FIRST SAVINGS BANK OF WASHINGTON BANCORP INC, 10-K405, 1997-06-30

FIRST SAVINGS BANK OF WASHINGTON BANCORP INC
10-K405, 1997-06-30
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 1997
--------------

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
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Commission File Number 0-26584
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC.
----------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 91-1691604
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10 S. First Avenue Walla Walla, Washington 99362
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(Address of principal executive offices and zip code)

(509) 527-3636
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(Registrant's telephone number, including area code)

N/A
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(Former name, former address and former fiscal year,
if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act:

Common Stock $.01 par value per share
-------------------------------------
(Title of class)

Indicate by check mark whether the registrant (1) has filed all 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.
Yes X No
----- -----

Indicate by check mark if disclosure of delinquent files pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. ____

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of May 31, 1997:

Common Stock - $219,583,749

The number of shares outstanding of the issuer's classes of common stock as of
May 31, 1997:

Common Stock, $.01 par value - 10,518,982 shares

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DOCUMENT INCORPORATED BY REFERENCE
Portions of Proxy Statement for Annual Meeting of Shareholders to be held July
18, 1997 are incorporated by reference into Part III.

FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC., AND SUBSIDIARIES

Table of Contents
PART I Page #

Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . 3
Acquisition of Inland Empire Bank . . . . . . . . 4
Stock Repurchase . . . . . . . . . . . . . . . . 4
Lending Activities . . . . . . . . . . . . . . . 4
Asset Quality . . . . . . . . . . . . . . . . . 12
Allowance for Loan Losses . . . . . . . . . . . . 14
Investment Activities . . . . . . . . . . . . . . 18
Deposit Activities and Other Sources of Funds . . 24
Personnel . . . . . . . . . . . . . . . . . . . . 27
Taxation. . . . . . . . . . . . . . . . . . . . . 27
Environmental Regulation. . . . . . . . . . . . . 28
Competition . . . . . . . . . . . . . . . . . . . 28
Regulation. . . . . . . . . . . . . . . . . . . . 29
Management Personnel . . . . . . . . . . . . . . 34
Item 2. Properties . . . . . . . . . . . . . . . . . . . 35
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 35
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . 35

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 36
Item 6. Selected Financial Data . . . . . . . . . . . . . 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . 39
Comparison of Results of Operations
March 31, 1997 vs. 1996 . . . . . . . . . . . . 40
March 31, 1996 vs. 1995 . . . . . . . . . . . . 42
Asset and Liability Management . . . . . . . . . 47
Liquidity and Capital Resources . . . . . . . . 50
Capital Requirements . . . . . . . . . . . . . . 50
Effect of Inflation and Changing Prices . . . . 51
Item 8. Financial Statements and Supplementary Data . . . 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . 51

PART III

Item 10.Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . 52
Item 11.Executive Compensation . . . . . . . . . . . . . . 52
Item 12.Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . 52
Item 13.Certain Relationships and Related Transactions . . 52

PART IV

Item 14.Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 53
SIGNATURES . . . . . . . . . . . . . . . . . . . . 54

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PART 1
Item 1 - Business General

First Savings Bank of Washington Bancorp, Inc. (the Company), a Delaware
corporation, is primarily engaged in the business of planning, directing, and
coordinating the business activities of its wholly owned subsidiaries, First
Savings Bank of Washington (FSBW) and Inland Empire Bank (IEB) (together, the
Banks). During fiscal 1996 the Company completed its sale of stock in
connection with converting from a mutual holding company to the stockholding
company form of organization. FSBW is a Washington-chartered savings bank the
deposits of which are insured by the Federal Deposit Insurance Corporation
(FDIC) under the Savings Association Insurance Fund (SAIF). FSBW conducts
business from its main office in Walla Walla, Washington and its sixteen
branch offices and three loan production offices located in southeast,
central, north central and western Washington. IEB is an Oregon-chartered
commercial bank whose deposits are insured by the FDIC under the Bank
Insurance Fund (BIF). IEB conducts business from its main office in
Hermiston, Oregon and its five branch offices and two loan production offices
located in northeast Oregon. First Savings Bank of Washington Bancorp, Inc.'s
main office is located at 10 S. First Avenue, Walla Walla, WA 99362 and its
telephone number is (509) 527-3636.

First Savings Bank of Washington is a community oriented savings bank which
has traditionally offered a wide variety of deposit products to its retail
customers while concentrating its lending activities on real estate loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
activities also have included the origination of multi-family, commercial real
estate and consumer loans. FSBW's primary business has been that of a
traditional thrift institution, originating loans for portfolio in its primary
market area. FSBW has also been an active participant in the secondary
market, originating residential loans for sale and on occasion acquiring loans
for portfolio. More recently, FSBW has begun making non-mortgage commercial
and agribusiness loans to small businesses and farmers. In addition FSBW has
maintained a significant portion of its assets in marketable securities. The
securities portfolio has been weighted toward mortgage-backed securities
secured by one- to four-family residential properties. This portfolio also
has included a significant amount of tax exempt municipal securities,
primarily issued by entities located in the State of Washington. In addition
to interest income on loans and investment securities, FSBW receives other
income from deposit service charges, loan servicing fees and from the sale of
loans and investments. FSBW has sought to increase its other income by
retaining loan servicing rights on some of the loans that it has sold and to a
lesser extent by purchasing mortgage servicing rights. FSBW also has a
wholly-owned subsidiary, Northwest Financial Corporation, which serves as the
trustee under FSBW's mortgage loan documents, is engaged in real estate sales,
and receives commissions from the sale of annuities.

Inland Empire Bank is a community oriented commercial bank which historically
has offered a wide variety of deposits and loan products to its consumer and
commercial customers. Lending activities have included origination of
consumer, commercial, agribusiness and real estate loans. IEB also has
engaged in mortgage banking activity with respect to residential lending
within its local markets, originating loans for sale generally on a servicing
released basis. Additionally, IEB has maintained a significant portion of its
assets in marketable securities, particularly U.S. Treasury and government
agency securities as well as tax exempt municipal securities issued primarily
by entities located in the State of Oregon. IEB operates a division, Inland
Financial Services, which offers insurance and brokerage services to its
customers. IEB has two wholly owned subsidiaries: Pioneer American Property
Company, which owns a building that is leased to IEB, and Inland Securities
Corporation, which previously made a market for IEB's stock but is currently
inactive.

The Company and the Banks are subject to regulation by the Federal Reserve
Board (FRB) and the FDIC, the State of Washington, Department of Financial
Institutions, Division of Banks (Division), and the State of Oregon Department
of Consumer and Business Services.

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Acquisition of Inland Empire Bank

The Company completed the acquisition of Inland Empire Bank of Hermiston,
Oregon effective August 1, 1996. The Company paid the former shareholders of
IEB $60.8951 per share, in cash, for a total acquisition price of $32.8
million. The acquisition of IEB was treated as a purchase for accounting
purposes. The Company acquired an institution with assets of $170.5 million
(adjusted to market) and assumed liabilities of $137.9 million including
$134.6 million of deposits. "Goodwill," which is the excess of the purchase
price (cost) over the net fair value of the assets and liabilities acquired,
was recorded at $12.5 million. Amortization of "goodwill" over a 14 year
period will result in a charge to earnings of approximately $893,000 per year
(see Note 2 of the Notes to the Consolidated Financial Statements).

Stock Repurchase

On November 19, 1996, the Company completed its stock repurchase program
initiated in April 1996 which authorized the repurchase of up to 545,525
shares of its outstanding common stock. On November 20, 1996, the Company's
Board of Directors approved continuance of the stock repurchase program
authorizing the repurchase of up to 10% of total shares outstanding over the
next 12 months. As of March 31, 1997, the Company has repurchased a total of
795,525 shares at an average price of $16.22 per share. The Company has
reserved 436,425 of the repurchased shares for its Management Recognition and
Development Plan (MRP) of which 403,882 shares were awarded as of March 31,
1997 (see Note 16 of the Notes to the Consolidated Financial Statements).

The Company conducts these purchases through open market transactions, unless
opportunities arise for unsolicited negotiated transactions or other types of
repurchase. No shares may be repurchased directly from directors or officers
of the corporation.
Lending Activities

General: Historically, the Banks have offered a wide range of loan products
to meet the demands of their customers. The Banks originate loans for both
their own loan portfolios and for sale in the secondary market. Management's
strategy has been to maintain a significant percentage of assets in these
loan portfolios in loans with more frequent repricing terms or shorter
maturities than traditional long term fixed-rate mortgage loans. As part of
this effort, the Banks have developed a variety of floating or adjustable-rate
products. In response to customer demand, however, both Banks continue to
originate fixed-rate loans including fixed-rate mortgage loans with terms up
to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans
that can be originated at any time is largely determined by the demand for
each in a competitive environment.

FSBW's primary lending focus is on the origination of loans secured by first
mortgages on owner-occupied, one- to four- family residences and loans for the
construction of one- to four-family residences. FSBW also originates, to a
lesser degree, consumer, commercial real estate, multi-family real estate and
land loans. More recently, FSBW has begun marketing non- mortgage commercial
and agribusiness loans to small businesses and farmers. Management expects
this type of lending increase at FSBW. At March 31, 1997, FSBW's net loan
portfolio totaled $541.4 million. Over 70% of the FSBW's first mortgage loans
are secured by properties located in the State of Washington.

The aggregate amount of loans that FSBW is permitted to make under applicable
federal regulations to any one borrower, including related entities, is the
greater of 15% of unimpaired capital and surplus or $500,000. At March 31,
1997, the maximum amount which FSBW could have lent to any one borrower and
the borrower's related entities was $13.8 million. At March 31, 1997, FSBW
had no loans to one borrower with an aggregate outstanding balance in excess
of this amount. FSBW had 26 borrowers with total loans outstanding in excess
of $2.0 million at March 31, 1997. At that date, the largest amount
outstanding to any one borrower and the borrower's related entities totaled
$8.2 million, which consisted of 41 single family, land development and lot
loans in the Tacoma, Bellevue and Tri-Cities, Washington; and Portland, Oregon
areas. At March 31, 1997, these loans were performing in accordance with
their terms.

Lending activities at Inland Empire Bank have included origination of
consumer, commercial, agribusiness and commercial real estate loans. In
particular, IEB has developed significant expertise and market share with
respect to small business and agricultural loans within its local markets. In
addition, IEB has originated one- to four-family residential real estate loans
for sale in the secondary market.

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At March 31, 1997, IEB's net loan portfolio totaled $104.5 million. The
aggregate amount of loans that IEB is permitted to make under applicable state
and federal regulations to any one borrower, including related entities, is
15% of the aggregate paid-up and unimpaired capital and surplus. At March 31,
1997, the maximum amount IEB could have lent to any one borrower and the
borrower's related entities was $4.9 million. At that date, the largest
amount outstanding to any one borrower of IEB totaled $3.1 million.

One- to Four-Family Residential Real Estate Lending: The Banks originate
loans secured by first mortgages on owner- occupied, one- to four-family
residences and loans for the construction of one- to four-family residences in
the communities where they have established full service branches. In
addition, the Banks operate loan production offices in Bellevue, Puyallup, and
Spokane, Washington and LaGrande and Condon, Oregon. FSBW also has a
significant relationship with a mortgage loan broker in the greater Portland,
Oregon market. At March 31, 1997, $434.2 million, or 61.3% of the Company's
loan portfolio consisted of permanent loans on one- to four-family residences.

Historically, FSBW has originated both fixed-rate loans and adjustable-rate
residential loans for its portfolio. Since the early 1980s, FSBW has
restructured its loan portfolio to reflect a larger percentage of
adjustable-rate loans. Fifteen and 30-year fixed-rate residential loans
generally have been sold into the secondary market; however, a portion of the
fixed-rate loans originated by FSBW have been retained in the loan portfolio
to meet asset/liability management objectives. The number of fixed-rate loans
retained by FSBW increased substantially during 1996 and remained high in 1997
in response to the capital deployment and growth objectives of the Company.
Historically, Inland Empire Bank has sold most of its residential loans into
the secondary market and has continued to so do subsequent to its acquisition
by the Company. Generally IEB has sold loans on a servicing-released basis
such that no revenue is realized by IEB after the sale.

In the loan approval process, the Banks assess the borrower's ability to repay
the loan, the adequacy of the proposed security, the employment stability of
the borrower and the creditworthiness of the borrower. As part of the loan
application process, qualified independent appraisers inspect and appraise the
security property. All appraisals are subsequently reviewed by a loan
underwriter and, if necessary, by the Banks' chief appraisers.

The Banks' residential loans are generally underwritten and documented in
accordance with the guidelines established by Freddie Mac and Fannie Mae.
Government insured loans are generally underwritten and documented in
accordance with the guidelines established by the Department of Housing and
Urban Development (HUD) and the Veterans Administration (VA). The Banks' loan
underwriters are approved as underwriters under HUD's delegated underwriter
program.

The Banks sell whole loans on either a servicing-retained or
servicing-released basis. All loans are sold without recourse. Occasionally,
the Banks will sell a participation interest in a loan or pool of loans to an
investor. In these instances, the Banks retain a small percentage of the
loan(s) and pass through a net yield to the investor on the percentage sold.
The decision to hold or sell loans is based on asset/liability management
goals and policies and market conditions. Recently, FSBW has retained
substantially all of its conventional fixed-rate and adjustable-rate mortgage
originations and sold all of its government insured loans into the secondary
market. IEB has continued to sell most of its residential loan originations.

The Banks offer adjustable-rate mortgages (ARMs) at rates and terms
competitive with market conditions. The Banks offer several ARM products which
adjust annually after an initial period ranging from one to five years subject
to a limitation on the annual increase of 1.0% to 2.0% and an overall
limitation of 5.0% to 6.0%. Certain ARM loans are originated with an option
to convert the loan to a 30-year fixed-rate loan at the then prevailing market
interest rate. Generally these ARM products utilize the weekly average yield
on one-year U.S. Treasury securities adjusted to a constant maturity of one
year plus a margin of 2.75% to 3.25%. ARM loans held in the Banks' portfolios
do not permit negative amortization of principal and carry no prepayment
restrictions. Borrower demand for ARM loans versus fixed-rate mortgage loans
is a function of the level of interest rates, the expectations of changes in
the level of interest rates and the difference between the initial interest
rates and fees charged for each type of loan.

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The retention of ARM loans in the Banks' loan portfolios helps reduce the
Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased interest
to be paid by the customer due to increases in interest rates. It is possible
that, during periods of rising interest rates, the risk of default on ARM
loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, because the ARM loans originated by the Banks
generally provide, as a marketing incentive, for initial rates of interest
below the rates which would apply were the adjustment index plus the margin
used for pricing initially, these loans are subject to increased risks of
default or delinquency. The Banks attempt to reduce the potential for
delinquencies and defaults on ARM loans by qualifying the borrower based on
the borrower's ability to repay the ARM loan assuming that the maximum
interest rate that could be charged at the first adjustment period remains
constant during the loan term. Another consideration is that although ARM
loans allow the Banks to increase the sensitivity of their asset bases to
changes in the interest rates, the extent of this interest sensitivity is
limited by the periodic and lifetime interest rate adjustment limits (caps).
Because of these considerations, the Company has no assurance that yields on
ARM loans will be sufficient to offset increases in its cost of funds.

It is the Banks' present policy to lend up to 95% of the lesser of the
appraised value of the property or purchase price of the property on
conventional loans, although ARM loans are normally restricted to not more
than 90%. Higher loan-to-value ratios are available on certain government
insured programs. The Banks generally require private mortgage insurance on
residential loans with a loan-to-value ratio at origination exceeding 80%.

Construction and Land Lending: Since 1988, FSBW has invested a significant
proportion of its loan portfolio in residential construction loans to
professional home builders. This activity has been prompted by favorable
economic conditions in the Northwest, lower long-term interest rates and an
increased demand for housing units as a result of the migration of people from
other parts of the country to the Northwest. To a lesser extent, FSBW also
originates land loans. IEB also originates construction and land loans
although to a much smaller degree than FSBW. At March 31, 1997, construction
and land loans totaled $108.5 million, or 15.3% of total loans of the Company.
Construction loans made by both Banks include both those with a sale contract
or permanent loan in place for the finished homes and those for which
purchasers for the finished homes may be identified either during or following
the construction period. The Banks monitor the number of unsold homes in
their construction loan portfolios, and generally maintain the portfolios so
that no more than 60-70% of their construction loans are secured by homes for
which there is not a sale contract in place.

Construction and land lending affords the Banks the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does
single-family permanent mortgage lending. Construction and land lending,
however, is generally considered to involve a higher degree of risk than
single-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they
are generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Banks may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be
inaccurate, the Banks may be confronted at, or prior to, the maturity of the
loan with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and
builders and by the failure of builders to pay subcontractors. Loans to
builders to construct homes for which no purchaser has been identified carry
more risk because the payoff for the loan is dependent on the builder's
ability to sell the property prior to the time that the construction loan is
due. The Banks have sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices.

The maximum number of speculative loans approved for each builder is based on
a combination of factors, including the financial capacity of the builder, the
market demand for the finished product, and the ratio of sold to unsold
inventory the builder maintains. The Banks have chosen to diversify the risk
associated with speculative construction lending by doing business with a
large number of smaller builders spread over a relatively large geographic
area.

Loans for the construction of one- to four-family residences are generally
made for a term of 12 months. The Banks' loan policies include maximum
loan-to-value ratios of up to 80% for speculative loans. Each individual
speculative loan request is supported by an independent appraisal of the
property and the loan file includes a set of plans, a cost breakdown and a
completed specifications form. All speculative construction loans must be
approved by senior loan officers. At March 31, 1997, the Company's
speculative construction portfolio included loans to 138 individual builders
in 66 separate communities. At March 31, 1997, the Company had 20 home
builders, who individually in the aggregate, had construction loans
outstanding with balances exceeding $1.0 million.

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The Company regularly monitors the construction loan portfolio and the
economic conditions and housing inventory in each of its markets and will
decrease construction lending if it perceives there are unfavorable market
conditions. The Company believes that the internal monitoring system in place
mitigates many of the risks inherent in its construction lending.

To a much lesser extent, the Banks make land loans to developers, builders and
individuals to finance the acquisition and/or development of improved lots or
unimproved land. In making land loans the Banks follow underwriting policies
and disbursement procedures similar to those for construction loans. The
initial term on land loans is typically one to three years with interest only
payments, payable monthly, and provisions for principal reduction as lots are
sold and released.

Multi-Family and Commercial Real Estate Lending: The Banks also originate
loans secured by multi-family and commercial real estate. At March 31, 1997,
the Company's loan portfolio included $64.0 million in multi-family and $38.2
million in commercial real estate loans (including construction lending).
Multi-family and commercial real estate lending affords the Banks an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties are generally greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multi-family and commercial properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy.

Multi-family and commercial real estate loans originated by the Banks are
predominately adjustable rate loans with terms to maturity of 20 to 30 years.
Rates on these ARM loans generally adjust annually after an initial period
ranging from one to ten years. Rate adjustments for these loans predominantly
reflect changes in the Federal Home Loan Bank (FHLB) National Monthly Median
Cost of Funds index, although a significant number of loans are also linked to
various constant maturity U.S. Treasury indices or certain prime rates. The
Banks' commercial real estate portfolios consist of loans on a variety of
property types including motels, nursing homes, office buildings, and
mini-warehouses. Multi-family loans generally are secured by small to medium
sized projects.

Many of the Banks' multi-family and commercial real estate loans are
considered by management to be older or seasoned loans although $17.3 million
of these loans were originated in 1997. At March 31, 1997, the Bank's loan
portfolio included 128 multi-family loans, the average loan balance of which
was $299,000. At March 31, 1997, the Banks had 27 multi-family and
commercial real estate loans with balances over $1.0 million, the largest of
which was $5.2 million. All of the properties securing the multi-family and
commercial real estate loans are located in the Northwest with the exception
of three seasoned participation loans on properties located in the greater
Stockton, California area.

Commercial / Agribusiness Lending. Inland Empire Bank has been very active in
small business and agricultural lending, with over 40% of presently
outstanding loans being made to finance businesses and farmers. IEB's
management has devoted a great deal of effort to developing customer
relationships and the ability to serve this type of borrower. It is
management's belief that many very large banks have in the past neglected
small business lending, thus contributing to IEB's success. IEB will continue
to emphasize this segment of lending in its market areas. Management intends
to leverage its past success and local decision making ability to continue to
expand this market niche.

First Savings Bank has recently begun making non-mortgage commercial and
agricultural loans. FSBW has staffed its Walla Walla and Tri-Cities offices
with experienced commercial bankers and anticipates a steady growth in the
origination of small business and agricultural loans. It is expected the
growth will come primarily from FSBW's existing customer base and referrals
from officers and Directors. In addition to providing higher yielding assets,
it is anticipated that this type of lending will increase the deposit base of
the two branches.

Similar to consumer loans, commercial and agricultural loans may entail
greater risk than do residential mortgage loans. Commercial and agricultural
loans may be unsecured or secured by special purpose or rapidly depreciating
assets, such as equipment, crops, live stock, inventory and receivables which
may not provide an adequate source of repayment on defaulted loans. In
addition, commercial and agricultural loans are dependent on the borrower's
continuing financial stability and management ability as well as market
conditions for various products, services and commodities. For these reasons,
commercial and agricultural loans generally provide higher yields than
residential loans but also require more administrative and management
attention. Interest rates on commercial and agricultural loans may be either
fixed or adjustable. Loan terms including the fixed or adjustable interest
rate, the loan maturity and the collateral considerations vary significantly
and are negotiated on an individual loan basis. At March 31, 1997, the Banks
had 5 commercial/agribusiness loans with balances greater than $1.0 million
totaling $7.2 million, the largest of which was $2.0 million.

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Consumer and Other Lending: The Banks originate a variety of consumer loans,
including secured second mortgage loans, automobile loans, credit card loans
and loans secured by deposit accounts. Consumer and other lending has
traditionally been a small part of FSBW's business. However, recent efforts
at FSBW have led to a substantial increase in credit card loans to its
existing customer base. Inland Empire Bank, on the other hand, has been an
active originator of consumer loans. At March 31, 1997, the Company had $23.6
million, or 3.3% of its loans receivable in outstanding consumer and other
loans.

Consumer loans often entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Banks, and a borrower
may be able to assert against such assignee claims and defenses that it has
against the seller of the underlying collateral.

Loan Solicitation and Processing: The Banks originate real estate loans by
direct solicitation of real estate brokers, builders, depositors, and walk-in
customers. Loan applications are taken by the Banks' loan officers and are
processed in each branch location. Most underwriting and all audit functions
are performed by loan administration personnel at each Bank's main office.
Applications for fixed-rate and adjustable-rate mortgages on one- to
four-family properties are generally underwritten and closed based on Freddie
Mac / Fannie Mae standards, and other loan applications are underwritten and
closed based on the Banks' own written guidelines.

Consumer loans are originated through various marketing efforts directed
primarily toward existing deposit and loan customers of the Banks. Consumer
loan applications may be processed at branch locations or by administrative
personnel at the Banks main offices.

Commercial and agricultural loans are solicited by loan officers of each Bank
by means of call programs focused on local businesses and farmers. Credit
decisions on significant commercial and agricultural loans are made by senior
loan officers or in certain instances by the Board of Directors of each Bank
or the Company.

Loan Originations, Sales and Purchases

While the Banks originate a variety of loans, their ability to originate loans
and their ability to originate each type of loan is dependent upon the
relative customer demand and competition for loans in each market. For the
years ended March 31, 1997, 1996 and 1995, the Banks originated $330.3
million, $219.5 million and $211.7 million of loans, respectively. The
Company's net loan portfolio grew $230.6 million or 55.5% from $415.3 million
in 1996 to $645.9 million in 1997.

In recent years prior to 1996 the Company generally sold most of its 30-year
fixed-rate one- to four-family residential mortgage loans to secondary market
purchasers. For the years ended March 31, 1996 and 1997 the Company sold a
smaller portion of its fixed-rate loan originations choosing to retain loans
in response to its capital deployment and growth objectives. Sales of loans
by the Company for the years ended March 31, 1997, 1996 and 1995 totaled $36.6
million, $44.9 million and $62.3 million, respectively. Sales of whole loans
generally are beneficial to the Company since these sales may generate income
at the time of sale, provide funds for additional lending and other
investments and increase liquidity. The Company sells loans on both a
servicing-retained and a servicing-released basis. See "-Loan Servicing-Loan
Servicing Portfolio." At March 31, 1997, the Company had $2.9 million in
loans held for sale.

PAGE
<PAGE>
The Banks, especially FSBW, purchase whole loans and loan participation
interests primarily during periods of reduced loan demand in their primary
market. Any such purchases are made consistent with the Banks' underwriting
standards; however, the loans may be located outside of the Banks' normal
lending area. For the years ended March 31, 1997 and 1996 the Banks'
substantially increased their loan purchases acquiring primarily whole loan
and participation interests in pools of seasoned one- to four-family
residential ARM and 15-year fixed-rate loans and seasoned multi-family and
commercial real estate loans. The properties securing these seasoned loans for
the most part are located outside of the Banks' normal lending territory.
During the years ended March 31, 1997, 1996 and 1995, the Company purchased
$74.1 million, $65.9 million and $1.9 million, respectively, of loans and loan
participation interests. In recent years, the Company's primary source of
loan participation interests (exclusive of the whole loan and participation
interests in seasoned loans purchased in fiscal 1996 and 1997) has been with a
commercial bank in Reno, Nevada. The participation interests are in
short-term construction loans secured by residential properties located in the
Reno and Las Vegas, Nevada markets. The Company normally requires the lead
lender to maintain a large interest in the loans and typically the loans have
been funded one-half by the subsidiary bank and one-half by the lead lender.

The following table shows total loans originated, purchased, sold and repaid
during the periods indicated (in thousands):

Years Ended March 31,
------------------------------
1997 1996 1995
---- ---- ----
Total loans at beginning of period $456,466 $333,685 $286,936
-------- -------- --------
Acquisition of IEB 91,860 -- --
-------- -------- --------
Loan originations:
One- to four-family real estate 161,189 129,703 127,471
Commercial and multi-family
properties 17,285 9,810 9,959
Construction and land loans 100,169 73,420 69,243
Commercial / agribusiness 26,938 -- --
Consumer and other loans 24,717 6,607 5,057
-------- -------- --------
Total loans originated 330,298 219,540 211,730
-------- -------- --------
Loans purchased:
One- to four-family real estate 34,294 57,323 --
Commercial and multi-family
properties 21,155 1,636 96
Construction and land loans 18,642 6,970 1,825
-------- -------- --------
Total loans purchased 74,091 65,929 1,921
-------- -------- --------

Loans sold:
One- to four-family whole loans 36,623 44,329 46,808
One- to four-family participation
loans -- 588 15,476
-------- -------- --------
Total loans sold 36,623 44,917 62,284
-------- -------- --------

Principal repayments 208,276 117,771 104,618
-------- -------- --------

Net increase in loans 251,350 122,781 46,749
-------- -------- --------
Total loans at end of period $707,816 $456,466 $333,685
======== ======== ========

PAGE
<PAGE>
<TABLE>
Loan Portfolio Analysis. The following table sets forth the composition of the Company's loan portfolio
(including loans held for sale) by type of loan as of the dates indicated.

March 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- ------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Type of Loan:
------------
One- to four-
family
real
estate $434,240 61.35 $311,472 68.24% $199,585 59.81% $134,401 46.84% $155,303 56.60%
Commercial
and multi-
family
prop-
erties 91,395 12.91 77,613 16.99 77,443 22.01 69,962 24.38 76,197 27.76
Construction
and
land 108,487 15.33 62,177 13.62 57,913 17.36 79,458 27.69 40,394 14.72
Commercial/
agri-
business 50,074 7.07 871 .19 902 .27 1,152 .68 1,190 .43
Consumer
and
other 23,620 3.34 4,333 .96 1,842 .55 1,963 .41 1,322 .49
-------- ------ ------- ------ -------- ------ -------- ------ -------- -----
Total
loans 707,816 100.00% 456,466 100.00% 333,685 100.00% 286,936 100.00% 274,406 100.00%
------- ====== ------- ====== -------- ====== -------- ====== -------- ======
Undisbursed
funds for
loans in
progress 52,412 35,244 28,507 35,069 33,295
Deferred
loan
fees and
discounts 2,775 1,876 2,226 2,174 2,046
Allowance
for loan
losses 6,748 4,051 3,549 3,429 3,105
------- -------- -------- -------- --------
Total
loans
receiv-
able,
net $645,881 $415,295 $299,403 $246,264 $235,960
======== ======== ======== ======== ========

10
</TABLE>
PAGE
<PAGE>
<TABLE>
Loan Maturity and Repricing

The following table sets forth certain information at March 31, 1997 regarding the dollar amount of
loans maturing in the Company's portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of
undisbursed loan proceeds, unamortized premiums and discounts, and exclude the allowance for loan losses (in
thousands):

Maturing Maturing Maturing Maturing Maturing
Within One within 1 within 3 within 5 Beyond
Year to 3 Years to 5 Years to 10 Years 10 Years Total
---------- ---------- ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One-to four-
family real
estate $ 7,898 $ 7,792 $15,657 $15,396 $374,061 $420,804
Commercial and
multi-family
properties 6,022 4,395 11,250 16,222 51,369 89,258
Construction and
land 56,309 12,681 25 196 1,702 70,913
Commercial/
Agribusiness 24,734 8,482 5,271 4,847 6,625 49,959
Consumer and
other 9,469 5,879 6,612 1,446 1,064 24,470
Unamortized yield
adjustments(1) (287) (204) (49) (135) (2,100) (2,775)
-------- --------- ------- ------- -------- --------
Total loans $104,145 $ 39,025 $38,766 $37,972 $432,721 $652,629
======== ========= ======= ======= ======== ========

(1) Deferred loan fees and discounts
</TABLE>

Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is substantially less than their
contractual terms because of prepayments. In addition, due-on-sale clauses on
loans generally give the Company the right to declare loans immediately due and
payable in the event that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decreases when
rates on existing mortgage loans are substantially higher than current mortgage
loan market rates.

<TABLE>
The following table sets forth the dollar amount of all loans due after March 31, 1998, which have fixed
interest rates and floating or adjustable interest rates (in thousands).

Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
<S> <C> <C> <C>
One-to four-family real estate $276,001 $136,905 $412,906
Commercial and multi-family properties 23,626 59,610 83,236
Construction and land 1,762 12,842 14,604
Commercial/agribusiness 8,694 16,531 25,225
Consumer and other 13,133 1,868 15,001
Unamortized yield adjustments(1) (1,721) (767) (2,488)
-------- -------- --------
Total $321,495 $226,989 $548,484
======== ======== ========

11
</TABLE>
PAGE
<PAGE>
Loan Servicing

General: The Banks receive fees from a variety of institutional mortgage
owners in return for performing the traditional services of collecting
individual payments and managing the loan portfolio. At March 31, 1997, the
Banks were servicing $208.4 million of loans for others. Loan servicing
includes processing payments, accounting for loan funds and collecting and
paying real estate taxes, hazard insurance and other loan-related items such
as private mortgage insurance. When the Banks receive the gross mortgage
payment from individual borrowers, they remit to the investor in the mortgage
a predetermined net amount based on the yield on that mortgage. The
difference between the coupon on the underlying mortgage and the predetermined
net amount paid to the investor is the gross loan servicing fee. In addition,
the Banks retain certain amounts in escrow for the benefit of the lender for
which the Banks incur no interest expense but are able to invest. At March
31, 1997, the Banks held $3.0 million in escrow for their portfolios of loans
serviced for others.

Loan Servicing Portfolio: The loan servicing portfolio at March 31, 1997 was
composed primarily of $53.7 million of Fannie Mae mortgage loans and $128.1
million of Freddie Mac mortgage loans. The balance of the loan servicing
portfolio at March 31, 1997, consisted of loans serviced for a variety of
private investors. At March 31, 1997, the portfolio included loans secured by
property located primarily in the states of Washington or Oregon. For the
year ended March 31, 1997, loan servicing fees totaled $807,000.

Purchased Mortgage Servicing Rights: In addition to maintaining the loan
servicing rights on some of the loans that FSBW originates and sells in the
secondary market, FSBW has also purchased mortgage servicing rights (PMSRs).
The cost of PMSRs is capitalized and amortized in proportion to, and over the
period of, the estimated future net servicing income. Management periodically
evaluates the estimates and assumptions used to determine the carrying values
of PMSRs and the amortization of PMSRs. These carrying values are adjusted
when the valuation indicates the carrying value is impaired. At March 31,
1997, PMSRs were carried by FSBW at a value of $355,000. PMSRs generally are
adversely affected by current and anticipated prepayments resulting from
decreasing interest rates. As discussed in Note 2 of the Notes to the
Consolidated Financial Statements, the Company's adoption of SFAS 122,
Accounting for Mortgage Servicing Rights and its subsequent amendment by SFAS
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities did not materially impact the Company's
operations. However, should the Company increase its future loan sales and
retain servicing on those loans the amount of gain recognized on loan sales
would increase when compared to prior loan sales with servicing retained due
to the change in accounting method.

Asset Quality

Federal regulations require that the Banks review and classify their problem
assets on a regular basis. In addition, in connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations have also created a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention. If an asset or portion thereof is classified loss, the
insured institution establishes specific allowances for loan losses for the
full amount of the portion of the asset classified loss. A portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.

Each Bank's asset classification committee meets at least monthly to review
all classified assets, to approve action plans developed to resolve the
problems associated with the assets and to review recommendations for new
classifications, any changes in classifications and recommendations for
reserves. The committee reports to the Board of Directors quarterly as to the
current status of classified assets and action taken in the preceding quarter.

PAGE
<PAGE>
At March 31, 1997, 1996 and 1995, the aggregate amounts of the Banks'
classified assets (as determined by the Banks) were as follows (in thousands):

At March 31
------------------------------
1997 1996 1995
---- ---- ----

Loss $ -- $ -- $ --
Doubtful -- -- --
Substandard assets 4,175 2,078 1,208
Special mention -- -- --

Non-performing Assets and Delinquencies.

Real Estate Loans: When a loan borrower fails to make a required payment when
due, the Banks institute collection procedures. The first notice is mailed to
the borrower within 10 to 17 days after the payment due date and attempts to
contact the borrower by telephone begin within five to ten days after the late
notice is mailed to the borrower. If the loan is not brought current by 30
days after the payment due date, the Banks will mail a second written notice
to the borrower. If a satisfactory response is not obtained, continuous
follow-up contacts are attempted until the loan has been brought current.
Generally, within 30 to 45 days into the delinquency procedure, the Banks
notify the borrower that home ownership counseling is available. In most
cases, delinquencies are cured promptly; however, if after 90 days of
delinquency, no response has been received nor an approved reinstatement plan
established, foreclosure according to the terms of the security instrument and
applicable law is initiated. Interest income on loans after 90 days of
delinquency is no longer accrued and the full amount of accrued and
uncollected interest is reversed.

Commercial / Agribusiness and Consumer Loans: When a borrower fails to make
payments as required, a late notice is sent to the borrower. If payment is
still not made the responsible loan officer is advised and contact is made my
telephone or letter. Continuous follow-up contacts are attempted until the
loan has been brought current. Generally, if the loan is not current within
45 to 60 days, action is taken to take possession of the security. A small
claims or lawsuit is normally filed on unsecured loans or deficiency balances
at 90 to 120 days. Loans over 90 days delinquent, repossessions, loans in
foreclosure and bankruptcy no longer accrue interest unless a satisfactory
repayment plan has been agreed upon, the loan is a full recourse contract or
fully secured by a deposit account.

PAGE
<PAGE>
The following table sets forth information with respect to the Banks'
non-performing assets and restructured loans within the meaning of SFAS No.
15, at the dates indicated (dollars in thousands).

At March 31
-------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Loans accounted for on
a nonaccrual basis:
Real estate -
One- to four-
family $1,644 $ 526 $ 336 $ 391 $ 3
Commercial and
multi-family 187 -- -- 280 2,561
Commercial/
agribusiness 206 -- -- -- --
Consumer and other 45 -- 5 13 16
------ ------ ------ ------ ------
Total 2,082 526 341 684 2,580
------ ------ ------ ------ ------
Accruing loans which
are contractually
past due 90 days or more:
Real estate - none
Commercial/
agribusiness -- -- -- -- --
Consumer and other 30 12 -- -- --
------ ------ ------ ------ ------
Total 30 12 -- -- --
------ ------ ------ ------ ------

Total non-performing
loans 2,112 538 341 684 2,580

Real estate held for
sale 1,057 712 588 750 1,663
------ ------ ------ ------ ------
Total non-performing
assets $3,169 $1,250 $ 929 $1,434 $4,243
====== ====== ====== ====== ======

Restructured loans (1) $ 238 $ 156 $ 165 $ -- $ 139
Total non-performing
loans to net loans 0.33% 0.13% 0.11% 0.28% 1.09%
Total non-performing
loans to total
assets 0.21% 0.07% 0.07% 0.16% 0.68%
Total non-performing
assets to total
assets 0.31% 0.17% 0.19% 0.34% 1.12%

(1) These loans are performing under their restructured terms but are
classified substandard.

For the year ended March 31, 1997, $127,000 in interest income would have been
recorded had nonaccrual loans been current, and no interest income on such
loans was included in net income for such period.

Allowance for Loan Losses

General: The Banks have established systematic methodologies for the
determination of provisions for loan losses. The methodologies are set forth
in a formal policy and take into consideration the need for an overall general
valuation allowance as well as specific allowances that are tied to individual
problem loans.

In originating loans, the Banks recognize that losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Banks increase their allowance for loan losses
by charging provisions for possible loan losses against the Banks' income.

<PAGE> <PAGE>
On April 1, 1995, the Company and its subsidiary Banks adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures,
an amendment of SFAS No. 114. These statements require that impaired loans
that are within their scope be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loans' observable market price or the fair value
of collateral if the loan is collateral dependent. Subsequent changes in the
measurement of impaired loans shall be included within the provision for loan
losses in the same manner in which impairment initially was recognized or as a
reduction in the provision that would otherwise be reported. The adoption of
these statements had no material impact on the Company's or Banks' financial
condition or results of operations. Prior to the adoption of these statements
a reserve for specific losses was provided for loans when any significant,
permanent decline in value was deemed to have occurred. As of March 31, 1997,
the Company and its subsidiary Banks had no impaired loans as defined by the
statement. The statements also apply to all loans that are restructured in a
troubled debt restructuring, subsequent to the adoption of SFAS No. 114, as
defined by SFAS No. 15. A troubled debt restructuring is a restructuring in
which the creditor grants a concession to the borrower that it would not
otherwise consider. At March 31, 1997, the Company had $238,000 of
restructured loans that, though performing, were classified substandard.

The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes
in the size and composition of the loan portfolio, actual loan loss
experience, current and anticipated economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans. Additions to these allowances are charged to
earnings. Provisions for losses that are related to specific assets are
usually applied as a reduction of the carrying value of the assets and charged
immediately against the income of the period. The reserve is based upon
factors and trends identified by management at the time financial statements
are prepared.

Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation. At March 31, 1997, the
Company had no specific loss allowances.

A provision for losses is charged against income on a monthly basis to
maintain an adequate allowance. At March 31, 1997, the Company had an
allowance for loan losses of $6.7 million which represented .95% of total
loans. Fiscal 1997 loan growth included $46.3 million of growth in higher risk
construction and land loans and the addition of new lines of lending business
in commercial, including agribusiness, and expanded consumer lending. These
loans, based on historical industry statistics, have a higher percentage of
losses than the Company has previously experienced in its prior mortgage
related lending and for this reason management is expecting increased losses
and has increased its current year provision for loan losses. Management
believes that the amount maintained in the allowance will be adequate to
absorb possible losses in the portfolio. Although management believes that it
uses the best information available to make such determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be significantly and adversely affected if circumstances
differ substantially from the assumptions used in making the determinations.

While the Company believes that the Banks have established their existing
allowance for loan losses in accordance with Generally Accepted Accounting
Principles (GAAP), there can be no assurance that regulators, in reviewing the
Banks' loan portfolio, will not request the Banks to increase significantly
their allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Company's financial
condition and results of operations.

Real Estate Held for Sale: Real estate acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
held for sale until it is sold. When property is acquired it is recorded at
the lower of its cost (the unpaid principal balance of the related loan plus
foreclosure costs), or fair value. Subsequent to foreclosure, the property is
carried at the lower of the foreclosed amount or fair value. Upon receipt of
a new appraisal and market analysis, the carrying value is written down
through the establishment of a specific reserve to the anticipated sales price
less selling and holding costs. At March 31, 1997, the Company had $1,057,000
of real estate owned.

PAGE
<PAGE>
The following table sets forth an analysis of the Company's gross allowance
for possible loan losses for the periods indicated.

Years Ended March 31
-----------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)

Allowance at beginning
of period $ 4,051 $ 3,549 $ 3,429 $ 3,105 $ 2,219
------- ------- ------- ------- -------

Acquired with IEB 1,416 -- -- -- --
------- ------- ------- ------- -------

Provision for loan
losses 1,423 524 391 440 1,335
------- ------- ------- ------- -------
Recoveries:
Secured by real
estate
One- to
four-family 38 -- -- -- --
Commercial
and multi-family -- -- -- -- --
Construction
and land -- -- -- -- --
Commercial /
agribusiness -- -- -- -- --
Consumer and other 16 -- -- 2 --
------- ------- ------- ------- ------
Total recoveries 54 -- -- 2 --
------- ------- ------- ------- ------
Charge-offs:
Secured by real estate
One- to four-family 127 -- -- 15 --
Commercial and
multi-family -- -- 271 101 444
Construction and
land -- -- -- -- --
Commercial /
agribusiness 3 -- -- -- --
Consumer and other 66 22 -- 2 5
------- ------- ------- ------- ------
Total charge-offs 196 22 271 118 449
------- ------- ------- ------- ------
Net charge-offs 142 22 271 116 449
------- ------- ------- ------- ------
Balance at end
of period $ 6,748 $ 4,051 $ 3,549 $ 3,429 $ 3,105
======= ======= ======= ======= =======

Ratio of allowance
to total loans
outstanding at
the end of the
period 0.95% 0.89% 1.06% 1.20% 1.13%

Ratio of net loan
charge-offs to the
average net book
value of loans
outstanding
during the period 0.04% 0.01% 0.10% .05% 0.19%

PAGE
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated.

At March 31
-------------------------------------------------------------------------------
1997(2) 1996 1995 1994 1993
---------------- -------------- -------------- ------------- --------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specific or
allocated loss
allowances:
Secured by
real estate
One- to
four-
family $ 1,098 61.34% $ -- 68.24% $ 11 59.81% $ 11 46.84% $ 26 56.60%
Commercial
and multi-
family 547 12.97 -- 16.99 46 22.01 317 24.38 418 27.76
Construction
and land 844 15.33 -- 13.62 -- 17.36 -- 27.69 -- 14.72
Commercial /
agribusiness 422 7.07 -- .19 -- .27 -- .68 -- .43

Consumer
and
other 237 3.34 -- .96 -- .55 -- .41 -- .49

Unallocated
general
loss
allow-
ance
(1) (2) 3,600 N/A 4,051 N/A 3,492 N/A 3,101 N/A 2,661 N/A

Total
allowance
for loan
losses $ 6,748 100.00% $ 4,051 100.00% $ 3,549 100.00% $ 3,429 100.00% $ 3,105 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
_________
(1) The Company establishes specific loss allowances when individual loans are identified
that present a possibility of loss (i.e., that full collectibility is not reasonably
assured). The remainder of the allowance for loan losses is established for the
purpose of providing for estimated losses which are inherent in the loan portfolio.

(2) For 1997 the Company has not changed how it determines the adequacy of its allowance
for loan losses other than to allocate the non-specific loan loss reserves to loan
categories that were the basis for its accrual. In the periods prior to 1997, it was
not the Company's practice to allocate general loan loss allowances to specific loan
categories.

17
</TABLE>
<PAGE> <PAGE>
Investment Activities

Under Washington and Oregon state law, banks are permitted to invest in
various types of marketable securities. Authorized securities include but are
not limited to U.S. Treasury obligations, securities of various federal
agencies, mortgage-backed securities, certain certificates of deposit of
insured banks and savings institutions, banker's acceptances, repurchase
agreements, federal funds, commercial paper, corporate debt and equity
securities and obligations of states and their political sub-divisions. The
investment policies of the Banks are designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. The Banks' policies generally limit investments
to U.S. Government and agency securities, municipal bonds, certificates of
deposit, marketable corporate debt obligations and mortgage-backed securities.
Investment in mortgage-backed securities includes those issued or guaranteed
by FHLMC, FNMA, Government National Mortgage Association (GNMA) and
privately-issued collateralized mortgage-backed securities that have an AA
credit rating or higher. A high credit rating indicates only that the rating
agency believes there is a low risk of loss or default. However, all of the
Banks' investment securities, including those that have high credit ratings,
are subject to market risk in so far as a change in market rates of interest
or other conditions may cause a change in an investment's market value.

At March 31, 1997, the Company's consolidated investment portfolio totaled
$288.5 million and consisted principally of U.S. Government and agency
obligations, mortgage-backed securities, municipal bonds, corporate debt
obligations, and stock of FNMA and FHLMC. From time to time, investment
levels may be increased or decreased depending upon yields available on
investment alternatives, and management's projections as to the demand for
funds to be used in the Banks' loan originations, deposits and other
activities. During fiscal 1997 investments and securities decreased by $5.2
million. Holdings of mortgage-backed securities decreased $2.8 million and
U.S. Treasury and agency obligations decreased $3.0 million. Ownership of
corporate securities decreased $3.6 million as a result of sales and bond
calls. Municipal bonds increased $4.6 million primarily as a result of the
acquisition of IEB.

During 1995, the Financial Accounting Standards Board (FASB) issued a report
entitled A Guide to Implementation of Statement 115 in Accounting for Certain
Investments in Debt and Equity Services, Questions and Answers that allowed
companies a one-time reassessment and related reclassification from the
held-to-maturity category to the available-for-sale category without adverse
accounting consequences for the remainder of the portfolio. FSBW reclassified
$142.5 million of its "held-to-maturity" securities into the "available for
sale" category on November 30, 1995. Approximately $86.6 million of
mortgage-backed-obligations, $28.3 million of corporate bonds and $27.6
million of municipal bonds were re-classified as "available-for-sale." Net
unrealized gains and losses related to the securities transfer were
immaterial. Management realizes this decision has and will subject the equity
on the balance sheet to changes based upon fluctuation in the fair value of
the securities portfolio, but believes that this is a prudent approach to
portfolio management allowing the Company flexibility to respond to changes in
market and economic conditions and opportunities.

Mortgage-Backed and Mortgage-Related Securities: The Company's subsidiary,
FSBW, purchases mortgage-backed securities in order to: (i) generate positive
interest rate spreads on large principal balances with minimal administrative
expense; (ii) lower the credit risk of the Company as a result of the
guarantees provided by FHLMC, FMNA, and GNMA; (iii) enable the Company to use
mortgage-backed securities as collateral for financing; and (iv) increase
liquidity. The Company invests primarily in federal agency mortgage-backed
securities, principally FNMA, FHLMC and GNMA. The Company also invests in
collateralized mortgage obligations (CMOs) and real estate mortgage investment
conduits (REMICs). At March 31, 1997, net mortgage-backed securities totaled
$174.4 million, or 17.3% of total assets. At March 31, 1997, 74.9% of the
mortgage- backed securities were adjustable-rate and 25.1% were fixed-rate.
The estimated fair value of the Company's mortgage- backed securities at March
31, 1997, was $174.4 million, which is $2.5 million less than the amortized
cost of $176.9 million. At March 31, 1997, the Company's portfolio of
mortgage-backed securities had a weighted average coupon rate of 6.72% and the
estimated weighted average life was 22.3 years.

PAGE
<PAGE>
Mortgage-backed securities known as PC's or mortgage pass-through certificates
represent a participation interest in a pool of single-family or multi-family
mortgages. The principal and interest payments on these mortgages are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and
resell the participation interests in the form of securities, to investors
such as the Company. Mortgage participation certificates generally yield less
than the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, PC's are usually more liquid
than individual mortgage loans and may be used to collateralized certain
liabilities and obligations of the Company. These types of securities also
permit the Company to optimize its regulatory capital because of their low
risk weighting.

CMOs and REMICs are mortgage-related obligations and are often considered as
derivative financial instruments because they are created by redirecting the
cash flows from the pool of mortgages or mortgage-backed securities underlying
these securities into two or more classes (or tranches) with different
maturity or risk characteristics. Management believes these securities may
represent attractive alternatives relative to other investments due to the
wide variety of maturity, repayment and interest rate options available.
Current investment practices of the Bank generally prohibit the purchase of
CMOs and REMICs classified as high risk by the Federal Financial Institutions
Examination Council (FFIEC). At March 31, 1997 the Company held CMOs and
REMICs with a net carrying value of $143.0 million. At that date, one FHLMC
CMO with a carrying value of $410,000 was identified as a high risk security
under the FFIEC standards and is included in the Company's available for sale
portfolio.

Of the Company's $174.4 million mortgage-backed securities portfolio at March
31, 1997, $131.6 million with a weighted average yield of 6.90% had
contractual maturities or period to repricing within ten years and $42.8
million with a weighted average yield of 7.80% had contractual maturities or
period to repricing over ten years. However, the actual maturity of a
mortgage-backed security is usually less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in rapid
amortization of premiums or discounts and thereby effects the net yield on
such securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of declining mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because, to the extent that the Company's
mortgage-backed securities amortize or prepay faster than anticipated, the
Company may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate. In contrast to mortgage-backed securities
in which cash flow is received (and hence, prepayment risk is shared) pro rata
by all securities holders, the cash flow from the mortgages or mortgage-backed
securities underlying REMICs or CMOs is segmented and paid in accordance with
a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of REMICs and CMOs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.

Municipal Bonds: The Company's tax exempt municipal bond portfolio, which at
March 31, 1997, totaled $34.0 million at estimated fair value ($32.9 million
at amortized cost), was comprised of general obligation bonds (i.e., backed by
the general credit of the issuer) and revenue bonds (i.e., backed by revenues
from the specific project being financed) issued by various authorities,
hospitals, water and sanitation districts located in the states of Washington
and Oregon. At March 31, 1997, general obligation bonds and revenue bonds
totaled $20.6 million and $13.4 million, respectively. Most of the municipal
bonds are not rated by a nationally recognized credit rating agency (e.g.,
Moody's or Standard and Poor's). At March 31, 1997, the Company's municipal
bond portfolio had an average life of approximately 8.2 years and average
coupon rate of 6.32%. The largest security in the portfolio was a revenue
bond issued by the City of Kent, Washington, with an amortized cost of $3.75
million and a fair value of $3.73 million. Because interest earned on
municipal bonds is exempt from federal, state and local income taxes, the
municipal bond portfolio has contributed to an effective income tax rate for
the Company that is below the normal corporate tax rate.

Corporate Bonds: The Company's corporate bond portfolio, which totaled $8.0
million at fair value ($8.0 million at amortized cost) at March 31, 1997, was
composed of short to intermediate-term fixed-rate securities. At March 31,
1997, the portfolio had an estimated average life of 3.7 years and a weighted
average coupon rate of 7.52%. The longest term bond, which had an amortized
cost of $2.0 million and a term to maturity of 11.4 years, was subject to put
options in favor of the Company exercisable in fiscal 1999 and 2004.

PAGE
<PAGE>
U.S. Government and Agency Obligations: The Company's portfolio of U.S.
Government and agency obligations had a fair value of $17.3 million ($17.4
million at amortized cost) at March 31, 1997. The Company's subsidiary,
FSBW, has invested a small portion of its securities portfolio in structured
notes. The structured notes in which FSBW has invested provide for
periodic adjustments in coupon rates on specified dates based on various
indices and formulae. At March 31, 1997, structured notes, which totaled $3.0
million at fair value ($3.0 million at amortized cost), consisted of U.S.
Government agency obligations with a weighted average maturity of less than a
year and a weighted average coupon of 6.00%.

Off Balance Sheet Derivatives: Derivatives include "off balance sheet"
financial products whose value is dependent on the value of an underlying
financial asset, such as a stock, bond, foreign currency, or a reference rate
or index. Such derivatives include "forwards," "futures," "options" or
"swaps." The Company generally has not invested in 'off balance sheet"
derivative instruments, although investment policies authorize such
investments. On March 31, 1997 the Company had no off balance
sheet derivatives and no outstanding commitments to purchase or sell
securities.

PAGE
<PAGE>
<TABLE>
The following table sets forth certain information regarding carrying values and percentage of total
carrying values, which is estimated market value, of the Company's consolidated portfolio of securities
classified as available for sale (in thousands).

At March 31
----------------------------------------------------------------
1997 1996 1995
------------------- -------------------- -------------------
Carrying Percent of Carrying Percent of Carrying Percent of
value Total value Total value Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury and
agency obligations $ 67,417 23.45% $ 70,389 24.13% $ 12,375 53.63%
Municipal bonds 33,969 11.81 29,365 10.07 -- --
Corporate bonds 7,997 2.78 11,632 3.99 4,247 18.40
Other 3,758 1.31 3,116 1.07 2,705 11.72

Mortgage-backed or
related securities
Mortgage-backed
securities:
GNMA 20,273 7.05 22,181 7.60 -- --
FHLMC 3,868 1.35 5,010 1.72 -- --
FNMA 7,281 2.53 8,413 2.88 -- --
Private issue -- --. 10,760 3.69 -- --
-------- ----- ------- ----- ------- ------
Total mortgage-
backed securities 31,422 10.93 46,364 15.89 -- --

Mortgage-related
securities
CMOs-agency backed 117,212 40.77 104,771 35.92 2,105 9.12
CMOs-Non-agency 25,741 8.95 26,050 8.93 1,645 7.13
-------- ----- -------- ----- ------- ------
Total mortgage-
related
securities 142,953 49.72 130,821 44.85 3,750 16.25
-------- ----- -------- ----- ------- ------
Total 174,375 60.65 177,185 60.74 3,750 16.25
-------- ----- -------- ----- ------- ------

Total securities
available for sale $ 287,516 100.00% $291,687 100.00% $ 23,077 100.00%
========= ======= ======== ======= ======== =======

21
</TABLE>
<PAGE> <PAGE>
The following table sets forth certain information regarding carrying values and
market values and percentage of total carrying values of the Company's
consolidated portfolio of securities classified as held to maturity.
<TABLE>
At March 31
----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
Esti- Esti- Esti-
mated Percent mated Percent mated Percent
Carrying Market of Carrying Market of Carrying Market of
value value Total value value Total value value Total
----- ------ ------ ----- ----- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Government
Treasury and
agency
obligations $ -- $ -- --% $ -- $ -- --% $ -- $ -- --%
Municipal
bonds -- -- -- -- -- -- 27,796 28,641 18.92
Corporate
bonds -- -- -- -- -- -- 28,352 28,240 19.29
Certificates
of deposit 987 987 100.00% 2,059 2,059 100.00 4,217 4,217 2.87
Other -- -- -- -- -- -- -- -- --

Mortgage-
backed or
related
securities
Mortgage-
backed
securities:
GNMA -- -- -- -- -- -- 2,393 2,431 1.63
FHLMC -- -- -- -- -- -- 5,721 5,851 3.89
FNMA -- -- -- -- -- -- 10,288 10,296 7.00
Total
mortgage-
backed
securities -- -- -- -- -- -- 18,402 18,578 12.52

Mortgage-
related
securities
CMOs-
agency
backed -- -- -- -- -- -- 55,181 52,291 37.56
CMOs-
Non-agency -- -- -- -- -- -- 12,983 12,300 8.84

Total
mortgage-
related
securities -- -- -- -- -- -- 68,164 64,591 46.40
Total -- -- -- -- -- -- 86,566 83,169 58.92

Total
securities
held to
maturity $ 987 $ 987 100.00% $ 2,059 $ 2,059 100.00% $146,931 $144,267 100.00%
====== ===== ====== ======= ======= ====== ======== ======== ======

22
</TABLE>
PAGE
<PAGE>
<TABLE>
The following table shows the maturity or period to repricing of the Company's consolidated
portfolio of securities (dollars in thousands):

At March 31, 1997
-----------------------------------------------------------------------------------------------------------------
Over Over Over
One Year One to Five to Ten to Over
or Less Five Years Ten Years Twenty Years Twenty Years Total
------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
- ------------------
U.S. Government
Treasury and
agency obligations
Fixed-rate $21,423 5.58% $41,070 6.13% $ 966 6.80% $ 983 5.93% $ -- --% $64,442 5.95%
Adjustable-rate 2,975 6.06 -- -- -- -- -- -- -- -- 2,975 6.06
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
24,398 5.64 41,070 6.13 966 6.80 983 5.93 -- -- 67,417 5.95

Municipal bonds 2,311 5.11 10,941 6.22 9,920 6.29 9,409 6.71 1,388 6.50 33,969 6.31
Corporate bonds
Fixed-rate 3,714 6.14 2,283 7.05 -- -- 2,000 4.85 -- -- 7,997 6.07
Adjustable-rate -- -- -- -- -- -- -- -- -- -- -- --
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
3,714 6.14 2,283 7.05 -- -- 2,000 4.85 -- -- 7,997 6.07
Mortgage-backed
obligations:
Fixed-rate 80 9.29 874 6.61 -- -- 1,859 10.08 19,730 7.57 22,543 7.75
Adjustable-rate 8,331 6.91 548 6.53 -- -- -- -- -- -- 8,879 6.89
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
8,411 6.93 1,422 6.58 -- -- 1,859 10.08 19,730 7.57 31,422 7.51
Mortgage-related
obligations:
Fixed-rate -- -- -- -- -- -- 9,006 5.47 12,218 6.99 21,224 6.35
Adjustable-
rate 121,729 6.58 -- -- -- -- -- -- -- -- 121,729 6.58
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
121,729 6.58 -- -- -- -- 9,006 5.47 12,218 6.99 142,953 6.55
Total mortgage-
backed or related
obligations 130,140 6.60 1,422 6.58 -- -- 10,865 6.26 31,948 7.35 174,375 6.72
Other stock 1,531 7.90 808 6.64 1,419 22.10 -- -- -- -- 3,758 12.99
Total securities
available for sale-
carrying value$162,094 6.44% $ 56,524 6.20% $ 12,305 8.15% $ 23,257 6.31% $ 33,336 7.31% $287,516 6.56%
Total securities
available for sale-
amortized cost$164,032 $ 56,628 $ 10,839 $ 22,804 $ 33,830 $288,142
Held to Maturity
- --------
Certificates of deposit-
fixed rate $ 793 5.10% $ 194 5.00% $ -- -- $ -- -- $ -- -- $ 987 5.08%

23
</TABLE>
PAGE
<PAGE>
Deposit Activities and Other Sources of Funds

General: Deposits, FHLB advances (or borrowings) and loan repayments are the
major sources of the Banks' funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced significantly
by general interest rates and money market conditions. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer-term basis for
general business purposes. The Banks do not currently solicit brokered
deposits.

Deposit Accounts: Deposits are attracted from within the Banks' primary
market areas through the offering of a broad selection of deposit instruments,
including demand checking accounts, NOW accounts, money market deposit
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of their deposit
accounts, the Banks consider current market interest rates, profitability to
the Banks, matching deposit and loan products and their customer preferences
and concerns. The Banks generally review their deposit mix and pricing
weekly.

The Banks compete with other financial institutions and financial
intermediaries in attracting deposits. Competition from mutual funds has
been particularly strong in recent years due to the performance of the stock
market. In addition, there is strong competition for savings dollars from
commercial banks, credit unions, and nonbank corporations, such as securities
brokerage companies and other diversified companies, some of which have
nationwide networks of offices.

The Banks, especially FSBW, have been most successful in attracting a broad
range of retail time deposits and, at March 31, 1997, the Banks had a total of
$330.3 million in retail time deposits, of which $233.7 million had original
maturities of one year or longer. The most popular time deposit is the one
year certificate, which totaled $108.4 million at March 31, 1997.

As illustrated in the following table, certificates of deposit have accounted
for a larger percentage of the deposit portfolio than have other transaction
accounts. However, as reflected in the balances and percentages for March
31, 1997, the acquisition of IEB has added significantly to demand, Now and
Money Market accounts for the Company.

PAGE
<PAGE>
<TABLE>
The following table sets forth the balances of deposits in the various types of accounts offered by the
Banks at the dates indicated (in thousands).

