SECURITIES AND EXCHANGE COMMISSION
                          Washington, D.C. 20549
                         ----------------------------

                                 FORM 10-KSB

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

          For the year ended December 31, 1998
                                    OR

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

                     Commission File Number:  0-28934

                        EMPIRE FEDERAL BANCORP, INC.
------------------------------------------------------------------------------
      (Exact name of small business issuer as specified in its charter)

         Delaware                                  81-0512374
----------------------------------    ------------------------------------
(State or other jurisdiction of       (I.R.S. Employer Identification No.)
incorporation or organization

123 South Main Street, Livingston, Montana                   59047
------------------------------------------                ----------
(Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:  (406) 222-1981
                                                     --------------
Securities registered pursuant to Section 12(b) of the Act: None

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

                   Common Stock, par value $0.01 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 whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB.  YES  x    NO
                                                  -----    -----

     The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the Nasdaq National Market System under the symbol "EFBC"
on March 12, 1999, was $25,516,192.50 (2,001,270) shares at $12.75 per share).
It is assumed for purposes of this calculation that none of the Registrant's
officers, directors and 5% stockholders are affiliates.

     The Registrant's revenues for the year ended December 31, 1998 were
$8,537,786.

                   DOCUMENTS INCORPORATED BY REFERENCE

1.  Portions of Annual Report to Stockholders for the year ended December 31,
    1998 (Parts I and II)
2.  Portions of the Proxy Statement for the Annual Meeting of Stockholders
    (Part III)

Transitional Small Business Disclosure Format (check one)   Yes       No  X
                                                               -----    -----

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                                  PART I

Item 1.  Business
-----------------

     Empire Federal Bancorp, Inc. (the "Corporation"), a Delaware corporation,
was incorporated on September 20, 1996 for the purpose of becoming the holding
company for Empire Federal Savings Bank ("Empire Federal" or the "Bank") (the
Corporation and Empire Federal shall at times be referred to as the
"Corporation") upon Empire Federal's conversion from a federal mutual stock
savings and loan association to a federal stock Bank ("Conversion").  The
Conversion was completed on January 23, 1997.  At December 31, 1998, the
Corporation had total assets of $109.2 million, total deposits of $66.4
million and stockholders' equity of $36.3 million.  The Corporation has not
engaged in any significant activity other than holding the stock of Empire
Federal.  Accordingly, the information set forth in this report, including
financial statements and related data, relates primarily to Empire Federal.

     Empire Federal was organized in 1923 as a Montana-chartered mutual
building and loan association under the name "Empire Building and Loan
Association."  In 1970, the Bank converted to a federal charter and adopted
the name "Empire Federal Savings and Loan Association of Livingston."  In
connection with the conversion, the Bank adopted its current corporate title. 
The Bank's deposits are federally insured by the Federal Deposit Insurance
Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). 
The Bank is a member of the Federal Home Loan Bank ("FHLB") System.

     The Bank is a community oriented financial institution which has
traditionally offered a variety of savings products to its retail customers
while concentrating its lending activities on the origination of loans secured
by one- to four- family residential dwellings. The Bank considers Gallatin,
Park and Sweet Grass counties in south-central Montana as its primary market
area.  Lending activities also have included the origination of multi-family,
commercial real estate and home equity loans.  The Bank's primary business has
been that of a traditional thrift institution, originating loans in its
primary market area for its portfolio.  In addition, the Bank has maintained a
significant portion of its assets in investment and mortgage-backed
securities.  Similar to its lending activities, the Bank's investment
portfolio has been weighted toward U.S. Government agency mortgage-backed
securities secured by one- to four- family residential properties.  The
portfolio also includes U.S. Government agency securities.  Investment
securities, including mortgage-backed securities and FHLB stock, totaled $51.7
million, or 47.4% of total assets, at December 31, 1998.  In addition to
interest and dividend income on loans and investments, the Bank receives other
income from the sale of insurance products through its wholly-owned
subsidiary, Dime Service Corporation.

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    Loan Portfolio Analysis.  The following table sets forth the composition
of the Bank's loan portfolio as of the dates indicated.  The Bank had no
concentration of loans of a given category exceeding 10% of total gross loans
other than as set forth below. 

