increase
                                                    Volume    Rate   (Decrease) Volume   Rate   (Decrease)
                                                    ------    -----  ---------- ------   -----  ----------
<S>                                                 <C>       <C>    <C>        <C>      <C>    <C>
Interest-earning assets:
  Loans receivable ...............................   $ 536    $ 146    $ 682    $ 188    $  75    $ 263
  Investment securities ..........................     128       (3)     125     (156)      78      (78)
  FHLB stock .....................................       3       --        3        2       (2)      --
  Other interest-earning assets ..................     (55)      28      (27)      85       (2)      83
                                                     -----    -----    -----    -----    -----    -----
Total interest-earning assets ....................   $ 612    $ 171    $ 783    $ 119    $ 149    $ 268
                                                     =====    =====    =====    =====    =====    =====
Interest-bearing liabilities:
 Certificates of Deposit .........................   $   1    $  (6)   $  (5)   $ 106    $ 141    $ 247
 NOW, money market, and passbook savings .........      10      (34)     (24)     (51)     115       64
 Advances from borrowers for
  taxes and insurance ............................      --       (1)      (1)      --       (1)      (1)
  FHLB advances ..................................      98      (14)      84       (8)      16        8
                                                     -----    -----    -----    -----    -----    -----
Total interest-bearing liabilities ...............   $ 109    $ (55)   $  54    $  47    $ 271    $ 318
                                                     =====    =====    =====    =====    =====    =====
Net interest income ..............................                     $ 729                      $ (50)
                                                                       =====                      =====
</TABLE>

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

Performance  Summary.  Net income for the year ended June 30, 1997  increased by
$124,000 or 27.9% to $565,000  from  $441,000  for the year ended June 30, 1996.
The increase was primarily due to an increase in net interest income of $729,000
and an  increase  in  noninterest  income  of  $34,000,  partially  offset by an
increase in noninterest  expense of $506,000,  an increase in provision for loan
losses of $25,000 and an increase  in income tax  expense of  $108,000.  For the
years  ended June 30,  1997 and 1996 the  return on average  assets was .90% and
 .78%,  respectively,  while  return on  average  equity  was  5.34%  and  6.94%,
respectively.
<PAGE>

Net  Interest  Income.  For the year ended June 30, 1997,  net  interest  income
increased by $729,000 as compared to June 30, 1996. This reflects an increase of
$783,000 in interest income to $5.0 million from $4.2 million and an increase in
interest expense of $54,000 to $2.6 million from $2.5 million.  The net increase
was  primarily due to the increase in  interest-earning  assets as a result of a
strong loan demand as well as an increase in the net interest rate spread.

For the year ended June 30, 1997 the average  yield on  interest-earning  assets
was 8.14%  compared  to 7.71% for 1996.  The  average  cost of  interest-bearing
liabilities  was 5.05% for the year ended June 30, 1997,  a decrease  from 5.16%
for the year ended June 30, 1996. The average balance of interest-earning assets
increased by $6.7 million to $61.3 million for the year ended June 30, 1997 from
$54.6  million for the year ended June 30,  1996.  During this same time period,
the average balance of interest-bearing liabilities increased by $2.2 million to
$50.6  million for the year ended June 30, 1997 from $48.4  million for the year
ended June 30, 1996.

Due to the lower funding costs,  the average  interest rate spread was 3.09% for
the year ended June 30, 1997 compared to 2.55% for the year ended June 30, 1996.
The  average  net  interest  margin was 3.97% for the year  ended June 30,  1997
compared to 3.13% for the year ended June 30, 1996.

Provision  for Loan Loss.  During the year ended June 30, 1997 the provision for
loan loss was $40,000  compared to $15,000 for the year ended June 30, 1996. The
primary  reason for the provision was the increased  size of the loan  portfolio
during the last few years.  The Company's loan portfolio  consists  primarily of
residential  mortgage  loans,  and it has  experienced  and a minimal  amount of
charge-offs  in the past three years.  The allowance for loan losses of $226,000
or .43% of loans  receivable,  net at June 30, 1997 compares to $209,000 or .49%
of loans  receivable,  net at June 30, 1996.  The allowance for loan losses as a
percentage  of  non-performing  assets was 98.52% at June 30, 1997,  compared to
475.00% at June 30, 1996.

Management  will  continue  to monitor  its  allowance  for loan losses and make
additions to the  allowance  through the  provision  for loan losses as economic
conditions dictate.  Although Washington maintains its allowance for loan losses
at a level which management considers to be adequate to provide for loan losses,
there can be no assurance that future losses will not exceed  estimated  amounts
or that  additional  provisions  for loan  losses  will not be  required  in the
future.

Non-Interest  Income.  For the year ended  June 30,  1997,  non-interest  income
increased  $34,000  or 17.3%  compared  to the  year  ended  June  30,  1996 due
primarily  to a $32,000  increase in bank  service  charges and fees,  a $23,000
increase  in  insurance   commissions,   and  an  $100,000   increase  in  other
non-interest income offset by a $32,000 decrease in securities gains.

Bank service charges and fees increased  $32,000 from $85,000 for the year ended
June 30, 1996 to $117,000  for the year ended June 30, 1997  primarily  due to a
$16,000  increase  in  overdraft  fees and a $9,000  increase  in ATM and  other
electronic funds transfer fees.  Insurance  commissions  increased  $23,000 from
$55,000 at June 30, 1996 to $78,000 at June 30, 1997 due to an increase in sales
of credit life and disability  insurance products through  Washington  Financial
Services.  Other non-interest  income increased $11,000 from $17,000 at June 30,
1996 to $28,000 at June 30, 1997 primarily due to a gain realized as a result of
the disposition of an REO property.

Non-Interest  Expense.  For the year ended June 30, 1997,  non-interest  expense
increased  $506,000 to $1.7 million  compared to $1.2 million for the year ended
June 30, 1996  primarily  due to a $260,000  increase in SAIF deposit  insurance
premium, a $140,000 increase in compensation and benefits, a $99,000 increase in
other  non-interest  expense and a $12,000  increase in occupancy  and equipment
offset by a $5,000 decrease in data processing.
<PAGE>

SAIF deposit insurance premium expense increased  $260,000 from $117,000 at June
30,  1996 to  $377,000  at June 30,  1997  primarily  due to the  one-time  SAIF
assessment.  Compensation  and benefits  increased  $140,000 to $722,000 for the
year  ended  June 30,  1997  from  $582,000  for the year  ended  June 30,  1997
primarily due to $107,000 increase in employee benefits through the ESOP and RRP
plans and a $38,000 increase in employee's salaries.  Other non-interest expense
increased  $99,000  from  $289,000 at June 30, 1996 to $388,000 at June 30, 1997
primarily due to the increase in professional  fees and overhead costs since the
conversion. Auditing and accounting fees increased $38,000, legal fees increased
$16,000 and postage and delivery increased $10,000.  Management feels that these
fees can and are  being  controlled  but not  eliminated  as a result of the SEC
reporting  requirements and the increased  shareholder  correspondence since the
conversion to a public  company in March 1996.  Occupancy and equipment  expense
increased  $12,000  from  $138,000 at June 30, 1996 to $150,000 at June 30, 1997
primarily due to a $10,000  increase in property tax as a result of the increase
in  assessed  value  of the  drive-through  facility.  Data  processing  expense
decreased  $5,000  from  $80,000 at June 30,  1996 to  $75,000 at June 30,  1997
primarily due to the timing of bill payments.

The deposits of savings  institutions  such as the Bank are presently insured by
the Savings Association Insurance Fund (the "SAIF"),  which, along with the Bank
Insurance  Fund (the "BIF"),  are the two insurance  funds  administered  by the
Federal Deposit Insurance Corporation (the "FDIC"). Financial institutions which
are members of the BIF have experienced  substantially  lower deposit  insurance
premiums because the BIF has achieved its required level of reserves,  while the
SAIF prior to  September,  1996 had not yet achieved its  required  reserves.  A
recapitalization  plan for the SAIF was signed by the President on September 30,
1996 as part of the Economic Growth and Regulatory  Paperwork  Reduction Act and
provided for a one-time  special  assessment of .657% of deposits imposed on all
SAIF insured  institutions  to enable the SAIF to achieve its required  level of
reserves. The assessment of .657% was assessed based on deposits as of March 31,
1995 and the Bank's special assessment amounted to approximately  $294,000 after
taxes. Accordingly, this special assessment significantly increased non-interest
expense, and adversely affected the Company's results of operations. Conversely,
depending upon the Bank's capital level and  supervisory  rating,  future annual
deposit  insurance  premiums  are  expected  to decrease  for periods  beginning
January 1, 1997, to approximately .064% from .23% of deposits previously paid by
the Bank.

As part of the legislation, Congress is considering requiring all federal thrift
institutions,  such as the  Bank,  to either  convert  to a  national  bank or a
state-chartered depository institution by January 1, 1998. The OTS also would be
abolished  and  its  functions  transferred  among  the  other  federal  banking
regulators.  Certain  aspects  of the  legislation  remain  to be  resolved  and
therefore  no  assurance  can  be  given  as to  whether  or in  what  form  the
legislation will be enacted or its effect on the Company and the Bank.

In addition, legislation was recently passed which will require the recapture of
a portion of the Bank's tax bad debt reserve.  The  recapture  will occur over a
six-year  period and began with the Bank's  fiscal year ending June 30, 1997. It
is not  anticipated  that this recapture will have a material  adverse effect on
the Company's results of operations  because the Bank had already  established a
deferred tax liability of  approximately  $156,000 on its balance sheet for this
purpose.

Income  Taxes.  Income taxes  increased  $108,000 to $351,000 for the year ended
June 30, 1997 from  $243,000  for the year ended June 30,  1996.  The  effective
income  tax rates  for the years  ended  June 30,  1997 and 1996 were  38.3% and
35.5%,  respectively.  The fluctuations in the effective income tax rate relates
primarily to changes in the amount of federally  tax-exempt  municipal  interest
income.

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

Performance  Summary.  Net income for the year ended June 30, 1996  increased by
$82,000 or 23% to $441,000 from  $359,000 for the year ended June 30, 1995.  The
increase was primarily due to an increase in  noninterest  income of $59,000,  a
decrease in noninterest expense of $72,000, and a decrease in income tax expense
of $16,000, partially offset by a decrease in net interest income of $50,000 and
an increase in  provision  for loan losses of $15,000.  For the years ended June
30, 1996 and 1995 the return on average assets was .78% and .67%,  respectively,
while return on average equity was 6.94% and 8.41%, respectively.
<PAGE>

Net  Interest  Income.  For the year ended June 30, 1996,  net  interest  income
decreased by $50,000 as compared to the year ended June 30, 1995.  This reflects
an increase of $268,000 in interest income to $4.2 million from $3.9 million and
an increase in interest  expense of $318,000 to $2.5 million from $2.2  million.
The net decrease was primarily due to the cost of the Company's interest-bearing
liabilities  increasing as a result of customer  preference for higher  yielding
products  partially  offset  by an  increase  in the  yield on  interest-earning
assets.