At March 31
------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ------------------
% of Increase % of Increase % of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----

Demand and NOW
<S> <C> <C> <C> <C> <C> <C> <C> <C>
checking $93,630 17.18% 54,635 $ 38,995 10.42% $ 3,482 $ 35,514 9.86%
Regular
savings
accounts 44,131 8.10 11,632 32,499 8.69 (4,712) 37,210 10.33
Money
market
accounts 76,869 14.11 47,282 29,587 7.91 (1,091) 30,678 8.51
Certi-
ficates
which
mature:
Within
1 year 212,853 39.05 34,431 178,422 47.70 19,976 158,446 43.97
After
1 year,
but
within
2 years 53,553 9.83 21,903 31,650 8.46 (5,227) 36,877 10.23
After
2 years,
but
within
5 years 40,963 7.52 (3,129) 44,092 11.79 952 43,140 11.97
Certi-
ficates
matur-
ing
there-
after 22,968 4.21 4,149 18,819 5.03 332 18,487 5.13
-------- ------ ------- -------- ------ -------- --------- ------

Total $544,967 100.00% 170,903 $374,064 100.00% $ 13,712 $ 360,352 100.00%
======== ======= ======= ======== ======= ======== ========= =======
</TABLE>

The following table sets forth the deposit activities of the Banks for the
periods indicated (in thousands).
Year Ended March 31,
---------------------------
1997 1996 1995
---- ---- ----

Beginning balance $374,064 $360,352 $352,547

Acquisition of subsidiary - IEB 134,610 - - - -
Net increase (decrease)
before interest credited 14,557 (5,264) (7,674)
Interest credited 21,736 18,976 15,479
-------- ------- --------
Net increase in savings deposits 170,903 13,712 7,805
-------- -------- --------

Ending balance $544,967 $374,064 $360,352
======== ======== ========

The following table indicates the amount of the Banks' jumbo certificates of
deposit by time remaining until maturity as of March 31, 1997. Jumbo
certificates of deposit require a minimum deposit of $100,000 and rates paid
on such accounts are negotiable (in thousands).
Jumbo
Maturity Period Certificates
- --------------- of deposits
-----------
Six months or less $ 21,902
Six through twelve months 17,627
Over twelve months 18,894
--------

PAGE
<PAGE>
Total $ 58,423
========

PAGE
<PAGE>
Borrowings: Deposits are the primary source of funds for the Banks' lending
and investment activities and for their general business purposes. FSBW also
uses borrowings to supplement its supply of lendable funds, to meet deposit
withdrawal requirements and to more effectively leverage its capital position.
The FHLB-Seattle serves as FSBW's primary borrowing source. Advances from the
FHLB-Seattle are typically secured by FSBW's first mortgage loans. At March
31, 1997, FSBW had $231.5 million of borrowings from the FHLB-Seattle at a
weighted average rate of 5.96%. FSBW has been authorized by the FHLB-Seattle
to borrow up to 40% of it's total assets under a blanket floating lien
security agreement, permitting a borrowing capacity of $326.0 million at March
31, 1996. Additional funds may be obtained through commercial banking credit
lines.

The FHLB-Seattle functions as a central reserve bank providing credit for
member financial institutions. As a member, FSBW is required to own capital
stock in the FHLB-Seattle and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.

FSBW also uses retail repurchase agreements due generally within 90 days as a
source of funds. At March 31, 1997, retail repurchase agreements totaling
$10.0 million with interest rates from 5.26% to 7.18% are secured by a pledge
of certain FNMA and FHLMC mortgage-backed securities with a market value of
$11.2 million.

FSBW also borrows funds through the use of secured wholesale repurchase
agreements with securities brokers. The broker holds FSBW's securities while
FSBW continues to receive the principal and interest payments from the
security. FSBW's outstanding borrowings at March 31, 1997, under wholesale
repurchase agreements, totaled $52.2 million and were collateralized by
mortgage-backed securities with a fair value of $55.1 million.

(See "Management's Discussion and Analysis of Financial Position and Results
of Operations - Liquidity and Capital Resources".)

The following table sets forth certain information regarding material
borrowings by the Company at the dates and for the periods indicated (dollars
in thousands):

At March 31
------------------------------
1997 1996 1995
---- ---- ----
Weighted average rate
at year end on:
FHLB advances 5.96% 5.43% 6.35%
Retail repurchase
agreements 5.76 5.35 6.04
Wholesale repurchase
agreements 5.53 5.41 N/A

At March 31
------------------------------
1997 1996 1995
---- ---- ----
Maximum amount of
borrowings outstanding
at any month end:
FHLB advances $235,098 $179,419 $ 72,135
Retail repurchase
agreements 11,119 9,789 8,040
Wholesale
repurchase
agreements 52,174 9,863 N/A
Approximate annual
average short-term
borrowings out-
standing with
respect to:
FHLB advances 214,563 66,252 42,419
Retail repurchase
agreements 11,322 7,620 7,424
Wholesale
repurchase
agreements 26,649 162 N/A
Approximated annual
weighted average
rate paid on:(1)
FHLB advances 5.83% 5.80% 5.60%
Retail repurchase
agreements 4.80 6.15 5.08
Wholesale
repurchase
agreements 5.96 5.41 N/A

- ---------------
(1) Computed using the weighted rates of each individual transaction.

PAGE
<PAGE>
Personnel

As of March 31, 1997, the Company had 275 full-time and 32 part-time
employees. The employees are not represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.

Taxation
Federal Taxation

General. The Company and the Banks report their income on a calendar year
basis using the accrual method of accounting. The Company and the Banks are
subject to federal income taxation in the same manner as other corporations
with some exceptions including particularly the reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Company and the Banks.

Bad Debt Reserve. Historically, savings institutions such as FSBW which met
certain definitional tests primarily related to their assets and the nature of
their business ("qualifying thrift") were permitted to establish a reserve for
bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. FSBW's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on FSBW's
actual loss experience, or a percentage equal to 8% of FSBW's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. Due to FSBW's loss experience, it
generally recognized a bad debt deduction equal to 8% of taxable income.

In August 1996, provisions repealing the current thrift bad debt rules were
enacted by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). FSBW has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, because FSBW is
a "large" bank (i.e., assets in excess of $500 million), FSBW's bad debt
deduction will be determined on the basis of net charge-offs during the
taxable year. The new rules allow an institution to suspend bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institution's average
residential lending activity for the six taxable years preceding 1996. For
this purpose, only home purchase or home improvement loans are included and
the institution can elect to have the tax years with the highest and lowest
lending activity removed from the average calculation. If an institution is
permitted to postpone the reserve recapture, it must begin its six year
recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution qualifies
as a bank as defined by the statute. In addition, the balance of the pre-1988
bad debt reserves continues to be subject to provisions of present law
referred to below that require recapture in the case of certain excess
distributions to shareholders.

Distributions. To the extent that FSBW makes "nondividend distributions" to
the Company, such distributions will be considered to result in distributions
from the balance of their bad debt reserves as of December 31, 1987 (or a
lesser amount if FSBW's loan portfolio decreased since December 31, 1987) and
then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in FSBW's taxable income. Nondividend distributions include
distributions in excess of FSBW's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of FSBW's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from FSBW's bad
debt reserves.

<PAGE> <PAGE>
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate. FSBW does not
intend to pay dividends that would result in a recapture of any portion of
their tax bad debt reserve.

Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by an
amount equal to 75% of the amount by which the corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Banks, whether or not an Alternative
Minimum Tax ("AMT") is paid. Under President Clinton's 1998 budget proposal,
the corporate environmental income tax would be reinstated for taxable years
beginning after December 31, 1996 and before January 1, 2008.

Dividends-Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Banks as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Banks will not file a consolidated
tax return, except that if the Company or the Banks own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.

There have not been any IRS audits of the Company's or the Banks' federal
income tax returns during the past five years.

Environmental Regulation

The business of the Company is affected from time to time by federal and state
laws and regulations relating to hazardous substances. Under the federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
owners and operators of properties containing hazardous substances may be
liable for the costs of cleaning up the substances. CERCLA and similar state
laws can affect the Company both as an owner of branches and other properties
used in its business and as a lender holding a security interest in property
which is found to contain hazardous substances. While CERCLA contains an
exemption for holders of security interests, the exemption is not available if
the holder participates in the management of a property, and some courts have
broadly defined what constitutes participation in management of property.
Moreover, CERCLA and similar state statutes can affect the Company's decision
of whether or not to foreclose on a property. Before foreclosing on
commercial real estate, it is the Company's general policy to obtain an
environmental report, thereby increasing the costs of foreclosure. In
addition, the existence of hazardous substances on a property securing a
troubled loan may cause the Company to elect not to foreclose on the property,
thereby reducing the Company's flexibility in handling the loan.

Competition

The Banks encounter significant competition both in attracting deposits and in
originating real estate loans. Their most direct competition for deposits has
come historically from other commercial and savings banks, savings
associations and credit unions in their market areas. More recently, the
Banks have witnessed an increased level of competition from securities firms,
insurance companies, money market and mutual funds, and other investment
vehicles. The Banks expect continued strong competition from such financial
institutions and investment vehicles in the foreseeable future. The ability
of the Banks to attract and retain deposits depends on their ability to
provide investment opportunities that satisfy the requirements of investors as
to rate of return, liquidity, risk of loss of principal, convenience of
locations and other factors. The Banks compete for deposits by offering
depositors a variety of deposit accounts and financial services at competitive
rates, convenient business hours, and a high level of personal service and
expertise.

The competition for loans comes principally from commercial banks, loan
brokers, mortgage banking companies, other savings banks and credit unions.
The competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Banks' market
areas as well as the increased efforts by commercial banks and credit unions
to expand mortgage loan originations.

The Banks compete for loans primarily through offering competitive rates and
fees and providing excellent services to borrowers and home builders. Factors
that affect competition include general and local economic conditions, current
interest rate levels and the volatility of the mortgage markets.

PAGE
<PAGE>
Regulation

The Banks

General: As state-chartered, federally insured financial institutions, the
Banks are subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Banks are regularly
examined by the FDIC and their state banking regulators and file periodic
reports concerning their activities and financial condition with their
regulators. The Banks' relationship with depositors and borrowers also is
regulated to a great extent by both federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.

Federal and state banking laws and regulations govern all areas of the
operation of the Banks, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Company and the Banks have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.

State Regulation and Supervision: As a state-chartered savings bank, FSBW is
subject to applicable provisions of Washington law and regulations. As a
state-chartered commercial bank, IEB is subject to applicable provisions of
Oregon law and regulations. State law and regulations govern the Banks'
ability to take deposits and pay interest thereon, to make loans on or invest
in residential and other real estate, to make consumer loans, to invest in
securities, to offer various banking services to its customers, and to
establish branch offices. Under state law, savings banks in Washington also
generally have all of the powers that federal mutual savings banks have under
federal laws and regulations. The Banks are subject to periodic examination
and reporting requirements by and of their state banking regulators.

Deposit Insurance: The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of depository institutions. The
FDIC currently maintains two separate insurance funds: the BIF and the SAIF.
As insurer of the Banks' deposits, the FDIC has examination, supervisory and
enforcement authority over the Banks.

FSBW's accounts are insured by the SAIF and IEB's accounts are insured by the
BIF to the maximum extent permitted by law. The Banks pay deposit insurance
premiums based on a risk-based assessment system established by the FDIC.
Under applicable regulations, institutions are assigned to one of three
capital groups that are based solely on the level of an institution's capital
- - "well capitalized," "adequately capitalized," and "undercapitalized" --
which are defined in the same manner as the regulations establishing the
prompt corrective action system, as discussed below. These three groups are
then divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications.

Pursuant to the Deposit Insurance Funds Act of 1996 (the "DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including FSBW,
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since January 1,
1997, SAIF members are charged an assessment of .065% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF- assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013% until the earlier
of December 31, 1999 or the date upon which the last savings association
ceases to exist, after which time the assessment will be the same for all
insured deposits. The DIF Act provides for the merger of the BIF and the SAIF
into the Deposit Insurance Fund on January 1, 1999, but only if no insured
depository institution is a savings association on that date.

The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC.

<PAGE> <PAGE>
Management is aware of no existing circumstances that could result in
termination of the deposit insurance of the Banks.

Prompt Corrective Action: Under Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be: (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, has a Tier I risk-based capital ratio of 4.0% or more, has a Tier I
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, has a Tier
I risk-based capital ratio that is less than 4.0% or has a Tier I leverage
capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, has a Tier I risk-based capital ratio that is less
than 3.0% or has a Tier I leverage capital ratio that is less than 3.0%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.

A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)

An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.

At March 31, 1997, the Banks were categorized as "well capitalized" under the
prompt corrective action regulations of the FDIC.

Standards for Safety and Soundness: The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings and (viii) compensation, fees and benefits (Guidelines). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the FDIC determines that
either Bank fails to meet any standard prescribed by the Guidelines, the
agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard. FDIC regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.

Capital Requirements: The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of
purchased mortgage servicing rights and certain other accounting adjustments.
All other banks must have a Tier 1 leverage ratio of at least 100-200 basis
points above the 3% minimum. The FDIC capital regulations establish a minimum
leverage ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth.

Any insured bank with a Tier 1 capital to total assets ratio of less than 2%
is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the FDIC is a party, to
correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower
than the prescribed minimum capital levels generally will not receive approval
of applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.

PAGE
<PAGE>
FDIC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital
(which is defined as Tier 1 capital and Tier 2 or supplementary capital) to
risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based
on the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of Tier 1 capital.

FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound, which are
well-managed and have no material or significant financial weaknesses. The
FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate
and/or a bank has a significant volume of assets classified substandard,
doubtful or loss or otherwise criticized, the FDIC may determine that the
minimum adequate amount of capital for that bank is greater than the minimum
standards established in the regulation.

The Company believes that, under the current regulations, the Banks will
continue to meet their minimum capital requirements in the foreseeable future.
However, events beyond the control of the Banks, such as a downturn in the
economy in areas where the Banks have most of their loans, could adversely
affect future earnings and, consequently, the ability of the Banks to meet
their capital requirements.

Activities and Investments of Insured State-Chartered Banks: Federal law
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if
certain requirements are met.

Federal law provides that an insured state-chartered bank may not, directly,
or indirectly through a subsidiary, engage as "principal" in any activity that
is not permissible for a national bank unless the FDIC has determined that
such activities would pose no risk to the insurance fund of which it is a
member and the bank is in compliance with applicable regulatory capital
requirements. Any insured state-chartered bank directly or indirectly engaged
in any activity that is not permitted for a national bank must cease the
impermissible activity.

Federal Reserve System: In 1980, Congress enacted legislation which imposed
Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits
with the regional Federal Reserve Bank. NOW accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any nonpersonal time deposits at a bank. Under
Regulation D, a bank must establish reserves equal to 3% of the first $49.3
million of transaction accounts, of which the first $4.4 million is exempt,
and 10% on the remainder. The reserve requirement on nonpersonal time deposits
with original maturities of less than 1-1/2 years is 0%. As of March 31,
1997, the Banks met their reserve requirements.

Affiliate Transactions: The Company and the Banks are legal entities separate
and distinct. Various legal limitations restrict the Banks from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the Bank's capital and surplus
and limiting all such transactions to 20% of the Bank's capital and surplus.
Such transactions, including extensions of credit, sales of securities or
assets and provision of services, also must be on terms and conditions
consistent with safe and sound banking practices, including credit standards,
that are substantially the same or at least as favorable to the Banks as those
prevailing at the time for transactions with unaffiliated companies.

<PAGE> <PAGE>
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.

Community Reinvestment Act: Banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank,
to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution.

Dividends: Dividends from the Banks will constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends
payable by the Banks to the Company will depend upon the Banks' earnings and
capital position, and is limited by federal and state laws, regulations and
policies.

Federal law further provides that no insured depository institution may make
any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would be "undercapitalized," as
defined in the prompt corrective action regulations. Moreover, the federal
bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice.

The Company

General: The Company is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(BHCA) and the regulations of the Federal Reserve. The Company is required to
file with the Federal Reserve annual reports and such additional information
as the Federal Reserve may require and is subject to regular examinations by
the Federal Reserve. The Federal Reserve also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.

Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.

The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve includes, among other things: operating a savings
institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to
certain limitations, providing securities brokerage services for customers.

PAGE
<PAGE>
Interstate Banking and Branching. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Riegle-Neal Act") was
enacted to ease restrictions on interstate banking. The Riegle-Neal Act
allows the Federal Reserve to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control
of, or acquire all or substantially all of the assets of, a bank located in a
state other than such holding company's home state, without regard to whether
the transaction is prohibited by the laws of any state. The Federal Reserve
may not approve the acquisition of a bank that has not been in existence for
the minimum time period (not exceeding five years) specified by the statutory
law of the host state. The Riegle-Neal Act also prohibits the Federal Reserve
from approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home
state or in any state in which the target bank maintains a branch. The
Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank holding company to the extent such limitation does not
discriminate against out-of-state banks or bank holding companies. Individual
states may also waive the 30% state-wide concentration limit contained in the
Riegle-Neal Act.

Additionally, beginning on June 1, 1997, the federal banking agencies will be
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state
of one of the banks opts out of the Riegle-Neal Act by adopting a law after
the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which
applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of branches
will be permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions will
also be subject to the nationwide and statewide insured deposit concentration
amounts described above.

The Riegle-Neal Act authorizes the applicable federal banking agency to
approve interstate branching de novo by national and state banks, but only in
states which specifically allow for such branching. The Riegle-Neal Act also
requires the appropriate federal banking agencies to prescribe regulations by
June 1, 1997 which prohibit any out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit production. These
regulations must include guidelines to ensure that interstate branches
operated by an out-of-state bank in a host state are reasonably helping to
meet the credit needs of the communities which they serve.

Dividends: The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to
the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is
consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends.

Bank holding companies, except for certain "well-capitalized" bank holding
companies, are required to give the Federal Reserve prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption of it determines
that the proposal would constitute an unsafe or unsound practice or would
violate any law, regulation, Federal Reserve order, or any condition imposed
by, or written agreement with, the Federal Reserve.

Capital Requirements: The Federal Reserve has established capital adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for the Banks. The Federal Reserve regulations
provide that capital standards will be applied on a consolidated basis in the
case of a bank holding company with $150 million or more in total consolidated
assets.

The Company's total risk based capital must equal 8% of risk-weighted assets
and one half of the 8% (4%) must consist of Tier 1 (core) capital. As of
March 31, 1997 the Company's total risk based capital was 26.77% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
25.52% of risk-weighted assets.

PAGE
<PAGE>
MANAGEMENT PERSONNEL

Executive Officers

The following table sets forth information with respect to the executive
officers of the Company.
Position Position
Name Age (1) with Company with Banks
- ---- ------- ------------ ----------

Gary Sirmon 53 Chief Executive FSBW - Chief
Officer, Executive
President and Officer,
Director President
and
Director,
IEB -
Director

D. Allan Roth 60 Secretary/Treasurer FSBW -
Executive
Vice
President
and Chief
Financial
Officer

Michael K.
Larsen 54 Vice President FSBW -
Executive
Vice
President
and Chief
Lending
Officer

- ----------------
(1) As of March 31, 1997.

Biographical Information
Set forth below is certain information regarding the executive officers of the
Company. Each resides in Walla Walla and has held his current occupation for
the last five years. There are no family relationships among or between the
directors or executive officers.

Gary Sirmon is Chief Executive Officer, President and a director of the
Company and FSBW; and a Director of IEB. He joined FSBW in 1980 as an
executive vice president and assumed his current position in 1982.

D. Allan Roth is Executive Vice President and Chief Financial Officer of FSBW
and is Secretary/Treasurer of the Company. He joined FSBW in 1965.

Michael K. Larsen is Executive Vice President and Chief Lending Officer of
FSBW and is Vice President of the Company. He joined FSBW in 1981.

PAGE
<PAGE>
Item 2 - Properties

The Company's home office, which is owned by the Company, is located in Walla
Walla, Washington. First Savings has, in total, 16 branch offices, all of
which are located in the State of Washington. These offices are located in
the cities of Walla Walla (3), Kennewick (2), Richland, Clarkston, Sunnyside,
Yakima (4), Selah, Wenatchee, East Wenatchee, and Dayton. Of these offices,
13 are owned by the Company and 3 are leased. The leases expire from 1998
through 2000. In addition to these, First Savings has three leased loan
production offices in Bellevue, Spokane and Puyallup, Washington. The leases
expire from 1998 through 2000. IEB's main office is located in Hermiston,
Oregon and is owned by the Company. IEB has, in total, four branch offices
and a drive-up facility, all of which are located in the State of Oregon.
These offices, which are owned by the Company, are located in Pendleton,
Umatilla, Boardman and Stanfield. IEB also has a remote drive-up facility in
Hermiston, which is owned, and two loan production offices in Condon and La
Grande, which are on month-to- month leases. IEB also leases two facilities
in Hermiston for its mortgage division and for its information systems. The
Company's net investment in its offices, premises, equipment and leaseholds
was $10.5 million at March 31, 1997.

Item 3 - Legal Proceedings

Periodically, there have been various claims and lawsuits involving the Banks,
mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Banks hold security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Banks' business. The Company and the Banks are not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Company.

Item 4 - Submission of Matters to a Vote of Security Holders

None.

<PAGE> <PAGE>
Part II

Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters

Stock Listing

First Savings Bank of Washington Bancorp, Inc. common stock is traded
over-the-counter on the Nasdaq National Market under the symbol "FWWB."
Newspaper stock tables list the company as "FSBWA." Stockholders of record at
March 31, 1997 totaled 844. This total does not reflect the number of persons
or entitles who hold stock in nominee or "street" name through various
brokerage firms. The following tables show the reported high and low sale
prices of the Company's common stock since the conversion.

Cash
Dividends
Fiscal 1996 High Low Declared
----------- ---- --- --------
Third quarter $13.25 $12.44 $0.05
Fourth quarter 13.50 12.38 0.05

Cash
Dividends
Fiscal 1997 High Low Declared
----------- ---- --- --------
First quarter $15.63 $13.38 $0.05
Second quarter 17.25 14.50 0.05
Third quarter 19.00 16.56 0.05
Fourth quarter 22.13 18.00 0.07

<PAGE> <PAGE>
Item 6 - Selected Financial Data

The following tables set forth selected consolidated financial and other data
of the Company at the dates and for the periods indicated. This information
is derived from and is qualified in its entirety by reference to the detailed
information and Consolidated Financial Statements and Notes thereto presented
elsewhere in this filing. Information for fiscal years prior to March 31,
1996, is for First Savings Bank's former mutual holding company.

FINANCIAL CONDITION DATA:

At March 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ----- ---- ----
(In thousands)

Total assets $1,007,633 $743,176 $491,368 $425,936 $379,124
Loans
receivable,
net 645,881 415,295 299,403 246,264 235,960
Cash, interest-
bearing deposits
and securi-
ties (1) 312,991 302,772 175,505 165,065 130,595
Deposits 544,967 374,064 360,352 352,547 327,100
Borrowings 293,700 199,071 70,338 17,655 6,515
Equity 148,636 154,142 50,251 44,931 35,546
Shares out-
standing
excluding
unearned
restricted
shares held
in ESOP. 9,744 10,077 N/A N/A N/A

At March 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ----- ---- ----
(In thousands)
OPERATING DATA:

Interest
income $67,292 $41,409 $33,652 $31,342 $31,422
Interest
expense 36,372 23,287 18,230 15,707 16,630
Net interest ------ ------ ------ ------ ------
income 30,920 18,122 15,422 15,635 14,792
Provision for
loan losses 1,423 524 391 440 1,335
Net interest ------ ------ ------ ------ ------
income after
provision for
loan losses 29,497 17,598 15,031 15,195 13,457

Gains (losses)
from sale of
loans and
securities 701 387 (121) 3,390 3,353
Other operating
income 2,455 1,281 1,219 2,045 834
Other operating
expense 19,416 10,383 10,022 8,610 8,390
------ ------ ------ ------ ------
Income before
provision for
income taxes
and cumulative
effect of
change in
accounting 13,237 8,883 6,107 12,020 9,254
Provision for
income taxes 3,923 2,631 1,335 2,635 2,836
------ ------ ------ ------ ------
Income before
cumulative
effect of
change in
accounting 9,314 6,252 4,772 9,385 6,418

Cumulative effect
of change in
accounting -- -- 396 -- --
------ ------ ------ ------ ------
Net income $9,314 $6,252 $5,168 $9,385 $6,418
====== ====== ====== ====== ======

(footnotes on following page)

PAGE
<PAGE>
KEY FINANCIAL RATIOS:

The table below sets forth certain ratios of the Company at or for the
periods indicated.

At or For the Years Ended March 31,
-------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Performance Ratios:
Return on average
assets (2) 1.04% 1.11% 1.12% 2.32% 1.76%
Return on average
equity (3) 6.30 6.62 10.85 23.73 20.04
Average equity to
average assets 16.58 16.75 10.34 9.77 8.77
Interest rate
spread (4) 2.83 2.49 3.05 3.63 3.80
Net interest
margin (5) 3.59 3.33 3.47 4.02 4.21
Non-interest expense
to average assets 2.18 1.84 2.17 2.13 2.30
Average interest-
earning assets
to interest-bearing
liabilities 118.11 119.80 110.31 109.72 108.62
Dividend payout
ratio 23.16 (*) (*) (*) (*)

Asset Quality Ratios:
Allowance for loan
losses as a percent
of total loans at
end of period 0.95 0.89 1.06 1.20 1.13
Net loan charge-offs
as a percent of
average outstanding
loans during the
period 0.04 0.01 0.10 0.05 0.19
Non-performing assets
as a percent of
total assets 0.31 0.17 0.19 0.34 1.12
Ratio of allowance
for loan losses
to non-performing
loans (6) 3.20 7.53 10.41 5.01 1.20

Consolidated Capital
Ratio:
Tier 1 leverage
capital ratio 13.68 20.78 10.19 10.55 9.38
- --------------
(1) Includes securities available for sale and held to maturity.
(2) Net income divided by average assets.
(3) Net income divided by average equity.
(4) Difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(5) Net interest income before provision for loan losses as a percent of
average interest-earning assets.
(6) Non-performing loans consist of nonaccrual and 90 days past due loans.

(*) First Savings Bank converted from mutual to stock ownership on 10/31/95,
therefore data is not meaningful for these fiscal periods.

PAGE
<PAGE>
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

Management's Discussion and Analysis and other portions of this report contain
certain "forward-looking statements" concerning the future operations of First
Savings Bank of Washington Bancorp, Inc. Management desires to take advantage
of the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995 and is including this statement for the express purpose of
availing the Company of the protections of such safe harbor with respect to
all "forward-looking statements" contained in our Annual Report. We have used
"forward-looking statements" to describe future plans and strategies,
including our expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, the ability of the Company to control
costs and expenses, competitive products and pricing, loan delinquency rates,
and changes in federal and state regulation. These factors should be
considered in evaluating the forward-looking statements, and undue reliance
should not be placed on such statements.

General

First Savings Bank of Washington Bancorp, Inc. (the Company), a Delaware
corporation, is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiaries, First
Savings Bank of Washington (FSBW) and Inland Empire Bank (IEB) (together, the
Banks). FSBW is a Washington-chartered savings bank the deposits of which are
insured by the Federal Deposit Insurance Corporation (FDIC) under the Savings
Association Insurance Fund (SAIF). FSBW conducts business from its main
office in Walla Walla, Washington and its sixteen branch offices and three
loan production offices located in southeast, central, north central and
western Washington. IEB is an Oregon-chartered commercial bank whose deposits
are insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts
business from its main office in Hermiston, Oregon and its five branch offices
and two loan production offices located in northeast Oregon.

The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of loans and securities, and interest expense on
interest-bearing liabilities, composed primarily of deposits and borrowings.
Net interest income is a function of the Company's interest rate spread,
which is the difference between the yield earned on interest-earning assets
and the rate paid on interest-bearing liabilities, as well as a function of
the average balance of interest-earning assets as compared to the average
balance of interest-bearing liabilities. As more fully explained below, the
Company's net interest income significantly increased for the recent year
ended March 31, 1997, when compared to the prior year. This increase in net
interest income was largely due to the substantial growth in average asset and
liability balances. The Company's net income also is affected by provisions
for loan losses and the level of its other income, including deposit service
charges, loan origination and servicing fees, and gains and losses on the sale
of loans and securities, as well as its non-interest operating expenses and
income tax provisions. As further explained below, net income for the year
also increased reflecting the rise in net interest income and a substantial
increase in other operating income, which were somewhat offset by increases in
operating expenses and the provision for income taxes. Operating results and,
in particular, non-interest operating expenses for the year ended March 31,
1997, were significantly affected by the special assessment to recapitalize
the SAIF. Operating results for the period were also significantly affected
by the acquisition of IEB during fiscal 1997.

Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying Notes
to Consolidated Financial Statements.

Recent Developments and Significant Events Since March 31, 1996

On November 19, 1996, the Company completed its stock repurchase program
initiated in April 1996 which authorized the repurchase of 545,525 shares of
its outstanding common stock. On November 20, 1996, the Company's Board of
Directors approved continuance of the stock repurchase program authorizing the
purchase of up to 10% of total shares outstanding over the next 12 months.
As of March 31, 1997, the Company has repurchased a total of 795,525 shares at
an average price of $16.22 per share. The Company has reserved 436,425 of the
repurchased shares for its Management Recognition and Development Plan (MRP)
of which 403,882 shares were awarded as of March 31, 1997 (see Note 16 to
financial statements).

PAGE
<PAGE>
During the past fiscal year the U.S. Congress passed legislation requiring
that all financial institutions with deposits insured by the SAIF pay a
special assessment to recapitalize the SAIF. This assessment resulted in the
Company's SAIF insured subsidiary, FSBW, paying $2.4 million to the SAIF.
The assessment was calculated at .657% of insured deposits as of March 31,
1995. The special assessment, charged to every depository institution in the
country with deposits insured by the SAIF, was contained in the U.S.
Congressional omnibus appropriations package passed on September 30, 1996. As
a result of the recapitalization of the SAIF, the FDIC lowered deposit
insurance premiums from $.23 per $100 of deposits to $.065 per $100 of
deposits beginning January 1, 1997. The $2.4 million assessment ($1.6 million
after tax) was recorded as part of the Company's non-interest expense in the
quarter ended September 30, 1996. Excluding the special assessment, the
Company's net income for the year ended March 31, 1997 would have been
approximately $10.9 million, or $1.11 per share compared with net income of
$6.3 million for the comparable period in fiscal 1996. Management estimates
that this special assessment expense will be offset during the next three to
four years through anticipated lower depository insurance costs.

The Company completed the acquisition of Inland Empire Bank of Hermiston,
Oregon effective August 1, 1996. The Company paid the former shareholders of
IEB $60.8951 per share, in cash, for a total acquisition price of $32.8
million. IEB has five full service branches, a remote drive-up facility and
two loan production offices located in northeast Oregon. The acquisition of
IEB was treated as a purchase for accounting purposes. The Company acquired
an institution with assets of $170.5 million and assumed liabilities of $137.9
million including $134.6 million of deposits. "Goodwill", which is the excess
of the purchase price (cost) over the net fair value of the assets and
liabilities acquired, was recorded at $12.5 million. Amortization of
"goodwill" over a 14 year period will result in a charge to earnings of
approximately $893,000 per year (see Note 2 to financial statements for
additional information).