                                                 At December 31,
                                 -------------------------------------------
                                       1998                    1997
                                 -----------------        ------------------
                                  Amount  Percent         Amount    Percent
                                  ------  -------         ------    -------
                                             (Dollars in Thousands)
 One- to four-family . . . . .   $39,941    79.51%       $38,178     79.02%
 Multi-family. . . . . . . . .     4,731     9.42          3,162      6.54
 Commercial real estate. . . .     2,227     4.43          1,102      2.28
 Consumer. . . . . . . . . . .     2,595     5.17          3,095      6.41
 Share loans . . . . . . . . .       474      .94            591      1.22
 Construction. . . . . . . . .       265      .53          2,185      4.53
                                 -------   ------        --------   ------
  Total. . . . . . . . . . . .    50,233   100.00%        48,313    100.00%
Less:                                      ======                   ======
 Loans in process. . . . . . .       208                   2,086
 Deferred loan origination 
  fees and costs . . . . . . .       306                     314
 Allowance for loan losses . .       220                     200
                                 -------                 -------
   Total loans, net. . . . . .   $49,499                 $45,713
                                 =======                 =======

     Permanent Residential One- to Four-Family Mortgage Loans.  The primary
lending activity of the Bank is the origination for portfolio of permanent
residential one- to four-family first mortgage loans.  Management believes
that this policy of focusing on single-family residential mortgage loans has
been successful in contributing to interest income while keeping delinquencies
and losses to a minimum.  At December 31, 1998, $39.9 million, or 79.51%, of
the Bank's total loan portfolio, before net items, consisted of permanent
residential one- to four-family mortgage loans, with an average balance of
$60,000.

     The Bank presently originates for its portfolio fixed-rate mortgage loans
secured by non-owner occupied one- to four rental properties with terms of up
to 20 years and up to 30 years for owner-occupied residential properties.  At
December 31, 1998, $38.2 million, or 76.02% of the total loans before net
items were fixed rate one- to four-family loans and $1.8 million, or 3.48%,
were adjustable rate mortgage ("ARM") loans.  The Bank has offered two ARM
loan products for portfolio which adjust annually subject to a limitation on
the annual increase of 1.5% to 2.0% and an overall limitation of 5.0% or to a
specific ceiling rate. These ARM products utilize either the OTS Monthly
Median Cost of Funds Index or the Semi-Annual Cost of Funds Index ("COFI"). 
Loans based on COFI constitute a majority of the Bank's ARM loans.  The COFI
is a lagging model index which, together with the periodic and overall
interest rate caps, may cause the yield on such loans to adjust more slowly
than the cost of interest-bearing liabilities especially in a rapidly rising
rate environment.

     The Bank's ARM loans 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. 
The relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.

     ARM loans help reduce the Bank's exposure to changes in interest rates. 
There are, however, unquantifiable credit risks resulting from the potential
of increased costs due to changed rates to be paid by the customer.  It is
possible that during periods of rising interest rates the risk of default on
ARM loans may increase as a result of repricing with increased costs to the
borrower.  Another consideration is that although ARM loans allow the Bank to
increase the

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sensitivity of its asset base to changes in the interest rates, the extent of
this interest sensitivity is limited by the periodic and lifetime interest
rate adjustment limits.  Because of these considerations, the Bank has no
assurance that yields on ARM loans will be sufficient to offset increases in
the Bank's cost of funds.

     The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner occupied properties to 80% of the
lesser of the appraised value or the purchase price, however, most loans have
loan-to-value ratios of 75% or less.  Appraisals are obtained on all
properties and are made by independent fee appraisers approved by the Board of
Directors.

     The Bank offers fixed-rate, permanent owner-occupied  one- to four-family
mortgage loans with terms of up to 30 years.  Substantially all permanent one-
to four-family loans have original contractual terms to maturity of 20 to 25
years and are primarily made for loan amounts of less than $250,000.  Such
loans generally are amortized monthly with principal and interest due each
month and customarily include "due-on-sale" clauses.  The Bank enforces due-
on-sale clauses to the extent permitted under applicable laws.  Substantially
all of the Bank's mortgage loan portfolio consists of conventional loans.  The
Bank has not originated significant amounts of mortgage loans on second
residences.

     The Bank also originates residential mortgage loans secured by non-owner
occupied rental properties within its primary market area.  Generally, such
loans are made at higher interest rates than owner-occupied residential
mortgage loans, with a loan-to-value ratio of 70%, and with a debt coverage
ratio of 1.25x.

     The Bank requires title insurance on all real estate secured loans.   The
Bank also requires that fire and extended coverage casualty insurance or
homeowners insurance (and, if appropriate, flood insurance) be maintained in
an amount at least equal to the outstanding loan balance.

