<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549



                                   FORM 10-Q
                                        


             [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934.


               For the Quarterly Period Ended September 30, 1997.


                          Commission File No. 0-19968



                          SOUTHWEST BANCSHARES, INC.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)



                 DELAWARE                                  36-3811042
       -------------------------------                 ------------------- 
       (State or other jurisdiction of                  (I.R.S. Employer
       incorporation or organization)                  Identification No.)



                 4062 SOUTHWEST HIGHWAY
                   HOMETOWN, ILLINOIS                         60456
       ----------------------------------------             ----------     
       (Address of principal executive offices)             (Zip Code)



                                 (708) 636-2700
              ----------------------------------------------------  
              (Registrant's telephone number, including area code)


        
        Indicate by check mark whether the registrant (1) has filed all the
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.



               (1) Yes   X      No
                        ---         ---

               (2) Yes   X      No
                        ---         ---    



        As of October 22, 1997, the Registrant had 2,658,755 shares of Common
Stock outstanding.
<PAGE>
 
                           SOUTHWEST BANCSHARES, INC.


                                   Form 10-Q
                                     Index

                                                                          Page
                                                                          ----

PART I.  FINANCIAL INFORMATION


Item 1.   Financial Statements

          Consolidated Balance Sheet as of
          September 30, 1997 and December 31, 1996.......................    3

          Consolidated Income Statement
          for the three and nine months ended
          September 30, 1997 and September 30, 1996......................    4


          Consolidated Statement of Cash
          Flows for the nine months ended
          September 30, 1997 and September 30, 1996......................    5


          Notes to Consolidated Financial Statements.....................  6-8

Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations.................. 9-16

PART II.  OTHER INFORMATION..............................................   17

          Signatures.....................................................   18

                                      -2-
<PAGE>

Item 1.  FINANCIAL STATEMENTS


                          SOUTHWEST BANCSHARES, INC.
                          CONSOLIDATED BALANCE SHEET
                                (In Thousands)
<TABLE> 
<CAPTION> 

                                                                        September 30,   December 31,
                                                                           1997            1996
                                                                        -------------   ------------
                                                                         (UNAUDITED)      (AUDITED)
<S>                                                                     <C>             <C>
 ASSETS:
      Cash and amounts due from depository institutions ..............    $     5,524          6,300
      Interest-bearing deposits ......................................          1,465          5,380
      U.S. Government and agency obligations, available for sale .....         45,670         46,591
      Mortgage-backed securities, available for sale .................         27,172         32,840
      Loans receivable, net ..........................................        273,105        262,431
      Foreclosed real estate .........................................              0            117
      Stock in Federal Home Loan Bank of Chicago .....................          2,734          3,108
      Other investments, available for sale ..........................            635          7,428
      Investment in joint ventures ...................................          7,337          7,072
      Accrued interest receivable ....................................          2,395          2,274
      Office property and equipment, net .............................          2,970          3,080
      Prepaid expenses and other assets ..............................          5,997          5,740
                                                                          -----------    -----------
           Total assets ..............................................        375,004        382,361
                                                                          ===========    ===========
 LIABILITIES:                                                                          
      Deposits .......................................................        275,353        280,434
      Borrowed Money .................................................         50,850         55,158
      Advance payments by borrowers for taxes and insurance ..........          1,075          2,335
      Other liabilities ..............................................          5,183          4,575
                                                                          -----------    ----------- 
           Total liabilities .........................................        332,461        342,502
                                                                          -----------    -----------
 STOCKHOLDERS' EQUITY:                                                                 
      Preferred stock, $.01 par value; authorized                                      
        1,000,000 shares; none outstanding ...........................              0              0
      Common stock, $.01 par value; authorized                                         
        5,000,000 shares; issued 4,463,358 shares                                      
        and outstanding 2,657,075 shares at September 30, 1997                         
        and 2,637,461 shares at December 31, 1996 ....................             45             44
      Additional paid-in capital .....................................         29,502         29,140
      Retained earnings, substantially restricted ....................         41,815         40,257
      Unrealized loss on available for sale securities ...............           (111)          (637)
      Treasury stock, at cost (1,806,283 shares at September 30, 1997                  
        and 1,800,259 shares at December 31, 1996) ...................        (28,308)       (28,183)
      Common stock acquired by Employee Stock                                          
        Ownership Plan ...............................................           (400)          (640)
      Common stock awarded by Management Recognition                                   
        Plan .........................................................              0           (122)
                                                                          -----------    ----------- 
           Total stockholders' equity.................................         42,543         39,859
                                                                          -----------    ----------- 
           Total liabilities and stockholders' equity ................    $   375,004        382,361
                                                                          ===========    =========== 
</TABLE> 

See notes to consolidated financial statements.

                                      -3-

<PAGE>
 
                          SOUTHWEST BANCSHARES, INC.
                         CONSOLIDATED INCOME STATEMENT
                                (In Thousands)
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                      THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                         SEPTEMBER 30,                  SEPTEMBER 30,
                                                                 ----------------------------   ----------------------------
                                                                     1997             1996          1997             1996
                                                                 -----------      -----------   -----------      ----------- 
<S>                                                              <C>              <C>           <C>              <C> 
Interest Income:
     Interest on loans ........................................  $     5,806            5,425        17,171           16,080
     Interest on mortgage-backed securities ...................          468              530         1,514            1,550
     Interest on investment securities ........................          691              713         2,111            2,043
     Interest on other financial assets .......................           44              120           187              304
     Dividends on FHLB stock ..................................           47               52           144              151
                                                                 -----------      -----------   -----------      ----------- 
          Total interest income ...............................        7,056            6,840        21,127           20,128
                                                                 -----------      -----------   -----------      -----------
Interest Expense:
     Interest on deposits .....................................        3,275            3,045         9,701            8,627
     Interest on borrowings ...................................          783              859         2,376            2,512
                                                                 -----------      -----------   -----------      -----------
          Total interest expense ..............................        4,058            3,904        12,077           11,139
                                                                 -----------      -----------   -----------      -----------
Net interest income before provision for loan losses...........        2,998            2,936         9,050            8,989
Provision for loan losses .....................................            6                6            18               18
                                                                 -----------      -----------   -----------      -----------
Net interest income after provision for loan losses............        2,992            2,930         9,032            8,971
                                                                 -----------      -----------   -----------      -----------
Non-interest Income:
     Fees and service charges .................................           28               45           111               98
     Insurance commissions ....................................           62               34           159              108
     Income from joint ventures ...............................          109              185           316              501
     Gain on sale of securities available for sale ............           81                0           174                0
     Gain (loss) on sale of real estate owned (net) ...........            0                0            (4)               6
     Miscellaneous income .....................................           90              102           251              319
                                                                 -----------      -----------   -----------      -----------
          Total non-interest income ...........................          370              366         1,007            1,032
                                                                 -----------      -----------   -----------      -----------
Non-interest Expense:
     Compensation, employee benefits and related expenses .....          980            1,065         3,157            3,248
     Advertising and promotion ................................           36               51            84              129
     Occupancy and equipment expense...........................          320              327           932              938
     Data processing ..........................................           59               71           194              190
     Insurance premiums .......................................          108            1,912           328            2,349
     Legal, audit and examination services ....................           49               47           155              144
     Other operating expenses .................................          184              163           493              536
                                                                 -----------      -----------   -----------      -----------
          Total non-interest expense ..........................        1,736            3,636         5,343            7,534
                                                                 -----------      -----------   -----------      -----------
Income (loss) before income taxes .............................        1,626             (340)        4,696            2,469
Provision (benefit) for federal and state income taxes ........          567             (196)        1,630              751
                                                                 -----------      -----------   -----------      -----------
Net income (loss) .............................................  $     1,059             (144)        3,066            1,718
                                                                 ===========      ===========   ===========      ===========