For the year ended June 30, 1996 the average  yield on  interest-earning  assets
was 7.71%  compared  to 7.57% for 1995.  The  average  cost of  interest-bearing
liabilities  was 5.16% for the year ended June 30, 1996 an  increase  from 4.53%
for the year ended June 30, 1995. The average balance of interest-earning assets
increased by $2.6 million to $54.6 million for the year ended June 30, 1996 from
$52.0  million for the year ended June 30,  1995.  During this same time period,
the average balance of interest-bearing  liabilities increased by $.2 million to
$48.4  million for the year ended June 30, 1996 from $48.2  million for the year
ended June 30, 1995.

Due to the higher funding costs,  the average interest rate spread was 2.55% for
the year ended June 30, 1996 compared to 3.04% for the year ended June 30, 1995.
The  average  net  interest  margin was 3.13% for the year  ended June 30,  1996
compared to 3.38% for the year ended June 30, 1995.

Provision  for Loan Loss.  During the year ended June 30, 1996 the provision for
loan loss was  $15,000  compared to none for the year ended June 30,  1995.  The
primary  reason for the provision was the increased  size of the loan  portfolio
during the last few years.  The Company's loan portfolio  consists  primarily of
residential  mortgage  loans,  and  it  has  experienced  little  change  in the
composition  of the loan  portfolio and a minimal  amount of  charge-offs in the
past three  years.  The  allowance  for loan losses of $209,000 or .49% of loans
receivable,  net at June  30,  1996  compares  to  $203,000  or  .50%  of  loans
receivable,  net at June 30, 1995. The allowance for loan losses as a percentage
of  non-performing  assets was 475.00% at June 30,  1996,  compared to 68.81% at
June 30, 1995.

Management  will  continue  to monitor  its  allowance  for loan losses and make
additions to the  allowance  through the  provision  for loan losses as economic
conditions dictate.  Although Washington maintains its allowance for loan losses
at a level which management considers to be adequate to provide for loan losses,
there can be no assurance that future losses will not exceed  estimated  amounts
or that  additional  provisions  for loan  losses  will not be  required  in the
future.

Non-Interest  Income.  For the year ended  June 30,  1996,  non-interest  income
increased  $59,000  or 42.8%  compared  to the  year  ended  June  30,  1995 due
primarily to security  gains  recognized in fiscal year 1996 and a $30,000 other
than temporary  impairment on equity securities in fiscal year 1995, offset by a
net decrease in bank service charges,  primarily due to an increase in overdraft
fees which had the effect of reducing  the number of  accounts  in an  overdraft
position. Management is committed to realigning the Bank's service charges to be
more  competitive  with  other  financial  service  corporations  our  size  yet
remaining conscious of the needs of our customers.

Non-Interest Expense. For the year ended June 30, 1996, non-interest expense has
decreased  $72,000 to $1.2  million  compared to $1.3 million for the year ended
June 30, 1995.  Compensation and benefits  decreased $32,000 to $582,000 for the
year ended June 30, 1996 from $614,000 for the year ended June 30, 1995 due to a
reduction in average full-time  equivalent  employees during the year ended June
30, 1996. Other expenses  decreased  $48,000 to $289,000 for the year ended June
30, 1996 from  $338,000  for the year ended June 30,  1995.  The decrease can be
primarily  attributed to legal and accounting  fees incurred  during fiscal year
1995 relative to isolated data processing and compensation issues.

Income Taxes. Income taxes decreased $16,000 to $243,000 for the year ended June
30, 1996 from $259,000 for the year ended June 30, 1995.  The  effective  income
tax rates for the  years  ended  June 30,  1996 and 1995 were  35.4% and  41.9%,
respectively.  The  fluctuations  in  the  effective  income  tax  rate  relates
primarily to the changes to the over\under accrual of income taxes.
<PAGE>

Asset/Liability Management

One of  Washington's  principal  financial  objectives  is to achieve  long-term
profitability  while reducing its exposure to  fluctuations  in interest  rates.
Washington  has sought to reduce  exposure of its  earnings to changes in market
interest rates by managing the mismatch  between asset and liability  maturities
and interest rates.  The principal  element in achieving this objective has been
to increase the interest-rate  sensitivity of Washington's assets by originating
loans with interest rates subject to periodic  adjustment to market  conditions.
Accordingly,  Washington's  primary one- to four-family  loan product has been a
three year balloon loan  accounting  for $20.9 million of its $52.5 million loan
portfolio,  or 39.8% at June 30, 1997.  In keeping with the objective to improve
interest-rate   sensitivity  and  in  order  to  satisfy  customer  preferences,
management  made the decision to discontinue  the three year balloon product and
replace it with an array of adjustable  rate  mortgage  loan products  effective
March 1996. Adjustable rate loans account for $16.0 million of its $52.5 million
loan portfolio, or 30.5% at June 30, 1997.

Washington has  historically  relied upon retail deposit accounts as its primary
source of funds and will  continue  to do so.  Management  believes  that retail
deposit  accounts  and long term  borrowings  as sources of funds,  compared  to
brokered  deposits,  reduce the effects of interest  rate  fluctuations  because
these deposits and borrowings generally represent a more stable source of funds.
In addition,  Washington has emphasized  longer term certificate  accounts in an
effort to extend the maturity of its liabilities.

Net Portfolio Value. In order to encourage savings  associations to reduce their
interest  rate risk,  the Office of Thrift  Supervision  ("OTS")  adopted a rule
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 net  portfolio
value  ("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  hypothetical  200 basis point  ("bp")  changes in market
interest  rates.  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 rules provide that the OTS will calculate
the IRR component  quarterly for each  institution.  Washington,  based on asset
size and risk-based capital, has been informed by the OTS that it is exempt from
this rule.

Presented  on the  following  table,  as of June 30,  1997,  is an  analysis  of
Washington's  interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points in accordance with OTS regulations.  For example, a
400 basis point increase in interest rates would  decrease  Washington's  NPV by
$2.2  million or 22% and a 400 basis  point  decrease  in  interest  rates would
increase Washington's NPV by $1.3 million or 13%. As previously  mentioned,  the
OTS has informed the Bank that it is not subject to the IRR component  discussed
above.  Further, were the Bank subject to the IRR component at June 30, 1997, it
would  not have  been  considered  to have had a greater  than  normal  level of
interest  rate  exposure  and a  deduction  from  capital  would  not have  been
required, although it is still subject to interest rate risk and, as can be seen
below, increasing rates will reduce the Bank's NPV.

                              At June 30, 1997
----------------------------------------------------------------------------
             Net Portfolio Value                    NPV as % of PV of Assets
--------------------------------------------------  ------------------------
Change in Rate     $ Amount  $ Change    % Change     NPV Ratio     Change
----------------   --------  --------    ---------   ----------   ---------
                 (Dollars in Thousands)

+400 bp ........   $ 7,971   $(2,190)       (22)%      12.75%     (264) bp
+300 bp ........     8,608    (1,553)       (15)       13.56      (183) bp
+200 bp ........     9,206      (956)        (9)       14.29      (109) bp
+100 bp ........     9,736      (425)        (4)       14.92       (47) bp
   0 bp ........    10,161        --         --        15.39        --
-100 bp ........    10,453       291          3        15.67        28  bp
-200 bp ........    10,685       524          5        15.87        48  bp
-300 bp ........    10,993       832          8        16.15        76  bp
-400 bp ........    11,448     1,287         13        16.60       121  bp
<PAGE>

Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation of NPV.  Although  certain assets and  liabilities  may have similar
maturities or periods within which they will reprice, they may react differently
to changes in market  interest  rates.  The interest  rates on certain  types of
assets and  liabilities  may fluctuate in advance of changes in market  interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates. Additionally,  Washington's primary loan products, the three-year balloon
and  adjustable  rate  loans,  may  permit  Washington  to adjust to  changes in
interest  rates on a  short-term  basis  and over  the  life of the  asset.  The
proportion of three-year  balloon and adjustable  rate loans could be reduced in
future periods if market  interest rates decrease and remain at lower levels for
a sustained period, due to increased refinance  activity.  Further, in the event
of a change in interest  rates,  prepayment  and early  withdrawal  levels would
likely  deviate  significantly  from those  assumed in the table.  Finally,  the
ability of many  borrowers to service their  three-year  balloon and  adjustable
rate  mortgage  loans may  decrease  in the event of a sustained  interest  rate
increase.

Liquidity and Capital Resources

Washington's  primary sources of funds are deposits,  long-term  borrowings from
the FHLB,  repayments  and  prepayments  of loans,  the  maturity of  investment
securities and interest income.  Although maturity and scheduled amortization of
loans are relatively predictable sources of funds, deposit flows and prepayments
on loans are  influenced  significantly  by  general  interest  rates,  economic
conditions and competition.

The primary investing activity of Washington is originating mortgage loans to be
held to  maturity.  For the fiscal  years  ended June 30,  1997,  1996 and 1995,
Washington  originated  loans for its portfolio in the amount of $28.2  million,
$16.7 million and $11.1  million,  respectively.  These  activities  were funded
primarily by FHLB  borrowings  and principal  repayments of loans,  and proceeds
from the IPO. FHLB borrowings have been more costly than deposits, but less than
other financing sources available.

For  investment  and  liquidity  purposes,  Washington  maintains a portfolio of
investment  securities  including  U.S.  Treasury  securities,  U.S.  government
agencies,  state and political  subdivisions,  mortgaged-backed  securities  and
corporation and other securities.

The Bank is required to maintain  minimum  levels of liquid assets under the OTS
regulations.  Savings  institutions  are  required to maintain an average  daily
balance of liquid assets (including cash,  certain time deposits,  and specified
U.S.  Government,  state or federal agency obligations) of not less than 5.0% of
its average daily balance of net withdrawal accounts plus short-term borrowings.
It is the  Bank's  policy  to  maintain  its  liquidity  portfolio  in excess of
regulatory  requirements.  The Bank's liquidity ratios were 8.7%, 14.6% and 8.6%
respectively, at June 30, 1997, 1996 and 1995.

Cash was generated by Washington's  operating  activities during the years ended
June 30, 1997,  1996 and 1995,  primarily as a result of net income and, in 1996
the IPO.  The  adjustments  to  reconcile  net  income to net cash  provided  by
operations during the periods presented  consisted  primarily of amortization of
premiums and discounts on debt securities, depreciation expense, deferred income
taxes and  increases and  decreases in other assets and other  liabilities.  The
primary investing  activities of Washington are the origination of loans and the
purchase of  investment  securities;  which are funded with cash  provided  from
operations and financing  activities,  as well as proceeds from amortization and
prepayments  on  existing  loans  and  proceeds  from  sales and  maturities  of
securities.  The  primary  financing  activities  (other  than  the IPO in 1996)
consist of deposits, borrowing/repayments with the FHLB of Des Moines.

Washington's  most liquid  assets are cash and cash  equivalents,  which include
short-term  investments.  At June  30,  1997,  1996  and  1995,  cash  and  cash
equivalents were $808,000, $1,903,000 and $1,658,000, respectively.