Comparison of Financial Condition at March 31, 1997 and March 31, 1996

Total assets increased $264.5 million, or 35.6%, from $743.2 million at March
31, 1996, to $1,007.6 million at March 31, 1997. The majority of the growth,
$170.5 million (adjusted to fair market value), was from the August 1996
acquisition of IEB. The balance of the increase resulted from growth in net
loans receivable that was funded primarily with borrowings.

Loans receivable grew $230.6 million, or 55.5%, from $415.3 million at March
31, 1996, to $645.9 million at March 31, 1997. The acquisition of IEB
contributed $90.5 million of the increase. The remaining increase in loans of
$140.1 million was funded primarily by a net increase of $94.6 million, or
47.5%, in FHLB advances and other borrowings, such as wholesale repurchase
agreements, from $199.1 million at March 31, 1996, to $293.7 million on March
31, 1997. The balance of loan growth was funded from growth in deposits and
current period earnings. Securities available for sale and held to maturity
decreased a net $5.2 million to $288.5 million at March 31, 1997, from
$293.7 million at March 31,1996. Federal Home Loan Bank Stock increased $3.8
million as the Company was required to purchase more stock as a result of its
increased use of FHLB advances. Deposits grew $170.9 million, or 45.7%, from
$374.1 million at March 31, 1996, to $545.0 million at March 31, 1997. The
acquisition of IEB contributed $134.6 million of the increase.

Comparison of Operating Results for the Years Ended March 31, 1997 and March
31, 1996

General. Net income for fiscal 1997 was $9.3 million, or $.95 per share,
compared to net income of $6.3 million recorded in fiscal 1996. Net income for
the year ended March 31, 1997, was significantly affected by the $2.4 million
($1.6 million after tax) non-interest expense representing the Company's share
of an industry-wide special assessment in the second quarter to recapitalize
the SAIF. In addition, the year ended March 31, 1997, included eight months of
combined operations with IEB which the Company acquired on August 1, 1996. The
acquisition significantly affected the Company's operating results for the
year ended March 31, 1997.

PAGE
<PAGE>
The Company's return on average equity for the year ended March 31, 1997,
decreased to 6.30% as compared to 6.62% for the year ended March 31, 1996,
which was expected due to the large increase in average equity resulting from
the October 31, 1995, stock offering that was present for a full year in
fiscal 1997 versus five months in fiscal 1996.

Interest Income. Interest income for the year ended March 31, 1997, was $67.3
million compared to $41.4 million for the year ended March 31, 1996, an
increase of $25.9 million, or 62.5%. The increase in interest income was a
result of a $317.7 million, or 58.3%, growth in average balances of
interest-earning assets combined with a 20 basis point increase in the average
yield on those assets. The yield on average assets rose to 7.81% in fiscal
1997 compared to 7.61% in fiscal 1996. Average loans receivable for fiscal
1997 increased by $217.2 million, or 66.2% when compared to fiscal 1996.
Interest income on loans increased by $19.1 million, or 69.5%, compared to the
prior year reflecting the impact of the increase in average loan balances
and a 17 basis point increase in the average yield primarily resulting from
the addition of $90.5 million of higher yielding loans held by IEB. Loans
yielded 8.54% for fiscal 1997 compared to 8.37% for fiscal 1996. The average
balance of mortgage-backed securities, investment securities, daily
interest-bearing deposits and FHLB stock increased by $100.5 million in fiscal
1997, and interest and dividend income from those investments rose by $6.8
million for fiscal 1997 compared to fiscal 1996. The average yield on
mortgage-backed securities rose from 6.65% for the year ended March 31, 1996,
to 6.86% in 1997. The average yield on investment securities and deposits
decreased from 6.23% for fiscal 1996 to 6.13% in 1997. Earnings on FHLB stock
increased by $561,000 reflecting an increase of $6.9 million in the average
balance of FHLB stock for the year ended March 31, 1997, and a 70 basis point
increase in the dividend yield on that stock.

Interest Expense. Interest expense for the year ended March 31, 1997, was
$36.4 million compared to $23.3 million for the comparable period in 1996, an
increase of $13.1 million, or 56.2%. The increase in interest expense was due
to the $275.4 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in fiscal 1997 was largely
due to a $178.7 million increase in the average balance of FHLB advances and
other borrowings combined with a $96.8 million growth in average deposits
coming primarily from the acquisition of IEB. Average FHLB advances totaled
$214.6 million during the year ended March 31, 1997, as compared to $66.3
million during the year ended March 31, 1996, resulting in an $8.7 million
increase in related interest expense. The average rate paid on those advances
increased to 5.83% for fiscal 1997 from 5.80% for fiscal 1996. Other
borrowings consist of retail repurchase agreements with customers and
repurchase agreements with investment banking firms secured by certain
investment securities. The average balance for other borrowings increased
$30.4 million from $7.6 million for the year ended March 31, 1996, to $38.0
million for the same period in 1997, and the related interest expense
increased $1.7 million from $469,000 to $2.1 million for the respective
periods. The bulk of this growth in other borrowings reflects an increase in
repurchase agreements with investment banking firms that are being used to
finance a portion of the Company's assets. Deposit interest expense increased
$2.8 million for the year ended March 31, 1997. Average deposit balances
increased from $380.6 million for the year ended March 31, 1996, to $477.4
million for the year ended March 31, 1997, while, at the same time, the
average rate paid on deposit balances decreased 44 basis points. The decline
in the rate paid on deposits primarily reflects the acquisition of IEB's $30.8
million of non-interest-bearing deposits.

Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 1997, increased by $899,000 to $1.4 million compared to $524,000 for
fiscal 1996. This increase is primarily reflective of the need to provide a
higher allowance level for the $140.1 million growth in loans receivable for
the fiscal year (excluding the acquisition of IEB's $90.5 million loan
portfolio). Fiscal 1997 loan growth included $46.3 million of growth in
higher risk construction and land loans and the addition of new lines of
lending business in commercial, including agribusiness, and expanded consumer
lending. These loans, based on historical industry statistics, have a higher
percentage of losses than the Company has previously experienced in its prior
mortgage related lending and for this reason management is expecting increased
losses and has increased its current year provision for loan losses. The
allowance for losses on loans is maintained at a level sufficient to provide
for estimated losses based on evaluating known and inherent risks in the loan
portfolio and upon management's continuing analysis of the factors underlying
the quality of the loan portfolio.

PAGE
<PAGE>
These factors include changes in the size and composition of the loan
portfolio, actual loan loss experience, current and anticipated economic
conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans.
Additions to these allowances are charged to earnings. Provisions for losses
that are related to specific assets are usually applied as a reduction of the
carrying value of the assets and charged immediately against the income of the
period. The reserve is based upon factors and trends identified by management
at the time financial statements are prepared. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such agencies may
require the Banks to provide additions to the allowance based upon judgments
different from management. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions beyond the Banks'
control.

Other Operating Income. Other operating income increased from $1.7 million
for the year ended March 31, 1996, to $3.2 million for the year ended March
31, 1997. The increase was primarily due to a $1.1 million increase in other
fees and service charges due largely to IEB operations earning higher fees as
a commercial bank combined with increased fee income at FSBW reflecting
deposit growth and pricing adjustments. In addition, there was a $314,000
increase in net gains on securities and loans sold in fiscal 1997 as compared
to 1996.

Other Operating Expenses. Other operating expenses increased $9.0 million
from $10.4 million for the year ended March 31, 1996, to $19.4 million for the
year ended March 31, 1997. The increase in non-interest operating expenses for
fiscal 1997 was primarily due to the addition of $4.2 million of IEB operating
expenses during the eight month period subsequent to acquisition. Included in
these IEB operating expenses is $592,000 of amortization of "goodwill". In
addition, fiscal 1997 expenses include the $2.4 million SAIF assessment. The
increase also reflects growth of the Company including increased personnel
costs and increases in legal, accounting and insurance costs relating to
operating as a public company. This aggregate increase was marginally reduced
by a $395,000 increase in capitalized loan origination costs reflecting a
$67.9 million increase in loan origination volume for fiscal 1997 compared to
the same period in 1996.

Income Taxes. Income tax expense for the year ended March 31, 1997, increased
$1.3 million from fiscal 1996. The Company's effective tax rate increased
slightly to 29.64% for fiscal 1997, from 29.62% for fiscal 1996. The
existence of substantial non-taxable interest income from municipal securities
and loans primarily accounts for the reduction in tax rates from statutory
levels. The expected increase in income taxes was due to the $4.4 million
increase in before-tax income during fiscal 1997 as compared to fiscal 1996.
Management is anticipating that the Company's effective tax rate for fiscal
1998 will increase from the fiscal 1997 rate of 29.64% to around 32% or 33%.
This increase is expected as the result of the effects of a full year of IEB's
state tax rates combined with a full year of non-deductible expenses
associated with "goodwill" amortization. In addition, if the Company's average
market price continues to hold or rise above recent fourth quarter levels of
$20 to $21 per share, the non-deductible expense related to recording the
difference between the cost and the fair market value of released Employees
Stock Ownership Plan (ESOP) shares will be greater in fiscal 1998 resulting in
an increased tax provision and effective tax rate for future periods.

Comparison of Operating Results for the Years Ended March 31, 1996 and March
31, 1995

General. Net income increased $1.1 million, or 21.0%, from $5.2 million for
the year ended March 31, 1995, to $6.3 million for the year ended March 31,
1996. The year to year operating results were primarily affected by an
increase in net interest income combined with a decrease in losses from the
sale of loans and investments. Net interest income increased $2.57 million
from $15.03 million for the year ended March 31, 1995, to $17.6 million for
the year ended March 31, 1996, due in large part to a $48.5 million increase
in the Company's average balance of net interest-earning assets. For the year
ended March 31, 1996, net gains on sales of loans and securities totaled
$387,000 compared to net losses of $121,000 for the year ended March 31, 1995.
These increases were substantially offset by increases in operating expenses
and the provision for income taxes. The Company's return on average equity
decreased from 10.85% for the year ended March 31, 1995, to 6.62% for the year
ended March 31, 1996, which was expected due to the large increase in equity
from the stock offering.

PAGE
<PAGE>
Interest Income. Interest income for the year ended March 31, 1996, was $41.4
million compared to $33.7 million for the year ended March 31, 1995, an
increase of $7.76 million, or 23.1%. The increase in interest income was a
result of a $100.3 million growth in average balances of interest-earning
assets and a slight increase in the average yield on those assets from 7.58%
in fiscal 1995 to 7.61% in fiscal 1996. Average loans receivable increased by
$51.7 million, or 18.7%, in 1996. Interest income on loans increased by $4.69
million or 20.6%, reflecting the impact of increased loan volume and a 13
basis point increase in the average yield on the Company's loans. Loans
yielded 8.37% for the year ended March 31, 1996, compared to 8.24% for the
year ended March 31, 1995. Loan yields were enhanced by higher rates on new
originations and by upward adjustments on most ARM loans.

The average balance of mortgage-backed securities, investment securities,
daily interest-bearing deposits and FHLB stock increased by $48.6 million in
fiscal 1996, while interest income from those investments rose by $3.06
million compared to 1995. The average yield on mortgage-backed securities rose
slightly from 6.49% in 1995 to 6.65% in 1996. The average yield on
investment securities, on the other hand, declined from 6.80% in 1995 to 6.29%
in 1996, reflecting the temporary investment of conversion proceeds in lower
yielding short-term investments. Interest income on interest-bearing
deposits, including certificates and time deposits, increased from $290,000 in
1995 to $913,000 in 1996 as both the average balance and the average yield
increased. Earnings on FHLB stock increased by $108,000 reflecting an
increase of $1.16 million in the average balance of FHLB stock for fiscal year
1996 and an 82 basis point increase in the average yield on that stock.

Interest Expense. Interest expense for the year ended March 31, 1996, was
$23.3 million compared to $18.2 million for the year ended March 31, 1995, an
increase of $5.1 million, or 27.7%. The increase in interest expense was due
to the $51.8 million growth in average interest-bearing liabilities and a rise
in the average rate associated with these liabilities from 4.53% during the
year ended March 31, 1995, to 5.12% for the comparable 1996 period. The
increase in average interest-bearing liabilities in fiscal 1996 was largely
due to a $23.8 million increase in the average balance of FHLB advances.
Average FHLB advances totaled $66.3 million during the year ended March 31,
1996, as compared to $42.4 million during the year ended March 31, 1995,
resulting in a $1.5 million increase in related interest expense for 1996.
The average rate paid on those advances increased from 5.60% for fiscal 1995
to 5.80% for fiscal 1996. Average deposit balances increased from $352.8
million for the year ended March 31, 1995, to $380.6 million for the year
ended March 31, 1996. At the same time, the average rate paid on deposit
balances increased from 4.39% for the year ended March 31, 1995, to 4.99% for
the year ended March 31, 1996, primarily due to the delayed impact of
increases in the general level of market interest rates during the second half
of calendar year 1994. Deposit interest expense increased $3.5 million from
$15.5 million for the year ended March 31, 1995, to $19.0 million for the year
ended March 31, 1996. Other borrowings, which were primarily retail
repurchase agreements with customers, and the related interest expense
increased marginally in 1996, reflecting increases in both the average balance
and the average rate paid on these accounts. The average balance for other
borrowings including other repurchase agreements was $7.4 million for the year
ended March 31, 1995, compared to $7.6 million for the year ended March 31,
1996, and the related expense increased $92,000, from $377,000 to $469,000 for
the respective years.

Provision for Loan Losses. During the year ended March 31, 1996, the
Company's provision for loan losses was $524,000, compared to $391,000 for the
year ended March 31, 1995, an increase of $133,000. The increase in the
provision for estimated loan losses is primarily attributable to the overall
increase in net loans receivable from $299.4 million at March 31, 1995, to
$415.3 million at March 31, 1996. The allowance for loan losses, net of
charge-offs, increased by $622,000 to $4.1 million at March 31, 1996 compared
to $3.5 million at March 31, 1995.

Other Operating Income. Other operating income increased from $1.1 million
for the year ended March 31, 1995 to $1.7 million for the year ended March 31,
1996. The increase was primarily due to a $547,000 reduction in net losses
from sale of investments. Other operating income increases in 1996 included
loan servicing fees, which increased $95,000 to $799,000 in fiscal 1996 from
$704,000 in fiscal 1995. Additionally, there was a $99,000 increase in 1996
in other fees and service charges income, resulting primarily from
restructuring the fee schedule of deposit account charges and from increased
customer use of credit and debit cards. These increases were offset by a
$39,000 decrease in gains on sales of loans and a $132,000 decrease in
miscellaneous income.

PAGE
<PAGE>
Other Operating Expenses. Other operating expenses increased $361,000 from
$10.0 million for the year ended March 31, 1995, to $10.4 million for the
year ended March 31, 1996. The increase in non-interest operating expense for
the year ended March 31, 1996, primarily reflects increases resulting from
growth of the Company, including costs associated with two new branch
openings, an increase of $35,000 in SAIF deposit insurance premiums and
expected increases in legal, accounting and insurance expenses relating to
operating as a public company. The increase in other operating expenses was
somewhat reduced by an increased level of capitalized loan origination costs
which were $1.3 million for 1996 as compared to $1.1 million for 1995. In
addition, other operating expenses for the year ended March 31, 1996, included
a net gain of $87,000 from real estate operations compared to a $70,000 loss
in fiscal 1995. The ratio of other operating expenses to average assets was
1.84% for fiscal 1996 compared to 2.17% for fiscal 1995.

Income Taxes. Income tax expense was $2.6 million for the year ended March
31, 1996, compared to $1.3 million for the year ended March 31, 1995. The
increased provision for income taxes reflected the greater level of taxable
income and an increase in the Company's effective tax rate. This increase in
effective tax rate reflected FSBW's expected change in calculating its
deduction for bad debts for tax purposes, using the "experience" method as
compared to the "percentage of taxable income" method that was used in earlier
periods. The Company's effective tax rates for the years ended March 31, 1996
and 1995, were 29.62% and 21.86%, respectively.

Yields Earned and Rates Paid

The earnings of the Company depend largely on the spread between the yield on
interest-earning assets (primarily loans and investment securities) and the
cost of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Company's interest-earning
assets and interest-earning liability portfolio.

The table, Analysis of Net Interest Spread, sets forth, for the periods
indicated, information regarding average balances of assets and liabilities
as well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin, and
ratio of average interest-bearing assets to average interest-bearing
liabilities. Average balances for a period have been calculated using the
daily average during such period.

Changes in the economic and interest rate environment, as well as greater
competition and efficiencies in the market place and changes in asset and
liability mix caused the Company's average interest rate spread to decrease
from 3.05% in fiscal 1995 to 2.49% in fiscal 1996. Significantly
contributing to this lower spread was a sharp increase in certificate of
deposit costs from 5.13% to 1995 to 5.90% in 1996. Also contributing to
higher funding cost was an increased reliance on FHLB advances. In addition
the portion of the Companys' assets invested in relatively low yielding
short-term securities was somewhat higher in fiscal 1996 as the Company had
temporarily invested the proceeds of the stock conversion in these types of
assets. At the same time, net interest margin declined much less
dramatically, reflecting the impact of the no interest cost funding provided
by the increased equity. Management worked to offset this trend in fiscal
1997 by more effectively deploying and leveraging the additional capital and
by modestly changing the mix of portfolio loans made by FSBW to focus on
somewhat higher risk but higher yielding construction, commercial and consumer
lending. Counterbalancing to a degree this effort to increase asset yields
was a much greater use of higher costing FHLB advances and other borrowings as
a part of the Companys' strategy to leverage its strong capital position. In
addition the acquisition of IEB, a commercial community bank, which added
$32.1 million of non-interest-bearing deposits and a higher yielding
commercial/agribusiness loan portfolio, helped to reverse the declining
interest spread experienced in fiscal 1996. While the average interest rate
spread increased 34 basis points to 2.83% in fiscal 1997 from 2.49% in fiscal
1996, management does not anticipate that the spread will return in the near
future to the higher levels experienced in the past. Management believes that
increased net interest income will come primarily from increased volumes,
although continued changes in asset and liability mix and a slightly more
favorable interest rate environment may also add to net interest income.

PAGE
<PAGE>
<TABLE>
Analysis of Net Interest Spread
Years Ended March 31, (dollars in thousands)
1997 1996 1995
----------------------- ---------------------- --------------------------
Interest Interest Interest
& & &
Average Divi- Yield/ Average Divi- Yield/ Average Divi- Yield/
Balance dends Cost Balance dends Cost Balance dends Cost
------- ----- ---- ------- ----- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning
assets(1):
Mortgage
loans $498,578 $41,797 8.38% $324,400 $27,094 8.35% $273,580 $22,518 8.23%
Commer-
cial/
agri-
business
loans 30,120 2,829 9.39 886 76 8.58 954 67 7.02
Consumer
and other
loans 16,494 1,923 11.66 2,714 299 11.02 1,788 191 10.68
Total -------- ------- ------ -------- ------- ------ -------- ------- ------
loans 545,192 46,549 8.54 328,000 27,469 8.37 276,322 22,776 8.24
Mortgage-
backed
securi-
ties 181,148 12,420 6.86 107,847 7,170 6.65 87,979 5,707 6.49
Securities
and
deposits 124,592 7,455 5.98 104,281 6,463 6.20 76,684 4,970 6.48
FHLB
stock 11,222 868 7.73 4,365 307 7.03 3,206 199 6.21
Total -------- ------- ------ -------- ------- ------ -------- ------- ------
invest-
ment
securi-
ties 316,962 20,743 6.54 216,493 13,940 6.44 167,869 10,876 6.48
Total -------- ------- ------ -------- ------- ------ -------- ------- ------
interest-
earning
assets 862,154 67,292 7.81 544,493 41,409 7.61 444,191 33,652 7.58
Non- ------- ------ ------- ------ ------- ------
interest-
earning
assets 30,217 19,706 16,628
Total -------- -------- --------
assets $892,371 $564,199 $460,819
======== ======== ========
Interest-
bearing
liabilities:
Savings
accounts 41,114 1,183 2.88 48,581 1,557 3.20 42,931 1,344 3.13
Checking
and NOW
accounts
(2) 69,525 864 1.24 32,831 636 1.94 33,097 666 2.01
Money
market
accounts 61,426 2,077 3.38 31,760 1,014 3.19 34,918 1,059 3.03
Certificates
of
deposit 305,336 17,612 5.77 267,458 15,769 5.90 241,872 12,410 5.13
Total -------- ------- ------ -------- ------- ------ -------- ------- ------
deposits 477,401 21,736 4.55 380,630 18,976 4.99 352,818 15,479 4.39
Other
interest-
bearing
liabilities:
FHLB
advances 214,563 12,504 5.83 66,252 3,842 5.80 42,419 2,374 5.60
Other
borrow-
ings 37,971 2,132 5.61 7,620 469 6.15 7,424 377 5.08
Total -------- ------- ------ -------- ------- ------ -------- ------- ------
interest-
bearing
liabili-
ties 729,935 36,372 4.98 454,502 23,287 5.12 402,661 18,230 4.53
Non- ------- ------ ------- ------ ------- ------
interest-
bearing
liabili-
ties 14,507 15,213 10,507
Total -------- -------- --------
liabili-
ties 744,442 469,715 413,168
-------- -------- --------
Equity 147,929 94,484 47,651
Total -------- -------- --------
liabili-
ties and
equity $892,371 $564,199 $460,819
Net ======== ======== ========
interest
income $30,920 $18,122 $15,422
Interest ======= ======= =======
rate
spread 2.83% 2.49% 3.05%
Net ====== ====== ======
interest
margin 3.59% 3.33% 3.47%
Ratio of ====== ====== ======
average
interest-
earning
assets to
average
interest-
bearing
liabili-
ties 118.11% 119.80% 110.31%
====== ====== ======
- ---------------
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due.
(2) Average balances include non-interest-bearing deposits.

</TABLE>
PAGE
<PAGE>
<TABLE>
The table, Rate/Volume Analysis, sets forth the effects of changing rates and volumes on net interest income
of the Company. Information is provided with respect to (i) effects on interest income attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest income attributable
to changes in rate (changes in rate multiplied by prior volume); and (iii) effects on interest income
attributable to changes in rate and volume (change in rate multiplied by change in volume).

Rate/Volume Analysis

Year Ended March 31, 1997 Year Ended March 31, 1996
Compared to March 31, 1996 Compared to March 31, 1995
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ----------------------------
(dollars in thousands)
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) $ 107 $14,544 $ 52 $14,703 $ 333 $4,182 $ 61 $4,576
Commercial/agribusiness
loans(1) 8 2,508 237 2,753 14 (5) (1) 8
Consumer and other loans(1) 17 1,519 88 1,624 13 86 10 109
------- ------- ------- ------- ------- ------ ----- ------
Total loans(1) 132 18,571 377 19,080 360 4,263 70 4,693
Mortgage-backed securities 221 4,875 154 5,250 142 1,289 32 1,463
Securities and deposits (223) 1,259 (45) 991 (193) 1,622 64 1,493
FHLB stock 32 481 49 562 26 72 10 108
------- ------- ------- ------- ------- ------ ----- ------
Total net change in interest
income on interest-earning
assets 162 25,186 535 25,883 335 7,246 176 7,757
------- ------- ------- ------- ------- ------ ----- ------
Interest-bearing liabilities:
Deposits (1,643) 4,829 (426) 2,760 2,109 1,221 167 3,497
FHLB advances 16 8,602 44 8,662 85 1,335 48 1,468
Other borrowings (40) 1,867 (164) 1,663 80 10 2 92
Total net change in interest ------- ------- ------- ------- ------- ------ ----- ------
expense on interest-bearing
liabilities (1,667) 15,298 (546) 13,085 2,274 2,566 217 5,057
------- ------- ------- ------- ------- ------ ----- ------
Net change in net interest
income $ 1,829 $ 9,889 $ 1,080 $12,798 $(1,939) $4,680 $ (41) $2,700
======= ======= ======= ======= ======= ====== ===== ======

- -------------------
(1) Does not include interest on loans 90 days or more past due.

</TABLE>
PAGE
<PAGE>
Asset and Liability Management

The principal objectives of asset and liability management are to evaluate the
interest-rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to
reduce the vulnerability of its earnings and capital position to changes in
the level of interest rates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Management Committee, which is
comprised of members of the Company's senior management. The committee
closely monitors the Company's interest sensitivity exposure, asset and
liability allocation decisions, liquidity and capital positions, and local and
national economic conditions and attempts to structure the loan and investment
portfolios and funding sources of the Company to maximize earnings within
acceptable risk tolerances.

The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling, which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.

The interest rate sensitivity analysis performed by the Company incorporates
beginning of the period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. The Company believes the data and assumptions are realistic
representations of its portfolio and possible outcomes under the various
interest rate scenarios. Nonetheless, the interest rate sensitivity of the
Company's net interest income and net market value of equity could vary
substantially if different assumptions were used or if actual experience
differs from the assumptions used.

The Interest Rate Risk Indicators table sets forth, as of March 31, 1997, the
estimated changes in the Company's net interest income over a one year time
horizon and the estimated changes in market value of equity based on the
indicated interest rate environments.

Interest Rate Risk Indicators
Estimated Change in
------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- ----------------
(Dollars in thousands)
+400 $ (2,946) (8.2%) $ (45,557) (31.6%)
+300 (1,549) (4.3%) (35,752) (24.8%)
+200 (558) (1.5%) (24,135) (16.7%)
+100 42 0.1 % (11,789) (8.2%)
0 0 0 0 0
-100 (297) (0.8%) 10,550 7.3 %
-200 (1,057) (2.9%) 14,161 9.8 %
-300 (2,035) (5.6%) 11,604 8.0 %
-400 (3,331) (9.2%) 2,936 2.0 %
__________
(1) Assumes an instantaneous and sustained uniform change in interest rates
at all maturities.

PAGE
<PAGE>
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest sensitive assets exceeds
the amount of interest sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.

Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as ARM loans, have features that 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. Finally,
the ability of some borrowers to service their debt may decrease in the event
of a severe interest rate increase.

The Interest Sensitivity Gap table sets forth the amounts of interest-earning
assets and interest-bearing liabilities which are anticipated by the Company,
based upon certain assumptions, to reprice or mature in each of the future
periods shown. At March 31, 1997, total interest-earning assets maturing or
repricing within one year exceeded total interest-bearing liabilities maturing
or repricing in the same time period by $73.8 million, representing a one-year
gap to total assets ratio of 7.32%.

PAGE
<PAGE>
<TABLE>
The Interest Sensitivity Gap table presents the Company's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at March 31, 1997.

Interest Sensitivity Gap
Within 6 Months 1-3 3-5 5-10 Over 10
6 Months to One Year Years Years Years Years Total
-------- ----------- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Construction loans $ 41,251 $ 18,636 $ 21 $ -- $ -- $ -- $ 59,908
Fixed-rate mortgage loans 22,777 19,973 65,584 59,191 78,692 74,438 320,655
Adjustable-rate mortgage loans 118,007 73,504 4,327 7,340 -- -- 203,178
Fixed-rate mortgage-backed
securities 2,662 2,554 9,265 8,000 16,179 5,114 43,774
Adjustable-rate mortgage-
backed securities 128,098 2,858 61 -- -- -- 131,017
Fixed-rate commercial/
agribusiness loans 3,261 3,064 3,994 2,698 1,321 321 14,659
Adjustable-rate commercial/
agribusiness loans 35,415 -- -- -- -- -- 35,415
Consumer and other loans 8,465 1,465 7,246 5,563 822 59 23,620
Investment securities and
interest-bearing deposits 37,876 5,159 34,684 19,870 10,825 26,846 135,260
-------- -------- -------- -------- -------- -------- --------
Total rate-sensitive assets 397,812 127,213 125,182 102,662 107,839 106,778 967,486
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities(2):
Regular savings and NOW
accounts 15,537 15,538 36,254 36,254 -- -- 103,583
Money market deposit accounts 38,868 23,321 15,547 -- -- -- 77,736
Certificates of deposit 133,839 79,014 79,602 14,914 22,968 -- 330,337
FHLB advances 100,408 9,308 86,566 35,233 -- -- 231,515
Other borrowings 27,174 -- 25,000 -- -- -- 52,174
Retail repurchase agreements 6,076 2,139 -- 695 1,060 -- 9,970
-------- -------- -------- -------- -------- -------- --------
Total rate-sensitive
liabilities 321,902 129,320 242,969 87,096 24,028 -- 805,315
-------- -------- -------- -------- -------- -------- --------
Excess (deficiency) of
interest-sensitive assets
over interest-sensitive
liabilities $ 75,910 $ (2,107) $(117,787) $ 15,566 $ 83,811 $106,778 $162,171
======== ======== ========= ======== ======== ======== ========
Cumulative excess
(deficiency) of interest-
sensitive assets $ 75,910 $ 73,803 $ (43,984) $(28,418) $ 55,393 $162,171 $162,171
======== ======== ========= ======== ======== ======== ========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 123.58% 116.36% 93.66% 96.36% 106.88% 120.14% 120.14%
======== ======== ========= ======== ======== ======== ========
Interest sensitivity gap to
total assets 7.53% (0.21%) (11.69%) 1.54% 8.32% 10.60% 16.09%
======== ======== ========= ======== ======== ======== ========
Ratio of cumulative gap to
total assets 7.53% 7.32% (4.37%) (2.82%) 5.50% 16.09% 16.09%
======== ======== ========= ======== ======== ======== ========
(footnotes on following page)

</TABLE>
PAGE
<PAGE>
Footnotes for Interest Sensitivity Gap table
- --------------------------------------------
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the periods in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing loans.
Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.

(2) Adjustable- and variable-rate liabilities are included in the period in
which interest rates are next scheduled to adjust rather than in the period
they are due to mature. Although the Banks' regular savings, demand, NOW, and
money market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these
accounts have been assigned decay rates to reflect their longer effective
maturities. If all of these accounts had been assumed to be short-term, the
one year cumulative gap of interest-sensitive assets would have been negative
$14.3 million or (1.41%) of total assets. Interest- bearing liabilities for
this table exclude certain non-interest bearing deposits which are included in
the average balance calculations in the earlier Analysis of Net Interest
Spread.

Liquidity and Capital Resources

The Company's primary sources of funds are deposits, borrowings, proceeds from
loan principal and interest payments and sales of loans, and the maturity of
and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by market interest rates, economic conditions and
competition.