Net income (loss) per share (primary) .........................  $      0.38            (0.05)         1.11             0.58
Net income (loss) per share (fully diluted) ...................  $      0.38            (0.05)         1.11             0.58
Dividends declared per common share ...........................  $      0.19             0.18          0.57             0.54
</TABLE> 

See notes to consolidated financial statements.             

                                      -4-

<PAGE>
 
                          SOUTHWEST BANCSHARES, INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
                                (In Thousands)
<TABLE> 
<CAPTION> 

                                                                          Nine Months Ended September 30,
                                                                      ----------------------------------------
                                                                          1997                       1996
                                                                      --------------              ------------
<S>                                                                   <C>                         <C> 
Cash flows from operating activities:                                    (UNAUDITED)                (UNAUDITED)
     Net income ...................................................        $   3,066                     1,718
     Adjustments to reconcile net income to net cash from      
       operating activities:                                   
          Depreciation ............................................              304                       316
          Amortization of cost of stock benefit plans .............              362                       424
          Net loss on sale of mortgage-backed securities,                                                  
             available for sale ...................................               48                         0
          Net gain on sale of investment securities, available                                             
             for sale .............................................             (223)                        0
          Net loss <gain> on sale of foreclosed real estate .......                4                        (6)
          Provision for loan losses-net ...........................               18                        18
          Decrease (Increase) in prepaid and deferred federal                                              
            and state income taxes ................................              533                       (61)
          Increase in accrued interest receivable .................             (121)                      (44)
          Increase in accrued interest payable ....................               16                        13
          Increase in other assets ................................             (965)                     (500)
          Increase in other liabilities ...........................              592                     3,184
                                                                           ---------                 --------- 
Net cash provided by operating activities .........................            3,634                     5,062
                                                                           ---------                 ---------
Cash flows from investing activities:
     Purchase of mortgage-backed securities, available for sale....                0                    (4,969)
     Purchase of investment securities, available for sale ........           (3,001)                  (13,330)
     Proceeds from sales of mortgage-backed securities,                                              
        available for sale ........................................            3,996                         0
     Proceeds from maturities of mortgage backed securities,                                         
        available for sale ........................................            1,959                     2,240
     Proceeds from sales of investment securities, available       
        for sale ..................................................            6,995                        45
     Proceeds from maturities of investment securities,            
        available for sale ........................................            4,500                    10,000
     Purchase of stock in Federal Home Loan Bank ..................             (171)                     (476)
     Proceeds from sale of stock in Federal Home Loan Bank ........              545                       687
     Participation loans purchased ................................           (3,318)                   (5,233)
     Participation loans sold .....................................            3,018                     1,882
     Proceeds from sale of foreclosed real estate .................              113                        74
     Loan disbursements ...........................................          (44,678)                  (51,872)
     Loan repayments ..............................................           34,286                    38,059
     Property and equipment expenditures ..........................             (194)                     (626)
     Investments in joint ventures ................................             (265)                   (1,204)
                                                                           ---------                 ---------
Net cash provided by (for) investing activities ...................            3,785                   (24,723)
                                                                           ---------                 ---------
Cash flows from financing activities:                                     
     Deposit receipts .............................................          281,792                   286,813
     Deposit withdrawals ..........................................         (295,655)                 (273,327)
     Interest credited to deposit accounts ........................            8,782                     7,806
     Proceeds of borrowed money ...................................           21,000                    18,500
     Repayment of borrowed funds ..................................          (25,308)                  (18,000)
     Decrease in advance payments by borrowers for                        
       taxes and insurance ........................................           (1,260)                   (1,432)
     Proceeds from exercise of stock options ......................              172                       578
     Purchase of treasury stock ...................................             (125)                   (7,627)
     Dividends paid on common stock ...............................           (1,508)                   (1,495)
                                                                           ---------                 ---------
Net cash provided by (for) financing activities ...................          (12,110)                   11,816
                                                                           ---------                 ---------
Decrease in Cash and cash equivalents .............................           (4,691)                   (7,845)
Cash and cash equivalents at beginning of period ..................           11,680                    15,868
                                                                           ---------                 ---------
Cash and cash equivalents at end of period ........................        $   6,989                     8,023
                                                                           =========                 =========
Cash paid during the period for:
     Interest .....................................................        $  12,061                    11,126
     Income taxes .................................................            1,143                       839
Non-cash investing activities:
     Transfer of loans to foreclosed real estate ..................                0                        68
                                                                           =========                 =========
</TABLE> 

See notes to consolidated financial statements.        

                                      -5-

<PAGE>
 
                           SOUTHWEST BANCSHARES, INC.