Liquidity management for Washington is both an ongoing and long-term function of
Washington's  asset/liability  management  strategy.  Excess funds generally are
invested  in  overnight  deposits  at  the  FHLB  of  Des  Moines  or  financial
institutions.  Should  Washington  require  funds beyond its ability to generate
them internally,  additional  sources of funds are available through FHLB of Des
Moines  advances.  Washington  would  pledge  its FHLB of Des  Moines  stock and
certain other assets as collateral for such advances.  During fiscal 1997,  1996
and 1995,  Washington  used FHLB  advances  to meet cash flow  requirements  and
finance  loan  growth.  The FHLB  advances  are  generally  at a higher  rate of
interest than transaction and savings deposit accounts.
<PAGE>

At June 30, 1997,  Washington had outstanding  loan  commitments of $1.6 million
and  undisbursed  loans in process of $500,000.  Washington  anticipates it will
have sufficient funds available to meet its current loan commitments,  including
loan  applications  received  and in  process  prior  to the  issuance  of  firm
commitments.  Certificates  of deposit which are scheduled to mature in one year
or less at June 30, 1997 were $20,515,000. Based on past experience,  management
believes  that a  significant  portion of such  deposits  will  remain  with the
Company.

Under federal law, the Bank is required to meet certain tangible,  core and risk
based capital requirements.  For information regarding  Washington's  regulatory
capital compliance, see "Selected Consolidated Financial Information."

Recent Accounting Developments

Effective  January 1, 1997, the Company  adopted the  requirements  of Financial
Accounting  Standards  Board  Statement No. 125,  "Accounting  for Transfers and
Servicing  of  Financial  Assets  and   Extinguishments   of  Liabilities."  The
provisions of Statement  125 have not  significantly  impacted the  consolidated
financial statements as the Company has not entered into transactions which give
rise to differences in existing accounting as a result of Statement 125.

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  "Earnings per Share." Statement 128 is effective for the year ending after
December  15,  1997,  for both  interim and annual  periods,  and  replaces  the
presentation of primary and fully diluted earnings per share with a presentation
of basic and diluted  earnings per share.  The adoption of Statement  128 is not
expected  to have a  material  impact  on  earnings  per share  reported  by the
Company.

In February 1997, the Financial  Accounting Standards Board issued Statement No.
129,  "Disclosure  of  Information  about Capital  Structure."  Statement 129 is
effective for financial  statements  for periods ending after December 15, 1997.
Statement  129  consolidates  the  existing  requirements  to  disclose  certain
information about an entity's capital structure.

In August 1997, the Financial  Accounting  Standards Board issued  Statement No.
130, "Reporting  Comprehensive Income." Statement 130 is effective for financial
statements   for  years   beginning   after   December  15,  1997  and  requires
comprehensive  income  to be  reported  as  part  of a  full  set  of  financial
statements.  The  adoption of  Statement  130 is not expected to have a material
impact on the financial statements of the Company.

In August 1997, the Financial  Accounting  Standards Board issued  Statement No.
131,  "Disclosures  about  Segments of an Enterprise  and Related  Information."
Statement  131 is  effective  for years  beginning  after  December 15, 1997 and
broadens the definition of an operating  segment.  The adoption of Statement 131
is not expected to have a material impact on the Company.

Impact of Inflation and Changing Prices

The Consolidated  Financial  Statements and Notes thereto  presented herein have
been prepared in accordance with generally accepted accounting principles, which
generally  requires the measurement of financial  position and operating results
in terms of historical  dollars  without  considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected  in the  increased  cost of  Washington's  operations.  Nearly all the
assets and  liabilities  of Washington  are  financial,  unlike most  industrial
companies. As a result, Washington's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
Washington's  ability to match the interest  sensitivity of its financial assets
to the interest sensitivity of its financial  liabilities in its asset/liability
management  may tend to  minimize  the  effect of change  in  interest  rates on
Washington's  performance.  Changes in interest rates do not necessarily move to
the same extent as changes in the price of goods and services. The liquidity and
the maturity  structure of  Washington's  assets and liabilities are critical to
the maintenance of acceptable performance levels.



<PAGE>

                                    CONTENTS


INDEPENDENT AUDITOR'S REPORT              

FINANCIAL STATEMENTS

   Consolidated statements of financial condition         
   Consolidated statements of income               
   Consolidated statements of  stockholders' equity     
   Consolidated statements of cash flows              
   Notes to financial statements               
<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors
Washington Bancorp
Washington, Iowa

We have audited the accompanying  consolidated statements of financial condition
of Washington  Bancorp and its  subsidiary as of June 30, 1997 and 1996, and the
related consolidated statements of income,  stockholders' equity, and cash flows
for each of the three 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 audits 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 financial position of Washington Bancorp
and subsidiary as of June 30, 1997 and 1996, and the results of their operations
and their  cash flows for each of the three  years in the period  ended June 30,
1997 in conformity with generally accepted accounting principles.



/s/  McGladrey & Pullen, LLP



Cedar Rapids, Iowa
August 6, 1997

<PAGE>


WASHINGTON BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
<TABLE>


ASSETS                                                                                 1997               1996
                                                                                   -----------        -----------
<S>                                                                                <C>                <C>  
Cash and cash equivalents (Note 2):
   Interest-bearing ........................................................       $   574,736        $ 1,109,583
   Noninterest-bearing .....................................................           233,069            793,769
Available-for-sale securities (Notes 2, 3 and 8) ...........................         9,849,991         14,628,089
Loans receivable, net (Notes 4, 8 and 14) ..................................        52,530,153         42,905,699
Accrued interest receivable (Note 5) .......................................           568,228            465,789
Federal Home Loan Bank stock ...............................................           465,600            369,100
Premises and equipment, net (Note 6) .......................................           550,231            543,606
Other assets ...............................................................           103,026             75,308
                                                                                   -----------        -----------
              Total assets .................................................       $64,875,034        $60,890,943
                                                                                   ===========        ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
   Deposits (Note 7) .......................................................       $44,754,328        $44,176,448
   Borrowed funds (Notes 3 and 8) ..........................................         8,651,765          5,504,742
   Advances from borrowers for taxes and insurance .........................           204,677            218,506
   Accrued expenses and other liabilities ..................................           519,441            443,082
                                                                                   -----------        -----------
              Total liabilities ............................................        54,130,211         50,342,778
                                                                                   -----------        -----------
Commitments and Contingencies (Note 12)

Redeemable Common Stock Held by Employee Stock
   Ownership Plan (ESOP) (Note 9) ..........................................            69,392                 --
                                                                                   -----------        -----------
Stockholders' Equity (Notes 11 and 16)
   Preferred stock, $.01 par value, authorized 1,000,000
      shares; none issued and outstanding ..................................                --                 --
   Common stock, $.01 par value, authorized 4,000,000
      shares; issued 1997 and 1996 657,519 shares ..........................             6,575              6,575
   Additional paid-in capital ..............................................         6,150,032          6,172,680
    Retained earnings ......................................................         5,292,419          4,941,449
   Unrealized (losses) on investment securities available
      for sale, net of income taxes (Note 3) ...............................            (3,307)           (68,209)
                                                                                   -----------        -----------
                                                                                    11,445,719         11,052,495
   Less:
      Cost of 6,386 common shares acquired for the treasury ................           (85,827)                --
      Deferred compensation ................................................          (151,739)                --
      Maximum cash obligation related to ESOP shares (Note 9) ..............           (69,392)                --
      Unearned ESOP shares (Note 9) ........................................          (463,330)          (504,330)
                                                                                   -----------        -----------
              Total stockholders' equity ...................................        10,675,431         10,548,165
                                                                                   -----------        -----------
              Total liabilities and stockholders' equity ...................       $64,875,034        $60,890,943
                                                                                   ===========        ===========
</TABLE>
See Notes to Financial Statements.


<PAGE>

WASHINGTON BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1997, 1996 and 1995


                                               1997        1996          1995
                                            ----------  ----------   ----------
Interest income:
   Loans receivable:
      First mortgage loans ...............  $3,430,290  $2,987,869   $2,763,772
      Consumer and other loans ...........     697,384     458,102      419,044
   Investment securities:
      Taxable ............................     840,485     713,988      687,754
      Nontaxable .........................      21,516      46,702       68,973
                                            ----------  ----------   ----------
              Total interest income ......   4,989,675   4,206,661    3,939,543
                                            ----------  ----------   ----------
Interest expense:
   Deposits (Note 7) .....................   2,215,768   2,246,017    1,936,410
   Borrowed funds ........................     337,405     252,657      244,862
                                            ----------  ----------   ----------
              Total interest expense .....   2,553,173   2,498,674    2,181,272
                                            ----------  ----------   ----------
              Net interest income ........   2,436,502   1,707,987    1,758,271
Provision for loan losses (Note 4) .......      40,085      15,000           --
                                            ----------  ----------   ----------
              Net interest income after
                 provision for loan losses   2,396,417   1,692,987    1,758,271
                                            ----------  ----------   ----------
Noninterest income:
   Securities gains (losses), net (Note 3)         388      32,534      (30,000)
   Loan origination and commitment fees ..       7,724       8,316        3,379
   Service charges and fees ..............     117,241      84,512      111,063
   Insurance commissions .................      77,922      54,615       38,961
   Other .................................      27,893      17,026       14,238
                                            ----------  ----------   ----------
              Total noninterest income ...     231,168     197,003      137,641
                                            ----------  ----------   ----------
Noninterest expense:
   Compensation and benefits (Note 9) ....     722,087     581,896      613,962
   Occupancy and equipment ...............     149,738     138,032      144,408
   SAIF deposit insurance premium ........     376,862     116,690      116,888
   Data processing .......................      75,196      80,076       65,533
   Other .................................     388,258     289,496      337,575
                                            ----------  ----------   ----------
              Total noninterest expense ..   1,712,141   1,206,190    1,278,366
                                            ----------  ----------   ----------
              Income before income taxes .     915,444     683,800      617,546
Income tax expense (Note 10) .............     350,767     242,378      258,947
                                            ----------  ----------   ----------
              Net income .................  $  564,677  $  441,422   $  358,599
                                            ==========  ==========   ==========

Earnings per common and common equivalent
   share subsequent to conversion (Note 1)  $     0.91  $     0.25   $      N/A
                                            ==========  ==========   ==========

Weighted average common and common
    equivalent shares ....................     617,602      606,002          N/A
                                            ==========   ==========   ==========
See Notes to Financial Statements.