The primary investing activity of the Company, through its subsidiaries, is
the origination and purchase of mortgage loans and, since the acquisition of
IEB, commercial/agribusiness and consumer loans. During the years ended March
31, 1997, 1996 and 1995, the Company closed or purchased loans in the amounts
of $387.8 million, $274.2 million and $220.2 million, respectively. This
activity was funded primarily by principal repayments on loans and securities,
sales of loans, increases in FHLB advances, other borrowings, and deposit
growth. During 1996 additional funding was provided from the $98.6 million of
net proceeds from the Company's initial stock offering. For the years ended
March 31, 1997, 1996 and 1995, principal repayments on loans totaled $207.5
million, $111.5 million and $98.5 million respectively. During the three
years ended March 31, 1997, 1996 and 1995 the Company sold $36.9 million,
$45.5 million and $62.3 million, respectively, of mortgage loans. FHLB
advances increased $52.1 million, $116.7 million and $52.6 million,
respectively, for the same three years. During the three years ended March
31, 1997, 1996 and 1995 other borrowings increased $41.9 million, $12.0
million and $130,000. Net deposit growth, excluding $134.6 million of
deposits acquired with IEB, was $36.3 million, $13.7 million, and $7.8 million
for the years ended March 31, 1997, 1996 and 1995, respectively.

The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to accommodate deposit withdrawals, to
support loan growth, to satisfy financial commitments and to take advantage
of investment opportunities. During fiscal years 1997, 1996 and 1995, the
Banks used their sources of funds primarily to fund loan commitments, to
purchase securities, and to pay maturing savings certificates and deposit
withdrawals. At March 31, 1997, the Banks had outstanding loan commitments
totaling $36.8 million and undisbursed loans in process totaling $52.4
million. The Banks generally maintain sufficient cash and readily marketable
securities to meet short term liquidity needs. FSBW maintains a credit
facility with the FHLB-Seattle, which provides for advances which in aggregate
may equal up to 40% of FSBW's assets, which as of March 31, 1997, could give a
total credit line of $326.0 million. Advances under this credit facility
totaled $231.5 million, or 28.4% of FSBW's assets at March 31, 1997. IEB also
maintains credit lines with various institutions that would allow it to borrow
up to $6.0 million.

At March 31, 1997, savings certificates amounted to $330.3 million, or 60.6%,
of the Banks' total deposits, including $212.9 million which were scheduled to
mature by March 31, 1998. Historically, the Banks have been able to retain a
significant amount of their deposits as they mature. Management believes it
has adequate resources to fund all loan commitments from savings deposits and
FHLB-Seattle advances and sale of mortgage loans and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.

Capital Requirements

The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks, as state
chartered federally insured institutions, is subject to the capital
requirements established by the FDIC.

PAGE
<PAGE>
The capital adequacy requirements are quantitative measures established by
regulation that require the Company and FSBW and IEB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of Tier 1 total capital to
risk-weighted assets as well as Tier 1 leverage capital to average assets.

At March 31, 1997 the Company and its banking subsidiaries, FSBW and IEB,
exceeded all current regulatory capital requirements and the Banks were
categorized at the highest regulatory standard, "well-capitalized."

The table Regulatory Capital Ratios shows the regulatory capital ratios of the
Company, FSBW and IEB and minimum regulatory requirements for the Banks to be
categorized as "well-capitalized":

Regulatory Capital Ratios

The "Well-capitalized"
Capital Ratios Company FSBW IEB Minimum Ratio
- -------------- ------- ---- --- -------------
Total capital to risk-
weighted assets 26.77% 23.68% 19.08% 10.00%
Tier 1 capital to risk-
weighted assets 25.52 22.44 17.91 6.00
Tier 1 leverage capital
to average assets 13.68 11.56 12.08 5.00

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which requires the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.

ITEM 8 - Financial Statements and Supplementary Data

For financial statements, see index on page 53.

ITEM 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

Not Applicable

PAGE
<PAGE>
Part III

ITEM 10 - Directors and Executive Officers of the Registrant

The information contained under the section captioned "Proposal I - Election
of Directors" in the Registrant's Proxy Statement is incorporated herein by
reference.

Information regarding the executive officers of the Registrant is provided
herein in Part I, Item 1 hereof.

Reference is made to the cover page of this Annual Report and the section
captioned "Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement for the Annual Meeting of the Stockholders regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934.

ITEM 11- Executive Compensation

Information regarding management compensation and transactions with management
and others is incorporated by reference to the section captioned "Proposal I -
Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders.

ITEM 12 - Security Ownership of Certain Beneficial Owners and Management

{a} Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement for the Annual Meeting of Stockholders.

{b} Security Ownership of Management

{c} Changes in Control

The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.

ITEM 13 - Certain Relationships and Related Transactions

The information contained under the sections captioned "Transactions with
Management" in the Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.

PAGE
<PAGE>
Part IV

ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K

{a} {1} Financial Statements

See Index to Consolidated Financial Statements on page 55.

{2} Financial Statement Schedules

All financial statement schedules are omitted because that are
not applicable or not required, or because the required
information is included in the consolidated financial statements
or the notes thereto or in Part 1, Item 1.

{b} Reports on 8-K:

Reports on form 8-k filed during the year ended March 31, 1997
are as follows:

Date Filed Purpose
---------- -------
August 16, 1996 Announcing the completed
acquisition of Inland Empire Bank
by First Savings Bank of Washington
Bancorp. Inc. on August 1, 1996.

October 15, 1996 Submissal of additional required
financial information on
acquisition of Inland Empire Bank
by First Savings Bank of
Washington, Bancorp, Inc.

{c} Exhibits

See Index of Exhibits on page 91.

PAGE
<PAGE>
Signatures of Registrant

Pursuant to the requirements of the Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on June 30, 1997.

FIRST SAVINGS BANK OF WASHINGTON
BANCORP, INC.

/s/ Gary Sirmon
-------------------------------------
Gary Sirmon
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on June 30, 1997.

/s/ Gary Sirmon /s/ D. Allan Roth
- ------------------------------ ------------------------------------
Gary Sirmon D. Allan Roth
President and Chief Executive Executive Vice President and Chief
Officer; Director Financial Officer
(Principle Executive Officer) (Principle Financial and Accounting
Officer)

/s/ Wilber Pribilsky /s/ Robert D. Adams
- ----------------------------- -------------------------------------
Wilber Pribilsky Robert D. Adams
Chairman of the Board Director

/s/ David Casper /s/ Morris Ganguet
- ----------------------------- -------------------------------------
David Casper Morris Ganguet
Director Director

/s/ R. R. "Pete" Reid /s/ Marvin Sundquist
- ----------------------------- -------------------------------------
R. R. "Pete" Reid Marvin Sundquist
Director Director

/s/ Dean W. Mitchell /s/ Jesse G. Foster
- ----------------------------- -------------------------------------
Dean W. Mitchell Jesse G. Foster
Director Director

<PAGE> <PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
(Item 8 and Item 14 (a) (1))

Independent Auditors' Report. . . . . . . . . . . . . . . . . . . 56
Consolidated Statements of Financial Condition
as of March 31, 1997 and 1996. . . . . . . . . . . . . . . . . . 57
Consolidated Statements of Income for the Years Ended
March 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 58
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 1997, 1996 and 1995. . . . . . . . . . . . 59
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . 61
Notes to the Consolidated Financial Statements . . . . . . . . . . 63

PAGE
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors
First Savings Bank of Washington Bancorp, Inc. and Subsidiaries
Walla Walla, Washington

We have audited the accompanying consolidated statements of financial
condition of First Savings Bank of Washington Bancorp, Inc. and subsidiaries
(the Company) as of March 31, 1997 and 1996, and the related consolidated
statements of income, equity, and cash flows for each of the three years in
the period ended March 31, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Company as of March 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1997 in conformity with generally
accepted accounting principles.

/s/Deloitte and Touche LLP

DELOITTE & TOUCHE LLP
May 9, 1997
Seattle, Washington

PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
March 31, 1997 and 1996

ASSETS
1997 1996

CASH AND DUE FROM BANKS $ 24,488 $ 9,026
SECURITIES AVAILABLE FOR SALE,
cost $288,142 and $290,515 287,516 291,687
SECURITIES HELD TO MATURITY,
fair value $987 and $2,059 987 2,059
LOANS RECEIVABLE HELD FOR SALE,
fair value $2,940 and $1,558 2,940 1,558
LOANS RECEIVABLE, net of the allowance
for losses of $6,748 and $4,051 642,941 413,737
ACCRUED INTEREST RECEIVABLE 6,950 4,627
REAL ESTATE HELD FOR SALE, net 1,057 712
FEDERAL HOME LOAN BANK STOCK 12,807 9,030
PROPERTY AND EQUIPMENT, net 10,534 6,582
COSTS IN EXCESS OF NET ASSETS ACQUIRED 11,906 --
DEFERRED TAX ASSET 1,220 240
OTHER ASSETS 4,287 3,918
---------- --------
$1,007,633 $743,176
========== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Interest-bearing $ 508,258 $ 367,248
Non-interest-bearing 36,709 6,816
---------- ----------
544,967 374,064

ADVANCES FROM FEDERAL HOME LOAN BANK 231,515 179,419
OTHER BORROWINGS 62,185 19,652
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 4,112 3,563
ACCRUED EXPENSES AND OTHER LIABILITIES 11,086 8,319
DEFERRED COMPENSATION 2,814 1,618
INCOME TAXES PAYABLE 2,318 2,399
---------- ----------
858,997 589,034
STOCKHOLDERS' EQUITY:
Preferred stock - $0.01 par value,
500,000 shares authorized,
no shares issued -- --
Common stock - $0.01 par value,
25,000,000 shares authorized,
10,910,625 shares issued:
10,518,982 shares and
10,910,625 shares outstanding
at March 31, 1997 and
March 31, 1996, respectively 109 109
Additional paid-in capital 107,844 107,370
Retained earnings 62,572 55,343
Valuation reserve for securities
available for sale (401) 774
Treasury stock, at cost: 391,643
shares at March 31, 1997 and none
at March 31, 1996 (6,954) --
Unearned shares of common stock
issued to employee stock ownership
plan trust
775,105 and 833,127 restricted
shares outstanding
at March 31, 1997 and
March 31, 1996, respectively (7,751) (8,331)
Shares held in trust for
stock-related compensation plans (6,783) (1,123)
---------- ----------
148,636 154,142
---------- ----------
$1,007,633 $ 743,176
========== ==========

See notes to consolidated financial statements

PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except for earnings per share data)
For the years ended March 31, 1997, 1996 and 1995

1997 1996 1995
---- ---- ----
INTEREST INCOME:
Loans receivable $ 46,549 $ 27,469 $ 22,776
Mortgage-backed securities 12,420 7,170 5,707
Securities and deposits 8,323 6,770 5,169
---------- --------- ---------
67,292 41,409 33,652
---------- --------- ---------

INTEREST EXPENSE:
Deposits 21,736 18,976 15,479
Federal Home Loan Bank
advances 12,504 3,842 2,374
Other borrowings 2,132 469 377
---------- --------- ---------
36,372 23,287 18,230
---------- --------- ---------
Net interest income
before provision for
loan losses 30,920 18,122 15,422
PROVISION FOR LOAN LOSSES 1,423 524 391
---------- --------- ---------

Net interest income 29,497 17,598 15,031

OTHER OPERATING INCOME:
Loan servicing fees 807 799 704
Other fees and service
charges 1,534 458 359
Gain on sale of loans 699 607 646
Gain (loss) on sale of
securities 2 (220) (767)
Miscellaneous 114 24 156
---------- --------- ---------
Total other operating income 3,156 1,668 1,098

OTHER OPERATING EXPENSES:
Salary and employee benefits 11,230 6,299 6,231
Less capitalized loan
origination costs (1,666) (1,271) (1,134)
Occupancy 1,428 998 912
Outside computer services 914 717 672
Real estate operations 4 (87) 70
Advertising 448 346 435
Deposit insurance 2,884 843 808
Amortization of costs in
excess of net assets acquired 592 -- --
Miscellaneous 3,582 2,538 2,028
---------- --------- ---------
Total other operating expenses 19,416 10,383 10,022
---------- --------- ---------

Income before provision
for income taxes and
cumulative effect of
change in accounting 13,237 8,883 6,107

PROVISION FOR INCOME TAXES 3,923 2,631 1,335
Income before cumulative ---------- --------- ---------
effect of change in
accounting 9,314 6,252 4,772

CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INVESTMENT SECURITIES,
net of income taxes of $204 -- -- 396
---------- --------- ---------

NET INCOME $ 9,314 $ 6,252 $ 5,168
========= ========= =========
Net income per common shares:
Primary $ 0.95 N/A N/A
Fully diluted $ 0.95 N/A N/A
See notes to consolidated financial statements

PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended March 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
Valuation Shares
res- held
erve in
for trust
secur- Unearned Treasury for
Common Stock Addi- ities ESOP shares Stock stock
------------ tional avail- ------------- ------------- related Total
Number At paid able Number Carry- Number Carry- Compen- stock-
of par -in Retained for of ing of ing sation holders'
Shares value capital earnings sale shares value shares value plans equity
------ ----- ------- -------- ----- ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1994 - - $ - - $ - - $44,931 $ - - - - $ - - - - $ - - $ - - $44,931

Cumulative effect
of change in
accounting for
securities
available
for sale, net
of federal
income taxes 48 48

Net income 5,168 5,168

Change in
valuation
reserve for
securities
available
for sale,
net of
income
taxes 104 104

BALANCE, March 31, 1995 - - $- - $ - - $50,099 $ 152 - - $ - - - - $ - - $ - - $50,251

Proceeds from sale
of stock in
initial offering,
net of underwriting
costs 10,038 100 98,533 98,633

Sale of stock to ESOP
Proceeds 9 8,719 (8,728)
Shares 873 (873)
Net income 6,252 6,252

Change in valuation
reserve for
securities
available for
sale, net of
income taxes 622 622

Cash dividends on stock
($.10/share cumulative) (1,008) (1,008)

Release of earned
ESOP shares 118 40 397 515
Forfeiture or net
change in number
and/or carrying
amount of shares
held in trust
for compensation
plans (1,123) (1,123)
------ ---- -------- ------- ----- ----- -------- ---- ------ -------- --------
BALANCE,March 31, 1996 10,911 $109 $107,370 $55,343 $ 774 (833) $(8,331) - - $ - - $(1,123) $154,142
====== ==== ======== ======= ===== ===== ======== ==== ====== ======== ========
See notes to consolidated financial statements.

60
</TABLE>
PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended March 31, 1997, 1996 and 1995
(in thousands) (continued)
<TABLE>
Valuation Shares
res- held
erve in
for trust
secur- Unearned Treasury for
Common Stock Addi- ities ESOP shares Stock stock
------------ tional avail- ------------- ------------- related Total
Number At paid able Number Carry- Number Carry- Compen- stock-
of par -in Retained for of ing of ing sation holders'
Shares value capital earnings sale shares value shares value plans equity
------ ----- ------- -------- ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1996
(forward) 10,911 $ 109 $107,370 $55,343 $ 774 (833) $(8,331) - - $ - - $(1,123)$154,142

Net income 9,314 9,314

Change in valuation
reserve for
securities available
for sale, net of
income taxes (1,175) (1,175)

Cash dividends on stock
($.22/share cumulative) (2,085) (2,085)

Purchase of treasury stock (795)(12,905) (12,905)

Treasury stock reissued to
MRP compensation plan 57 404 5,957 (6,014)

Release of earned ESOP
shares 417 58 580 997

Amortization of
compensation related to MRP 902 902

Forfeiture or net change
in the number and /or
carrying amount of
shares held in trust
for compensation plans (1) (6) (548) (554)
------ ----- -------- ------- ------- ----- -------- ---- ------- ------ --------
BALANCE,
March 31, 1997 10,911 $ 109 $107,844 $62,572 $ (401) (775) $(7,751) (392) (6,954)$(6,783)$148,636
====== ===== ======== ======= ======= ===== ======== ===== ======= ======== ========

61
</TABLE>
PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended March 31, 1997, 1996 and 1995

1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 9,314 $ 6,252 $ 5,168
Adjustments to reconcile
net income to net cash
provided by operating activities:
Cumulative effect of change in
accounting - - - - (396)
Deferred taxes (315) (240) - -
Depreciation 744 477 411
Loss (gain) on sale of securities (2) 220 767
Amortization of costs in excess
of net assets acquired 592 - - - -
Amortization of MRP compensation
liability 902 - - - -
Loss (gain) on sale of loans (699) (607) (646)
Net change in deferred loan fees,
premiums and discounts 792 (347) 51
Loss (gain) on disposal of real
estate held for sale 62 - - - -
Amortization of purchased mortgage
servicing rights 72 76 39
Net amortization of premiums and
discounts on investments (595) 152 16
Provision for loan and real
estate held for sale losses 1,423 454 516
FHLB stock dividend (868) (306) (199)
Cash provided (used) in operating
assets and liabilities:
Loans held for sale 665 1,022 6,007
Accrued interest (335) (1,316) (230)
Other assets 90 (759) (10)
Deferred compensation 258 510 3
Accrued expenses and other
liabilities 546 2,243 (53)
Income taxes payable (256) 1,379 (496)
----------- ----------- ----------
Net cash provided by
operating activities 12,390 9,210 10,948
----------- ----------- ----------

INVESTING ACTIVITIES:
Purchase of securities available
for sale (485,548) (554,799) (18,007)
Principal repayments and
maturities of securities
available for sale 534,177 408,063 4,115
Sales of securities available
for sale 769 21,183 19,439
Purchase of securities held
to maturity - - (2,215) (32,612)
Purchase of FHLB stock (2,909) (4,990) (565)
Principal repayments and
maturities of securities
held to maturity 1,092 4,600 16,531
Purchase of mortgage servicing
rights - - (176) (366)
Loans closed - net (270,240) (208,303) (1,468)
Purchase of loans and
participating interest in loans (117,584) (65,929) (218,745)
Sale of loans and participating
interest in loans 36,942 45,523 62,317
Principal repayments on loans 207,526 111,547 98,547
Disposition of property,
equipment and real estate
acquired for development 5 - - 22
Purchase of property and equipment (1,463) (1,272) (1,108)
Additional investment in real
estate held for sale - - (34) - -
Basis of real estate held for
sale acquired in settlement of
loans and disposed of during
the year 652 658 32
Acquisition of IEB, net of cash
acquired (17,289) - - - -
Funds transferred to deferred
compensation plans (94) (858) - -
---------- ---------- ---------
Net cash used by investing
activities $ (113,964) $ (247,010) $ (71,868)
---------- ---------- ---------
Continued on next page

PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended March 31, 1997, 1996 and 1995

(Continued from prior page)

1997 1996 1995
---- ---- ----
FINANCING ACTIVITIES:

Proceeds from issuance of common stock $ - - $ 107,361 $ - -
Funding provided to ESOP for purchase
of common stock - - (8,728) - -
Compensation expense recognized for
shares released for allocation to
participants of the ESOP:
Original basis of shares 580 397 - -
Excess of fair value of
released shares over basis 417 118 - -
Increase (decrease) in deposits 36,293 13,712 7,805
Proceeds from FHLB advances 600,327 480,152 309,839
Repayment of FHLB advances (548,231) (363,444) (257,286)
Proceeds from reverse repurchase
borrowings 42,444 9,863 - -
Repayment of reverse repurchase
borrowings (133) - - -
Cash dividend paid (1,907) (504) - -
Increase (decrease) in other borrowings (398) 2,162 130
Increase (decrease) in borrowers'
advances for taxes and insurance 549 232 346
Purchase of treasury stock (12,905) - - - -
--------- -------- --------
Net cash provided by financing
activities 117,036 241,321 60,834
--------- -------- --------

NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 15,462 3,529 (86)
CASH AND DUE FROM BANKS, BEGINNING
OF PERIOD 9,026 5,497 5,583
--------- -------- --------
CASH AND DUE FROM BANKS, END OF PERIOD $ 24,488 $ 9,026 $ 5,497
========= ======== ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 35,744 $ 22,701 $ 18,068
Taxes paid $ 4,494 $ 1,496 $ 2,114
Non-cash transactions:
Loans, net of discounts,
specific loss allowances
and unearned income
transferred to real estate
held for sale $ 1,059 $ 678 $ - -
Securities transferred
from held to maturity to
available for sale $ - - $142,519 $ 20,249
Net change in accrued
dividends payable $ 178 $ 504 $ - -
Net change in unrealized
gain (loss) in deferred
compensation trust and
related liability $ 475 $ 284 $ - -
Treasury stock reissued to MRP $ 6,014 $ - - $ - -
Treasury stock forfeited by MRP $ 6 $ - - $ - -

PAGE
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1997, 1996 and 1995

Note 1: SUMMARY OF ACCOUNTING POLICIES

Basis for Presentation: First Savings Bank of Washington Bancorp, Inc. (the
Company) is a Bank holding company incorporated in the state of Delaware. The
Company was organized for the purpose of acquiring all of the capital stock of
First Savings Bank of Washington (FSBW) upon its reorganization from the
mutual holding company form of organization to the stock holding company form
of organization.

During the year ended March 31, 1996 the Company completed the sale of
10,910,625 shares of its common stock at $10.00 per share through subscription
and community offerings to the FSBW depositors, Board of Directors,
management, employees and the public and used approximately 50% of the net
proceeds from such sales to purchase all of the FSBW common stock issued in
the FSBW conversion to stock form. Such business combination was accounted
for at historical cost in a manner similar to a pooling of interests.

On August 1, 1996 the Company acquired Inland Empire Bank (IEB) of Hermiston,
Oregon for $32.8 million. The acquisition of IEB was treated as a purchase
for accounting purposes. See Note 2 for additional information on the
acquisition of IEB.

At March 31, 1997, First Savings Bank of Washington Bancorp, Inc., is
primarily engaged in the business of planning, directing and coordinating the
business activities of its wholly owned subsidiaries, First Savings Bank of
Washington and Inland Empire Bank (together, the Banks). FSBW is a
Washington-chartered savings bank the deposits of which are insured by the
Federal Deposit Insurance Corporation (FDIC) under the Savings Association
Insurance Fund (SAIF). FSBW conducts business from its main office in Walla
Walla, Washington and its sixteen branch offices and three loan production
offices located in southeast, central, north central and western Washington.
IEB is an Oregon-chartered commercial bank whose deposits are insured by the
FDIC under the Bank Insurance Fund (BIF). IEB conducts business from its main
office in Hermiston, Oregon and its five branch offices and two loan
production offices located in northeast Oregon. The Company's only significant
assets are the capital stock of its subsidiaries, its loan to FSBW's ESOP (see
Note 15) and the portion of the net proceeds retained from the offering. The
Company has no significant liabilities.

The Company and its Bank subsidiaries are subject to regulation by the Federal
Reserve Board (FRB) and the FDIC. In addition FSBW and IEB are subject to the
state banking regulations of Washington and Oregon, respectively.

Nature of Business: The operating results of the Company depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets, consisting of loans and securities, and interest
expense on interest-bearing liabilities, composed primarily of deposits and
borrowings. Net interest income is a function of the Company's interest rate
spread, which is the difference between the yield earned on interest-earning
assets and the rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to the
average balance of interest-bearing liabilities.

FSBW is a community oriented savings bank which has traditionally offered a
wide variety of deposit products to its retail customers while concentrating
its lending activities on real estate loans. Lending activities have been
focused primarily on the origination of loans secured by one- to four-family
residential dwellings, including an emphasis on loans for construction of
residential dwellings. FSBW's primary business is originating loans for
portfolio in its primary market area, which consists of southeast, central,
north central, and western Washington state. FSBW's wholly owned subsidiary,
Northwest Financial Corporation, provides trustee services for FSBW, is
engaged in real estate sales and receives commissions from the sale of
annuities.

PAGE
<PAGE>
IEB is a community oriented commercial bank, chartered in the state of Oregon.
IEB's lending activities consist of granting agribusiness, commercial and
consumer loans to customers throughout the northeastern Oregon region. IEB
has two wholly owned subsidiaries: Pioneer American Property Company, which
owns a building that is leased to IEB, and Inland Securities Corporation,
which previously made a market for IEB's stock but is currently inactive.
In addition to interest income on loans and securities, the Banks receive
other income from deposit service charges, loan origination and servicing fees
and from the sale of loans and investments. FSBW has sought to increase its
other income by retaining loan servicing rights on some of the loans that it
has sold and by purchasing mortgage servicing rights.

Principles of Consolidation: The consolidated financial statements include
the accounts of First Savings Bank of Washington Bancorp, Inc. and its
wholly-owned subsidiaries First Savings Bank of Washington and Inland Empire
Bank. All material intercompany transactions, profits and balances have been
eliminated.

Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial
statements. The Company has used significant estimates in determining
reported reserves and allowances for loan losses, tax liabilities, and other
contingencies.

Securities: Effective April 1, 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115,
securities are classified as held to maturity when the Company has the ability
and positive intent to hold them to maturity. Securities classified as
available for sale are available for future liquidity requirements and may be
sold prior to maturity.

Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts to maturity. Unrealized losses on
securities held to maturity due to fluctuations in fair value are recognized
when it is determined that an other than temporary decline in value has
occurred. Unrealized gains and losses on securities available for sale are
excluded from earnings and are reported net of tax as a separate component of
stockholders' equity until realized. Realized gains and losses on sale are
computed on the specific identification method and are included in operations
on the trade date sold.

In the fiscal year ended March 31, 1995, as provided by SFAS No. 115, the
cumulative unrealized losses which had previously been recorded for securities
were, upon classification of such securities as available for sale, reversed
through the statement of income with a corresponding valuation allowance for
the unrealized losses, net of federal income taxes, established as a separate
component of equity. This reclassification of securities increased net income
for 1995 by $396,000 and decreased equity at April 1, 1994, by an equal
amount. With the adoption of this standard, FSBW also reclassified certain
securities previously recorded as held to maturity to available for sale.
This reclassification resulted in a $444,000 unrealized gain, net of tax,
which increased equity at April 1, 1994. The net effect of adopting this
standard resulted in a net increase of equity in the amount of $48,000 at
April 1, 1994.

Loans Receivable: The Banks originate mortgage loans for both portfolio
investment and sale in the secondary market. At the time of origination,
mortgage loans are designated as held for sale or held for investment. Loans
held for sale are stated at lower of cost or estimated fair value determined
on an aggregate basis. The Banks also originate commercial, financial,
agribusiness and installment credit loans for portfolio investment. Loans
receivable not designated as held for sale are recorded at the principal
amount outstanding, net of allowance for loan losses, deferred fees,
discounts, and premiums. Premiums, discounts and deferred loan fees are
amortized to maturity using the level yield methodology.

Interest is accrued as earned unless management doubts the collectibility of
the loan or the unpaid interest. Interest accruals are generally discontinued
when loans become 90 days past due for interest. All previously accrued but
uncollected interest is deducted from interest income upon transfer to
nonaccrual status. Future collection of interest is included in interest
income based upon an assessment of the likelihood that the loans will be
repaid or recovered. A loan may be put in nonaccrual status sooner than this
standard would dictate if, in management's judgment, the loan may be
uncollectible. Such interest is then recognized as income only if it is
ultimately collected.

PAGE
<PAGE>
Costs in Excess of Net Assets Acquired: Costs in excess of net assets
acquired ("goodwill") is an intangible asset arising from the purchase of IEB.
It is being amortized on a straight line basis over the 14 year period of
expected benefit. The Company periodically evaluates goodwill for impairment.
Mortgage Servicing Rights: In May 1995, the Financial Accounting Standards
Board (FASB) issued SFAS No. 122, Accounting for Mortgage Servicing Rights.
The statement eliminates the distinction between servicing rights that are
purchased and those that are retained upon the sale or securitization of
loans. The statement requires mortgage servicers to recognize the servicing
rights on loans as separate assets, no matter how acquired. Banks that sell
or securitize loans and retain the servicing rights are required to allocate
the total cost of the loans between servicing rights and loans based on
relative fair values if their values can be estimated. The Banks' adoption of
SFAS No. 122 as of April 1, 1996 did not materially impact the Banks'
operations.

Purchased servicing rights represent the cost of acquiring the right to
service mortgage loans. Originated servicing rights are recorded when
mortgage loans are originated and subsequently sold or securitized with the
servicing rights retained. The total cost of the mortgage loans is allocated
to the servicing rights and the loans (without the servicing rights) based on
relative fair values. The cost relating to purchased and originated servicing
is capitalized and amortized in proportion to, and over the period of,
estimated future net servicing income.

The Banks assess the fair value and impairment of unamortized remaining
servicing rights on a quarterly basis by using secondary market quotes for
comparable packages of serviced loans and also use a valuation model that
calculates the present value of future cash flows using market discount rates
and market based assumptions for prepayment speeds, servicing costs and
ancillary income.

In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, effective
for transactions occurring after December 31, 1996. SFAS No. 125 superseded
SFAS No. 122 and amended SFAS No. 65, Accounting for Certain Mortgage Banking
Activities to eliminate the distinction between normal and excess servicing
rights. The Banks adopted SFAS No. 125 on January 1, 1997, and account for
their mortgage servicing rights accordingly.

Allowance for Loan Losses: The adequacy of general and specific reserves is
based on management's continuing evaluation of the pertinent factors
underlying the quality of the loan portfolio, including actual loan loss
experience and current and anticipated economic conditions. As of April 1,
1995, the Banks adopted SFAS No. 114, Accounting by Creditors for Impairment
of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan
- - Income Recognition and Disclosures, an amendment of SFAS No. 114. This
standard is applicable to all loans except large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment. Loans that
are collectively evaluated for impairment by the Banks include residential
real estate and consumer loans. Residential construction and land, commercial
real estate and commercial business loans are individually evaluated for
impairment. Factors involved in determining impairment include, but are not
limited to, the financial condition of the borrower, value of the underlying
collateral and current status of the economy. These statements require that
impaired loans that are within their scope be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of collateral if the loan is collateral dependent.
Subsequent changes in the measurement of impaired loans shall be included
within the provision for loan losses in the same manner in which impairment
initially was recognized or as a reduction in the provision that would
otherwise be reported. The adoption of these statements had no material
impact on the Banks' or the Company's financial condition or results of
operations. Prior to the adoption of these statements a reserve for specific
losses was provided for loans when any significant, permanent decline in value
was deemed to have occurred. As of March 31, 1997, the Banks had no impaired
loans as defined by the statement.

General loan loss reserves are established to provide for inherent loan
portfolio risks not specifically provided for. The level of general reserves
is based on analysis of potential exposures existing in the Banks' loan
portfolios including evaluation of historical trends, current market
conditions and other relevant factors identified by management at the time the
financial statements are prepared. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.