Notes to Consolidated Financial Statements
------------------------------------------

1.  Statement of Information Furnished
--------------------------------------

          The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and Article 10 of Regulation
S-X, and in the opinion of management contain all adjustments (all of which are
normal and recurring in nature) necessary to present fairly the financial
position as of September 30, 1997, the results of operations for the three and
nine months ended September 30, 1997 and 1996 and the cash flows for the nine
months ended September 30, 1997 and 1996.  These results have been determined on
the basis of generally accepted accounting principles.  The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures 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.  The attached consolidated statements are those of
Southwest Bancshares, Inc. and its consolidated subsidiaries Southwest Federal
Savings and Loan Association of Chicago and Southwest Bancshares Development
Corporation.  The results of operations for the nine month period ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the full year.

          These consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto, included in the
Company's Annual Report to Stockholders for the year ended December 31, 1996.

2.  Earnings Per Share
----------------------

          Southwest Bancshares, Inc. presents earnings per share on a primary
and a fully diluted basis.  Earnings per share were computed by dividing net
income by the average number of common equivalent shares outstanding during the
period.  Common equivalent shares include shares issuable under the stock option
plans.

3.  Impact of New Accounting Standards
--------------------------------------

          In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities".  This statement, among other things, applies a "financial-
components approach" that focuses on control, whereby an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes assets when control has been surrendered, and derecognizes
liabilities when extinguished.  SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings.  SFAS No. 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996.  The Company has adopted SFAS No. 125 effective January 1, 1997,
resulting in no material impact on its consolidated financial condition or
results of operations.

          In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 ("SFAS No. 127"), "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125".  The statement delays for one year the
implementation of SFAS No. 125, as it relates to (1) secured borrowings and
collateral, and (2) for the transfers of financial assets that are part of
repurchase agreement, dollar-roll, securities lending and similar transactions.
The Company has adopted portions of SFAS No. 125 (those not deferred by SFAS No.
127) effective January 1, 1997.  Adoption of these portions did not have a
significant effect on the Company's financial condition or results of
operations.  Based on its review of SFAS No. 125, management does not believe
that adoption of the portions of SFAS No. 125 which have been deferred by SFAS
No. 127 will have a material effect on the Company.

                                      -6-
<PAGE>
 
          In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share".  This statement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock.  This statement simplifies
the standards for computing earnings per share previously found in Accounting
Principles Board Opinion No. 15 (APB No. 15), "Earnings Per Share" and makes
them comparable to international EPS standards.  It replaces the presentation of
primary EPS with a presentation of basic EPS and fully diluted EPS with diluted
EPS.  It also requires dual presentation of basic EPS and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.


     Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period.  Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.  Diluted EPS is
computed similarly to fully diluted EPS under APB No. 15.


          SFAS No. 128 is effective for financial statements for both interim
and annual periods ending after December 15, 1997.  The following presentation
illustrates pro forma basic and diluted earnings per share based on the
provisions of SFAS No. 128:

<TABLE>
<CAPTION>
                                            Three Months Ended     Nine Months Ended
                                               September 30,         September 30,
                                            --------------------  --------------------
                                               1997      1996       1997       1996
                                            ---------  ---------  ---------  ---------
<S>                                         <C>        <C>        <C>        <C>
Weighted-average number of
  common shares outstanding
  used in basic earnings per
  share calculation.......................  2,652,782  2,682,852  2,644,072  2,788,899
Add common stock equivalents        
  for shares issuable under         
  Stock Option Plan.......................    105,203    116,096    111,440    123,974
                                            ---------  ---------  ---------  ---------
Weighted-average number of            
  shares outstanding adjusted         
  for common stock equivalent.............  2,757,985  2,798,948  2,755,512  2,912,873
                                            =========  =========  =========  =========

Net income (loss)......................... $1,059,000   (144,000) 3,066,000  1,718,000
                                            =========  =========  =========  =========

Basic earnings (loss) per share........... $      .40       (.05)      1.16        .62
                                                                                
Diluted earnings (loss) per share......... $      .38       (.05)      1.11        .58

</TABLE>


     Disclosure of earnings per share calculated in accordance with Accounting
Principles Board Opinion No. 15, "Earnings Per Share" is contained in Exhibit
11.

                                      -7-
<PAGE>
 
     In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 ("SFAS No. 129"), "Disclosure of Information about Capital
Structure".  This statement establishes standards for disclosing information
about an entity's capital structure.  It supersedes specific disclosure
requirements of APB Opinions No. 10, "Omnibus Opinion-1996" and No. 15,
"Earnings Per Share", and Statement of Financial Accounting Standards No. 47
("SFAS No. 47"), "Disclosure of Long-Term Obligations", and consolidates them in
this statement for ease of retrieval and for greater visibility to nonpublic
entities.  This statement is effective for financial statements for periods
ending after December 15, 1997.  It contains no changes in disclosure
requirements for entities that were previously subject to the requirements of
Opinions No. 10 and No. 15 and SFAS No. 47, and, therefore, is not expected to
have a significant impact on the consolidated financial condition or results of
operations of the Company.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income".  This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, losses) in a full set of general-purpose
financial statements.  SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997.  The Company has not yet determined the impact of
adopting this statement.

     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS No. 131"),"Disclosures about Segments of an Enterprise and
Related Information" which becomes effective for fiscal years beginning after
December 15, 1997.  SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and requires
enterprises to report selected information about operating segments in interim
financial reports.  The Company has not yet determined the impact of adopting
this statement.

     The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities.  It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.

                                      -8-
<PAGE>
 
Item 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL
-------


Southwest Bancshares, Inc. (the "Company") is the holding company for Southwest
Federal Savings and Loan Association of Chicago (the "Association") and
Southwest Bancshares Development Corporation, a participant in real estate
development.  The Association operates a wholly-owned subsidiary, Southwest
Service Corporation, which engages in real estate development activity and
operates a full service insurance agency.

The Company's results of operations 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, mortgage-backed and
related securities and investment securities, and the interest paid on interest-
bearing liabilities, consisting primarily of deposits.  The Company's earnings
also are affected by the level of its other income, including fee revenue, joint
venture income and gain on sale of investments and loans, as well as its level
of non-interest expenses, including employee compensation and benefits,
occupancy and equipment costs, federal deposit insurance premiums and other
general and administrative expenses.  The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------


The Company's primary sources of funds are the Association's deposits and
proceeds from principal and interest payments on loans and mortgage-backed
securities, advances from the FHLB-Chicago and proceeds from the maturity of
investments.  While maturities and scheduled amortization of loans and mortgage-
backed securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.  As of September 30, 1997 the Association had
outstanding loan commitments of $6.6 million, with an average interest rate of
8.46%, of which the majority were fixed-rate loans.  Management anticipates that
it will have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
September 30, 1997 totalled $138.9 million.  Based upon the Association's
experience, management believes that a significant portion of such deposits will
remain with the Association.