<PAGE>


WASHINGTON BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 11 AND 16)
Years Ended June 30, 1997, 1996 and 1995
<TABLE>

                                                                                               Unrealized
                                                                                              (Losses) On
                                                                                               Investment
                                                                                               Securities
                                                                                               Available
                                                                       Additional              For Sale,  
                                             Preferred      Common      Paid-In     Retained  Net of Income
                                               Stock        Stock       Capital     Earnings     Taxes
-----------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>         <C>           <C>   
Balance, June 30, 1994 ..................    $       --   $       --   $      --   $4,141,428    $      --  
   Net income ...........................            --           --          --      358,599           --
   Cumulative effect of accounting
      change as of July 1, 1994 (Note 3).            --           --          --           --      (91,602)
   Net change in unrealized (losses) on
      investment securities available
      for sale, net of income taxes .....            --           --          --           --       (8,269)
                                             -------------------------------------------------------------
Balance, June 30, 1995 ..................            --           --          --    4,500,027      (99,871)
   Net income ...........................            --           --          --      441,422           --
    Issuance of 604,917 shares of
      common stock (Note 15) ............            --        6,049   6,043,121           --           -- 
   Expenses incurred relating to
      conversion to stock form (Note 15)             --           --    (396,477)          --           --
   Issuance of 52,602 shares of common
      stock to ESOP (Note 9) ............            --          526     525,494           --           --
   Allocation of ESOP shares (Note 9) ...            --           --         542           --           --
   Net change in unrealized (losses) on
      investment securities available for
      sale, net of income taxes .........            --           --          --           --       31,662 
                                             -------------------------------------------------------------
Balance, June 30, 1996 ..................            --        6,575   6,172,680    4,941,449      (68,209)
   Net income ...........................            --           --          --      564,677           --
   Dividends ............................            --           --          --     (213,707)          --
   Acquisition of 26,300 shares of
      common stock for the treasury .....            --           --          --           --           --
   Issuance of 19,914 shares under stock
      awards program ....................            --           --     (38,703)          --           --
   Amortization of compensation under
      stock awards program ..............            --           --          --           --           --
   Allocation of ESOP shares (Note 9) ...            --           --      16,055           --           --
   Net change in unrealized (losses) on
      investment securities available for
      sale, net of income taxes .........            --           --          --           --       64,902 
   Change related to ESOP shares ........            --           --          --           --           --
                                             -------------------------------------------------------------
Balance, June 30, 1997 ..................    $       --    $   6,575 $ 6,150,032  $ 5,292,419    $  (3,307)
                                             =============================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>

WASHINGTON BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 11 AND 16) (continued)
Years Ended June 30, 1997, 1996 and 1995
<TABLE>

                                              Cost Of                               Unearned            
                                               Common                  Maximum       Shares,
                                               Shares                    Cash       Employee
                                              Acquired                Obligation      Stock         Total
                                              For the      Deferred    Related to   Ownership   Stockholders'
                                              Treasury   Compensation ESOP Shares Plan (Note 9)     Equity
-------------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>         <C>           <C>   
Balance, June 30, 1994 ..................    $       --   $       --   $      --   $       --    $1,414,428 
   Net income ...........................            --           --          --           --       358,599
   Cumulative effect of accounting
      change as of July 1, 1994 (Note 3).            --           --          --           --      (91,602)
   Net change in unrealized (losses) on
      investment securities available
      for sale, net of income taxes .....            --           --          --           --       (8,269)
                                             -------------------------------------------------------------
Balance, June 30, 1995 ..................            --           --          --           --    4,400,156 
   Net income ...........................            --           --          --           --      441,422 
    Issuance of 604,917 shares of
      common stock (Note 15) ............            --           --          --           --    6,049,170 
   Expenses incurred relating to
      conversion to stock form (Note 15)             --           --          --           --     (396,477)
   Issuance of 52,602 shares of common
      stock to ESOP (Note 9) ............            --           --          --     (526,020)          --
   Allocation of ESOP shares (Note 9) ...            --           --          --       21,690       22,232
   Net change in unrealized (losses) on
      investment securities available for
      sale, net of income taxes .........            --           --          --           --       31,662 
                                             -------------------------------------------------------------
Balance, June 30, 1996 ..................            --           --          --     (504,330)  10,548,165
   Net income ...........................            --           --          --           --      564,677
   Dividends ............................            --           --          --           --     (213,707)
   Acquisition of 26,300 shares of
      common stock for the treasury .....      (348,563)          --          --           --     (348,563)
   Issuance of 19,914 shares under stock
      awards program ....................       262,736     (224,033)         --           --           --
   Amortization of compensation under
      stock awards program ..............            --       72,294          --           --       72,294
   Allocation of ESOP shares (Note 9) ...            --           --          --       41,000       57,055
   Net change in unrealized (losses) on
      investment securities available for
      sale, net of income taxes .........            --           --          --           --       64,902 
   Change related to ESOP shares ........            --           --     (69,392)          --      (69,392)
                                             -------------------------------------------------------------
Balance, June 30, 1997 ..................    $  (85,827)   $(151,739)  $ (69,392) $  (463,330) $10,675,431
                                             =============================================================
</TABLE>
<PAGE>


WASHINGTON BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
 YEARS ENDED JUNE 30, 1997, 1996  AND 1995

<TABLE>
                                                                  1997           1996            1995   
                                                              ------------    -----------     -----------
<S>                                                           <C>             <C>             <C>  
Cash Flows from Operating Activities
   Net income ............................................    $   564,677     $   441,422     $   358,599
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Amortization of premiums and discounts on
        debt securities ..................................         37,771          80,890          93,263
      Provision for loan losses ..........................         40,085          15,000              --
      Provision for impairment on available-for-sale
        securities .......................................             --              --          30,000
      (Gain) on sale of investment securities ............           (388)        (32,534)             --
      (Gain) on sale of foreclosed real estate ...........        (36,911)             --         (10,338)
      Depreciation .......................................         56,620          68,847          76,474
      Compensation under stock awards ....................         72,294              --              --
      ESOP contribution expense ..........................         57,055          22,232              --
      Deferred income taxes ..............................        (16,798)         28,360          44,221
      (Increase) decrease in accrued interest receivable .       (102,439)        (44,527)         29,334
      (Increase) decrease in other assets ................        (27,718)         59,192          (1,638)
      Increase in accrued expenses and other liabilities .         54,215          75,415          52,004
                                                               ----------     -----------     -----------
               Net cash provided by operating activities .        698,463         714,297         671,919
                                                               ----------     -----------     -----------
Cash Flows from Investing Activities
   Held-to-maturity securities:
      Maturities and calls ...............................             --         166,988         379,660
      Purchases ..........................................             --              --        (100,000)
   Available-for-sale securities:
      Sales ..............................................            911       3,807,939              --
      Maturities .........................................     11,238,648       2,556,485       1,800,000
      Purchases ..........................................     (6,395,000)     (9,647,200)       (642,300)
   Purchase of Federal Home Loan Bank stock ..............        (96,500)             --              --
   Loans made to customers, net ..........................     (9,627,628)     (2,485,965)     (2,913,533)
   Purchase of premises and equipment ....................        (63,245)        (39,776)        (93,253)
                                                               ----------     -----------     -----------
              Net cash (used in) investing activities ....     (4,942,814)     (5,641,529)     (1,569,426)
                                                               ----------     -----------     -----------
Cash Flows from Financing Activities
   Net increase (decrease) in deposits ...................    $   577,880     $ 1,226,649     $  (922,602)
   Proceeds from Federal Home Loan Bank advances .........     98,650,000      16,820,000      51,415,000
   Principal payments on Federal Home Loan Bank
      advances ...........................................    (95,502,977)    (18,545,473)    (48,673,522)
   Net increase in advances from borrowers for taxes and
      insurance ..........................................        (13,829)         18,672           1,810
   Proceeds from issuance of 604,917 shares of common
      stock ..............................................             --       6,049,170              --
   Acquisition of 26,300 shares of common stock
      for the treasury ...................................       (348,563)             --              --
   Dividends paid ........................................       (213,707)             --              --
   Payments for expenses incurred relating to conversion
      to stock form ......................................             --        (396,477)             --
                                                               ----------     -----------     -----------
               Net cash provided by financing activities .      3,148,804       5,172,541       1,820,686
                                                               ----------     -----------     -----------
              Net increase (decrease) in cash and
                    cash equivalents .....................     (1,095,547)        245,309         923,179

Cash and cash equivalents:
   Beginning .............................................      1,903,352       1,658,043         734,864
                                                               ----------     -----------     -----------
   Ending ................................................     $  807,805     $ 1,903,352     $ 1,658,043
                                                               ==========     ===========     ===========
</TABLE>
<PAGE>

WASHINGTON BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
 YEARS ENDED JUNE 30, 1997, 1996  AND 1995

<TABLE>
                                                                  1997           1996            1995   
                                                              ------------    -----------     -----------
<S>                                                           <C>             <C>             <C>  

Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest paid to depositors ........................    $ 2,225,796     $ 2,241,023     $ 1,875,273
      Interest paid on other obligations .................        337,405         252,657         271,862
      Income taxes, net of refunds .......................        288,713          99,356         297,442

Supplemental Schedule of Noncash Investing and
   Financing Activities
   Transfers from loans to foreclosed real estate ........    $   106,289     $        --     $    33,152
   Contract sales of foreclosed real estate ..............        143,200              --          93,395
   Stock issued under stock awards program ...............        262,736              --              --

   Transfer of held-to-maturity securities to
      available-for-sale securities in accordance
      with the adoption of FAS No. 115 ...................    $        --     $        --     $ 9,919,066

   Investment securities transferred from held to maturity
      portfolio to available for sale, at fair value .....    $        --     $ 2,872,058     $        --
</TABLE>
See Notes to Financial Statements.
<PAGE>

WASHINGTON BANCORP AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS


Note 1.  Significant Accounting Policies

Organization:  On March 11, 1996,  Washington  Bancorp  issued 604,917 shares of
common stock at $10 per share and simultaneously invested $3,089,356 for all the
outstanding  common shares of Washington  Federal  Savings Bank in a transaction
accounted for like a pooling of interests.

Prior to March 11,  1996,  the  Savings  Bank was a federally  chartered  mutual
savings bank. After a reorganization, effective March 11, 1996, the Savings Bank
is now a federally  chartered  stock savings bank and 100% of the Savings Bank's
common stock is owned by Washington  Bancorp.  See Note 15 for a description  of
the reorganization.

Principles of consolidation:  The accompanying consolidated financial statements
include the accounts of Washington  Bancorp (the "Company"),  Washington Federal
Savings Bank (the "Savings Bank"), and its wholly-owned  subsidiary,  Washington
Federal  Financial  Services,  Inc.,  which is a discount  brokerage  firm.  The
activity of the Savings  Bank's  subsidiary  is not  material.  All  significant
intercompany accounts and transactions have been eliminated in consolidation.

Accounting estimates: The preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the reported  amount of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

Cash equivalents: Cash equivalents consist of FHLB-daily time, cash on hand, and
funds due from  banks.  For  purposes  of  reporting  cash  flows,  the  Company
considers all highly liquid debt instruments  purchased with a maturity of three
months  or less to be  equivalents.  Cash  flows  from  loans and  deposits  are
reported net.

Investment in debt securities and accounting change: The Company has investments
in  debt  securities,  which  consist  primarily  of  obligations  of the U.  S.
Government and related agencies and corporations, state governments and domestic
corporations.

The Company  adopted the provisions of FASB Statement No. 115,  "Accounting  for
Certain  Investments  in Debt  and  Equity  Securities,"  as of  July  1,  1994.
Statement  No.  115  requires   that   management   determine  the   appropriate
classification  of securities at the date of adoption  and,  thereafter,  at the
date individual investment securities are acquired, and that the appropriateness
of  such   classification   be  reassessed  at  each  balance  sheet  date.  The
classifications are as follows:

Securities available for sale:  Securities  classified as available for sale are
those debt securities that the Company intends to hold for an indefinite  period
of time,  but not  necessarily  to  maturity.  Any  decision  to sell a security
classified  as available for sale would be based on various  factors,  including
significant  movements  in interest  rates,  changes in the  maturity mix of the
Company's  assets  and  liabilities,   liquidity   needs,   regulatory   capital
considerations,  and other similar  factors.  Securities  available for sale are
carried at fair value.  Unrealized gains or losses,  net of related deferred tax
effect, are reported as increases or decreases in the Company's equity. Realized
gains or  losses,  determined  on the basis of the cost of  specific  securities
sold, are included in earnings.