PAGE
<PAGE>
Real Estate Held for Sale: Property acquired by foreclosure or deed in lieu of
foreclosure is recorded at the lower of estimated fair value, less cost to
sell, or the principal balance of the defaulted loan. Development,
improvement, and direct holding costs relating to the property are
capitalized. The carrying value of such property is continuously evaluated by
management and, if necessary, allowances are established to reduce the
carrying value to net realizable value. Gains or losses at the time the
property is sold are charged or credited to operations in the period in which
they are realized. The amounts the Banks will ultimately recover from real
estate held for sale may differ substantially from the carrying value of the
assets because of future market factors beyond the Banks' control or because
of changes in the Banks' strategy for recovering the investment.

Depreciation: The provision for depreciation is based upon the straight-line
method applied to individual assets and groups of assets acquired in the same
year at rates adequate to charge off the related costs over their estimated
useful lives.

Buildings and improvements . . . . . . . . . . . . . . 10-30 years
Furniture, equipment and software . . . . . . . . . . . .3-10 years

Routine maintenance, repairs, and replacement costs are expensed as incurred.
Expenditures which materially increase values or extend useful lives are
capitalized.

Loan Origination and Commitment Fees: Loan origination fees, net of certain
specifically defined direct loan origination costs, are deferred and
recognized as an adjustment of the loans' interest yield using the level
interest yield method over the contractual term of each loan adjusted for
actual loan prepayment experience. Net deferred fees or costs related to loans
held for sale are recognized in income at the time the loans are sold. Loan
commitment fees are deferred until the expiration of the commitment period
unless management believes there is a remote likelihood that the underlying
commitment will be exercised, in which case the fees are amortized to fee
income using the straight-line method over the commitment period. If a loan
commitment is exercised, the deferred commitment fee is accounted for in the
same manner as a loan origination fee. Deferred commitment fees associated
with expired commitments are recognized as fee income.

Income Taxes: The Company files a consolidated income tax return including all
of its wholly owned subsidiaries on a calendar year basis. Income taxes are
accounted for using the asset and liability method as set forth in SFAS No.
109. Under this method, a deferred tax asset or liability is determined based
on the enacted tax rates which will be in effect when the differences between
the financial statement carrying amounts and tax bases of existing assets and
liabilities are expected to be reported in the Company's income tax returns.
The deferred tax provision for the year is equal to the change in the deferred
tax liability from the beginning to the end of the year. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
of change. Where state income tax laws do not permit consolidated income tax
returns, applicable state income tax returns are filed.

Employee Stock Ownership Plan: FSBW sponsors an Employee Stock Ownership Plan
(ESOP). The ESOP purchased 8% of the shares of common stock issued in the
reorganization pursuant to the subscription rights granted under the ESOP
plan. The ESOP borrowed $8,728,500 from the Company in order to fund the
purchase of common stock. The loan to the ESOP will be repaid principally
from the Company's contribution to the ESOP, and the collateral for the loan
is the Company's common stock purchased by the ESOP. As the debt is repaid
shares are released from collateral based on the proportion of debt service
paid in the year and allocated to participants' accounts. As shares are
released from collateral, compensation expense is recorded equal to the then
current market price of the shares, and the shares become outstanding for
earnings-per- share calculations. Stock and cash dividends on allocated
shares are recorded as a reduction of retained earnings and paid or
distributed directly to participants' accounts. Stock and cash dividends on
unallocated shares are recorded as a reduction of debt and accrued interest
(See additional discussion in Note 15).

Earnings Per Share: Earnings per share are not presented for periods prior to
conversion to stock form, October 31, 1995, as FSBW was a wholly-owned
subsidiary of a mutual holding company.

Reclassification: Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year's presentation.

PAGE
<PAGE>
Note 2: ACQUISITION OF INLAND EMPIRE BANK

The Company completed the acquisition of Inland Empire Bank (IEB) of
Hermiston, Oregon effective August 1, 1996. The Company paid the former
shareholders of IEB $60.8951 per share, in cash, for a total acquisition price
of $32.8 million. IEB has five full service branches, a remote drive-up
facility and two loan production offices located in northeast Oregon. The
acquisition of IEB was treated as a purchase for accounting purposes.
Accordingly, under GAAP, the assets and liabilities of IEB have been recorded
on the books of the Company at their respective fair market values at the
effective date the acquisition was consummated. Goodwill, the excess of the
purchase price (cost) over the net fair value of the assets and liabilities
acquired, was recorded at $12.5 million. Amortization of goodwill over a 14
year period will result in a charge to earnings of approximately $893,000 per
year. Because of the amount of assets of IEB acquired by the Company, the
financial results for March 31, 1997, are not generally comparable to those of
a year ago. The combined organization at March 31, 1997, is significantly
larger than it was a year ago.

The accompanying financial statements include the operations of the two
institutions from August 1, 1996, to March 31, 1997. The following pro forma
information presents the results of operations for the years ended March 31,
1997 and 1996, as though the acquisition had occurred on April 1, 1995. The
pro forma results do not necessarily indicate the actual results that would
have been obtained, nor are they necessarily indicative of the future
operations of the combined companies. The unaudited pro forma results of
operations were as follows (in thousands except per share amounts):

(Unaudited) (pro forma)
Year ended March 31,
-----------------------------
1997 1996
---- ----
Net interest income before
provision for loan loss $ 33,727 $ 26,117
Net income 9,885 7,983
Net income per share:
Primary $ 1.01 N/A
Fully diluted $ 1.01 N/A

NOTE 3: CASH AND DUE FROM BANKS

Cash and due from banks consisted
of the following (in thousands):
March 31,
-----------------------------
1997 1996
---- ----
Cash on hand and demand deposits $ 15,639 $ 7,790
Cash equivalents:
Short-term interest-bearing
deposits 1,866 1,236
Federal funds sold 6,983 - -
----------- -----------
$ 24,488 $ 9,026
=========== ===========

For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, overnight investments and short-term
deposits with original maturities less than 90 days.

FRB regulations require depository institutions to maintain certain minimum
reserve balances. Included in cash and demand deposits were required deposits
at the Federal Reserve of $2.5 million and $1.1 million at March 31, 1997 and
1996, respectively.

PAGE
<PAGE>
NOTE 4: SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of securities available for sale
are summarized as follows (in thousands):

March 31, 1997
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
U. S. Government
and agency
obligations $ 67,986 $ 18 $ (587) $ 67,417
Municipal bonds 32,884 1,186 (101) 33,969
Corporate bonds 8,031 11 (45) 7,997
Mortgage-backed
securities:
FHLMC certificates 3,827 66 (25) 3,868
GNMA certificates 20,698 60 (485) 20,273
FNMA certificates 7,286 63 (68) 7,281
Collateralized
mortgage
obligations 145,068 607 (2,722) 142,953
FHLMC stock 2,049 1,342 - - 3,391
FARMERMAC stock 10 14 - - 24
FNMA stock 303 40 - - 343
--------- ---------- ---------- ---------
$ 288,142 $ 3,407 $ (4,033) $ 287,516
========= ========== ========== =========

Proceeds from sales of securities during 1997 were $769,000. Gross gains of
$2,000 and gross losses of $0 were realized on those sales.

At March 31, 1997, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.

March 31, 1996
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------

U. S. Government
and agency
obligations $ 70,520 $ 20 $ (151) $ 70,389
Municipal bonds 28,026 1,425 (86) 29,365
Corporate bonds 11,613 84 (65) 11,632
Mortgage-backed
securities:
FHLMC certificates 4,887 134 (11) 5,010
GNMA certificates 22,309 88 (216) 22,181
FNMA certificates 8,301 153 (41) 8,413
Private issue
certificates 10,908 1 (149) 10,760
Collateralized
mortgage
obligations 131,899 597 (1,675) 130,821
FHLMC stock 2,049 1,029 - - 3,078
FNMA stock 3 35 - - 38
----------- ---------- ---------- ---------
$ 290,515 $ 3,566 $ (2,394) $ 291,687
=========== ========== ========== =========

Proceeds from sales of securities during 1996 were $21,183,000. Gross gains
of $19,000 and gross losses of $272,000 were realized on those sales.

At March 31, 1996, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.

PAGE
<PAGE>
The amortized cost and estimated fair value of securities available for sale
at March 31, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

March 31, 1997
--------------------------
Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 30,027 $ 30,038
Due after one year through five years 58,370 58,275
Due after five years through ten years 32,255 33,891
Due after ten years 167,490 165,312
--------- ----------
$ 288,142 $ 287,516
========= ==========

NOTE 5: SECURITIES HELD TO MATURITY

The amortized cost and estimated fair value of securities held to maturity are
summarized as follows (in thousands):

March 31, 1997
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------

Certificates of deposit $ 987 $ - - $ - - $ 987
========= ========== ========== =========

March 31, 1996
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------

Certificates of deposit $ 2,059 $ - - $ - - $ 2,059
========= ========== ========== =========

The amortized cost and estimated fair value of securities held to maturity at
March 31, 1997, by contractual maturity, are shown below (in thousands):

Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 793 $ 793
Due after one year through five years 194 194
--------- ----------
$ 987 $ 987
========= ==========

PAGE
<PAGE>
NOTE 6: ADDITIONAL INFORMATION REGARDING COMPOSITION OF SECURITIES AND
DEPOSIT INTEREST INCOME

The following table sets forth the composition of income from securities and
deposits for the periods indicated (in thousands):

Years ended
March 31
---------------------------------
1997 1996 1995
---- ---- ----
Taxable interest income $ 5,227 $ 4,438 $ 2,845
Tax-exempt interest income 2,033 1,855 1,930
Other stock-dividend income 195 170 195
Federal Home Loan Bank stock-dividend income 868 307 199
--------- --------- ---------
Total securities and deposit income $ 8,323 $ 6,770 $ 5,169
========= ========= =========

NOTE 7: LOANS RECEIVABLE

Loans receivable at March 31 are summarized as follows (in thousands):

1997 1996
---- ----
One- to four-family $ 431,280 $ 309,895
Commercial and multifamily properties 91,395 77,613
Construction and land 108,487 62,177
Commercial / agribusiness 50,074 871
Consumer and other 23,620 4,333
----------- ----------
$ 704,856 $ 454,889

Less:
Loans in process (52,392) (35,225)
Deferred loan fees, discounts and premiums (2,775) (1,876)
Allowance for loan losses (6,748) (4,051)
----------- ----------
$ 642,941 $ 413,737
=========== ==========

A summary of changes in the Banks' loans to their directors, officers, and
employees and their affiliated companies for the years ended March 31 is as
follows:

1997 1996
---- ----
Loans outstanding, April 1 $ 5,081,363 $4,874,549
Acquired with purchase of IEB 1,982,264 - -
Loan disbursements 955,061 853,703
Loan repayments (1,629,498) (646,889)
----------- ----------
Loans outstanding, March 31 $ 6,389,190 $5,081,363
=========== ==========

Loans serviced for others totaled $208,359,000 and $221,201,000 at March 31,
1997 and 1996, respectively. Custodial accounts maintained in connection with
this servicing totaled $2,963,000 and $4,024,000 at March 31, 1997 and 1996,
respectively.

PAGE
<PAGE>
The Banks' outstanding loan commitments totaled $36,779,000 and $10,190,000 at
March 31, 1997 and 1996, respectively. The interest rates for the 1997
commitments range from 6.50% to 11.00%. In addition, the Banks had
outstanding commitments to sell loans of $2,951,000 at March 31, 1997.

Nonaccrual loans totaled $2,082,000 and $526,000 at March 31, 1997 and 1996,
respectively. Nonaccrual loans at year end are composed of residential real
estate and consumer loans and on a collective basis they are not considered,
"Impaired" under SFAS No. 114.

Loans held for sale at March 31, 1997, of $2,940,000 are stated net of
unrealized loss, undisbursed loans in process and deferred loan fees.

Loans held for sale at March 31, 1996, of $1,558,000 are stated net of
unrealized loss, undisbursed loans in process and deferred loan fees.

The Banks originate both adjustable- and fixed-rate loans. At March 31, 1997,
the composition of those loans, less undisbursed amounts, were as follows (in
thousands):

Fixed-rate (term to maturity):

One month to one year $ 28,666
One to three years 18,187
Three to five years 33,550
Five to ten years 18,286
Over ten years 249,035
-----------
$ 347,724
===========

Adjustable-rate (term to rate adjustment):

One month to one year $ 277,422
One to three years 9,320
Three to five years 15,916
Five to ten years 533
Over ten years 1,549
-----------
$ 304,740
===========

The adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to the Banks' internal cost of funds, FHLB National Cost of
Funds Index, One Year Constant Maturity Treasury Index, Prime Rate (Wall
Street Journal) or the FHLB 11th District Cost of Funds. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Banks pay on the short-term deposits that primarily have been
utilized to fund these loans.

PAGE
<PAGE>
NOTE 8: ALLOWANCES FOR LOAN AND REAL ESTATE HELD FOR SALE LOSSES

An analysis of the changes in the allowances for loan and real estate held for
sale losses is as follows for the three years ended March 31, 1997 (in
thousands):

Real estate
Loans held
receivable for sale
---------- -----------

Balance, April 1, 1994 $ 3,429 $ 704

Provision (recoveries) 391 125
Net charge-offs (271) (55)
---------- -----------

Balance, March 31, 1995 3,549 774

Provision (recoveries) 524 (70)
Net charge-offs (22) (704)
---------- -----------

Balance, March 31, 1996 4,051 - -

Acquired with IEB 1,416 - -
Provision (recoveries) 1,423 - -
Net charge-offs (142) - -
---------- -----------

Balance, March 31, 1997 $ 6,748 $ - -
========== ===========

NOTE 9: PROPERTY AND EQUIPMENT

Land, buildings, equipment and software owned by the Company and its
subsidiaries at March 31 are summarized as follows (in thousands):

1997 1996
---- ----
Land $ 2,199 $ 1,457
Buildings and improvements 11,308 7,877
Furniture, equipment and software 5,835 3,013
----------- ----------

19,342 12,347
Accumulated depreciation (8,808) (5,765)
----------- ----------
$ 10,534 $ 6,582
=========== ==========

In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement
establishes accounting standards for the impairment of long-lived assets that
either will be held and used in operations or that will be disposed of.
Effective January 1, 1996, the Company adopted SFAS No. 121. The Company
periodically evaluates long-lived assets for impairment.

<PAGE> <PAGE>
NOTE 10: DEPOSITS

Customer deposits consist of the following at March 31 (in thousands):

1997 1996
---- ----
Demand and NOW accounts, including non-
interest-bearing deposits in 1997
and 1996 of $36,709 and
$6,816, respectively, 0% to 6% $ 170,499 $ 68,582

Regular savings, 2% to 6% 44,131 32,499

Certificate accounts:
2.01% to 4% 1,220 5,317
4.01% to 6% 265,473 193,980
6.01% to 8% 60,069 65,791
8.01% to 10% 3,571 7,886
10.01% to 12% 4 9
----------- -----------
330,337 272,983
----------- -----------
$ 544,967 $ 374,064
=========== ===========

Deposits at March 31, 1997 and 1996, include public funds of $13,217,000 and
$6,322,000, respectively. Securities with a book value of $4,940,000 and
$969,000 were pledged as collateral on these deposits at March 31, 1997 and
1996, respectively, which exceeds the minimum collateral requirements
established by the state regulations.

Scheduled maturities of certificate accounts at March 31 are as follows (in
thousands):

1997 1996
---- ----
Due in less than one year $ 212,853 $ 178,422
One to two year 53,553 31,650
Two to three years 26,049 21,387
Three to four years 6,998 18,032
Four to five years 7,916 4,673
After five years 22,968 18,819
----------- -----------
$ 330,337 $ 272,983
=========== ===========

Included in deposits are certificates of deposit in excess of $100,000 of
$58,423,000 and $45,453,000 at March 31, 1997 and 1996, respectively.
Interest on certificates in excess of $100,000 totaled $2,945,000, $2,102,000
and $1,808,000 for the years ended March 31, 1997, 1996 and 1995,
respectively.

Deposit interest expense by type for the years ended March 31 is as follows
(in thousands):

1997 1996 1995
---- ---- ----
Certificates $ 19,751 $ 15,768 $ 12,410
Demand and NOW accounts 808 1,650 1,725
Regular savings 1,177 1,558 1,344
--------- ----------- -----------
$ 21,736 $ 18,976 $ 15,479
========= =========== ===========

PAGE
<PAGE>
NOTE 11: ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE

FSBW has entered into borrowing arrangements with the Federal Home Loan Bank
of Seattle (FHLB) to borrow funds under a short-term cash management advance
program and long-term loan agreements. All borrowings are secured by stock
of, and cash deposits in, the FHLB. Additionally, mortgage loans receivable
and securities issued, insured, or guaranteed by the U. S. Government or
agencies thereof are pledged as security for the loans. At March 31, 1997,
FHLB advances were scheduled to mature as follows (in thousands):

Adjustable-rate Fixed-rate Total
advances advances advances
--------------- -------------- --------------
Rate* Amount Rate* Amount Rate* Amount
----- --------- ----- -------- ----- --------
Due in less than one year 5.68% $ 5,400 5.49% $104,316 5.50% $109,716
One to two years - - - - 6.15 38,516 6.15 38,516
Two to three years - - - - 6.33 48,050 6.33 48,050
Three to four years - - - - 6.38 8,233 6.38 8,233
Four to five years - - - - 6.77 27,000 6.77 27,000
--------- -------- --------
5.68% $ 5,400 5.97% $226,115 5.96% $231,515
========= ======== ========
* Weighted average interest rate

The maximum and average outstanding balances and average interest rates on
advances from the FHLB were as follows for
the year ended March 31 (in thousands):

1997 1996 1995
---- ---- ----
Maximum outstanding at
any month end $ 235,098 $ 179,419 $ 72,135
Average outstanding 214,563 66,252 42,419
Weighted average
interest rates:
Annual 5.83% 5.80% 5.60%
End of year 5.96 5.43 6.35
Interest expense
during the year $ 12,504 $ 3,842 $ 2,374

NOTE 12: OTHER BORROWINGS

Retail Repurchase Agreements included in other borrowings are due generally
within 90 days with interest. At March 31, 1997, they carry interest rates
ranging from 5.21% to 7.18%, payable at maturity, and are secured by the
pledge of certain FNMA and FHLMC mortgage-backed securities with a fair value
of $11,156,000 as of March 31, 1997.

A summary of retail repurchase agreements at March 31 by the period remaining
to maturity is as follows (in thousands):

1997 1996
------------------ -------------------
Weighted Weighted
average average
rate Balance rate Balance
---- ---------- ---- ---------
Due in less than one year 5.55% $ 8,215 5.02% $ 7,682
One to two years - - - - 6.00 1,102
Three to four years 6.10 695 - - - -
After five years 7.18 1,060 7.18 1,005
---------- ---------
5.76% $ 9,970 5.35% $ 9,789
========== =========

Interest expense for the three years ended March 31, 1997, 1996 and 1995 was
$543,000, $462,000 and $377,000, respectively.

PAGE
<PAGE>
Wholesale Repurchase Agreements: The table below outlines the wholesale
repurchase agreements as of March 31, 1997 and 1996. The agreements to
repurchase are secured by mortgage-backed securities with a fair value of
$55,115,000 at March 31, 1997. The Broker holds the security while FSBW
continues to receive the principal and interest payments from the security.
Upon maturity of the agreement the pledged securities will be returned to
FSBW.

A summary of wholesale repurchase agreements at March 31 by the period
remaining to maturity is as follows (in thousands):

1997 1996
------------------ -------------------
Weighted Weighted
average average
rate Balance rate Balance
---- ---------- ---- ---------
Due in less than one year 5.40% $ 27,174 5.41% $ 9,863
One to two years 5.68 25,000 - - - -
--------- ---------

5.53% 52,174 5.41% $ 9,863
========= =========

The maximum and average outstanding balances and average interest rates on
wholesale repurchase agreements were as follows for the year ended March 31
(in thousands):

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

Maximum outstanding at any month end $ 52,174 $ 9,863 N/A
Average outstanding 26,649 162 N/A
Weighted average interest rates:
Annual 5.96% 5.41%
End of year 5.53 5.41
Interest expense during the year $ 1,589 $ 7

NOTE 13: INCOME TAXES

The recently enacted Small Business Job Protection Act of 1996 (the "Job
Protection Act") requires that a qualified thrift institution, such as FSBW,
recapture, for federal income tax purposes, that portion of the balance of its
tax basis bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts are to be generally taken into
ordinary income ratably over a six-year period beginning in 1997. In
addition, the Job Protection Act also repeals the reserve method of accounting
for tax basis bad debt deductions and, thus, requires thrifts to calculate the
tax basis bad debt deduction based on actual current loan losses. FSBW will
be required to recapture its post-1987 additions to its tax basis bad debt
reserves, whether such additions were made pursuant to the percentage of
taxable income method or the experience method. As of March 31, 1997, these
additions were $1.5 million which, pursuant to the Job Protection Act, will be
included in taxable income ratably over a six-taxable-year period beginning
with the year ending March 31, 1998. The recapture of the post-1987 additions
to tax basis bad debt reserves will require FSBW to pay approximately $85,000
a year in federal income taxes (based upon current federal income tax rates).
This will not result in a charge to earnings as these amounts are included in
the deferred tax liability at March 31, 1997.

Retained earnings at March 31, 1997, include $5,318,000 of earnings which
represent federal income tax basis bad debt reserve deductions taken by FSBW
for which no provisions for federal income taxes have been made. If the
accumulated amount that qualified as deductions for federal income taxes is
later used for purposes other than to absorb bad debt losses or FSBW no longer
qualifies as a bank, the accumulated reserve will be subject to federal income
tax at the then current tax rates.

PAGE
<PAGE>
The provision for income taxes for the years ended March 31 differs from that
computed at the statutory corporate tax rate as follows (in thousands):

1997 1996 1995
---- ---- ----
Taxes at statutory rate $ 4,501 $ 3,020 $ 2,076
Increase (decrease) in taxes:
Tax-exempt interest (608) (553) (578)
Amortization of cost in
excess of assets acquired 201 - - - -
Difference in fair market
value versus basis
of released ESOP shares 184 40 - -
Other (355) 124 (163)
--------- --------- -----------
3,923 2,631 1,335
Cumulative effect of change
in accounting principle - - - - 204
--------- --------- -----------
$ 3,923 $ 2,631 $ 1,539
========= ========= ===========

The provision for income tax expense for the year ended March 31 is composed
of the following (in thousands):

1997 1996 1995
---- ---- ----
Current $ 4,238 $ 2,871 $ 1,539
Deferred (286) (181) 85
Change in valuation allowance (29) (59) (85)
--------- ---------- -----------
$ 3,923 $ 2,631 $ 1,539
========= ========== ===========
Income taxes are provided for the temporary differences between the tax basis
and financial statement carrying amounts of assets and liabilities.
Components of the Company's net deferred tax assets at March 31 consisted of
the following (in thousands):

1997 1996
---- ----
Deferred tax assets:
Loan loss reserves per books $ 2,278 $ 1,377
Deferred compensation 1,061 554
Timing of deductibility of
ESOP contributions 93 34
Nondeductible write-down of
investment securities 28 61
Other 163 184
----------- -----------
3,623 2,210
----------- -----------

Deferred tax liabilities:
Change in method of accounting
for amortization of premium
and discount on investments 142 168
Tax basis bad debt reserves-post 1987 509 295
FHLB stock dividends 1,196 867
Depreciation 631 173
Deferred loan fees 99 - -
Other 24 13
----------- ---------
2,601 1,516
----------- ---------
1,022 694
Valuation allowance (27) (56)
----------- ---------
995 638
Income taxes related to valuation
reserve on securities available for sale 225 (398)
----------- ---------
Deferred tax asset (liability) - net $ 1,220 $ 240
=========== =========

PAGE
<PAGE>
NOTE 14: EMPLOYEE BENEFIT PLANS

The Banks have their own profit sharing plans for all eligible employees. The
plans are funded annually at the discretion of the individual Banks' Boards of
Directors. Contributions charged to operations for the years ended March 31,
1997, 1996 and 1995 were $253,000, $208,700 and $384,610, respectively.

FSBW has entered into a salary continuation agreement with certain of its
senior management. This program was funded by purchasing single premium life
insurance contracts. The program provides for aggregate continued annual
compensation for all participants totaling $240,000 for life with a 15-year
guarantee. Participants vest ratably each plan year until retirement,
termination, death or disability. FSBW is recording the salary obligation
over the estimated remaining service lives of the participants. Expenses
related to this program were $119,278, $108,678 and $111,920 for the years
ended March 31, 1997, 1996 and 1995, respectively. The plan's projected
benefit obligation is $2,031,000, of which $313,000 was vested at March 31,
1997. The assumed discount rate was 7% for 1997 and 1996. At March 31, 1997,
an obligation of $375,620 and cash value of life insurance of $2,036,449 were
recorded. At March 31, 1996, an obligation of $256,342 and cash value of life
insurance of $1,932,149 were recorded. Increases in cash surrender value and
related net earnings from the life insurance contracts partially offset the
expenses of this program resulting in a net cost of $14,978, $33,985 and
$61,475 for the years ended March 31, 1997, 1996 and 1995, respectively. IEB
also has a non-qualified, non-contributory retirement compensation plan for
certain bank employees whose benefits are based upon a percentage of defined
participant compensation. Expenses related to this plan included in fiscal
1997 operations were $27,000.

The Company and FSBW also offer non-qualified deferred compensation plans to
members of their Boards of Directors and certain bank employees. The plans
permit each director or certain bank employees to defer a portion of director
fees, non- qualified retirement contributions or bonuses until the future.
Compensation is charged to expense in the period earned. In order to fund a
portion of the plans' future obligations the Company has purchased life
insurance policies, contributed to money market investments and purchased
common stock of the Company. As the Company is the owner of the investments
and beneficiary of life insurance contracts, and in order to reflect the
Company's policy to pay benefits equal to accumulations, the assets and
liabilities under the plans are reflected in the consolidated balance sheets
of the Company. Common stock of the Company held for such plans is reported as
a contra-equity account and was valued at $1,677,000 and $1,123,000 for March
31, 1997 and 1996, respectively. The money market investments and cash
surrender value of the life insurance policies are included in other assets.

PAGE
<PAGE>
NOTE 15: EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

FSBW established for eligible employees an employee stock ownership plan
(ESOP) and related trust that became effective upon the former mutual holding
company's conversion to a stock-based holding company. Eligible employees of
FSBW as of January 1, 1995 and eligible employees of the Company or FSBW
employed after such date who have been credited with at least 1,000 hours
during a 12-month period will become participants.

The ESOP borrowed $8,728,500 from the Company in order to purchase the common
stock. The loan will be repaid principally from the Company's or FSBW's
contributions to the ESOP over a period not to exceed twenty years, and the
collateral for the loan will be the unreleased, restricted common stock
purchased by the ESOP. Contributions to the ESOP will be discretionary;
however, FSBW intends to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirements of the debt.
The interest rate for the loan is 8.75%.

Participants generally become 100% vested in their ESOP account after seven
years of credited service or if their service was terminated due to death,
early retirement, permanent disability or a change in control. Prior to the
completion of one year of credited service, a participant who terminates
employment for reasons other than death, retirement, disability, or change in
control of FSBW or the Company will not receive any benefit. Forfeitures will
be reallocated among remaining participating employees, in the same proportion
as contributions. Benefits are payable upon death, retirement, early
retirement, disability or separation from service. The contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
ESOP compensation expense for March 31, 1997 and 1996 (first plan year) was
$997,000 and $515,000, respectively.

As of March 31, 1997, the Company has allocated or committed to be released to
the ESOP 97,745 earned shares and has 775,105 unearned, restricted shares
remaining to be released. The fair value of unearned, restricted shares held
by the ESOP trust was $14,630,000 at March 31, 1997.

NOTE 16: STOCK BASED COMPENSATION

At the Company's annual stockholders meeting held on July 26, 1996, the
shareholders approved adoption of the Management Recognition and Development
Plan (MRP) and Stock Option Plan (SOP).

MRP: Under the MRP the Company is authorized to grant up to 436,425 shares of
restricted stock to directors, officers and employees of FSBW. The initial
grant of 404,282 shares with a total cost of $6.0 million vests over a five
year period starting from the July 26, 1996, MRP approval date. The
consolidated statements of income for the year ended March 31, 1997, reflect
an accrual of $971,000 compensation expense for the MRP including $69,000 of
expense for dividends on the allocated, restricted stock. A summary of the
changes in the granted, but not vested, MRP shares for the years ended March
31 follows:

1997 1996
--------- ---------
Shares granted- July 26, 1996 404,282 N/A
Shares vested - -
Shares forfeited (400)
---------
Shares granted - not vested - March 31, 1997 403,882
=========

PAGE
<PAGE>
SOP: Under the SOP the Company has reserved 1,091,063 shares for issuance
pursuant to the exercise of stock options which may be granted to directors
and employees. The exercise price of the stock options are set at 100% of the
fair market value of the stock price at date of grant. Such options will vest
ratably over a five year period and any unexercised options will expire after
10 years or 90 days after employment or service ends.

Details of stock options granted, vested, exercised, surrendered or terminated
are as follows:

Number of option shares
-----------------------
Granted Exercisable
---------- -----------
For the year ended March 31, 1996 N/A N/A
========== ===========

For the year ended March 31, 1997
Options granted 913,445 - -
Options vested - - - -
Options surrendered - - - -
Options exercised - - - -
Options terminated - - - -
----------- -----------

Number of option shares at March 31, 1997 913,445 - -
=========== ===========
Financial data pertaining to outstanding stock options granted at March 31,
1997 were as follows:

Weighted
average fair value Number of Number of Remaining
Exercise of option shares option shares option shares contractual
price granted granted exercisable life
--------- ------------------ ------- ----------- -----------
$ 14.875 $3.49 to $5.29 770,430 - - N/A
15.375 5.40 to 5.58 88,015 - - N/A
16.750 6.08 45,000 - - N/A
18.500 6.72 10,000 - - N/A
------- -----------
15.055* 4.87 913,445 - -
======= ===========

* Weighted average exercise price of options granted

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based
Compensation. The statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS
No. 123 does not rescind or interpret the existing accounting rules for
employee stock-based arrangements. Companies may continue following those
rules to recognize and measure compensation as outlined in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but they are now required to disclose the pro forma amounts of net
income and earnings per share that would have been reported had the company
elected to follow the fair value recognition provisions of SFAS No. 123.
Effective April 1, 1996, the Company has determined that it will continue to
measure its employee stock-based compensation arrangements under the
provisions of APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the Company's
compensation plan been determined consistent with SFAS No. 123, the Company's
net income available to fully diluted common stock and fully diluted earnings
per share would have been reduced to the pro forma amounts indicated below:

PAGE
<PAGE>
Years ended March 31
---------------------------
1997 1996
----------- ------------
(dollars in thousands,
except per share amounts)
Net income attributable to common stock:
Primary:
As reported $ 9,314 $ N/A
Pro forma 8,429
Fully diluted:
As reported $ 9,314
Pro forma 8,429
Net income per common share:
Primary:
As reported $ 0.95
Pro forma 0.86
Fully diluted:
As reported $ 0.95
Pro forma 0.86

The compensation expense included in the pro forma net income attributable to
fully diluted common stock and fully diluted earnings per share is not likely
to be representative of the effect on reported net income for future years
because options vest over several years and additional awards generally are
made each year.