The Company's cash flows are comprised of three primary classifications:  cash
flows from operating activities, investing activities and financing activities.
Cash flows from operating activities were $3.6 million for the nine months ended
September 30, 1997 as compared to $5.1 million for the same period in 1996.  Net
cash provided by investing activities was $3.8 million for the nine months ended
September 30, 1997 as compared to $24.7 million provided for investing
activities in the nine month period ended September 30, 1996.  Net cash provided
for financing activities was $12.1 million for the nine month period ended
September 30, 1997 as compared to $11.8 million provided by financing activities
for the nine month period ended September 30, 1996.

The primary investment activity of the Association is the origination of
mortgage loans and the purchase of mortgage-backed and mortgage-related
securities.  The Association disbursed $44.7 million in mortgage loans during
the nine month period ended September 30, 1997 as compared to $51.9 million for
the same nine month period of 1996.  The Company also purchased $3.3 million in
participation loans for the nine month period ended September 30, 1997 as
compared to $5.2 million in the same period of 1996.   Participation loans sold
by the Company totalled $3.0 million for the nine month period ended September
30, 1997 as compared to $1.9 million in the same period of 1996.  The Company
did not purchase any mortgage-backed securities, available for sale in the nine
month period ended September 30, 1997 as compared to $5.0 million purchased
during the nine month period ended September 30, 1996.  Proceeds of $4.0 million
from the sales of mortgage-backed securities, available for sale for the nine
month period ended September 30, 1997 compares to no sales during the same
period of 1996.  Proceeds from maturities of mortgage-backed securities,
available for sale of $2.0 million for the nine month period ended September

                                      -9-
<PAGE>
 
30, 1997 compares to $2.2 million for the same period in 1996. Other investing
activities include primarily investing in U.S. Government and agency obligations
and other investments which totalled $3.0 million and $13.3 million for the nine
month periods ended September 30, 1997 and 1996, respectively. Proceeds of $7.0
million from sales of investment securities, available for sale during the nine
month period ended September 30, 1997 compares to $45,000 for the same period in
1996. Proceeds from maturities of investment securities, available for sale of
$4.5 million during the nine month period ended September 30, 1997 compares to
$10.0 million for the same nine month period of 1996.

The Association is required to maintain minimum levels of liquid assets as
defined by the Office of Thrift Supervision ("OTS") regulations.  This
requirement, which may be varied at the direction of the OTS depending upon
economic conditions and deposit flows, is based upon a percentage of deposits
and short-term borrowings.  The required ratio is currently 5%.  The
Association's liquidity ratio was 14.50% at September 30, 1997.

The Association's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments.  The levels of
these assets are dependent on the Association's operating, financing, lending
and investing activities during any given period.  At September 30, 1997, cash
and cash equivalents totalled $7.0 million.

The OTS capital regulations require savings institutions to meet three capital
standards:  a 1.5% tangible capital standard; a 3% leverage (core capital)
ratio; and an 8% risk-based capital standard.  The core capital requirement was
effectively increased to 4% since OTS regulations stipulate that an institution
with less than 4% core capital will be deemed to be "undercapitalized".  As of
September 30, 1997, the Association's actual capital percentages for tangible
capital of 7.77%, core capital of 7.77%, and current risk-based capital of
13.81% exceed the regulatory requirement for each category.  On August 23, 1993,
the OTS issued a final rule which sets forth the methodology for calculating an
interest rate risk component that would be incorporated into the OTS risk-based
regulatory capital rule.  The effective date for the rule has been delayed by
the OTS.  This regulation is not expected to have a material impact on the
financial condition of the Association.

The Company invests in mortgage-backed and related securities as part of its
asset and liability management strategy and to complement its mortgage lending
and investment activities.  The Company has designated its entire portfolio of
mortgage-backed and related securities as "available for sale" and are accounted
for at fair market value, and unrealized gains or losses are reported net of
taxes as a separate component of stockholders' equity.

As of September 30, 1997, all of the mortgage-backed and related securities
owned by the Company are issued or guaranteed either directly or indirectly by a
federal agency and are typically rated in one of the two highest rated
categories by a nationally recognized rating agency.

Consistent with its asset and liability management strategy, $17.5 million or
64.58% of the Company's mortgage-backed and related securities have adjustable
interest rates, thereby reducing the impact of changing interest rates on these
securities.  However, because these securities are subject to prepayments, the
Company's yield on this portfolio could be adversely affected if significant
prepayments occur.

Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs") purchased by the Company are not classified as "high risk"
under regulatory guidelines and are subject to normal effects of changes in
interest rates.  To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of CMO and REMIC securities.  This policy, which has been adopted
by the OTS, requires the Company to annually test its CMOs and REMICs to
determine whether they are high risk or non-high risk securities.  All CMOs and
REMICs are subjected to this stress test quarterly and at September 30, 1997 all
were considered to be low risk securities.

                                      -10-
<PAGE>
 
Non-Performing Assets - The following table sets forth information regarding
loans which are 90 days or more delinquent.  The Association continues accruing
interest on delinquent loans 90 days or more past due, but reserves 100% of the
interest due on such loans, thus effecting a non-accrual status.  At September
30, 1997 there were no other known problem assets except as included in the
table below.



                             NON-PERFORMING ASSETS

                             (Dollars in Thousands)
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                      Sept. 30,    June 30,      March 31,     Dec. 31,    Sept. 30,
                                        1997         1997          1997          1996        1996
                                      ----------   ----------   ----------   ----------   ----------  
<S>                                   <C>          <C>          <C>          <C>          <C>  
Non-accrual delinquent
mortgage loans......................  $      761   $    1,133   $      671   $      811   $      781
                                                                                                 
Total real estate owned,                                                                         
net of related allowance                                                                         
for loan losses.....................           0            0            0          117           47
                                      ----------   ----------   ----------   ----------   ----------  
Total non-performing assets.........  $      761   $    1,133   $      671   $      928   $      828
                                      ==========   ==========   ==========   ==========   ==========  

Allowance for loan losses...........  $      769   $      763   $      757   $      751   $      772

Total non-performing
assets to total assets..............        0.20%        0.30%        0.18%        0.24%        0.22%

Total non-performing
loans to gross loans................        0.27%        0.40%        0.24%        0.30%        0.29%

Allowance for loan losses
to total non-performing loans.......      101.05%       67.34%      112.82%       92.60%       98.85%

Amount of interest that would have
been recorded on a non-accrual
basis if loans had been current
within their original terms.........  $   38,000   $   43,000   $   26,000   $   19,000   $   20,000
</TABLE> 
                                                          

                                      -11-
<PAGE>
 
                           Interest Rate Sensitivity

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997 which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown.  Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability.  The Association has assumed that
its passbook savings, NOW and money market accounts, which totalled $104.6
million at September 30, 1997, are withdrawn at the annual percentage rates of
6%, 38% and 15%, respectively.  These withdrawal rates, as well as loan
prepayment assumptions, are based on the Association's historical experience
regarding loan prepayments and deposit withdrawals.