     Construction Loans.  The Bank originates construction loans primarily to
prospective home owners for the construction of their single-family
residences.  Construction loans generally convert to a permanent loan upon the
completion of construction.  Construction loans generally begin to amortize as
permanent residential one- to four-family mortgage loans after the
construction period (typically six months) is completed, unless extended.  At
December 31, 1998, construction loans amounted to $265,000, or .53%, of the
Bank's total loan portfolio, before net items.  Construction loans have rates
and terms which generally match the non-construction loans then offered by the
Bank, except that during the construction phase, the borrower pays only
interest on the loan.  The borrower is qualified at the interest rate for the
permanent loan.  The Bank's construction loan agreements generally provide
that loan proceeds are disbursed in increments as construction progresses. 
The Bank periodically reviews the progress of the underlying construction
project.  Construction lending is generally limited to the Bank's primary
lending areas and is underwritten pursuant to the same general guidelines used
for originating permanent one- to four-family loans.

     Construction financing is generally considered to involve a higher degree
of risk of loss than financing on improved, owner-occupied real estate because
of the uncertainties of construction and the possibility of costs exceeding
the initial estimates.  The Bank has sought to minimize the risks associated
with permanent construction lending by limiting construction loans to
qualified owner-occupied borrowers with construction performed by qualified
builders located primarily in the Bank's market area.

     Multi-Family and Commercial Real Estate Lending.  The Bank also
originates loans secured by multi-family and commercial real estate.  At
December 31, 1998, the Bank's loan portfolio included $4.7 million in
multi-family loans and $2.2 million in commercial real estate loans.

     Multi-family and commercial real estate lending affords the Bank 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
commercial

                                       3
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real estate and multi-family properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
influenced by adverse conditions in the real estate market or the economy.

     Multi-family and commercial real estate loans originated by the Bank are
predominately fixed-rate loans with terms to maturity of 15 to 20 years.  The
Bank's commercial real estate portfolio consists of loans on a variety of
properties located in the Bank's primary market area, including office
buildings and churches.  Multi-family loans generally are secured by small to
medium-sized apartment buildings.  Appraisals on properties which secure
multi-family and commercial real estate loans are performed by an independent
appraiser engaged by the Bank before the loan is made.  Underwriting of
commercial and multi-family loans includes a thorough analysis of the cash
flows generated by the real estate to support the debt service and the
financial resources, experience, and income level of the borrowers.  The Bank
imposes a debt coverage ratio of 1.25x to ensure that the property securing
the loans will generate sufficient cash flow to adequately cover operating
expenses and debt service payments plus provide an acceptable return to the
investor.  Operating statements on each multi-family and commercial real
estate loan are required and reviewed by management on an annual basis.

     At December 31, 1998, the average loan balance of the Bank's multi-family
loans was $249,000.  At December 31, 1998, the Bank had five multi-family
loans with two borrowers with an aggregate balance of $2.3 million, and the
Bank had one commercial loan in excess of $250,000 which is a loan
collaterized by a motel for $1.4 million.  All of the properties securing
multi-family loans are located in the Bank's primary market area with the
exception of one participation loan on a property located in California with a
balance at December 31, 1998, of $313,000.  At December 31, 1998, two multi-
family/commercial real estate loans amounting to $663,000 were delinquent.

     Consumer Lending.  The Bank's consumer loan portfolio consists primarily
of home equity, home improvement, share loans and, to a substantially lesser
extent, mobile home and automobile loans.  At December 31, 1998 the Bank's
consumer loans totalled approximately $3.1 million, or 6.11%, of the Bank's
gross loans of which $2.5 million, or 5.06%, consisted of home equity and home
improvement loans.

     Consumer loans are made at fixed interest rates and for varying terms. 
Home equity and home improvement loans are made for terms up to 15 years for
owner occupied residences.  In the case of home equity loans, the Bank holds a
second mortgage behind its own or another financial institution's first
mortgage.  When originating a home equity loan, the Bank accounts for both the
first and second mortgage liens and generally limits the loan-to-value ratio
to 80%.

     Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles.  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 that can be recovered on such loans.

                                       4
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     Maturity of Loan Portfolio.  The following table sets forth the maturity
of the Bank's loan portfolio at December 31, 1998.  The table does not include
prepayments of scheduled principal repayments.  All loans are shown as
maturing based on contractual maturities.