The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black- Scholes options-pricing model
with the following weighted-average assumptions used for grants in fiscal
1997: annual dividend yield of 1.75%, expected volatility of 19.93%,
risk-free interest rates of 6.36% and expected lives of 2.5 to 12.5 years.

NOTE 17: REGULATORY CAPITAL REQUIREMENTS

The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks as state
chartered federally insured institutions are subject to the capital
requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by
regulation that require the Company and FSBW and IEB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of total capital and Tier 1
capital to risk-weighted assets as well as Tier 1 leverage capital to average
assets.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
created a statutory framework that increased the importance of meeting
applicable capital requirements. For FSBW and IEB, FDICIA established five
capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-
based capital measure, a leverage ratio capital measure, and certain other
factors. The federal banking agencies (including the FDIC) have adopted
regulations that implement this statutory framework. Under these regulations,
an institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to risk-
weighted assets is 6.00% or more, its ratio of core capital to adjusted total
assets is 5.00% or more and it is not subject to any federal supervisory order
or directive to meet a specific capital level. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8.00%, a Tier 1 risk-based capital ratio of not less than 4.00%, and
leverage ratio of not less that 4.00%. Any institution which is neither
well-capitalized nor adequately capitalized will be considered
undercapitalized.

PAGE
<PAGE>
Undercapitalized institutions are subject to certain prompt corrective action
requirements, regulatory controls and restrictions which become more extensive
as an institution becomes more severely undercapitalized. Failure by the
Banks, individually, to comply with applicable capital requirements would, if
unremedied, result in restrictions on their activities and lead to enforcement
actions against FSBW or IEB by the FDIC, including, but not limited to, the
issuance of a capital directive to ensure the maintenance of required capital
levels. FDICIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, FDIC approval of any regulatory
application filed for its review may be dependent on compliance with capital
requirements.

The actual regulatory capital ratios calculated for the Company and the Banks,
along with the minimum capital amounts and ratios for capital adequacy
purposes and to be categorized as well-capitalized under the regulatory
framework for prompt corrective action were as follows:

Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
----------------- ---------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
March 31, 1997:
The Company-
consolidated
Total capital
to risk-
weighted
assets $ 143,811 26.77% $ 42,977 8.00% N/A
Tier 1
capital
to risk-
weighted
assets 137,095 25.52 21,488 4.00 N/A
Tier 1
leverage
capital
to
average
assets 137,102 13.68 39,465 4.00 N/A

FSBW
Total capital
to risk-
weighted
assets 96,826 23.68 32,692 8.00 $ 40,864 10.00%
Tier 1
capital
to risk-
weighted
assets 91,715 22.44 16,346 4.00 24,519 6.00
Tier 1
leverage
capital
to average
assets 91,714 11.56 31,746 4.00 39,682 5.00

IEB
Total capital
to risk-
weighted
assets 23,229 19.08 9,738 8.00 12,173 10.00
Tier 1
capital
to risk-
weighted
assets 21,806 17.91 4,869 4.00 7,304 6.00
Tier 1
leverage
capital
to average
assets 21,814 12.08 7,226 4.00 9,033 5.00

PAGE
<PAGE>

March 31, 1996:
The Company-
consolidated
Total capital
to risk-
weighted
assets $ 158,500 43.80% $ 28,950 8.00% N/A
Tier 1 capital
to risk-
weighted
assets 154,449 42.68 14,475 4.00 N/A
Tier 1
leverage
capital
to average
assets 154,449 20.78 29,730 4.00 N/A

FSBW
Total capital
to risk-
weighted
assets 96,649 27.55 28,068 8.00 $ 35,085 10.00%
Tier 1 capital
to risk-
weighted
assets 92,596 26.39 14,034 4.00 21,051 6.00
Tier 1
leverage
capital
to average
assets 92,596 13.42 27,599 4.00 34,499 5.00

IEB
Total capital
to risk-
weighted
assets N/A IEB was acquired August 1, 1996
Tier 1 capital
to risk-
weighted
assets
Tier 1
leverage
capital
to average
assets

Company management believes, as of March 31, 1997, the Company, FSBW and IEB
individually met all capital adequacy requirements to which they were subject.
Additionally, as of March 31, 1997, the most recent notification from the
Federal Reserve and the FDIC individually categorized the Company and the
Banks as well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized, a bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table above. There are no conditions or events since that notification
that management believes have changed their individual category.

PAGE
<PAGE>
Federal law requires that the federal banking agencies' risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multi-family
mortgages. In 1994, the federal banking agencies jointly revised their
capital standards to specify that concentration of credit and nontraditional
activities are among the factors that the agencies will consider in evaluating
capital adequacy. In that year, the FDIC amended its risk-based capital
standards with respect to the risk weighting of loans made to finance the
purchase or construction of multi-family residences. Management believes that
the effect of including such an interest rate risk component in the
calculation of risk-adjusted capital will not cause the Company and the Banks
to cease to be well-capitalized. In June 1996, the FDIC and certain other
federal banking agencies issued a joint policy statement providing guidance on
prudent interest rate risk management principles. The agencies stated that
they would determine banks' interest rate risk on a case-by-case basis, and
would not adopt a standardized measure or establish an explicit minimum
capital charge for interest rate risk.

NOTE 18: CONTINGENCIES In the normal course of business, the Company and/or
its subsidiaries have various legal claims and other contingent matters
outstanding. The Company believes that any liability ultimately arising from
these actions would not have a material adverse effect on the results of
operations or consolidated financial position at March 31, 1997.

NOTE 19: INTEREST RATE RISK The financial condition and operation of the
Company are influenced significantly by general economic conditions, including
the absolute level of interest rates as well as changes in interest rates and
the slope of the yield curve. The Company's profitability is dependent to a
large extent on its net interest income, which is the difference between the
interest received from its interest-earning assets and the interest expense
incurred on its interest-bearing liabilities.

The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates.

The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk), product caps and floors, and early repayment or withdrawal
provisions, which may be contractual or market driven, that are generally more
favorable to customers than to the Company.

The Company's primary monitoring tool for assessing interest rate risk is
"asset/liability simulation modeling," which is designed to capture the
dynamics of balance sheet, interest rate and spread movements, and to qualify
variation in net interest income and net market value resulting from those
movements under different rate environments. Another monitoring tool used by
the Company to assess interest rate risk is "gap analysis." The matching of
repricing characteristics of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are 'interest
sensitive" and by monitoring the Company's interest sensitivity "gap."
Management is aware of the sources of interest rate risk and in its opinion
actively monitors and manages it to the extent possible, and considers that
the Company's current level of interest rate risk is reasonable.

PAGE
<PAGE>
NOTE 20: COSTS IN EXCESS OF NET ASSETS ACQUIRED

Costs in excess of net assets acquired (goodwill) consisted of the following
(in thousands):

March 31
------------------------------
1997 1996
----------- ----------
Inland Empire Bank, net of
amortization of $592,000 and N/A. $ 11,906 N/A
=========== ==========

Costs in excess of net assets acquired result from business combinations
accounted for as a purchase of assets and an assumption of liabilities.
Goodwill is amortized using the straight-line method over the period that is
expected to be benefitted of 14 years. The Company periodically evaluates
goodwill for impairment.

NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows at March 31
(in thousands):

1997 1996
------------------- --------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------- --------- -------- ---------

Assets:
Cash $ 24,488 $ 24,488 $ 9,026 $ 9,026
Securities available for sale 287,516 287,516 291,687 291,687
Securities held to maturity 987 987 2,059 2,059
Loans receivable held for sale 2,940 2,940 1,558 1,558
Loans receivable 642,941 651,813 413,737 420,561
Accrued interest receivable 6,950 6,950 4,627 4,627
FHLB stock 12,807 12,807 9,030 9,030
Mortgage servicing rights 354 360 427 430

Liabilities:
Demand and NOW accounts 170,499 170,499 68,582 68,582
Regular savings 44,131 44,131 32,499 32,499
Certificates of deposit 330,337 330,887 272,983 274,982
Advance payments by borrowers
for taxes and insurance 4,112 4,112 3,563 3,563
FHLB advances 231,515 228,966 179,419 178,968
Other borrowings 62,185 61,628 19,652 19,738

Off-balance-sheet financial instruments:

Commitments to sell loans $ 0 $ 0 $ 0 $ 0
Commitments to originate
loans 0 0 0 0
Commitments to purchase
securities 0 0 0 0

PAGE
<PAGE>
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial and off-balance-sheet instruments:

Cash: The carrying amount of these items is a reasonable estimate of their
fair value.

Securities: The estimated fair values of investment securities and
mortgaged-backed securities available for sale and held to maturity are based
on quoted market prices or dealer quotes.

Loans Receivable: Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
multi-family real estate, residential mortgage, nonresidential, commercial /
agribusiness, consumer and other. Each loan category is further segmented
into fixed- and adjustable-rate interest terms and by performing and
nonperforming categories.

The fair value of performing residential mortgages is estimated based upon
secondary market sources by type of loan and terms such as fixed or variable
interest rates. For performing nonresidential and multi-family real estate
loans, the fair value has been estimated based upon the level of interest
rates inherent in the loans as compared to current interest rates for
comparable loans taking into consideration the estimate of maturity and
experience with repayments. The fair value of performing commercial /
agribusiness, consumer and other loans is based on discounted cash flows using
as a discount rate the current rate offered on similar products.

Fair value for significant nonperforming loans is based on recent appraisals
or estimated cash flows discounted using rates commensurate with risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.

FHLB Stock: The fair value is based upon the redemption value of the stock
which equates to its carrying value.

Deposit Liabilities: Under SFAS No. 107, the fair value of deposits with no
stated maturity, such as savings, checking and NOW accounts, is equal to the
amount payable on demand. Management also has considered the fair value of
time deposits with a maturity of six months or less to be the same as the
amount recorded. The market value of certificates of deposit with maturities
in excess of six months is based upon the discounted value of contractual cash
flows. The discount rate is determined using the borrowing rate available
from the FHLB for comparable terms.

FHLB Advances and Other Borrowings: The fair value of FHLB advances and other
borrowings is estimated based on discounting the estimated future cash flows
using rates currently available to the Company for debt with similar remaining
maturities.

Commitments: Commitments to sell loans with a notional balance of $2,951,000
and $1,578,000 at March 31, 1997 and 1996, respectively, have a carrying value
of zero, representing the cost of such commitment. Commitments to originate
loans, $36,779,000 and $10,190,000 at March 31, 1997 and 1996, respectively,
also have a carrying value of zero. A commitment to purchase a security with
a notional balance of $5,250,000 at March 31, 1996 has a carrying value of
zero, representing the cost of such commitment. The fair value of such
commitments is also estimated to be zero based upon current market rates for
similar loans and any fees received to enter into similar agreements.

Limitations: The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.

Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business. The fair value has not been estimated for assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not financial instruments include the mortgage banking
operations; deferred tax assets; land, building, equipment and software; costs
in excess of net assets acquired; and real estate held for sale.

PAGE
<PAGE>
NOTE 22: FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. (FSBWB)
(PARENT COMPANY ONLY)

Summary financial information as of March 31 (in thousands):
(Note - Information for 1995 is for the former mutual holding company)

FSBWB
Balance Sheets

For the years ended March 31, 1997 and 1996

1997 1996
---- ----

ASSETS

Cash $ 893 $ 109
Investments available for sale 14,020 53,054
Loan receivable ESOP 7,956 8,431
Investment in subsidiaries 125,187 93,412
Deferred tax asset 230 - -
Other assets 1,779 1,306
----------- -----------
$ 150,065 $ 156,312
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities 1,429 1,047
Stockholders' equity 148,636 155,265
----------- -----------
$ 150,065 $ 156,312
=========== ===========

FSBWB
Statements of Income

For the years ended March 31, 1997, 1996 and 1995

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

INTEREST INCOME:
Certificates and
time deposits $ 62 $ 26 $ 2
Investments 1,403 1,054 - -
ESOP loan 724 313 - -

OTHER INCOME:
Equity in
undistributed
income of
subsidiaries 8,719 5,612 5,181
Miscellaneous 25 - - - -
--------- ----------- -----------
10,933 7,005 5,183

OTHER EXPENSE:
Compensation,
payroll taxes
and fringe
benefits 409 64 1
Other expense 888 345 14
--------- ----------- -----------
9,636 6,596 5,168
PROVISION FOR INCOME TAXES 322 344 - -
--------- ----------- -----------

NET INCOME $ 9,314 $ 6,252 $ 5,168
========= =========== ===========

PAGE
<PAGE>
FSBWB
Statements of Cash Flow
For the years ended March 31, 1997, 1996 and 1995

1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 9,314 $ 6,252 $ 5,168
Adjustments to
reconcile net
income to net
cash provided
by operating
activities:
Equity in
undistributed
earnings of
subsidiaries (8,719) (5,612) (5,181)
Net amortization
of investment
discounts (1,403) - - - -
Amortization of
MRP liability 254 - - - -
(Increase) decrease
in deferred taxes (230) - - - -
(Increase) decrease
in other assets (486) (1,285) 5
Increase (decrease)
in other liabilities 199 543 - -
------- ------- --------
Net cash used by
operating activities (1,071) (102) (8)
------- ------- --------

INVESTING ACTIVITIES:
Purchase of securities
available for sale (446,308) (440,626) - -
Principal repayments
and maturities of
securities available
for sale 486,739 387,572 - -
Funds transferred to
deferred compensation
trust (75) - - - -
Acquisition of wholly
owned subsidiary:
1997-IEB, 1996-FSBW (32,833) (53,681) - -
Dividends received
from subsidiaries 4,515 8,560 - -
Loan provided to
FSBW's ESOP for
purchase of common
stock - - (8,728) - -
Principal repayments -
FSBW's ESOP loan 475 297 - -
Additional investment
in subsidiaries (166) (41) - -
-------- -------- --------
Net cash used by investing
activities 12,347 (106,647) - -
-------- --------- --------

FINANCING ACTIVITIES:
Proceeds from issuance
of common stock,
net of underwriting
costs - - 107,361 - -
Purchase of treasury
stock (12,905) - - - -
Proceeds from sale
of treasury stock
to FSBW 4,320 - - - -
Cash dividends paid (1,907) (504) - -
Contribution from
(reimbursement to)
wholly owned
subsidiary - - (62) - -
------- ------- --------

Net cash provided by
financing activities (10,492) 106,795 - -
NET INCREASE (DECREASE)
IN CASH 784 46 (8)
CASH, BEGINNING OF PERIOD 109 63 71
------- ------- --------
CASH, END OF PERIOD $ 893 $ 109 $ 63
======= ======= ========

PAGE
<PAGE>
FSBWB
Statements of Cash Flow
For the years ended March 31, 1997, 1996 and 1995
(continued)

1997 1996 1995

SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:
Interest paid $ - - $ - - $ - -
Taxes paid $ 505 $ - - $ - -
Non-cash transactions:
Net change in
dividends payable $ 178 $ 504 $ - -
Reduction of initial
investment in
subsidiary for
loan advanced to
ESOP $ - - $ 8,728 $ - -
Increase of investment
in subsidiary for
shares released
to ESOP
participants as
compensation $ 417 $ 515 $ - -
Net change in
unrealized gain
(loss) in deferred
compensation trust
& related liability
for company &
subsidiaries $ 493 $ - - $ - -
Treasury stock
forfeited by
subsidiary's MRP $ 6 $ - - $ - -

NOTE 23: CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP

In October 1995, the Company converted from the mutual holding company to the
stock holding company form of organization. At the time, the Company
established a liquidation account in an amount equal to its equity, as
reflected in the latest statement of financial condition used in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts at
FSBW after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore
an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Company, each FSBW eligible account
holder will be entitled to receive a distribution from the liquidation account
in an amount proportionate to the current adjusted qualifying balances for
accounts then held.

Subsequent to the conversion, the Company may not declare or pay cash
dividends on, or repurchase, any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.

NOTE 24: STOCK REPURCHASE

On November 19, 1996, the Company completed its stock repurchase program
initiated in April 1996 which authorized the repurchase of 545,525 shares of
its outstanding common stock. On November 20, 1996, the Company's Board of
Directors approved continuance of the stock repurchase program authorizing the
purchase of up to 10% of total shares outstanding over the next 12 months.
As of March 31, 1997, the Company has repurchased a total of 795,525 shares at
an average price of $15.22 per share. The Company has reserved 436,425 shares
for its MRP of which 403,882 shares were awarded as of March 31, 1997 (see
Note 16 to financial statements). The remaining 32,543 unallocated shares are
held as treasury stock reserved for the MRP.

PAGE
<PAGE>
NOTE 25: EARNINGS PER SHARE

Earnings per share information is not meaningful for any periods prior to
December 31, 1995, since the Company's stock
was issued on October 31, 1995. Earnings per share are not presented for
periods prior to conversion to stock form as FSBW
was a wholly-owned subsidiary of a mutual holding company.

(in thousands)
Years ended March 31
------------------------------------------
1997 1996 1995
------- -------- -------
*
Total shares issued 10,911 N/A N/A
Less purchase of
treasury stock
including shares
allocated to MRP (488)

Less unallocated
shares held by
the ESOP (811)

Plus MRP and stock
option incremental
shares considered
outstanding for
primary EPS
calculations 155
-------

Primary weighted
average shares
outstanding 9,767 N/A N/A
------- -------- -------

Plus MRP and stock
option incremental
shares considered
outstanding for
fully diluted
EPS calculations 36
-------

Fully diluted weighted
average shares
outstanding 9,803 N/A N/A
======= ======== =======
* Weighted average shares

Calculation of
outstanding shares
------------------

At March 31 At March 31
1997 1996
----------- -----------
Total shares issued 10,911 10,911
Less treasury stock (392) - -

Outstanding shares 10,519 10,911
=========== ===========

In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No.
128 specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public market. This
standard specifies computation and presentation requirements for both basic
EPS and, for entities with complex capital structures, diluted EPS. SFAS No.
128 is effective for reporting periods ending after December 15, 1997 and
early adoption of the standard is not permitted. The Company does not
anticipate the adoption of SFAS No. 128 to have a material effect on its
results of operations on a per share basis.

PAGE
<PAGE>
NOTE 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Results of operations on a quarterly basis were as follows (in thousands):

Years ended March 31, 1997
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

Interest
income $ 13,785 $ 16,648 $ 18,264 $ 18,595
Interest
expense 7,566 9,007 9,791 10,008
--------- --------- --------- ---------
Net
interest
income 6,219 7,641 8,473 8,587
Provision
for loan
losses 513 407 231 272
--------- --------- --------- ---------
Net
interest
income
after
provision
for loan
losses 5,706 7,234 8,242 8,315
Non-interest
income 455 594 1,199 908
Non-interest
expense 2,884 6,861 4,891 4,780
--------- --------- --------- ---------
Income
before
provision
for income
taxes 3,277 967 4,550 4,443
Provision for
income taxes 884 164 1,444 1,431
--------- --------- ---------- ---------
Net operating
income $ 2,393 $ 803 $ 3,106 $ 3,012
========= ========= ========== =========

Earnings per
share $ 0.24 $ 0.08 $ 0.32 $ 0.31
Fully diluted
earnings
per share $ 0.24 $ 0.08 $ 0.32 $ 0.31
Cash dividend
declared $ 0.05 $ 0.05 $ 0.05 $ 0.07

Years ended March 31, 1996
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

Interest
income $ 9,170 $ 9,310 $ 10,733 $ 12,196
Interest
expense 5,566 5,710 5,622 6,389
--------- --------- --------- ---------
Net
interest
income 3,604 3,600 5,111 5,807
Provision
for loan
losses 37 75 156 256
--------- --------- --------- ---------
Net
interest
income
after
provision
for loan
losses 3,567 3,525 4,955 5,551
Non-interest
income 542 472 170 484
Non-interest
expense 2,665 2,402 2,477 2,839
--------- --------- --------- ---------
Income
before
provision
for income
taxes 1,444 1,595 2,648 3,196
Provision for
income taxes 369 442 830 990
--------- --------- --------- ---------
Net operating
income $ 1,075 $ 1,153 $ 1,818 $ 2,206
========= ========= ========= =========

Earnings per
share $ (*) $ (*) $ (*) $ 0.22
Fully diluted
earnings
per share $ (*) $ (*) $ (*) $ 0.22
Cash dividend
declared $ N/A $ N/A $ 0.05 $ 0.05

(*)The Company converted from mutual to stock ownership on October 31, 1995;
therefore earnings per share information is meaningful only for the fourth
quarter of fiscal year 1996.

PAGE
<PAGE>
First Savings Bank of Washington Bancorp, Inc.
Index of Exhibits

Exhibit
- -----------------------------------------------------------------------------
2 Agreement and Plan of Merger dated March 11, 1996 between First
Savings Bank of Washington Bancorp, Inc. and Inland Empire Bank
[incorporated by reference to Exhibit 2 to the Current Report on Form
8-K dated March 15, 1996 (File No. 0-26584).]

3{a} Certificate of Incorporation of Registrant [incorporated by reference
to Registration Statement on Form S-1, as amended (File No.
33-93386).]

3{b} Bylaws of Registrant (incorporated by reference to Registration
Statement on Form S-1, as amended [File No. 33-93386).]

10{a} Employment Agreement with Gary L. Sirmon. [incorporated by reference
to exhibits filed with the Annual Report on Form 10-k dated March 31,
1996 (File No. 0-26584).]

10{b} Executive Salary Continuation Agreement with Gary L. Sirmon
[incorporated by reference to exhibits filed with the Annual Report
on Form 10-k dated March 31, 1996 (File No. 0-26584).]

10{c} Employment Agreement with D. Allan Roth. [incorporated by reference
to exhibits filed with the Annual Report on Form 10-k dated March 31,
1996 (File No. 0-26584).]

10{d} Executive Salary Continuation Agreement with D. Allan Roth.
[incorporated by reference to exhibits filed with the Annual Report
on Form 10-k dated March 31, 1996 (File No. 0-26584).]

10{e} Employment Agreement with Michael K. Larsen [incorporated by
reference to exhibits filed with the Annual Report on Form 10-k dated
March 31, 1996 (File No. 0-26584).]

10{f} Executive Salary Continuation Agreement with Michael K. Larsen.
[incorporated by reference to exhibits filed with the Annual Report
on Form 10-k dated March 31, 1996 (File No. 0-26584).]

10{g} 1996 Stock Option Plan [(incorporated by reference to Exhibit A to
the Proxy Statement for the Annual Meeting of Stockholders held on
July 26, 1996).

10{h} 1996 Management Recognition and Development Plan (incorporated by
reference to Exhibit B to the Proxy Statement for the Annual Meeting
of Stockholders held on July 26, 1996).

10{i} Employment and Non-competition Agreement with Jesse G. Foster.

10{j} Supplemental Retirement Plan as Amended with Jesse G. Foster.

21 Subsidiaries of the Registrant.

23 Consent of Independent Auditors.

27 Financial Data Schedule.

PAGE
<PAGE>
Exhibit 10(i)
EMPLOYMENT AND NONCOMPETITION AGREEMENT
---------------------------------------
For Jesse G. Foster

This agreement is made this 30 day of September 1994, by and between
Inland Empire Bank (hereinafter referred to as "Employer") and Jesse G. Foster
(hereinafter referred to as "Executive").

In consideration of the mutual covenants and conditions set forth below,
the parties hereby agree as follows:

1. Employment and Duties. Employer hereby employs
---------------------
Executive to serve in and to have, subject to the terms and conditions of this
Agreement, the authority and responsibilities of the position of President and
Chief Executive Officer and perform such other duties as Employer in its
discretion may from time to time determine and assign to him. Executive's
personal performance of his duties hereunder is the essence of this Agreement.
Executive agrees to diligently perform all such duties in accordance with
policy directions of the Board of Directors of Employer. If Executive is
elected or appointed to continue as an officer or director of Employer or any
subsidiary thereof during the term of this agreement, Executive will serve in
such capacity.

Executive will devote his productive time, ability, attention and best
efforts to the Company's business to the exclusion of all other business
activities; provided, that Executive may devote reasonable periods of time to
(a) serving on boards of directors of nonprofit corporations or charitable
institutions; provided, that such service shall be subject to the
confidentiality provisions of this Agreement; (b) engaging in charitable or
community service activities; or (c) engaging in personal investment
activities; so long as none of the foregoing additional activities materially
interferes with Executive's duties under this Agreement.

1. Term of Agreement. This Agreement shall commence on
the 30 day of September 1994, and continue, subject to
early termination as provided in paragraph 5 hereof,
for a term of five (5) year (s) from such date. Upon
expiration of the initial term of this Agreement, and
annually thereafter, this Agreement shall automatically
extend for an additional one-year term, unless either
party gives written notice to the other a least 60 days
in advance of their election not to renew.

1. Compensation. For all the services to be rendered by
Executive in any capacity hereunder, including services
as an officer, director, member of any committee or any
other duties assigned to him by the directors or
officers of Employer, Employer agrees to pay Executive
an initial salary of $8,358.00 per month. Such amount
may be adjusted upward but not downward during the term
of this Agreement in accord with Employer's past
practices at the sole discretion of the Board of
Directors. If serving as a director, Executive shall
be entitled to receive director's fees as established
from time to time by Employer's Board of Directors,
consistent with past practices.

In addition to other compensation set forth herein, Executive may, in
the sole discretion of Employer, be entitled to participate in, and receive
the benefit of, any plan or plans as may from time to time be adopted by the
Board of Directors of Employer providing for payment of bonuses to some or all
employees of the Company in the form of cash or other property.

PAGE
<PAGE>
Employer shall be entitled to withhold from Executive's cash
compensation in accordance with federal, state and local tax laws, income
taxes or other taxes required to be withheld with respect to compensation
(cash or otherwise) paid to Executive.

1. Executive Benefits. Executive shall be entitled to
participate in and receive the benefits of all
vacation, sick leave, comprehensive medical,
dental, disability, life insurance, savings,
retirement, and other benefit plans or policies,
according to their terms, as may from time to time be
adopted by the Board of Directors of Employer for its
employees, including but not limited to the 401(k)
Profit Sharing Plan, the Employee Stock Ownership Plan
and any replacement plan or plans. In addition,
Employer shall continue in effect the Supplemental
Retirement Plan for Executive so long as Executive
complies with Section 7 hereof, provided that such Plan
shall be amended to (a) modify the forfeiture
provisions so as to full vest Executive's benefits as
of the current date of this Agreement, (b) increase the
benefit from thirty percent (30%) of average career
compensation as defined in the Plan to forty percent
(40%), (c) provide for a benefit period of 12 years
rather than 15 years, and (d) reduce normal retirement
age to be the age of sixty-two (62) years rather than
sixty-five (65) years.

1. Early Termination. This Agreement may or will, as
appropriate, be terminated prior to the expiration of
the term set forth above in Section 2 in the following
circumstances:

(a) Disability. If the Executive is disabled and is
unable to perform the essential functions of his
duties hereunder on account of his illness or
other incapacity for a continuous period of
one-hundred eighty (180) days, Employer thereafter
may, upon ten (10) days written notice, terminate
this Agreement. For purpose of this subparagraph,
Executive will be deemed to have been continuously
disabled for one-hundred eight days (180) day if
lesser periods of disability total one-hundred
eighty (180) days and are separated by periods of
less than two weeks each.

(b) Death. In the event of the death of Executive,
this Agreement will terminate immediately, and
Employer shall pay to Executive's estate the
balance of any compensation due for services prior
to the date of Executive's death.

(c) Termination by Employer for Cause. Employer may
terminate this Agreement for Cause, without
advance notice of further obligation to Executive.
For purposes of this subparagraph, Employer will
have "Cause" to terminate this Agreement upon (i)
the willful failure by Executive to substantially
perform his duties hereunder (other than any such
failure resulting from Executive's incapacity due
to physical or mental illness), (ii) the engaging
by Executive in misconduct which is materially
injurious to Employer, monetarily or otherwise,
(iii) the willful violation by Executive to the
provisions of this Agreement; (iv) material breach
of any fiduciary duty owed by Executive to the
Employer, or material acts of dishonesty or
disloyalty relating to the business of Employer or
its relationships with employees, customers or
others with whom Employer does business; (v)
refusal of a state or federal banking regulatory
agency having jurisdiction over the Employer to
approve the appointment or the continuation of
Executive as the President of Employer; (vi)
habitual or repeated misuse of alcohol or
controlled substances; (vii) conviction of a crime
involving acts Executive constituting fraud,
intentional dishonesty, moral turpitude, or other
conduct which materially compromises the
reputation of Executive or Employer; or (viii)
willful and repeated failure or refusal to carry
out reasonable orders, instructions, or directives
of the Board of Directors.

PAGE
<PAGE>
(a) Termination Without Cause. Employer may terminate
this Agreement and Executive's employment with
Employer without cause upon sixty (60) days
notice. In such event, so long as Executive
complies with Section 7 hereof, Employer shall pay
Executive as severance his monthly salary, as in
effect at the date of termination, for the balance
of the then current term of this Agreement, and
shall have no further obligations to Executive
hereunder.

(a) Resignation. Executive may resign by giving
notice to Employer at least 60 days in advance and
specifying the effective date of resignation. In
such event, Employer shall pay Executive his
monthly salary through the effective date of
termination, provided, however, that if Executive
resigns within twelve (12) months after the
effective date of a Change in Control as defined
in Subsection 6(a), and so long as Executive
complies with Section 7 hereof, Employer shall pay
Executive his monthly salary through the date that
occurs twelve (12) months following the date of
termination of employment, but in no event longer
that the then current term of this Agreement as
determined pursuant to Section 2 hereof. Without
diminishing its obligation to pay Executive as
provided herein, Employer may, at its option,
relieve Executive of some or all of his
continuing duties and responsibilities during the
notice period.