<TABLE>
<CAPTION>
                                                                           At September 30, 1997
                                        -------------------------------------------------------------------------------------------
                                                             More Than    More Than    More Than   More Than
                                           0-3      4-12    One Year to  Three Years  Five Years    10 Years   More Than
                                         Months    Months   Three Years to Five Years to 10 Years to 20 Years   20 Years    Total
                                        --------- --------- ----------- ------------- ----------- ------------ ---------- ---------
                                                                               (Dollars in thousands)
<S>                                     <C>       <C>       <C>         <C>           <C>         <C>          <C>        <C>
Interest-earning assets:                
 Mortgage loans (1) ....................$  21,194    23,821      54,626        41,822      66,054       52,300      7,733   267,550
 Other loans (1) .......................    8,498      ---           93          ---         ---          ---        ---      8,591
 Interest-bearing deposits .............    1,365      ---          100          ---         ---          ---        ---      1,465
 Mortgage-backed securities ............   18,159       755       1,735         1,401       2,465        2,401        563    27,479
 Investment securities .................   11,935    14,450       8,000         4,630      10,000         ---        ---     49,015
                                        --------- --------- ----------- ------------- ----------- ------------ ---------- ---------
      Total interest-earning            
        assets .........................   61,151    39,026      64,554        47,853      78,519       54,701      8,296   354,100
                                        
Less:                                   
 Unearned discount and                  
   deferred fees .......................     (248)     (279)       (640)         (490)       (774)        (613)       (91)   (3,135)
                                        --------- --------- ----------- ------------- ----------- ------------ ---------- ---------
      Net interest-earning              
        assets .........................$  60,903    38,747      63,914        47,363      77,745       54,088      8,205   350,965
                                        ========= ========= =========== ============= =========== ============ ========== =========
                                        
Interest-bearing liabilities:           
 Passbook accounts .....................$     708     2,082       2,682         2,514       2,358        2,210     33,218    45,772
 NOW accounts ..........................    2,241     5,555       6,871         1,835       2,464        1,350        229    20,545
 Money market accounts .................    1,530     4,366       5,255         4,480       3,820        3,257     15,546    38,254
 Certificate accounts ..................   47,438    91,442      31,902          ---         ---          ---        ---    170,782
 Borrowed funds ........................   17,000    14,200      18,450         1,200        ---          ---        ---     50,850
                                        --------- --------- ----------- ------------- ----------- ------------ ---------- ---------
      Total interest-bearing            
        liabilities ....................$  68,917   117,645      65,160        10,029       8,642        6,817     48,993   326,203
                                        ========= ========= =========== ============= =========== ============ ========== =========
 Interest sensitivity gap ..............$  (8,014)  (78,898)     (1,246)       37,334      69,103       47,271    (40,788)   24,762
 Cumulative interest sensitivity gap ...$  (8,014)  (86,912)    (88,158)      (50,824)     18,279       65,550     24,762
 Cumulative interest sensitivity gap    
   as a percentage of total assets .....    (2.14)%  (23.18)     (23.51)       (13.55)       4.87        17.48       6.60
 Cumulative net interest-earning        
   assets as a percentage of interest-  
   sensitive liabilities ...............    88.37 %   53.41       64.98         80.58      106.76       123.65     107.59
----------
</TABLE>

  (1) For purposes of the gap analysis, mortgage and other loans are reduced for
      non-performing loans and undisbursed loan proceeds but are not reduced by
      the allowance for loan losses. At September 30, 1997, non-performing loans
      and undisbursed loan proceeds totalled $761,000 and $5.8 million,
      respectively.


Certain shortcomings are inherent in the method of analysis presented in the
foregoing table.  For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates.  Also, 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, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset.  Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table.

In this current environment of narrowing interest margins, management intends to
decrease the interest rate sensitivity by extending liability maturities and
shortening the investment portfolio.

                                      -12-
<PAGE>
 
                             Average Balance Sheet


The following table sets forth certain information relating to the Company's
consolidated statements of financial condition for the periods indicated and
reflects the average yield on assets and average cost of liabilities.  Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown.  Average
balances are derived from average monthly balances.  Management does not believe
that the use of month-end balances instead of average daily balances has caused
any material differences in the information presented.  The yields and costs
include fees which are considered adjustments to yields.


<TABLE>
<CAPTION>

                                                                               Three Months Ended September 30,               
                                                              --------------------------------------------------------------  
                                                                         1997                            1996                 
                                                              -----------------------------   ------------------------------   
                                                               Average             Average     Average             Average    
                                                               Balance  Interest Yield/Cost    Balance  Interest  Yield/Cost  
                                                              --------- -------- ----------   --------- --------  ----------    
Assets:                                                                             (Dollars in Thousands)                   
<S>                                                           <C>       <C>      <C>          <C>       <C>       <C>            
Interest-earning assets:                                                                                                     
     Mortgage loans, net ...................................  $264,893  $ 5,617       8.48%    254,112    5,317      8.37     
     Other loans ...........................................     8,436      189       8.96       4,937      108      8.75     
     Mortgage-backed securities ............................    28,334      468       6.61      32,242      530      6.58     
     Interest-bearing deposits .............................     2,563       44       6.87       5,737      120      8.37     
     Investment securities .................................    50,167      738       5.88      53,145      765      5.76     
                                                              --------- -------- ----------   --------- --------  --------    
          Total interest-earning assets ....................   354,393    7,056       7.96     350,173    6,840      7.81     
Non-interest earning assets ................................    23,432                          19,474                        
                                                              ---------                       ---------                       
               Total assets ................................  $377,825                         369,647                        
                                                              =========                       =========                       
                                                                                                                             