Securities held to maturity: Securities classified as held to maturity are those
debt  securities the Company has both the intent and ability to hold to maturity
regardless  of  changes  in market  conditions,  liquidity  needs or  changes in
general economic  conditions.  These securities are carried at cost adjusted for
amortization  of premium and  accretion  of  discount,  computed by the interest
method  over  their  contractual  lives.  The  cost of such  securities  sold is
determined using the specific identification method.

Prior to the  adoption  of  Statement  No.  115,  the  Company  stated  its debt
securities at amortized cost. Under both the newly adopted  accounting  standard
and the  Company's  former  accounting  practices,  premiums  and  discounts  on
investments in debt securities are amortized over their  contractual  lives. The
method of amortization results in a constant effective yield on those securities
(the interest  method).  Interest on debt  securities is recognized in income as
earned.  Realized gains and losses,  including  losses from declines in value of
specific  securities  determined by management to be  other-than-temporary,  are
included in income. Realized gains and losses are determined on the basis of the
specific securities sold.
<PAGE>

Pursuant to a FASB Special Report,  "A Guide to  Implementation of Statement No.
115 on Accounting for Certain  Investments in Debt and Equity  Securities,"  the
Company's  subsidiary  savings bank  transferred,  at fair value,  $2,872,058 of
investment  securities  from held to maturity to available  for sale in December
1995.

Loans receivable:  Loans receivable are stated at unpaid principal balances less
the allowance for loan losses.

Interest  on loans is  accrued  daily on the  outstanding  balances.  Accrual of
interest is discontinued on a loan when management  believes,  after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful.

The allowance  for loan losses is increased by provisions  charged to income and
reduced by charge-offs,  net of recoveries.  Management's periodic evaluation of
the  adequacy of the  allowance  is based on the  Savings  Bank's past loan loss
experience,  known and inherent risks in the portfolio,  adverse situations that
may affect the borrower's  ability to repay,  estimated  value of any underlying
collateral, and current economic conditions.

In accordance  with Financial  Accounting  Standards  Board (FASB)  Statement of
Financial  Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," loans are considered impaired when, based on all current information
and  events,  it is probable  the  Savings  Bank will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to impaired
loans has been computed based on the present value of the estimated  future cash
flows of interest and principal discounted at the loan's effective interest rate
or on the fair value of the  collateral  for  collateral  dependent  loans.  The
entire  change in present  value of  expected  cash flows or  impaired  loans is
reported as bad debt  expense in the same manner in which  impairment  initially
was  recognized  or as a  reduction  in the  amount  of bad  debt  expense  that
otherwise would be reported.  Interest income on impaired loans is recognized on
the cash basis.

Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less estimated selling
expenses  at  the  date  of  foreclosure.  Costs  relating  to  development  and
improvement  of property  are  capitalized,  whereas  costs  relating to holding
property are expensed.

Valuations are periodically performed by management.  If the carrying value of a
property  exceeds its  estimated  fair value less  estimated  selling  expenses,
either an allowance for losses is established,  or the property's carrying value
is reduced, by a charge to income.

Premises and  equipment:  Premises  and  equipment  are carried at cost,  net of
accumulated  depreciation.  Depreciation  is computed by the  straight-line  and
declining-balance methods over the estimated useful lives of the assets.

Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are  recognized for deductible  temporary  differences  and operating
loss and tax credit  carryforwards  and deferred tax  liabilities are recognized
for taxable  temporary  differences.  Temporary  differences are the differences
between  the  reported  amounts of assets and  liabilities  and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management,  it is more likely than not that some portion or all of the deferred
tax  assets  will not be  realized.  Deferred  tax assets  and  liabilities  are
adjusted  for the  effects  of  changes  in tax  laws  and  rates on the date of
enactment.

Earnings per common share: The earnings per common and common  equivalent share,
assuming no dilution, were computed using the weighted average number of shares,
stock  options and stock awards  outstanding  during the periods  presented.  In
accordance  with Statement of Position 93-6,  shares owned by the ESOP that have
not been committed to be released are not  considered to be outstanding  for the
purpose of computing  earnings  per share.  Dilutive  common  stock  equivalents
related to the stock options were  determined  using the treasury  stock method.
Dilutive common stock  equivalents  related to a stock award plan are considered
to be common stock  equivalents  at all times since they were awarded.  Earnings
per share information for the year ended June 30, 1996 is calculated by dividing
net  income,  subsequent  to the  mutual to stock  conversion,  by the  weighted
average number of shares  outstanding.  Net income  subsequent to the conversion
was $150,832 for the period ended June 30, 1996.  Earnings per share information
is not applicable for the years ended June 30, 1995 because the Savings Bank was
a mutual association at that time.

Earnings per common and common equivalent  shares,  assuming full dilution,  for
the years ended June 30, 1997 and 1996 are the same as the  earnings  per common
and common equivalent shares, assuming no dilution.
<PAGE>

ESOP  obligations  and expense:  The receivable from the Company's ESOP has been
treated as a reduction of equity. Any principal repayment of the debt is treated
as an  increase in equity.  Compensation  expense for the ESOP is based upon the
fair value of shares allocated to participants.

Stock  awards:  Expense  for  common  stock to be  issued  under  the  Company's
recognition and retention plan is based upon the fair value of the shares at the
date of grant, allocated over the period of vesting.

Redeemable  common stock held by ESOP:  The  Company's  maximum cash  obligation
related to these shares is classified outside  stockholders'  equity because the
shares are not readily traded and could be put to the Company for cash.

Stock options issued to employees:  In fiscal year 1996, the Company adopted the
provisions of SFAS No. 123,  "Accounting  for Stock-Based  Compensation,"  which
establishes  a fair  value  based  method  for the  financial  reporting  of its
stock-based  employee  compensation  plans.  However,  as  allowed  by  the  new
standard,  the Company has elected to continue to measure compensation using the
intrinsic  value based  method as  prescribed  by  Accounting  Principles  Board
Opinion No. 25,  "Accounting for Stock Issued to Employees."  Under this method,
compensation is measured as the difference between the market value of the stock
on the grant  date,  less the  amount  required  to be paid for the  stock.  The
difference, if any, is charged to expense over the periods of service.

Fair value of financial instruments:  FASB Statement No. 107, "Disclosures About
Fair  Value  of  Financial  Instruments,"  requires  disclosure  of  fair  value
information  about  financial  instruments,  whether  or not  recognized  in the
balance  sheet,  for which it is  practicable  to estimate that value.  In cases
where quoted market prices are not available, fair values are based on estimates
using  present  value  or  their  valuation  techniques.  Those  techniques  are
significantly  affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate  settlement of the instrument.  Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its  disclosure  requirements.  Accordingly,  the  aggregate  fair value amounts
presented do not represent the underlying value of the Company.

The  following  methods and  assumptions  were used by the Company in estimating
fair value of its financial instruments:

   Cash and cash equivalents: The carrying amounts reported in the balance sheet
   for cash and cash equivalents approximate their fair values.

   Investment securities (including mortgage-backed securities): Fair values for
   investment securities are based on quoted market prices, where available.  If
   quoted  market  prices  are not  available,  fair  values are based on quoted
   market prices of comparable instruments.

   Loans receivable: For variable-rate loans that reprice frequently and have no
   significant  change in credit  risk,  the fair  values are based on  carrying
   values.  The fair values of other loans are determined using estimated future
   cash flows,  discounted  at the interest  rates  currently  being offered for
   loans with  similar  terms to  borrowers  with similar  credit  quality.  The
   carrying amount of accrued interest receivable approximates its fair value.

   Deposits:  The fair values of demand  deposits equal their  carrying  amounts
   which represents the amount payable on demand. The carrying amounts for money
   market and passbook  savings  accounts  approximate  their fair values at the
   reporting  date.  Fair  values for  fixed-rate  certificates  of deposit  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.

   Borrowed  funds:  Fair  values  for  borrowed  funds  are  estimated  using a
   discounted cash flow  calculation that applies interest rates currently being
   charged for borrowed funds of similar maturities.

   Off-balance  sheet  instruments:  Fair values for the  Company's  off-balance
   sheet  instruments  are  valued  based upon the  current  fee  structure  for
   outstanding letters of credit. Unfunded loan commitments are not valued since
   the loans are generally priced at market at the time of funding.

Recently issued accounting standards:  The Company believes that the adoption of
recently  issued  accounting  standards  will not have a material or significant
effect on the financial statements.
<PAGE>

Note 2.  Restrictions on Cash Due from Banks and Investments

The Savings Bank is required to maintain  reserve balances in cash or on deposit
with  Federal   Reserve  Banks.   The  total  of  those  reserve   balances  was
approximately  $25,000  at June 30,  1997.  In  addition,  the  Savings  Bank is
required  to  maintain  a  minimum  balance  of  unpledged  cash and  investment
securities  totaling  approximately  $2,548,000  as of June 30,  1997 to provide
liquidity for deposits.

Note 3.  Investment Securities and Accounting Change

As discussed in Note 1, the Company adopted FASB Statement No. 115 as of July 1,
1994. The cumulative effect of adopting  Statement No. 115 decreased the July 1,
1994  equity by $91,602,  net of the $54,494  related  deferred  tax effect,  to
recognize the net unrealized holding loss on securities at that date.

The amortized cost and fair value of investment securities available for sale as
of June 30, 1997 and 1996 are as follows:
<TABLE>

                                                                                 1997
                                                        -------------------------------------------------------
                                                          Cost Or        Gross          Gross
                                                         Amortized     Unrealized     Unrealized      Fair
                                                            Cost         Gains         (Losses)       Value
                                                        -----------   -----------    -----------    -----------
<S>                                                     <C>           <C>            <C>            <C> 

U. S. Treasury securities ...........................   $   400,237   $     2,386    $      (263)   $   402,360
U. S. Government agencies ...........................     6,994,454         9,180         (4,904)     6,998,730
Corporations and other ..............................     1,958,104         1,475         (4,499)     1,955,080
State and political subdivisions ....................       353,750            --             --        353,750
Mortgage-backed securities ..........................       148,737            --         (8,666)       140,071
                                                        -----------   -----------    -----------    -----------
                                                        $ 9,855,282   $    13,041    $   (18,332)   $ 9,849,991
                                                        ===========   ===========    ===========    ===========

                                                                                 1996
                                                        -------------------------------------------------------

U. S. Treasury securities ...........................   $   402,253   $     3,653    $   (12,250)   $   393,656
U. S. Government agencies ...........................     7,998,939         3,145        (40,743)     7,961,341
Corporations and other ..............................     4,279,374         1,810        (64,036)     4,217,148
State and political subdivisions ....................       403,750            --             --        403,750
Mortgage-backed securities ..........................       152,908            --           (714)       152,194
Certificates of deposit with
   financial institutions ...........................     1,500,000            --             --      1,500,000
                                                        -----------   -----------    -----------    -----------
                                                        $14,737,224   $     8,608    $  (117,743)   $14,628,089
                                                        ===========   ===========    ===========    ===========
</TABLE>

The amortized cost and fair value of mortgage-backed securities are as follows:
<TABLE>

                                                                           June 30,
                                                        -----------------------------------------------
                                                                 1997                      1996
                                                        ---------------------     ---------------------
                                                         Cost Or                   Cost Or
                                                        Amortized     Fair        Amortized     Fair
                                                          Cost        Value         Cost        Value
                                                        ---------    --------     ---------    --------
<S>                                                     <C>          <C>          <C>          <C>  
GNMA certificates ...................................   $     --     $     --     $    624     $    624
FHLMC certificates ..................................    148,737      140,071      152,284      151,570
                                                        --------     --------     --------     --------
                                                        $148,737     $140,071     $152,908     $152,194
                                                        ========     ========     ========     ========
</TABLE>
<PAGE>

The  amortized  cost and fair value of debt  securities  as of June 30,  1997 by
contractual  maturity are shown below.  Maturities  may differ from  contractual
maturities in mortgage-backed  securities  because the mortgages  underlying the
securities  may be called or repaid  without  any  penalties.  Therefore,  these
securities are not included in the maturity categories in the following maturity
summary.