                                                               Consumer
                          1-4       Multi-   Comm-    Con-     and 
                          Family    Family   ercial struction  Shares   Total
                          ------    ------   ------ ---------  ------   -----
                                             (In Thousands)
Amounts Due:
 Within 3 months. . . . . $    15    $  --      $1    $ 100     $138     $254
 3 months to 1 year . . .       1       25      --      165      310      501
After 1 year:
 1 to 3 years . . . . . .     179       --      14       --      129      322
 3 to 5 years . . . . . .     359      181      56       --      330      926
 5 to 10 years. . . . . .   5,545      655     505       --      746    7,451
 10 to 20 years . . . . .  23,771    3,870   1,651       --    1,200   30,492
 Over 20 years. . . . . .  10,071       --      --       --      216   10,287
Total due after one       -------   ------  ------    -----   ------  -------
 year . . . . . . . . . .  39,925    4,706   2,226       --    2,621   49,478
                          -------   ------  ------    -----   ------  -------
Total amount due. . . . . $39,941   $4,731  $2,227    $ 265   $3,069   50,233
Less:                     =======   ======  ======    =====   ======
 Allowance for loan
  loss. . . . . . . . . .                                                 220
 Loans in process . . . .                                                 208
 Deferred loan fees . . .                                                 306
                                                                      -------
Loans receivable, net . .                                             $49,499
                                                                      =======

     The following table sets forth the dollar amount of all loans due after
December 31, 1998, which have fixed interest rates and have floating or
adjustable interest rates.

                                   Fixed-     Floating- or
                                   Rates      Adjustable-Rates      Total
                                   -----      ----------------      -----
                                              (In Thousands)

 One- to four-family . . . . .    $38,191        $1,750           $39,941
 Multi-family. . . . . . . . .      3,506         1,225             4,731
 Commercial. . . . . . . . . .      2,227            --             2,227
 Construction. . . . . . . . .        265            --               265
 Consumer and share. . . . . .      3,069            --             3,069
                                  -------        ------           -------
     Total . . . . . . . . . .    $47,258        $2,975           $50,233
                                  =======        ======           =======

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     Scheduled contractual principal repayments of loans as presented in the
preceding table do not reflect the actual life of such assets.  The average
life of loans ordinarily is substantially less than their contractual terms
because of prepayments.  In addition, due-on-sale clauses on loans generally
give the Bank the right to declare loans immediately due and payable in the
event, among other things, 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
higher than rates on existing mortgage loans and, conversely, decrease when
rates on existing mortgage loans are higher than current mortgage loan market
rates.

     Loan Solicitation and Processing.  Loan customers are solicited through
advertising media and contacts with local real estate brokers.  Upon receipt
of a loan application from a prospective borrower, a credit report and other
data are obtained to verify specific information relating to the loan
applicant's employment, income and credit standing.  All of the Bank's lending
is subject to its written nondiscriminatory underwriting standards, loan
origination procedures and lending policies prescribed by the Bank's Board of
Directors.

     All loans must be approved by the Bank's Loan Committee, which consists
of any three members of the Board of Directors.  Interest rates are subject to
change if the approved loan is not closed within the time of the commitment. 
Because the Bank originates loans for its own portfolio, many of the loans do
not comply with all secondary market documentation criteria.  This practice
has enabled the Bank to develop an expedited loan application and approval
process which management believes provides it with a competitive advantage in
its primary market area while continuing to maintain its underwriting
standards.  Management of the Bank also believes its local decision-making
capabilities is an attractive quality to customers within its market area. 
The Bank's loan approval process allows loans to be approved and closed in
approximately four weeks.

     Loan Commitments.   Loan commitments typically contain a termination date
of 30 days from the date of the commitment letter that is issued at the time
the loan is approved.  The Bank had outstanding loan commitments of
approximately $666,000 at December 31, 1998, all of which were for fixed rate
loans.

     Loan Originations, Sales and Purchases.  During the year ended December
31, 1998, the Bank's total gross loan originations were $17.2 million.