Liabilities and retained earnings:                                                                                           
Interest-bearing liabilities:                                                                                                
     Deposits:                                                                                                               
          Passbook .........................................  $ 46,778  $   353       3.02%     47,854      358      3.00     
          Certificate ......................................   170,174    2,456       5.77     158,245    2,226      5.63     
          NOW and money market accounts ....................    60,096      466       3.10      61,034      461      3.02     
     Borrowed funds:                                                                                                         
          FHLB advances and other ..........................    50,100      783       6.25      53,658      859      6.40     
                                                              --------- -------- ----------   --------- --------  --------    
               Total interest-bearing liabilities ..........   327,148    4,058       4.96     320,791    3,904      4.87     
Other liabilities ..........................................     8,803                           8,704                        
                                                              ---------                       ---------                       
               Total liabilities ...........................   335,951                         329,495                        
Stockholders' equity .......................................    41,874                          40,152                        
                                                              ---------                       ---------                       
               Total liabilities and stockholders'                                                                           
                 equity ....................................  $377,825                         369,647                        
                                                              =========                       =========                       
                                                                                                                             
Net interest income/interest rate spread (1) ...............            $ 2,998       3.00%               2,936      2.94     
Net earning assets/net interest margin (2) .................  $ 27,245                3.38%     29,382               3.35     
                                                              =========          ==========   =========           ========    
                                                                                                                             
Ratio of interest-earning assets to interest-bearing                                                                         
  liabilities ..............................................      1.08 x                          1.09                        
                                                              =========                       =========               

</TABLE> 
<TABLE> 
<CAPTION> 
                                                                               Nine Months Ended September 30,                
                                                             -----------------------------------------------------------------
                                                                         1997                            1996                 
                                                             ------------------------------   --------------------------------    
                                                               Average             Average     Average             Average    
                                                               Balance  Interest Yield/Cost    Balance  Interest  Yield/Cost  
                                                             ---------- -------- ----------   --------- --------  ------------
Assets:                                                                             (Dollars in Thousands)                   
<S>                                                           <C>       <C>      <C>          <C>       <C>       <C>            
Interest-earning assets:                                                                                                      
     Mortgage loans, net ...................................   261,550   16,643       8.48     246,666   15,862      8.57     
     Other loans ...........................................     7,981      528       8.82       3,394      218      8.56     
     Mortgage-backed securities ............................    30,377    1,514       6.65      31,418    1,550      6.58     
     Interest-bearing deposits .............................     4,045      187       6.16       6,038      304      6.71     
     Investment securities .................................    51,133    2,255       5.88      51,948    2,194      5.63     
                                                             ---------- -------- ----------   --------- --------  --------    
          Total interest-earning assets ....................   355,086   21,127       7.93     339,464   20,128      7.91     
Non-interest earning assets ................................    23,002                          21,229                        
                                                             ----------                       ---------                       
               Total assets ................................   378,088                         360,693                        
                                                             ==========                       =========                       
                                                                                                                              
Liabilities and retained earnings:                                                                                            
Interest-bearing liabilities:                                                                                                 
     Deposits:                                                                                                                
          Passbook .........................................    47,030    1,073       3.04      47,214    1,080      3.05     
          Certificate ......................................   171,423    7,224       5.62     150,491    6,159      5.46     
          NOW and money market accounts ....................    59,706    1,404       3.14      60,840    1,388      3.04     
     Borrowed funds:                                                                                                          
          FHLB advances and other ..........................    50,492    2,376       6.27      52,058    2,512      6.43     
                                                             ---------- -------- ----------   --------- --------  --------    
               Total interest-bearing liabilities ..........   328,651   12,077       4.90     310,603   11,139      4.78     
Other liabilities ..........................................     8,416                           7,491                        
                                                             ----------                       ---------                       
               Total liabilities ...........................   337,067                         318,094                        
Stockholders' equity .......................................    41,021                          42,599                        
                                                             ----------                       ---------                       
               Total liabilities and stockholders'                                                                            
                 equity ....................................   378,088                         360,693                        
                                                             ==========                       =========                       
                                                                                                                              
Net interest income/interest rate spread (1) ...............              9,050       3.03                8,989      3.13     
Net earning assets/net interest margin (2) .................    26,435                3.40      28,861               3.53     
                                                              =========          ==========   =========           ========    
                                                                                                                              
Ratio of interest-earning assets to interest-bearing                                                                          
  liabilities ..............................................      1.08                            1.09                        
                                                              =========                       =========            

</TABLE> 
<TABLE> 
<CAPTION> 
                                                               At September 30,  
                                                                    1997
                                                             -------------------  
                                                                         Average          
                                                              Balance   Yield/Cost       
                                                             --------- ----------        
Assets:                                                     (Dollars in Thousands)                   
<S>                                                         <C>        <C>      
Interest-earning assets:                                                                 
     Mortgage loans, net ...................................  264,514      8.08          
     Other loans ...........................................    8,591      8.91          
     Mortgage-backed securities ............................   27,372      6.57          
     Interest-bearing deposits .............................    1,465      5.28          
     Investment securities .................................   49,015      5.80          
                                                             ---------  --------         
          Total interest-earning assets ....................  350,957      7.65          
Non-interest earning assets ................................   24,047                    
                                                             ---------                   
               Total assets ................................  375,004                    
                                                             =========                   
                                                                                         
Liabilities and retained earnings:                                                       
Interest-bearing liabilities:                                                            
     Deposits:                                                                           
          Passbook .........................................   45,772      3.01          
          Certificate ......................................  170,782      5.72          
          NOW and money market accounts ....................   58,799      3.09          
     Borrowed funds:                                                                     
          FHLB advances and other ..........................   50,850      6.36          
                                                             ---------  --------         
               Total interest-bearing liabilities ..........  326,203      4.97          
Other liabilities ..........................................    6,258                    
                                                             ---------                   
               Total liabilities ...........................  332,461                    
Stockholders' equity .......................................   42,543                    
                                                             ---------                   
               Total liabilities and stockholders'                                       
                 equity ....................................  375,004                    
                                                             =========                   
                                                                                         
Net interest income/interest rate spread (1) ...............               2.68          
Net earning assets/net interest margin (2) .................               3.04          
                                                                        ========         
                                                                                         
Ratio of interest-earning assets to interest-bearing                                     
  liabilities ..............................................     1.08                    
                                                             =========           
</TABLE> 


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

 (2) Net interest margin represents net interest income before the provision
     for loan losses divided by average interest-earning assets.