                                                       Amortized         Fair
                                                          Cost           Value
                                                       ----------     ----------
Available for sale:
   Due in one year or less ......................      $1,658,181     $1,659,337
   Due after one year through five years ........       6,343,178      6,345,182
   Due after five years through ten years .......       1,705,186      1,705,401
   Mortgage-backed securities ...................         148,737        140,071
                                                       ----------     ----------
                                                       $9,855,282     $9,849,991
                                                       ==========     ==========
                                                                            
Investment  securities  with a carrying  amount of $3,306,610  and $3,322,469 at
June 30,  1997 and 1996,  respectively,  were  pledged as  collateral  on public
deposits.  Investment  securities  with a  carrying  amount  of  $4,801,396  and
$3,521,611 at June 30, 1997 and 1996,  respectively,  were pledged as collateral
on FHLB advances.

Securities  gains (losses) for the years ended June 30, 1997,  1996 and 1995 are
as follows:

                                              1997         1996         1995
                                            --------     -------      --------

Realized gains .........................    $    388     $91,644      $     --
Realized (losses) ......................          --     (59,110)           --
Other provision for impairment on 
  equity securities ....................          --          --       (30,000)
                                            --------     -------      --------
                                            $    388     $32,534      $(30,000)
                                            ========     =======      ========

The Company  transferred  securities with an amortized cost of $2,907,058 and an
unrealized   loss   of   $35,000   from   held-to-maturity   portfolio   to  the
available-for-sale   portfolio  on  December  1,  1995,  based  on  management's
reassessment of their previous  descriptions of securities giving  consideration
to liquidity needs, management of interest rate risk and other factors.

Note 4.  Loans Receivable

Loans receivable are summarized as follows:

                                                              June 30,
                                                      --------------------------
                                                         1997            1996
                                                      -----------    -----------
First mortgage loans (principally conventional):
   Secured by one-to-four family residences .......   $40,695,861    $33,914,215
   Home equity and second mortgage ................     1,232,736      1,568,747
   Multifamily and commercial real estate .........     4,775,465      2,896,215
   Construction loans .............................       693,766      1,118,765
   Other ..........................................        98,653        114,617
                                                                              
              Total first mortgage loans ..........    47,496,481     39,612,559
Commercial loans ..................................     2,715,020      1,545,856
Consumer and other loans:
   Automobile .....................................     1,899,763      1,134,405
   Other ..........................................       644,539        822,273
                                                                            
              Total loans .........................    52,755,803     43,115,093
   Less allowance for loan losses .................       225,650        209,394
                                                      -----------    -----------
                                                      $52,530,153    $42,905,699
                                                      ===========    ===========

Loans receivable are net of loans in process of $500,182 and $561,976 as of June
30, 1997 and 1996, respectively.
<PAGE>

Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:

                                                 1997       1996       1995
                                              ---------- ---------- ----------

Balance, beginning ..................         $  209,394 $  203,074 $  202,526
   Provision charged to expense .....             40,085     15,000         --
   Charge-offs ......................            (33,841)   (13,574)   (19,402)
   Recoveries .......................             10,012      4,894     19,950
                                              ---------- ---------- ---------- 
Balance, ending .....................         $  225,650 $  209,394 $  203,074
                                              ========== ========== ==========

The  Savings  Bank has no loans  receivable  at June 30,  1997 and 1996  that it
considers  to be  impaired  that are not part of a  homogeneous  group of loans.
Accordingly, no separate allowance has been provided for these loans.

Note 5.  Accrued Interest Receivable

Accrued interest receivable at June 30 is summarized as follows:

                                                          1997          1996
                                                        --------      --------

Investment securities ............................      $ 94,470      $144,064
Loans receivable .................................       473,758       321,725
                                                        --------      --------
                                                        $568,228      $465,789
                                                        ========      ========

Note 6.  Premises and Equipment

Premises and equipment consisted of the following at June 30:

                                                        1997        1996
                                                     ----------  ----------

Land .........................................       $   83,080  $   83,080
Building .....................................          504,357     502,624
Furniture, fixtures and equipment ............          603,503     553,269
                                                     ----------  ----------
                                                      1,190,940   1,138,973
Less accumulated depreciation ................          640,709     595,367
                                                     ----------  ----------
                                                     $  550,231  $  543,606
                                                     ==========  ==========

Note 7.  Deposits

Deposits at June 30 are as follows:
<TABLE>

                                             Weighted
                                             Average
                                             Rate At            1997                    1996
                                             June 30,  ---------------------    --------------------
                                              1997        Amount     Percent       Amount    Percent              
                                             --------  ------------  -------    -----------  -------
<S>                                          <C>       <C>           <C>        <C>          <C> 
Demand and NOW accounts,
   including noninterest-bearing
   deposits 1997 $1,401,119;
   1996 $973,103 ...............               1.25%   $ 3,094,048      6.9%    $ 2,529,246     5.7% 
Money market ...................               3.92      9,044,368     20.2       9,086,719    20.6
Passbook savings ...............               2.30      2,181,904      4.9       2,243,982     5.0
                                                       -----------    ------    -----------   ------
                                                        14,320,320     32.0      13,859,947    31.3
                                                       -----------    ------    -----------   ------
Certificates of deposit:
   3% to 4% ....................               2.62         12,525       --          27,711     0.1
   4.01% to 5% .................               4.73      2,205,090      4.9       4,976,426    11.3
   5.01% to 6% .................               5.69     23,247,461     51.9      14,445,459    32.7
   6.01% to 7% .................               6.42      4,968,932     11.1      10,866,905    24.6
                                                       -----------    ------    -----------   ------
                                                        30,434,008     68.0      30,316,501    68.7
                                                       -----------    ------    -----------   ------
                                               4.89    $44,754,328    100.0%     44,176,448   100.0%
                                                       ===========    ======    ===========   ======
</TABLE>
<PAGE>

The aggregate amount of short-term jumbo  certificates of deposit with a minimum
denomination of $100,000 was  approximately  $1,248,000 and $919,000 at June 30,
1997 and 1996,  respectively.  Deposits in excess of $100,000 are not insured by
the FDIC.

At June 30,  1997,  scheduled  maturities  of  certificates  of  deposit  are as
follows:
<TABLE>
                                                        Year Ending June 30,
                           ------------------------------------------------------------------------------------
                              1998          1999           2000          2001           2002           Total
                           -----------   -----------   -----------   -----------    -----------     -----------
<S>                        <C>           <C>           <C>           <C>            <C>             <C>

3% to 4% ...............   $    12,525   $        --   $        --   $        --    $        --     $    12,525
4.01% to 5% ............     2,205,090            --            --            --             --         205,090
5.01% to 6% ............    14,465,235     6,372,632     1,944,196       282,242        183,156      23,247,461
6.01% to 7% ............     3,832,363       333,783       567,685       235,101             --       4,968,932
                           -----------   -----------   -----------   -----------    -----------     -----------
                           $20,515,213   $ 6,706,415   $ 2,511,881   $   517,343    $   183,156     $30,434,008
                           ===========   ===========   ===========   ===========    ===========     ===========
</TABLE>

Interest  expense  on  deposits  for the years  ended June 30 is  summarized  as
follows:

                                     1997        1996        1995
                                  ----------  ----------  ----------

Money market ...................  $  384,112  $  399,720  $  330,703
Passbook savings ...............      53,293      63,349      74,041
NOW ............................      36,907      36,856      32,883
Certificates of deposit ........   1,741,456   1,746,092   1,498,783
                                  ----------  ----------  ----------
                                  $2,215,768  $2,246,017  $1,936,410
                                  ==========  ==========  ==========


Note 8.  Borrowed Funds

Borrowed funds at June 30 are as follows:
<TABLE>
                                                                 1997        1996
                                                              ----------  ----------
<S>                                                           <C>         <C> 
Short-term advances from the Federal Home Loan Bank (A) ..... $1,750,000  $2,500,000
Long-term advances from the Federal Home Loan Bank (B) ......  6,901,765   3,004,742
                                                              ----------  ----------
                                                              $8,651,765  $5,504,742
                                                              ==========  ==========
</TABLE>
(A)  Pursuant to collateral  agreements  with the Federal Home Loan Bank (FHLB),
     these advances are collateralized by pledged  investment  securities with a
     carrying  amount of  $4,801,396  and  $3,521,611 at June 30, 1997 and 1996,
     respectively.

(B)  Pursuant to collateral  agreements  with the Federal Home Loan Bank (FHLB),
     these advances are  collateralized  by all the  Institution's  stock in the
     FHLB and qualifying first mortgage loans. Of this total,  $4,000,000 of the
     advances are callable beginning August 15, 1997 and then every three months
     thereafter with a three calendar day notice. Therefore,  these advances are
     categorized as maturing within one year per the schedule below.

Advances at June 30, 1997 have maturity dates as follows:

  Year Ending                                June 30,
    June 30             Interest Rate          1997
------------------------------------------------------

    1998                4.983% to 5.74%     $6,861,074
    1999                4.983% to 5.74%      1,611,120
    2000                     5.74%              14,979
    2001                     5.74%              15,862
    2002                     5.74%              16,796
    Thereafter               5.74%             131,934
                                            ----------
                                            $8,651,765
                                            ==========
<PAGE>

Note 9.  Employee Benefit Plans

Employee Stock Ownership Plan: In conjunction with the Savings Bank's conversion
to stock  ownership,  the Company  established an Employee Stock  Ownership Plan
(ESOP) for eligible employees. Employees of the Bank are eligible to participate
after they attain age 21 and complete one year of service during which they work
at least 1,000 hours.  The Company  issued  52,602 shares of common stock to the
ESOP on the date of the conversion and reorganization.

The Savings Bank makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends  received by the ESOP. All dividends received by the ESOP
are used to pay debt service. Contributions to the ESOP and shares released from
the suspense account in an amount proportional to the repayment of the ESOP loan
are allocated  among ESOP  participants on the basis of compensation in the year
of  allocation.  Benefits  generally  become  100%  vested  after seven years of
credited service.  Forfeitures will be reallocated among remaining participating
employees,  in the same proportion as contributions.  Benefits may be payable in
the form of stock or cash upon termination of employment.

As shares are released,  the Company reports  compensation  expense equal to the
current  fair  value  of the  shares,  and the  shares  become  outstanding  for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained  earnings;  dividends on unallocated  ESOP shares are
recorded as a reduction of debt and accrued interest.  ESOP compensation expense
totaled $56,620 and $22,232 for the years ended June 30, 1997 and 1996.