(b) Effect of Termination on Savings and Retirement
Plans. Executive's rights under Employer's
retirement and savings plans, including without
limitation the 401(k) Profit Sharing Plan, the
Employee Stock Ownership Plan and Executive's
Supplemental Retirement Plan, following
termination or resignation shall be governed by
those Plans, except as provided in Section 4 and 7
hereof.

1. Change in Control and Assignability.

(a) Definition. "Change in Control" shall mean any of
the following events:

(i) Any person (including any individual or
entity) or group of persons acting in
concert shall become the beneficial owner of
voting shares representing 25% or more of the
voting power of the Company other than (1) the
DSB Trust and/or descendants of Doris S.
Bounds, (2) the Inland Empire Bank Employee
Stock Ownership Plan and Trust, or (3) a bank
holding company formed at the initiative
of Employer and with the approval of the Board
of Directors of Employer.

(ii) A majority of the Board of Directors of the
Employer are removed from office by a vote of
shareholders contrary to recommendation of the
Board of Directors then serving.

(iii) The Employer is a party to a Plan of Merger,
Plan of Exchange, or a sale of substantially
all of Employer's assets, and upon
consummation of such plan, the shareholders of
the Employer do not own or continue to own at
least a majority of the shares of the
surviving company.

(iv) A change in control shall have otherwise
occurred or must be reported pursuant to the
Change in Bank Control Act or the Bank Holding
Company Act as presently constituted or as
hereinafter amended.

PAGE
<PAGE>
(a) Assignability. This Agreement is personal to
Executive and shall not be assignable by Executive.
Employer may assign its rights hereunder to any
corporation, partnership, association, or other
person or entity carrying on the business of
Employer in connection with a change in control
(the "Successor Employer"). All terms and
provisions of this Agreement shall be binding upon
and shall inure to the benefit of and be
enforceable by the parties hereto and their
respective successors and permitted assigns.

(b) Change of Duties and Responsibilities Following a
Change in Control. Notwithstanding the provisions
of Section 1, Executive agrees that in the event of
a Change in Control as defined in Subsection
6(a)(iii) the Successor Employer may assign
Executive to a position other than President and
Chief Executive Officer, provided, (i) that the
status, duties, and responsibilities of the new
position (which may include a branch manager or
similar position in a branch or in a regional
office) are reasonably commensurate with
Executive's experience, skill, and ability; (ii)
that any such change in position shall not
negatively affect compensation and benefits
Executive is entitled to receive pursuant to
Section 3 and 4, and (iii) such position is at a
location within 50 miles of Employers current head
office.

1. Covenant Not to Compete.

(a) Covenant. During the term for which compensation
payments are being made hereunder, and in order to
be eligible to receive the benefit of the Amendment
to Executive's Supplemental Retirement Plan
provided for in Section 4 hereof, for a period of
one year following any termination of or
resignation by Executive hereunder, Executive shall
not participate, directly or indirectly, in any
business or entity which is engaged in commercial
banking, savings banking, savings and loan, credit
union, or a commercial, or consumer, or mortgage
lending business within 50 miles of the head office
of any branch office of Employer, including but not
limited to directly or indirectly soliciting or
influencing any customer or depositor of Employer
for the purpose of causing, encouraging or
attempting to cause or encourage such customer or
depositor to divert their current, ongoing or
future business from Employer or directly or
indirectly soliciting, influencing or assisting
anyone in the solicitation or influencing of any
other employee of Employer for the purpose of
causing, encouraging or attempting to cause or
encourage such other employee to leave the
employment of Employer.

(b) Definition. For purposes of Subsection 7(a) above,
the term "participate" includes, but is not limited
to, any conduct as an officer, director, employee,
agent, consultant, or independent contractor or as
an owner, partner, investor, or shareholder with in
excess of a 5% equity position of, or with respect
to, any business engaging in any of the activities
described above in Subsection 7(a).

(c) Judicial Limitation of Scope. The parties hereby
acknowledge and agree that any breach by Executive
of the limitations of this Section 7 will cause
substantial and irreparable harm to Employer and
that in view thereof, if in any judicial proceeding
in any applicable jurisdiction, the court
determines that the provisions of this Section 7
are unenforceable in such jurisdiction by reason of
the geographic area or business scope being to
extensive, or by reason that the limitations
survive for too long of a period of time, or for
any other reason, then the parties intend that the
limitations of this Section 7 shall be deemed to
cover such reduced maximum geographic area, reduced
maximum business scope and reduced maximum time
period as will permit enforceability by such court
in such jurisdiction.

PAGE
<PAGE>
1. Confidentiality. The parties acknowledge that in the
---------------
course of Executive's duties he will have access to and become familiar with
certain proprietary and confidential information of Employer and other
information about the Employer not known by its actual or potential
competitors, as well as confidential information about Employer's customers.
Executive acknowledges that such information constitutes, valuable, special,
unique assets of Employer's business even though such information may not be
protected under applicable trade secrets or related laws. Executive agrees
that he will hold in a fiduciary capacity and will not use for himself and
will not reveal, communicate, or divulge during the period of his employment
with Employer or at any time thereafter, any such data or confidential
information of any kind, nature, or description concerning any matters
affecting or relating to Employer's business, customers, or its services, to
any person, firm, or company other than Employer or persons, firms, or
companies designated by Employer. Executive agrees that all memoranda, notes,
records, papers, customer files, and other documents, and all copies thereof
relating to Employer's operations or business, or matters related to any of
Employer's customers, some of which may be prepared by Executive, and all
objects associated therewith and any way obtained by Executive, shall be
Employer's property.

2. Remedies for Violation of Sections 7 and 8. The
------------------------------------------
parties acknowledge and agree that any breach by Executive of Sections 7 and 8
of this Agreement will cause substantial and irreparable harm to Employer,
that recovery by the Employer of money damages will not constitute an adequate
remedy for such breach, and that the provisions of this Agreement may
therefore be specifically enforced, in addition to any other rights or
remedies available on account of such breach, including without limitations,
injunctive relief. Executive hereby waives the defense in any equitable
proceeding that there is an adequate remedy at law for any breach of this
Agreement.

3. Notices. Any notices required or permitted to be given
-------
under the terms of this Agreement, or by law, shall be in writing and may be
given by personal delivery or be certified mail, return receipt requested,
directly to Employer at 101 E. Main St., P. O. Box 1170, Hermiston, Oregon
97838, and if to Executive, to his home address as shown in the employment
records of Employer, or such other address as any party may designate in
writing prior to the time of giving of such notice. Unless otherwise provided
in this Agreement, any notice shall be effective when actually received, or if
given by certified mail, then seventy-two (72) hours after the deposit of such
notice in the U. S. Mail with postage and special charges prepaid.

4. Arbitration. Except in connection with enforcing
-----------
Section 7 and 8 of this Agreement, for which legal and equitable remedies may
be sought directly in a court of law pursuant to Section 9, any dispute
between the Executive and Employer or its directors, officers, managers,
supervisors, employees or agents involving the interpretation or application
of this Agreement or arising out of or relating to the employment
relationship, including, but not limited to, any claim for breach of contract,
wrongful termination, or violation of federal or state laws against
discrimination, shall be submitted to final and binding arbitration in
accordance with the commercial arbitration rules of the American Arbitration
Association ("AAA") then in effect, conducted by one arbitrator either
mutually agreed upon by the parties or selected in accordance with the AAA
rules. The arbitration shall be conducted in Oregon under the jurisdiction of
the Seattle, Washington office of the American Arbitration Association. In
any claim for breach of this Agreement, the arbitrator shall have authority
only to interpret and apply provisions of this Agreement, and shall have no
authority to add to, subtract from, or modify terms of this Agreement. Any
demand for arbitration must be made within sixty (60) days of the event(s)
giving rise to the claim.

<PAGE> <PAGE>
1. Attorney Fees. If any arbitration, action, or other
-------------
proceeding ("Proceeding") is brought to enforce or interpret the provisions of
this Agreement, the prevailing party shall be entitled to recover all costs
and expenses incurred in such Proceeding, or on appeal, including reasonable
attorney fees as fixed by the arbitrator or court, and including a reasonable
amount for costs and attorney fees to be incurred in collecting any money
judgment or award or otherwise enforcing each order, judgment, or decree
entered in the claim for relief, action or other proceeding. If either party
becomes the subject of any bankruptcy or other insolvency proceedings, the
party which becomes the subject of such proceedings will pay all legal costs
and expenses incurred by the other party in connection with such proceedings,
whether such amounts are incurred in connection with issues of state law,
federal law, bankruptcy law or otherwise.

2. Captions. The headings to the various divisions of
--------
this Agreement are for reference purposes only and shall not be construed as
affecting the meaning or interpretation of this Agreement.

3. Choice of Forum. Any claim or action arising out of or
---------------
in connection with this Agreement shall be brought exclusively in Circuit
Court of the State of Oregon for the County of Umatilla or the United States
District Court of Oregon and both parties hereby submit to the jurisdiction
of those courts and consent to venue in those courts for any such claims or
actions.

4. Entire Agreement. This Agreement constitutes the final
----------------
and complete expression of the parties with respect to the matters
contemplated herein and replaces and supersedes any prior agreements,
representation or understanding, whether written or oral, provided that this
Agreement does not supersede or modify any of the Bank's existing employee
benefit plans, such as the 401(k) Profit Sharing Plan and the Employee Stock
Ownership Plan, except as specifically provided herein with respect to
Executive's Supplemental Retirement Plan.

5. Modification. This Agreement may not be changed,
------------
modified, released, discharged, abandoned or otherwise amended, in whole or
part, except by an instrument in writing, signed by Executive and an
authorized Officer of Employer. Executive agrees that any subsequent change
or changes in his duties, salary, or compensation will not affect the validity
or scope of this Agreement.

6. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Oregon
applicable to contracts made and to be performed in Oregon, without regard to
conflicts of law principles thereunder.
7. Severability. If any provision of this Agreement or
------------
the application thereof to any person or circumstance shall be determined to
be invalid or unenforceable, the remainder of this Agreement, or the
application of such provision to person or circumstances other that those to
which it is invalid or unenforceable shall not be affected thereby and each
provision of this Agreement shall be valid and be enforced to the fullest
extent permitted by law.

Dated: 9/30/94 Executive:
-------
/s/ Jesse G. Foster
-------------------

Employer:
Inland Empire Bank

/s/ Richard A. Koch, M.D
------------------------
Chairman

PAGE
<PAGE>
EXHIBIT 10(j)
INLAND EMPIRE BANK
SUPPLEMENTAL RETIREMENT PLAN
FOR JESSE G. FOSTER
AS AMENDED

PARTIES:
- -------

INLAND EMPIRE BANK, an Oregon banking corporation
(Corporation)
JESSE GREGORY FOSTER
(Employee)

RECITALS:
- --------

Employee is employed by Corporation, with such employment
including substantial involvement in management of
Corporation's business, personal contact with customers,
knowledge of customer requirements related to Corporation's
business, or knowledge of trade secrets or other proprietary
information of Corporation.

The supplemental retirement benefits to be paid under the
terms of this agreement are in recognition of, and an
inducement for, services to be rendered by Employee to
Corporation during the term of this agreement.

A. The Employee and the Corporation have entered into an
Employment and Noncompetition Agreement dated September
30, 1994, which provided for certain amendments to the
original Supplemental Retirement Plan between these
parties dated September 10, 1987. The following
constitutes the amended and restated Plan including the
changes provided in Paragraph 4 of the Employment and
Noncompetition Agreement:

1. SUPPLEMENTAL RETIREMENT BENEFITS. Effective January
1, 1987, Employee shall be entitled to supplemental
retirement benefits payable to Employee under the
terms of this agreement.

a. Amount of Supplemental Retirement Benefits.
The amount of supplemental retirement
benefits Employee shall be entitled to each
calendar year following the occurrence of an
event described in Paragraph 1.b. shall be
an amount equal to forty percent (40%) of
Employee's career average compensation.
Employee's career average compensation
shall mean the average annual compensation
received by Employee from Corporation during
any three (3) calendar years prior to
Employee's death, disability or retirement
which shall produce the highest average
annual compensation for Employee. For
purposes of this agreement, any bonus,
profit sharing contribution, or other
benefit paid or credited to Employee shall
not be included in determining Employee's
total annual compensation. Calendar years
prior to the effective date to this
agreement shall be included in determining
Employee's career average compensation.

PAGE
<PAGE>
b. Timing of Payment of supplemental Retirement
Benefits. Payment of supplemental
retirement benefits to Employee shall
commence upon the first to occur of the
following events:

(i) Death of Employee
(ii) Disability of Employee
(iii)At age 62 if Employee's employment
had previously terminated for any
other cause.
(iv) At retirement or other termination
of employment for any cause after
age 62.

The disability of the Employee shall be determined as set forth in the
Employment and Noncompetition Agreement.

a. Form of Payment of Supplemental Retirement
Benefits. Payment of supplemental retirement
benefits shall be made in equal monthly
installments in an amount equal to forty percent
(40%) of Employee's career average compensation,
as determined under Paragraph 1.a., divided by
twelve (12). Payments shall begin on the first
day of the first calendar month following the
occurrence of an event described in Paragraph
1.b., and shall continue to be made on the first
day of each calendar month thereafter, for a
period of twelve (12) years, unless otherwise
terminated by the terms of this agreement.
Payment shall be made to Employee in the event
Employee's employment ceases by reason of the
retirement or disability of Employee. Payment
shall be made to the beneficiary of Employee, as
Employee may designate in accordance with
Paragraph 8, in the event of the death of
Employee. If no beneficiary shall survive
Employee, supplemental retirement benefits
payments payable hereunder shall be paid to
Employee's estate.

1. ACCOUNTING OF SUPPLEMENTAL RETIREMENT BENEFITS. The
obligations of Corporation to Employee under this agreement
shall not be funded. A supplemental retirement benefits
account shall be set up on the books of the Corporation with
respect to Employee. Such account shall accrue the present
value of the estimated liability of the Corporation as
determined by the certified public accountant for the
Corporation to Employee with regard to Employee's
supplemental retirement benefits.

1. CLAIMS OF CREDITORS. Any assets of Corporation which may be
designated by Corporation for payment of its liability for
supplemental retirement benefits to Employee under the terms
of this agreement shall be subject to the claim of general
unsecured creditors of Corporation. To the extent Employee
acquires a right to receive payment under this agreement,
such rights shall be no greater than the right of any general
unsecured creditors of Corporation. No trust or fiduciary
relationship between Corporation and Employee is created or
intended to be created by this agreement.

2. ASSIGNABILITY. This agreement is the personal agreement of
the parties hereto. The right of Employee to payment of
supplemental retirement benefits under the terms of this
agreement shall not be sold, assigned, transferred,
pledged or encumbered.

PAGE
<PAGE>
3. FORFEITURE. Notwithstanding any provision contained in this
agreement, no payments of any amounts due as supplemental
retirement benefits shall be made, and all rights of Employee
to payment of supplemental retirement benefits shall be
forfeited, if Employee violates the terms of Paragraph 7 of
this agreement.

4. TREATMENT AS SALARY. Any amounts paid or accrued as
supplemental retirement benefits under the terms of this
agreement shall not be considered wages or salary of Employee
for the purposes of nay profit sharing plan maintained by
Corporation.

5. COVENANT NOT TO COMPETE.

a. Covenant. For a period of one (1) year following any
termination of or resignation by Employee of his
employment with the Corporation, Employee shall not
participate, directly or indirectly, in any business or
entity which is engaged in commercial banking, savings
banking, savings and loan, credit union, or a
commercial, consumer, or mortgage lending business
within fifty (50) miles of the head office or any
branch office of the Corporation, including but not
limited to directly or indirectly soliciting or
influencing any customer or depositor of the
Corporation for the purpose of causing, encouraging or
attempting to cause or encourage such customer or
depositor to divert their current, ongoing or future
business from the Corporation or directly or indirectly
soliciting, influencing or assisting anyone in the
solicitation or influencing of any other employee of
the Corporation for the purpose of causing, encouraging
or attempting to cause or encourage such other employee
to leave the employment of the Corporation.

b. Definition. For purposes of subparagraph 7.a. above,
the term "participate" includes, but is not limited to,
any conduct as an officer, director, employee, agent,
consultant, or independent contractor or as an owner,
partner, investor, or shareholder with in excess of a
five percent (5%) equity position of, or with respect
to, any business engaging in any of the activities
described above in subparagraph 7.a.

c. Judicial Limitation of Scope. The parties hereby
acknowledge and agree that any breach by Employee of
the limitations of this Paragraph 7 will cause
substantial and irreparable harm to the Corporation and
that in view thereof, if in any judicial proceeding in
any applicable jurisdiction, the court determines that
the provisions of this Paragraph 7 are unenforceable in
such jurisdiction by reason of the geographic area or
business scope being too extensive, or by reason that
the limitations survive for too long of a period of
time, or for any other reason, then the parties intend
that the limitations of this Paragraph 7 shall be
deemed to cover such reduced maximum geographic area,
reduced maximum business scope and reduced maximum time
period as will permit enforceability by such court in
such jurisdiction.

1. DESIGNATION OF BENEFICIARY. Employee shall designate, on a
form provided by the Corporation, a beneficiary to receive
supplemental retirement benefits payable under the terms of
this agreement in the event of Employee's death. Such
designation shall be delivered to Corporation prior to the
effective date of this agreement. Employee may designate a
new beneficiary (without the consent of any prior
beneficiary) by delivering to Corporation written notice of
such designation at any time after the effective date of this
agreement.

PAGE
<PAGE>
2. CLAIMS PROCEDURE. Claims shall be made in the following
manner:

a. Upon the request of Employee, beneficiary of Employee
or personal representative of Employee's estate,
Corporation shall provide claim forms to Employee,
beneficiary of Employee or personal representative of
Employee's estate. Such claim form shall be completed
and submitted to Corporation no later than thirty (30)
days after its receipt. Upon receipt of the
appropriateness of the claim, and if Corporation
determines that the claim should not be allowed,
Corporation shall respond in writing within thirty (30)
day of the receipt of the completed form. Such
response shall include the specific reason or reasons
for the denial, specific references to pertinent
provisions of this agreement on which the denial is
based and a description of whatever additional material
or information, if any, need be supplied to perfect the
claim. If notice of the denial of a claim is not
furnished within thirty (30) days of receipt of the
completed claim form by Corporation, the claim shall be
deemed denied.

b. Within sixty (60) days after receipt of notice of
denial of the claim or when the claim is deemed to have
been denied, Employee, beneficiary of Employee or
personal representative of Employee's estate may
respond to the denial by requesting, in writing, a
review of the decision and a review of pertinent
documents. If such a response is made and review of
the decision to deny benefits is sought, issues and
comments must be submitted in writing to Corporation.
Such issues and comments shall specify the reasons that
the decision of Corporation is claimed to be erroneous.
Corporation shall review the contentions regarding the
denial of the claim and shall, within sixty (60) days
from Corporation's receipt of the request for review,
respond to such request.

1. GENERAL PROVISIONS.

a. Litigation. In the event any legal proceeding is
commenced for the purpose of interpreting or enforcing
any provision of this agreement, the prevailing party in
such proceeding shall be entitled to recover a
reasonable attorney fee in such proceeding or any appeal
thereof, to be set by the court without the necessity of
hearing testimony or receiving evidence, in addition to
the costs and disbursements allowed by law.

b. Binding Effect. This agreement shall be binding upon all
parties and their estates, legal representatives, heirs,
devisees, successors and assigns; provided that this
subparagraph shall not be construed as a modification of
any restriction on assignment contained herein.

c. Right to Employment. Nothing contained in this agreement
shall be construed as conferring upon Employee the right
to continue in the employ of Corporation.

d. Notices. Any notice required or permitted to be given
hereunder, or by law, shall be in writing and may be
given by personal delivery or by deposit in the United
States mails, with postage prepaid, directed to the
parties at the following addresses or such other
addresses as any party may designate in wiring, prior to
the date of the giving of such notice:

PAGE
<PAGE>
INLAND EMPIRE BANK
P.O. Box 1170
Hermiston, Oregon 97838

JESSE G. FOSTER
______________________

______________________

Notice shall be effective when actually received by any party; provided that
it shall be conclusively presumed as between the parties that any notice given
by certified mail is received within forty-eight (48) hours following the
deposit of such notice in the United States mails.

a. Partial Invalidity. If any provision of this agreement
is held to be invalid or unenforceable, all other
provisions shall nevertheless continue to be in full
force and effect.

Amendment dated effective September 30, 1994.

INLAND EMPIRE BANK

By:/s/ William H. Wright
------------------------
Senior Vice President

/s/ Jesse G. Foster
-------------------
Employee

PAGE
<PAGE>
INLAND EMPIRE BANK

SUPPLEMENTAL RETIREMENT PLAN

PARTIES:
- -------

INLAND EMPIRE BANK, an Oregon banking corporation

(Corporation)

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

(Employee)

RECITALS:
- --------

A. Employee is employed by Corporation, with such
employment including substantial involvement in
management of Corporation's business, personal contact
with customers, knowledge of customer requirements
related to Corporation's business, or knowledge of trade
secrets or other proprietary information of Corporation.
B. The supplemental retirement benefits to be paid under
the terms of this agreement are in recognition of, and
an inducement for, services to be rendered by Employee
to Corporation during the term of this agreement.

AGREEMENTS:
- ----------

1. SUPPLEMENTAL RETIREMENT BENEFITS. Effective January 1,
1987, Employee shall be entitled to supplemental
retirement benefits payable to Employee under the terms
of this agreement.

a. AMOUNT OF SUPPLEMENTAL RETIREMENT BENEFITS. The
amount of supplemental retirement benefits Employee
shall be entitled to each calendar year following
the occurrence of an event described in Paragraph
1.b. shall be an amount equal to thirty percent
(30%) of Employee's career average compensation.
Employee's career average compensation shall mean
the average annual compensation received by
Employee from Corporation during any three (3)
calendar years prior to Employee's death,
disability or retirement which shall produce the
highest average annual compensation for Employee.
For purposes of this agreement, any bonus, profit
sharing contribution, or other benefit paid or
credited to Employee shall not be included in
determining Employee's total annual compensation.

PAGE
<PAGE>
Calendar years prior to the effective date of this
agreement shall be included in determining
Employee's career average compensation.

b. TIMING OF PAYMENT OF SUPPLEMENT RETIREMENT
BENEFITS. Payment of supplemental retirement
benefits to Employee shall commence upon the first
to occur of the following events:
(i) Death of Employee
(ii) Disability of Employee
(iii)Retirement of Employee

The retirement of Employee shall not be prior to the normal retirement age of
sixty-five (65) unless otherwise specified by the Board of Directors of the
Corporation. The disability of Employee shall be determined by the Board of
Directors of the Corporation in its sole discretion.

a. FORM OF PAYMENT OF SUPPLEMENTAL RETIREMENT
BENEFITS. Payment of supplemental retirement
benefits shall be made in equal monthly
installments in an amount equal to thirty percent
(30%) of Employee's career average compensation, as
determined under Paragraph 1.a., divided by twelve
(12). Payments shall begin on the first day of the
first calendar month following the occurrence of an
event described in Paragraph 1.b., and shall
continue to be made on the first day of each
calendar month thereafter, for a period of fifteen
(15) years, unless otherwise terminated by the
terms of this agreement. Payment shall be made to
Employee in the event Employee's employment ceases
by reason of the retirement or disability of
Employee. Payment shall be made to the beneficiary
of Employee, as Employee may designate in
accordance with paragraph 8., if the Employee
ceases to be employed because of the retirement or
disability of Employee. If no such beneficiary
shall survive Employee, supplemental retirement
benefits payments payable hereunder shall be paid
to Employee's estate.

1. ACCOUNTING OF SUPPLEMENTAL RETIREMENT BENEFITS. The
obligations of Corporation to Employee under this
agreement shall not be funded. A supplemental
retirement benefits account shall be set up on the books
of the Corporation with respect to Employee. Such
account shall accrue the present value of the estimated
liability of the Corporation as determined by the
certified public accountant for the Corporation to
Employee with regard to Employee's supplemental
retirement benefits.

1. CLAIMS OF CREDITORS. Any assets of Corporation which
may be designated by Corporation for payment of its
liability for supplemental retirement benefits to
Employee under the terms of this agreement shall be
subject to the claim of general unsecured creditors of
Corporation. To the extent Employee acquires a right to
receive payment under this agreement, such rights shall
be no greater than the right of any general unsecured
creditor of

PAGE
<PAGE>
Corporation. No trust of fiduciary relationship between
Corporation and Employee is created or intended to be
created by this agreement.

2. ASSIGNABILITY. This agreement is the personal agreement
of the parties hereto. The right of Employee to payment
of supplemental retirement benefits under the terms of
this agreement shall not be sold, assigned, transferred,
pledged or encumbered.

3. FORFEITURE. Notwithstanding any provision contained in
this agreement, no payments of any amounts due as
supplemental retirement benefits shall be made, and all
rights of Employee to payment of supplemental retirement
benefits shall be forfeited, if:

a. Employee terminated employment with Corporation for
any reason, with or without cause.

b. Employee's employment by Corporation is terminated
for any reason, with or without cause, by the Board
of Directors.

c. Employee's employment by Corporation is terminated
for any reason, with or without cause, by an officer
of the Corporation and, the Board does not act within
ninety (90) calendar days from such termination to
waive the forfeiture of benefits as provided for
herein.

d. If the Employee ceases to be employed by Corporation
because of retirement of disability, and the Employee
fails or refuses during his lifetime to make himself
available to provide advice and consultation to
Corporation when reasonably requested to do so during
the period of payment of supplemental retirement
benefits, or

e. Employee violates the terms of Paragraph 7. of this
agreement.

1. TREATMENT AS SALARY. Any amounts paid of accrued as
supplemental retirement benefits under the terms of this
agreement shall not be considered wages or salary of
Employee for the purposes of any profit sharing plan
maintained by Corporation.

1. COVENANT NOT TO COMPETE. For a period of three (3)
years following commencement of payment as provided
under Paragraph 1.b., Employee shall not engage in the
business of banking in any capacity including, but not
limited to, an employee or independent contractor within
the Oregon counties of Morrow and Umatilla. If Employee
breaches the foregoing Corporation's obligations to pay
supplemental retirement benefits hereunder shall
immediately cease and this agreement shall become null
and void/. It is intended that this paragraph be
interpreted to be consistent with Oregon Revised Statute
653.295. to the extent that a court determines that the
requirements contained herein violate said statute, this
paragraph shall be modified in such manner as the court
shall determine to be reasonable to relation to the
services performed by Employee.

2. DESIGNATION OF BENEFICIARY. Employee shall designate,
on a form provided by the Board of Directors of the
Corporations, a beneficiary to receive supplemental
retirement benefits payable under the terms of this
agreement in the event of Employee's death. Such
designation shall be delivered to Corporation prior to
the effective date of this agreement.

PAGE
<PAGE>
Employee may designate a new beneficiary (without the
consent of any prior beneficiary) by delivering to
Corporation written notice of such designation at any
time after the effective date of this agreement.

3. CLAIMS PROCEDURE. Claims shall be made in the following
manner:

a. Upon the request of Employee beneficiary of Employee
or personal representative of Employee's estate,
Corporation shall provide claim forms to Employee,
beneficiary of Employee or personal representative of
Employee's estate. Such claim form shall be
completed and submitted to Corporation no later than
thirty (30) days after its receipt. Upon receipt of
the completed claim form, Corporation shall review
the appropriateness of the claim, and if Corporation
determines that the claim should not be allowed,
Corporation shall respond in writing within thirty
(30) days of the receipt of the completed form. Such
response shall include the specific reason or reasons
for the denial, specific references to pertinent
provisions of this agreement on which the denial is
based, and a description of whatever additional
material or information, if any, need be supplied to
perfect the claim. If notice of the denial of a
claim is not furnished within thirty (30) days of
receipt of the completed claim form by Corporation,
the claim shall be deemed denied.

b. Within sixty (60) days after receipt of notice of
denial of the claim or when the claim is deemed to
have been denied, Employee beneficiary of Employee or
personal representative of Employees estate may
respond to the denial by requesting, in writing, a
review of the decision and as review of pertinent
documents. If such a response is made and review of
the decision to deny benefits is sought, issues and
comments must be submitted in writing to Corporation.
Such issues and comments shall specify the reasons
that the decision of Corporation is contentions
regarding the denial of the claim and shall, within
sixty (60) days from Corporation's receipt of the
request for review, respond to such request.

1. GENERAL PROVISIONS.

a. LITIGATION. In the event any legal proceedings is
commenced for the purpose of interpreting or
enforcing any provision of this agreement, the
prevailing party in such proceeding shall be entitled
to recover a reasonable attorney fee in such
proceeding or any appeal thereof, to be set by the
court without the necessity of hearing testimony or
receiving evidence, in addition to the costs and
disbursements allowed by law.

a. BINDING EFFECT. This agreement shall be binding upon
all parties and their estates, legal representatives,
heirs, devisees, successors and assigns; provided
that this subparagraph shall not be construed as a
modification of any restriction on assignment
contained herein.

b. RIGHT TO EMPLOYMENT. Nothing contained in this
agreement shall be construed as conferring upon
Employee the right to continue in the employ of
Corporation

c. NOTICES. Any notices required or permitted to be
given hereunder, or by law, shall be in writing and
may be given by personal delivery or by deposit in
the United States mails, with postage prepaid,
directed to the parties at the following addresses or
such other addresses as any party may designate in
writing, prior to the date giving of such notice:

<PAGE> <PAGE>
INLAND EMPIRE BANK
P.O. Box 1170
Hermiston, Oregon 97838

______________________

______________________
Notice shall be effective when actually received by any party; provided that
it shall be conclusively presumed as between the parties that any notice given
by certified mail is received within forty-eight (48) hours following the
deposit of such notice in the United States mails.

a. Partial Invalidity. If any provision of this agreement
is held to be invalid or unenforceable, all other
provisions shall nevertheless continue to be in full
force and effect.

INLAND EMPIRE BANK

Dated 10 September, 1987 By:/s/ Roger Bounds
-------------------
President

Dated 10 September, 1987 /s/ Jesse G. Foster
-------------------
Employee

<PAGE> <PAGE>
EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT
- -----------------------------

We consent to the incorporation by reference in Registration Statement No.
333-10819 of First Savings Bank of Washington Bancorp, Inc. on Form S-8 of our
report dated May 9, 1997, appearing in the Annual Report on Form 10-K of First
Savings Bank of Washington Bancorp, Inc. for the year ended March 31, 1997.

/s/Deloitte & Touche LLP
- ------------------------

DELOITTE & TOUCHE LLP
June 27, 1997
Seattle, Washington

<PAGE>

<ARTICLE> 9
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<PERIOD-TYPE> YEAR
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<PERIOD-END> MAR-31-1997
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0
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</TABLE>