                                      -13-
<PAGE>
 
FINANCIAL CONDITION
-------------------


The assets of the Company decreased $7.4 million, or 1.92%, to $375.0 million at
September 30, 1997 from $382.4 million at December 31, 1996.  This decrease
primarily resulted from a $4.7 million decrease in cash and interest-bearing
deposits, a $1.0 million decrease in U.S. Government and agency obligations,
available for sale, a $5.7 million decrease in mortgage-backed securities,
available for sale and a $6.8 million decrease in other investments, available
for sale, all partially offset by the $10.7 million increase in net loans
receivable.

At September 30, 1997, cash and interest-bearing deposits decreased by $4.7
million, or 40.16%, to $7.0 million from $11.7 million at December 31, 1996.
U.S. Government and agency obligations, available for sale decreased $921,000,
or 1.98%, to $45.7 million at September 30, 1997 from $46.6 million at December
31, 1996.

Mortgage-backed securities, available for sale decreased $5.7 million, or
17.26%, to $27.2 million at September 30, 1997 from $32.8 million at December
31, 1996, as a result of $4.0 million in sales and $2.0 million in maturing
securities which were partially offset by current market value adjustments.

Loans receivable increased to $273.1 million, a $10.7 million or 4.07% increase,
at September 30, 1997 from $262.4 million at December 31, 1996.  This resulted
primarily from funding $44.7 million in new loans and purchasing $3.3 million in
participation loans, which were partially offset by loan repayments of $34.3
million and the sale of participation loans of $3.0 million.

The Association has no foreclosed real estate at September 30, 1997 as compared
to $117,000 at December 31, 1996.

Other investments, available for sale decreased $6.8 million, or 91.45%, to
$635,000 at September 30, 1997 from $7.4 million at December 31, 1996, primarily
as a result of the sale of an ARM loan mutual fund.

Savings deposits at September 30, 1997 decreased by $5.1 million, or 1.81%, as
withdrawal activity of $295.7 million exceeded deposit receipts of $281.8
million and interest credited to deposit accounts of $8.8 million.

Borrowed money decreased $4.3 million, or 7.81%, in the nine month period ended
September 30, 1997, to $50.9 million from $55.2 million at December 31, 1996, as
borrowings were repaid.

Stockholders' equity increased $2.7 million, or 6.73%, for the nine month period
ended September 30, 1997 to $42.5 million at September 30, 1997 from $39.9
million at December 31, 1996, as a result of net income of $3.1 million, an
increase of $172,000 from the exercise of stock options, a decrease of $526,000
in unrealized loss on available for sale securities and the decrease in the
amortization of $240,000 and $122,000 of the ESOP and MRP plans, respectively,
all of which were partially offset by the dividend payment of $1.5 million and
the purchase of treasury stock of $125,000.

ANALYSIS OF OPERATIONS
----------------------

Net income for the three months ended September 30, 1997 increased by $1,203,000
to $1.1 million from a negative $144,000 for the three month period ended
September 30, 1996.  For the nine month period ended September 30, 1997, net
income increased $1.3 million, or 78.46%, to $3.1 million from $1.7 million in
the same period in 1996.  The increase for both the three and nine month periods
is primarily attributable to the one-time assessment for SAIF recapitalization
of $1.0 million after tax provision recognized in the third quarter of 1996.

Interest income increased for the quarter ended September 30, 1997 to $7,056,000
from $6,840,000 for the same quarter in 1996, a $216,000 or 3.16% increase.
Interest income increased $999,000, or 4.96%, to $21,127,000 for the nine month
period ended September 30, 1997 from $20,128,000 for the same nine month period
ended September 30, 1996.  The increase in interest income for both the three
month and nine

                                      -14-
<PAGE>
 
month periods was primarily attributed to the increase in total interest-earning
assets, particularly the increase in loans receivable.  For the three month
period ended September 30, 1997, the yield on interest-earning assets increased
0.15%, or 1.92%, to 7.96% from 7.81% for the same period of 1996.  The yield for
the nine month period ended September 30, 1997 increased 0.02%, or 0.25%, to
7.93% from 7.91% for the nine month period ended September 30, 1996.

Interest expense increased $154,000, or 3.94%, for the quarter ended September
30, 1997 to $4,058,000 from $3,904,000 for the quarter ended September 30, 1996.
For the nine month period ended September 30, 1997, interest expense increased
$938,000, or 8.42%, to $12.1 million from $11.1 million for the same period in
1996.  The increase for both the three month period and nine month period ending
September 30, 1997 is related to the increase in the average balance of
interest-bearing liabilities and the overall increase in the cost of funds.  For
the three month period the average cost of funds increased 0.09%, a 1.85%
increase, to 4.96% as compared to 4.87% for the same period in 1996 and
increased 0.12%, a 2.51% increase, to 4.90% for the nine month period as
compared to 4.78% for the same nine month period in 1996 as noted on the Average
Balance Sheet set forth above.

The Association calculates any allowance for possible loan losses based upon its
on-going evaluation of pertinent factors underlying the types and quality of its
loans, including the risks inherent in its loan portfolio and other factors,
such as the current regulatory and economic environment.  As a result of this
review, loan loss provisions are recorded.  A provision of $6,000 was
established for both the three month periods ended September 30, 1997 and 1996.
A provision of $18,000 was established for both the nine month periods ended
September 30, 1997 and 1996.  The ratio of non-performing loans to total loans
was 0.27% as of September 30, 1997 as compared to 0.29% as of September 30,
1996.  The allowance for loan losses to non-performing loans was 101.05% as of
September 30, 1997 as compared to 98.85% as of September 30, 1996.  Management
believes its provision for loan losses is adequate, given the risks inherent in
its loan portfolio and the current regulatory and economic environment.
Although the Association believes its allowance for losses is at a level which
it considers to be adequate to provide for potential losses, there can be no
assurance that such losses will not exceed the estimated amounts.

Activity in the allowance for loan losses for all periods presented in the
consolidated income statement is included in the following table.