     The Bank has occasionally originated or participated in loans secured by
properties outside the State of Montana.  These properties are primarily
located in California but also include loans secured by one- to four- family
properties in Massachusetts, New Mexico, Arizona and Colorado.  At December
31, 1998, these loans amounted to $1.3 million and consisted of (i) $610,000
in permanent residential one- to four-family mortgage loans, (ii) $375,000 in
multi-family loans, and (iii) a participation interest in a commercial real
estate loan for $313,000.  The Bank has  purchased loan participation
interests primarily during periods of reduced loan demand in its market area. 
At December 31, 1998, the Bank had five participations in its primary market
area with a balance of $204,000.  Any such purchases are made in conformance
with the Bank's underwriting standards.  The Bank may decide to purchase
additional loans outside its market area in the future depending upon the
demand for mortgage credit in its market area, however, it has not purchased
any participation interests outside of its primary market area during the past
five years.

     Historically, the Bank has been a portfolio lender, maintaining the
residential mortgage loans it originates in its portfolio rather than selling
them in the secondary market.  The Bank currently intends to continue this
practice.

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     The following table sets forth the Bank's originations and loan sales and
principal repayments during the periods indicated.  Predominately all mortgage
loan originations during the periods indicated were fixed-rate loans.
                          
                                              Year Ended December 31,
                                           ---------------------------
                                             1998                1997
                                             ----                ----
                                                  (In Thousands)
Total gross loans receivable at
  beginning of period. . . . . . .         $48,313             $43,834         
                                           -------             -------
Loans originated:
 One- to four-family . . . . . . .          12,964               5,876
 Multi-family. . . . . . . . . . .             480               1,312
 Construction. . . . . . . . . . .           1,108               3,047
 Commercial. . . . . . . . . . . .           1,550                 134
 Consumer. . . . . . . . . . . . .           1,063               2,004
                                           -------             -------
   Total loans originated. . . . .          17,165              12,373

Loans sold:
 Whole loans . . . . . . . . . . .              --                  --
 Participations sold . . . . . . .              --                  --
   Total loans sold. . . . . . . .              --                  --

Loan principal repayments. . . . .         (15,245)             (7,894)
                                           -------             -------
Net loan activity. . . . . . . . .           1,920               4,479
                                           -------             -------
   Total gross loans receivable
    at end of period . . . . . . .         $50,233             $48,313
                                           =======             =======

     Loan Origination and Other Fees.  The Bank charges loan origination fees,
which are a percentage of the principal amount of the mortgage loan.  The
amount of fees charged by the Bank is generally up to 1% for mortgage loans
and 2% for construction loans.  The Bank generally does not charge fees for
home equity loans.  Current accounting standards require that origination fees
received (net of certain loan origination costs) be deferred and amortized
into interest income over the contractual life of the loan.  Net deferred fees
or costs associated with loans that are prepaid are recognized as income at
the time of prepayment.  The Bank had $306,000 in net deferred loan fees at
December 31, 1998.

     Non-Performing Assets and Delinquencies.  When a mortgage loan borrower
fails to make a required loan payment when due, the Bank institutes collection
procedures.  All loan payments are due on the contractual due date, however, a
loan is not considered delinquent and collection procedures are not instituted
until after the 30th day of the contractual due date.  The Bank does not
charge its borrowers late penalty fees on payments made after the contractual
due date because the Bank charges daily interest on the outstanding loan
balance.  The first notice is mailed to the borrower 30 days after the
contractual due date and, if necessary, a second written notice follows within
30 days thereafter giving the borrower 15 days to respond and correct the
delinquency.  Attempts to contact the borrower by telephone generally begin
soon after the first notice is mailed to the borrower.  If a satisfactory
response is not obtained, continuous follow-up contacts are attempted until
the loan has been brought current or foreclosure is initiated.  Attempts to
interview the borrower, preferably in person, are made to establish (i) the
cause of the delinquency, (ii) whether the cause is temporary, (iii) the
attitude of the borrower toward the debt, and (iv) a mutually satisfactory
arrangement for curing the default.

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     After such attempts have been made by the Bank, or sooner if the borrower
is chronically delinquent and all reasonable means of obtaining payment on
time have been exhausted, foreclosure is initiated according to the terms of
the security instrument and applicable law.  Interest income on loans is then
reduced by the full amount of accrued and uncollected interest.

     When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Bank institutes the same collection
procedures as for its mortgage loan borrowers.

     The Bank's Board of Directors is informed monthly as to the status of all
mortgage and consumer loans that are delinquent more than 30 days, the status
on all loans currently in foreclosure, and the status of all foreclosed and
repossessed property owned by the Bank.