Shares  of  common  stock  held by the  ESOP at June  30,  1997  and 1996 are as
follows:

                                                    1997       1996
                                                  --------   --------

Allocated shares ..............................      4,337         --
Share released for allocation .................      1,932      2,169
Unreleased (unearned) shares ..................     46,333     50,433
                                                  --------   --------
                                                    52,602     52,602
                                                  ========   ========

Fair value of unreleased (unearned) shares ....   $741,328   $529,547
                                                  ========   ========

The ESOP plan may allow, at the discretion of the Advisory Committee,  employees
to elect to defer up to fifteen  percent of compensation  annually.  The Company
may, at the discretion of the Advisory Committee, make matching contributions on
an annual basis.

Payments to a previous defined  contribution  plan were at the discretion of the
Board of Directors.  The expense for this previous plan was $30,815 for the year
ended June 30, 1995.

Stock-based   compensation  plans:  At  June  30,  1997,  the  Company  has  two
stock-based  compensation  plans which are described  below.  As permitted under
generally accepted accounting principles, grants under those plans are accounted
for following APB Opinion No. 25 and related  interpretations.  Had compensation
cost for the two stock-based  compensation  plans been  determined  based on the
grant date fair values of the awards (the method  prescribed  in SFAS No.  123),
reported net income and earnings  per common and common  equivalent  share would
have been reduced to the pro forma amounts shown below:

                                                            Year Ended June 30,
                                                          ---------------------
                                                              
                                                             1997         1996
                                                          ---------------------

Pro forma net income ...................................   $ 506,840    $   N/A
Pro forma income  per common and common equivalent share        0.82        N/A

The pro forma  effects of  applying  SFAS No. 123 are not  indicative  of future
amounts.

The fair value of each grant and award is  estimated at the grant date using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions  for grants in 1997:  dividend  rate of 2.3%;  price  volatility  of
14.42%; risk-free interest rates of 6.0%; and expected life of 5 years.

Stock options:  During the year ended June 30, 1997, the Company adopted a stock
option plan for certain officers and directors  whereby up to 65,751 shares were
reserved for grants.  The Board has granted  options at prices equal to the fair
value of the stock on the dates of the grants. All options are for a term of ten
years  after  vesting  and 20%  become  exercisable  each year for the next five
years.
<PAGE>

A summary of the status of the Company's stock option plan is as follows:

                                                                     Weighted-
                                                                      Average
                                                                     Exercise
                                                          Shares       Price
                                                         ----------------------

Outstanding at June 30, 1996 ..................               --      $   --
     Granted ..................................           52,600       11.25
     Exercised ................................               --          --
     Forfeited ................................           (2,818)      11.25
                                                         -------      
Outstanding at June 30, 1997 ..................           49,782       11.25
                                                         =======


                                                      1997       1996      1995
                                                    ----------------------------
Weighted-average fair value per option of
     options granted during the year .........      $   5.70       N/A      N/A
                                                    ===========================

Other pertinent  information related to the options outstanding at June 30, 1997
is as follows:

                                     Remaining
     Number       Exercise          Contractual         Number
  Outstanding      Price               Life          Exercisable
----------------------------------------------------------------

     49,782        $11.25             12 Years            --
     ======        ======             ========

Stock awards:  The Company  adopted a recognition  and retention plan in October
1996 whereby  26,300  shares of common stock have been  reserved for issuance to
certain executive officers and directors.  Shares awarded under the plan vest in
five equal  annual  installments,  beginning on the  anniversary  of the grants.
During the year ended June 30, 1997,  awards were granted for 19,914 shares with
a fair value of $11.25 per share at the date of the grant.

The  expense  under the plan is based  upon the fair  value of the shares on the
date of the grant, allocated over the five-year term of vesting. The expense for
the year  ended  June 30,  1997  totaled  $72,294  and is  included  in  accrued
expenses. Shares of common stock are issued upon vesting.

Note 10.  Income Taxes

Net deferred  income tax liabilities  consist of the following  components as of
June 30, 1997 and 1996:

                                                        1997           1996
                                                      ---------      --------
Deferred tax assets:
   Unrealized loss on investment securities
      available for sale ...........................  $   1,984      $ 40,926
   Accrued compensation ............................     26,966            --
   Allowance for loan losses .......................     84,167        68,191
   Other ...........................................         --         7,343
                                                      ---------      --------
                                                        113,117       116,460
                                                      ---------      --------
Deferred tax liabilities:
   Recapture of allowance for loan losses ..........    156,048       156,048
   FHLB stock dividends ............................     44,067        44,067
   Premises and equipment ..........................      7,908            --
   Other ...........................................     10,893            --
                                                      ---------      --------
                                                        218,916       200,115
                                                      ---------      --------
              Net deferred tax liability included in
                   other liabilities ...............  $(105,799)     $(83,655)
                                                      =========      ========
<PAGE>

The net  change in the  deferred  income  taxes is  reflected  in the  financial
statements for the years ended June 30, 1997, 1996 and 1995 as follows:

                                                1997          1996        1995
                                              --------      --------   --------

Statement of income .......................   $ 16,798      $(28,360)  $(44,221)
Statement of stockholders' equity* ........    (38,942)      (18,996)    59,922
                                              --------      --------   --------
                                              $(22,144)     $(47,356)  $ 15,701
                                              ========      ========   ========

*    Change in  deferred  tax asset  related to  unrealized  loss on  investment
     securities available for sale.

The provision  for income taxes  charged to operations  for the years ended June
30, 1997, 1996 and 1995 consisted of the following:

                                             1997        1996           1995
                                           --------    --------       --------

Current .........................          $367,565    $214,018       $214,726
Deferred ........................           (16,798)     28,360         44,221
                                           --------    --------       --------
                                           $350,767    $242,378       $258,947
                                           ========    ========       ========

The income tax  provision  differs from the amount of income tax  determined  by
applying the U. S. Federal  income tax rate to pretax income for the years ended
June 30, 1997, 1996 and 1995 due to the following:
<TABLE>

                                                    Years Ended June 30,
                             ------------------------------------------------------------------
                                      1997                 1996                     1995
                             ---------------------  --------------------   --------------------
                                             % Of                  % Of                   % Of
                                            Pretax                Pretax                 Pretax
                               Amount       Income    Amount      Income     Amount      Income 
                             -------------------------------------------------------------------
<S>                          <C>            <C>     <C>           <C>      <C>           <C>
Computed "expected" tax
   expense ...............   $ 320,405       35.0%  $ 239,330       35.0%  $ 216,141       35.0%
Tax-exempt interest ......      (9,833)      (1.1)    (16,346)      (2.4)    (24,140)      (3.9)
State income taxes, net of
   federal benefit .......      32,271        3.5      20,287        2.9      20,070        3.2
Other, net ...............       7,924        0.9        (893)      (0.1)     46,876        7.6
                             -------------------------------------------------------------------
                             $ 350,767       38.3%  $ 242,378       35.4%  $ 258,947       41.9%
                             ===================================================================
</TABLE>

Note 11.  Regulatory Capital Requirements

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

                                                   Regulatory Capital - Unaudited
                            --------------------------------------------------------------------------------
                                          Percent                     Percent                       Percent
                                            Of                           Of                         Of Risk-
                             Tangible     Tangible        Core        Tangible        Risk-Based     Based
                             Capital       Assets        Capital       Assets           Capital      Assets
                           ----------------------------------------------------------------------------------
<S>                        <C>           <C>           <C>           <C>             <C>           <C>
The Savings Bank
   equity ..............   $ 8,689,723                 $ 8,689,723                   $ 8,689,723
Unrealized losses of
   available-for-sale
   securities ..........         3,307                       3,307                         3,307
Allowance for loan
   losses ..............            --                          --                       225,650
Other assets required
   to be deducted ......            --                          --                       (20,700)
                           -----------------------------------------------------------------------------------
      Regulatory capital
        computed .......     8,693,030        13.4%      8,693,030       13.4%         8,897,980      20.8%
Minimum capital
   requirement .........       972,405         1.5       1,944,810        3.0          3,415,343       8.0
                           -----------------------------------------------------------------------------------
Regulatory capital
   excess ..............   $ 7,720,625        11.9%    $ 6,748,220       10.4%       $ 5,482,637      12.8%
                           ===================================================================================
</TABLE>
<PAGE>

The Savings Bank's equity reported to the Office of Thrift  Supervision  ("OTS")
was the same as that shown in the above table as of June 30, 1997.

The ability of the Company to pay  dividends  to its  stockholders  is dependent
upon  dividends paid by its  subsidiary.  The Savings Bank is subject to certain
statutory and regulatory  restrictions  on the amount they may pay in dividends.
To maintain  acceptable  capital ratios in the subsidiary bank, certain of their
retained earnings are not available for the payment of dividends.

Note 12.  Commitments and Contingencies

Financial  instruments with off-balance  sheet risk: The Savings Bank is a party
to financial  instruments  with  off-balance  sheet risk in the normal course of
business  to  meet  the  financing  needs  of  its  customers.  These  financial
instruments include commitments to extend credit.  Those instruments involve, to
varying  degrees,  elements  of credit and  interest  rate risk in excess of the
amount recognized in the statement of financial position.

The Savings Bank's exposure to credit loss in the event of nonperformance by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented by the contractual notional amount of those instruments. The Savings
Bank  uses the same  credit  policies  in  making  commitments  and  conditional
obligations as it does for on-statement of financial condition instruments.

Unless noted otherwise,  the Savings Bank requires  collateral or other security
to support financial instruments with credit risk.

                                                                       Contract
                                                                          Or
                                                                       Notional
                                                                        Amount
                                                                      ----------
Financial instruments whose contract amounts
   represent credit risk, commitments to extend credit:
   First mortgage loans ........................................      $1,980,682
   Consumer and other loans ....................................          69,500
                                                                      ----------
                                                                      $2,050,182
                                                                      ----------

The above commitments are to make fixed rate loans with a June 30, 1997 weighted
average interest rate of 8.35%.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is not violation of any condition established in the contract. Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require   payment  of  a  fee.  The  Savings  Bank  evaluates  each   customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by the Savings  Bank,  upon  extension  of credit is based on
management's  credit  evaluation  of the party.  Collateral  held varies but may
include   accounts   receivable,   inventory,   property  and   equipment,   and
income-producing commercial properties.

Concentrations  of credit risk:  Most of the Savings Bank's lending  activity is
with customers  located within the state. The Savings Bank generally  originates
single-family  residential loans within its primary lending area of southeastern
Iowa. The Savings Bank's  underwriting  policies require such loans to be an 85%
loan to value  based  upon  appraised  values.  These  loans are  secured by the
underlying  properties.  The Savings Bank is also active in originating  secured
consumer loans to its customers,  primarily automobile and home equity loans. As
of June 30,  1996,  the  Bank has  approximately  $1,943,000  of  agriculturally
dependent loans.