                           ALLOWANCE FOR LOAN LOSSES
                             (Dollars in Thousands)


<TABLE>
<CAPTION>
                                         Three Months Ended     Nine Months Ended      
                                           September 30,           September 30,
                                         ------------------     -------------------
                                          1997        1996       1997         1996
                                          ----        ----       ----         ----
<S>                                      <C>       <C>          <C>      <C>
     Balance at beginning of period....   $763        $766       $751         $754
     Provision for loan losses.........      6           6         18           18
     Write downs charged to allowance..      0           0          0            0
     Recoveries of amounts previously                                        
      charged off......................      0           0          0            0
                                          ----        ----       ----         ----
     Balance at end of period..........   $769        $772       $769         $772
                                          ====        ====       ====         ====
 
</TABLE>
Non-interest income increased $4,000, or 1.09%, for the three month period ended
September 30, 1997, to $370,000 from $366,000 in 1996.  The increase in non-
interest income for the three month period ended September 30, 1997 resulted
from an $81,000 gain on sale of securities, available for sale and an increase
of $28,000 in insurance commissions, which were offset by decreases in joint
venture income of $76,000, fees and service charges of $17,000 and $12,000 in
miscellaneous income.  Non-interest income decreased $25,000, or 2.42%, for the
nine month period ended September 30, 1997, to $1,007,000 from $1,032,000 for
the nine month period ended September 30, 1996.  Increases of $174,000, $51,000
and $13,000 in gain on sale of securities, insurance commissions, and fees and
service charges, respectively, were offset by decreases of $185,000, $68,000 and
$10,000 in joint venture income, miscellaneous income, and REO gains,
respectively.

                                      -15-
<PAGE>
 
Non-interest expense decreased $1.9 million, or 52.26%, to $1.7 million for the
three month period ended September 30, 1997 as compared to $3.6 million for the
three month period ended September 30, 1996.  The major factor in the
significant decrease was the $1.7 million special assessment for SAIF
recapitalization in 1996 as insurance premium expense decreased $1.8 million.
Compensation expense decreased $85,000 while other non-interest expenses
remained relatively stable for the three month period ended September 30, 1997.
For the nine month period ended September 30, 1997, non-interest expense
decreased $2.2 million, or 29.08%, to $5.3 million from $7.5 million for the
same period in 1996.  The $1.7 million SAIF recapitalization assessment in 1996
was the major factor as insurance premium expense decreased $2.0 million.
Compensation expense decreased $91,000 for the nine month period with other non-
interest expenses remaining relatively stable.

The provision for federal and state income taxes in both periods increased as a
result of the increase in net income before taxes.  The provision was increased
by $763,000 for the three month period ended September 30, 1997 and by $879,000,
or 117.04%, for the nine month period ended September 30, 1997.


RECENT DEVELOPMENTS
-------------------


On August 13, 1997 the Company announced a quarterly cash dividend of 19 cents
per share which was paid on September 9, 1997 to shareholders of record on
August 26, 1997.

On July 16, 1996, the Company announced its intention to repurchase up to
100,000 shares, or approximately 5% of its outstanding shares at that time.
With the 3-for-2 stock split announced in the fourth quarter of 1996 the amount
of shares authorized for repurchase increased to 150,000.  This repurchase
program continues and is to be accomplished by purchasing shares in open market
transactions or unsolicited privately negotiated transactions, from time to
time, subject to availability, stock price and other economic conditions.  As of
October 22, 1997 the purchase of 54,941 shares had been completed.

Thrift Rechartering Legislation.  The proposed legislation regarding elimination
of the federal thrift charter and related issues remains pending before
Congress.  The Company is unable to predict whether such legislation would be
enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge.  See Form
10-K for the fiscal year ended December 31, 1996 for a discussion of the
proposed legislation.

                                      -16-
<PAGE>
 
PART II.                    OTHER INFORMATION

Item 1.  Legal Proceedings
                Neither the Company nor its subsidiaries are involved in any
         pending legal proceedings, other than routine legal matters occurring
         in the ordinary course of business, which in the aggregate involve
         amounts which are believed by management to be immaterial to the
         consolidated financial condition or results of operations of the
         Company.

Item 2.  Changes in Securities
                Not applicable

Item 3.  Defaults Upon Senior Securities
                Not applicable

Item 4.  Submission of Matters to a Vote of Security-Holders
                Not applicable

Item 5.  Other Information
                Not applicable

Item 6.  Exhibits and Reports on Form 8-K
         a.  Exhibits

             3.1  Amended Certificate of Incorporation of Southwest Bancshares,
                  Inc.*
             3.2  Bylaws of Southwest Bancshares, Inc.*
            11.0  Statement regarding Computation of Earnings Per Share
<TABLE> 
<CAPTION> 
                                                                          Quarter Ended
                                                                       September 30, 1997
                                                                       ------------------
                  <S>                                                  <C>       
                  Net Income................................................   $1,059,000
                                                                               ==========
                                                                             
                  Weighted-average shares outstanding.......................    2,652,782

                  Common stock equivalents due to                            
                  dilutive effect on stock options..........................      105,203
                                                                               ----------
                  Total weighted-average common shares                       
                  and equivalents outstanding...............................    2,757,985
                                                                               ==========

                  Primary earnings per share................................   $     0.38
                                                                               ==========
                  Total weighted-average common shares                       
                  and equivalents outstanding...............................    2,757,985
                                                                             
                  Additional dilutive shares using the end of period         
                  market value versus the average market value when          
                  applying the treasury stock method........................          -0-**
                                                                               ----------
                  Total weighted-average common shares and                   
                  equivalents outstanding for fully diluted computation.....    2,757,985
                                                                               ==========
                                                                             
                  Fully diluted earnings per share..........................   $     0.38
                                                                               ==========
</TABLE> 
              **Note:  If average share price is greater than ending price, the
                       average price is used for both primary and fully diluted
                       calculation.

            27.0  Financial Data Schedule (filed herewith)

       b.  Report on Form 8-K
           None

  *    Incorporated herein by reference into this document from the Exhibits to
       Form S-1, Registration Statement, and Pre-Effective Amendment No. 1,
       filed on March 13, 1992 and April 24, 1992, respectively, Registration
       No. 33-46409.          
                                      -17-
<PAGE>
 
                                   SIGNATURES



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                    Southwest Bancshares, Inc.



Dated: November 10, 1997            By: /s/ Richard E. Webber
      -------------------------         ------------------------------------
                                        Richard E. Webber
                                        President and Chief Financial Officer

                                      -18-