     At December 31, 1998 and 1997, the Bank did not have any nonaccrual
loans, accruing loans contractually past due 90 days or more as to principal
or interest payments, or troubled debt restructurings within the meaning of
Statement of Financial Accounting Standards, ("SFAS") No. 15.  Loans amounting
to $1.1 million and $611,000 were past due, but still accruing at December 31,
1998 and 1997, respectively.  The increase in delinquent loans is primarily
related to two multi-family dwelling/commercial loans located in Park County. 
Management does not expect any significant loss from these delinquencies.

     Real Estate Owned.  The Bank had no real estate acquired through
foreclosure or in satisfaction of loans at December 31, 1998 or 1997.

     Asset Classification.  The OTS has adopted various regulations regarding
problem assets of savings institutions.  The regulations require that each
insured institution review and classify its assets on a regular basis.  In
addition, in connection with examinations of insured institutions, OTS
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 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 may 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 as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted.  If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset.  All or 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.  Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" and are 
monitored by the Bank.

     At December 31, 1998, the Bank had two substandard loans totaling $12,000
and at December 31, 1997 had two substandard loans totaling $80,000.

     Allowance for Loan Losses.  The Bank has established a systematic
methodology for determining provisions for loan losses.  The methodology is
set forth in a formal policy and considers the need for an overall general
valuation allowance as well as specific allowances for individual loans.

     In originating loans, the Bank recognizes 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 Bank may increase its allowance for loan
losses by charging provisions for loan losses against the Bank's income.

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<PAGE>
     The general valuation allowance is maintained to cover losses inherent in
the portfolio of performing loans.  Management reviews the adequacy of the 
allowance at least quarterly based on management's assessment of current 
economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio.  The amount of the allowance is based
on management's evaluation of the collectibility of the loan portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
peer group comparisons and economic conditions.  Allowances for impaired loans
are generally determined based on collateral values or the present value of
estimated cash flow.  Specific valuation allowances may be 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 December 31, 1998, the Bank had an allowance for loan losses of
$220,000, which management believed to be adequate to absorb losses inherent
in the portfolio at that date.  Although management believes that it uses the
best information available to make such determinations in accordance with
generally accepted accounting principles, 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.  Furthermore, there
can be no assurance that regulators, in reviewing the Bank's loan portfolio,
will not request the Bank to increase significantly its 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 will continue to be 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 Bank's financial
condition and results of operations.

     The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.

                                                  Year Ended December 31,
                                                  -----------------------
                                                  1998              1997
                                                  ----              ----
                                                  (Dollars in Thousands)
Total loans outstanding before net items . . .   $50,233          $48,313

Allowance balance at beginning of year . . . .       200              200
                                                 -------          -------
Provision . . . . . . . . . . . . .  . . . . .   
  One-to-four family . . . . . . . . . . . . .        20               19
  Consumer . . . . . . . . . . . . . . . . . .        --                1
                                                 -------          -------
Total. . . . . . . . . . . . . . . . . . . . .        20               20      
                                                 -------          -------
Net charge-offs. . . . . . . . . . . . . . . .
  One-to-four family . . . . . . . . . . . . .        --              (19)
  Consumer . . . . . . . . . . . . . . . . . .        --               (1)
                                                 -------          -------
Total. . . . . . . . . . . . . . . . . . . . .        --              (20)     
                                                 -------          -------
Allowance balance at end of year . . . . . . .   $   220          $   200
                                                 =======          =======
Allowance for loan losses as a percent
 of total loans outstanding. . . . . . . . . .      0.44%            0.41%

                                                 =======          =======

                                       9
<PAGE>
<PAGE>
     The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.  The portion of the allowance
to each loan category does not necessarily represent the total available for
losses within that category since the total allowance applies to the entire
loan portfolio.  The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any other category.

                                                At December 31,
                               -----------------------------------------------
                                      1998                          1997
                               --------------------       --------------------
                                      % of                      % of
                                      Loans                     Loans
                                      in Each                   in Each
                                      Category                  Category
                                      to Total                  to Total
                                Amount        Loans       Amount        Loans
                                ------        -----       ------        -----
                                            (Dollars in Thousands)

One- to four-family  . . . . .   $140         79.51%       $120        79.02%
Commercial real estate . . . .     40          4.43          40         2.28
Multi-family . . . . . . . . .     25          9.42          25         6.54
Construction . . . . . . . . .     --           .53          --         4.53
Consumer and share . . . . . .     15          6.11          15         7.63
                                 ----        ------        ----       ------
  Total allowance. . . . . . .   $220        100.00%       $200       100.00%
                                 ====        ======        ====       ======

Investment Activities

     The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Seattle, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds.  Subject to various
restrictions, the Bank may also invest a portion of its assets in commercial
paper and corporate debt securities.  The Bank is also required to maintain an
investment in FHLB stock as a condition of membership in the FHLB-Seattle.