Purchase  commitment:  On July 2, 1997,  the Company  entered  into a definitive
agreement  to acquire  Rubio  Savings Bank of Brighton  ("Rubio")  pursuant to a
merger in which the Company will pay Rubio stockholders a total of approximately
$4.6 million in cash (the "Rubio  Merger").  Rubio is headquartered in Brighton,
Iowa and as of June 30, 1997 had assets of approximately $21.3 million, deposits
of approximately  $17.9 million and stockholder's  equity of approximately  $3.2
million.  The Rubio  merger will be accounted  for as a purchase,  is subject to
regulatory  and  stockholder  approval and is expected to close by calendar year
end.
<PAGE>

Note 13.  Fair Value of Financial Instruments

The  fair  value  of  financial  instruments  at June  30,  1997 and 1996 are as
follows:

                                         1997                      1996
                              ------------------------   -----------------------
                                Carrying      Fair        Carrying      Fair
                                 Amount       Value        Amount       Value
                              --------------------------------------------------

Financial assets:
   Cash and cash equivalents  $   807,805  $   807,805  $ 1,903,352  $ 1,903,352
   Investment securities
      available-for-sale ...    9,849,991    9,849,991   14,628,089   14,628,089
   Loans ...................   52,530,153   52,593,286   42,905,699   42,826,036
Financial liabilities:
   Deposits ................   44,754,328   45,985,031   44,176,448   44,603,760
   Borrowed funds ..........    8,651,765    8,580,789    5,504,742    5,432,513

                                                   Face Amount       Face Amount
                                                   -----------       -----------

Off-balance sheet instruments ..............        $2,050,182        $1,775,095

Note 14.  Transactions with Related Parties

The Savings  Bank has had,  and may be  expected to have in the future,  banking
transactions  in the  ordinary  course of  business  with  directors,  principal
officers,  their immediate  families and affiliated  companies in which they are
principal  stockholders  (commonly referred to as related parties), all of which
have, in the opinion of management,  on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
others.

Aggregate loan transactions with related parties were as follows:

                                                 Year Ended June 30,
                                             --------------------------
                                                1997            1996 
                                             ----------      ----------

Balance, beginning ......................    $  899,503      $  847,878
   New loans ............................       377,840         298,306
   Repayments ...........................      (675,302)       (148,075)
   Loans of former officers and directors            --         (98,606)
                                             ----------      ----------
Balance, ending .........................    $  602,041      $  899,503
                                             ==========      ==========

Maximum balance during the year .........    $1,153,058      $1,146,184
                                             ==========      ==========

Note 15.  Reorganization and Conversion to Stock Ownership

On September 7, 1995,  the Board of Directors of the Savings Bank adopted a plan
of conversion  to convert from a federally  chartered  mutual  savings bank to a
federally  chartered  stock  savings  bank with the  concurrent  formation  of a
holding  company.  The conversion was  accomplished  through an amendment of the
Savings Bank's Federal charter and the issuance of the holding  company's common
stock through a public stock offering.

The  reorganization  and stock  offering was completed on March 11, 1996 and the
holding company received stock offering proceeds of $5,652,693,  net of costs of
$396,477.  The Savings Bank concurrently issued one share of common stock to the
holding company  representing  100% of the common stock of the Savings Bank at a
price of $3,089,356.

Persons who had liquidation rights with respect to the mutual savings bank as of
the date of  reorganization  shall,  as long as they  remain  depositors  of the
Savings  Bank,  continue to have such rights  solely with  respect to the mutual
savings bank after the reorganization.
<PAGE>

Note 16.  Parent Company Only Financial Information

Following is condensed  financial  information  of the Company  (Parent  Company
only):

                                WASHINGTON BANCORP

                   CONDENSED STATEMENTS OF FINANCIAL CONDITION
                          As Of June 30, 1997 and 1996
<TABLE>

ASSETS                                                                                    1997             1996
                                                                                       -----------    -----------
<S>                                                                                    <C>            <C> 
Cash ...............................................................................   $ 1,886,565    $ 2,111,119
Investment securities available for sale ...........................................            --        500,000
Investment in subsidiary bank, at cost plus equity in
   undistributed earnings ..........................................................     8,762,017      7,963,481
Other assets .......................................................................       109,846         35,028
                                                                                       -----------    -----------
                                                                                       $10,758,428    $10,609,628
                                                                                       ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities, accrued expenses and other liabilities ................................   $    13,605    $    61,463
                                                                                       -----------    -----------
Redeemable common stock held by Employee Stock
   Ownership Plan (ESOP) ...........................................................        69,392             --
                                                                                       -----------    -----------
Stockholders' equity:
   Preferred stock
   Common stock ....................................................................         6,575          6,575
   Additional paid-in capital ......................................................     6,150,032      6,172,680
   Retained earnings ...............................................................     5,292,419      4,941,449
   Unrealized (losses) on investment securities available
      for sale of bank subsidiary ..................................................        (3,307)       (68,209)
                                                                                       -----------    -----------
                                                                                        11,445,719     11,052,495
   Less:
      Cost of common shares acquired for the treasury, 6,386 shares ................       (85,827)            --
      Deferred compensation ........................................................      (151,739)            --
      Maximum cash obligation related to ESOP shares (Note 9) ......................       (69,392)            --
      Unearned shares, Employee Stock Ownership Plan ...............................      (463,330)      (504,330)
                                                                                       -----------    -----------
                                                                                        10,675,431     10,548,165
                                                                                       -----------    -----------
                                                                                       $10,758,428    $10,609,628
                                                                                       ===========    ===========
</TABLE>
<PAGE>

                               WASHINGTON BANCORP

                              STATEMENTS OF INCOME
                       Years Ended June 30, 1997 and 1996

                                                               1997      1996
                                                             --------  --------

Interest income ............................................ $  5,693  $ 35,027
Miscellaneous expense ......................................   65,600        30
              Income (loss) before equity in subsidiary's
                    undistributed income and taxes on income $(59,907) $ 34,997
Equity in undistributed net income of bank subsidiary ......  604,285   420,075
                                                             --------  --------
              Income before taxes on income ................  544,378   455,072
Federal and state income taxes (credits) ...................  (20,299)   13,650
                                                             --------  --------
              Net income ................................... $564,677  $441,422
                                                             ========  ========



<PAGE>

                               WASHINGTON BANCORP

                            STATEMENTS OF CASH FLOWS
                       Years Ended June 30, 1997 and 1996
<TABLE>

                                                                       1997          1996
                                                                    ----------    ----------
<S>                                                                 <C>           <C> 
Cash Flows from Operating Activities
   Net income ...................................................   $  564,677    $  441,422
   Adjustments to reconcile net income to net cash
      provided by operations:
      Equity in net income of subsidiary ........................     (604,285)     (420,075)
      (Increase) in other assets ................................      (74,818)      (35,028)
      Increase in accrued expenses and other liabilities ........      (47,858)       61,463
                                                                    ----------    ----------
              Net cash provided by (used in) operating activities     (162,284)       47,782
                                                                    ----------    ----------

Cash Flows from Investing Activities
   Purchases of available-for-sale securities ...................           --      (500,000)
   Maturity of available-for-sale securities ....................      500,000            --
   Acquisition of stock in subsidiary ...........................           --    (3,089,356)
                                                                    ----------    ----------
              Net cash provided by (used in) investing activities      500,000    (3,589,356)
                                                                    ----------    ----------

Cash Flows from Financing Activities
   Proceeds from issuance of common stock .......................           --     6,049,170
   Payments for expenses incurred related to
      conversion of stock form ..................................           --      (396,477)
   Acquisition of common stock for the treasury .................     (348,563)           --
   Dividends paid ...............................................     (213,707)           --
                                                                    ----------    ----------
              Net cash provided by (used in) financing activities     (562,270)    5,652,693
                                                                    ----------    ----------

              Increase (decrease) in cash .......................     (224,554)    2,111,119

Cash balance:
   Beginning ....................................................    2,111,119           --
                                                                    ----------    ----------
   Ending .......................................................   $1,886,565    $2,111,119
                                                                    ==========    ==========

Supplemental Disclosures
   Cash payments for income taxes, net of
      payments from subsidiary ..................................   $  129,458    $       --
</TABLE>



<PAGE>



                               WASHINGTON BANCORP


                                       and

                         WASHINGTON FEDERAL SAVINGS BANK

                        DIRECTORS AND EXECUTIVE OFFICERS



Directors

Stan Carlson                                Rick R. Hofer
President and Chief Executive               Chairman of the Board, Washington
 Officer, Washington and the Bank             and the Bank
                                            Employee, Sitler Electric Supply

James D. Gorham                             Mary Levy
District Agent, Northwestern Mutual         Treasurer and co-owner, Mose Levy
 Life Insurance Co.                           Steel Company

Myron L. Graber                             Richard L. Weeks
Co-owner, Graber Home                       Owner, Sitler Electric Supply, Inc.
 Improvement, Inc.

J. Richard Wiley
Owner, Wiley Computers


Executive Officers

Stan Carlson                                Leisha Linge
President and Chief Executive Officer       Controller

Jeff Johnson                                Sandra K. Bush
Vice President                              Vice President and Secretary




<PAGE>





                             STOCKHOLDER INFORMATION


Corporate Profile

Washington  is an Iowa  corporation  which was organized in 1995 by the Bank for
the  purpose of  becoming a thrift  institution  holding  company.  The Bank was
organized  in 1934 and  converted to a federal  savings  bank in 1994.  In March
1996,  the Bank  converted to the stock form of  organization  and  concurrently
became the wholly-owned  subsidiary of Washington  through the sale and issuance
of common stock.  The principal asset of Washington is the outstanding  stock of
the Bank,  its wholly owned  subsidiary.  Washington  presently  has no separate
operations  and its  business  consists  only of the  business of the Bank.  The
Bank's primary business consists of attracting  deposits from the general public
and using these deposits to provide  financing for the purchase and construction
of residential and, to a lesser extent, other properties.


Main Office                                 Drive-thru Office

102 East Main Street                        220 East Washington Street
Washington, Iowa                            Washington, Iowa

Independent Auditors                        Local Counsel

McGladrey & Pullen, LLP                     Washington County Abstract Co.
Town Centre, Suite 300                      225 W. Main Street
221 Third Avenue, SE                        Washington, Iowa  52353
Cedar Rapids, Iowa 52401

Transfer Agent                              Special Counsel

Registrar & Transfer Co.                    Silver, Freedman & Taff, L.L.P.
10 Commerce Drive                           1100 New York Avenue, N.W.
Cramford, New Jersey                        Washington, D.C.  20005

Form 10-KSB Report

A copy of  Washington's  Annual  Report on Form 10-KSB for the fiscal year ended
June 30, 1997  including  financial  statements,  as filed with the SEC, will be
furnished  without charge to  stockholders of Washington upon written request to
the Secretary, Washington Bancorp, 102 East Main Street, Washington, Iowa 52353.

Stock Listing

Washington's common stock is reported on the National Daily Quotation Service by
the  National  Quotation  Bureau under the symbol  "WBIO".  As of July 31, 1997,
Washington  had 418  stockholders  of record and 651,133  outstanding  shares of
common stock.

Price Range of Common Stock

The table below shows the range of high and low interdealer prices. These prices
do not include retail  markups,  markdowns or commissions  and may not represent
actual transactions. The table below also shows dividends paid by the Company.

                                         High              Low         Dividend
                                      -----------      -----------    ----------
1996
----

Third quarter ...............         $     11.50      $     10.50      $   --
Fourth quarter ..............         $     11.38      $     10.50      $   --

1997
----

First quarter ...............         $     11.38      $     10.63      $  .08
Second quarter ..............         $     12.63      $     10.88      $  .08
Third quarter ...............         $     15.00      $     12.88      $  .10
Fourth quarter ..............         $     15.35      $     13.75      $  .10