     The Bank is required under federal regulations to maintain a minimum
amount of liquid assets.  At December 31, 1998, the Bank's regulatory
liquidity of 18.3% was significantly in excess of the 4% required by OTS
regulations.  The securities in the Bank's investment portfolio provide it
with liquidity for funding loan originations and enables the Bank to improve
the match between the maturities and repricing of its interest-rate sensitive
assets and liabilities.  See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources" contained in the Company's 1998 Annual Report to Stockholders
incorporated herein by reference.

     The President of the Bank determines appropriate investments in
accordance with the Board of Directors' approved investment policies and
procedures.  The Bank's policies generally limit investments to U.S.
Government and agency securities and mortgage-backed securities issued and
guaranteed by Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association  ("FNMA"), and Government National Mortgage
Association ("GNMA").  The Bank's policies provide that investment purchases
be ratified at monthly Board of Directors meetings.  Investments are made
based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, the Bank's liquidity position,
and anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments).  The effect that the proposed investment would
have on the Bank's credit and interest rate risk, and risk-based capital is
also given consideration during the evaluation.

                                       10
<PAGE>
<PAGE>
     At December 31, 1998, the Bank's investment and mortgage-backed
securities portfolio totaled $50.4 million and consisted principally of U.S.
Government and agency obligations and U.S. Government and agency mortgage-
backed securities.  At December 31, 1998, the Bank had investment securities
available-for-sale with an estimated market value of $5.0 million, which
includes stock in the FHLMC and two mutual funds, the assets of which
consisted of ARM loans and U.S. Government and agency securities.  The FHLMC
common stock at December 31, 1998 had an amortized cost of $55,000 and an
estimated market value of $3.1 million.  The market value of the FHLMC common
stock has increased significantly since its purchase in the mid-1980's.  From
time to time, investment levels may be increased or decreased depending upon
the yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the
future, as well as management's projections as to the short-term demand for
funds to be used in the Bank's loan origination and other activities.

     U.S. Government and Agency Obligations.  At December 31, 1998, the Bank's
portfolio of U.S. Government and agency obligations had a carrying value of
$1.5 million  maturing in 2006. At December 31, 1998, the interest rates on
these obligations ranged from 6.88% to 7.52%.

     Mortgage-Backed Securities.  The Bank 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 Bank as a result of the guarantees provided by FHLMC, FNMA, and
GNMA; (iii) enable the Bank to use mortgage-backed securities as collateral
for financing; and (iv) invest excess funds during periods of reduced loan
demand.  Included in the Bank's mortgage-backed securities portfolio are real
estate mortgage investment conduits ("REMICs"), which mature between 2008 and
2028 and have interest rates based primarily on the rate paid on U.S. Treasury
securities and the COFI.  At December 31, 1998, net mortgage-backed securities
totaled $45.4 million, or 41.55%, of total assets.  At December 31, 1998,
$10.6 million of the mortgage-backed securities had adjustable rates of
interest and $34.8 million had fixed rates.  The mortgage-backed securities
portfolio had coupon rates ranging from 6.01% to 12.5% and had a weighted
average yield of 6.67% during the year ended December 31, 1998.  At December
31, 1998, the amortized cost of the Bank's mortgage-backed securities held to
maturity was $10.5 million.

     Mortgage-backed securities (which also are known as mortgage
participation certificates or pass-through certificates) typically 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
Bank.  Such U.S. Government agencies and government sponsored enterprises,
which guarantee the payment of principal and interest to investors, primarily
include the FHLMC, FNMA and the GNMA.  Mortgage-backed securities typically
are issued with stated principal amounts, and the securities are backed by
pools of mortgages that have loans with interest rates that fall within a
specific range and have varying maturities.  Mortgage-backed securities
generally yield less than the loans that underlie such securities because of
the cost of payment guarantees and credit enhancements.  In addition,
mortgage-backed securities are usually more liquid than individual mortgage
loans and may be used to collateralize certain liabilities and obligations of
the Bank.  These types of securities also permit the Bank to optimize its
regulatory capital because they have low risk weighting.

     REMICs are generally classified 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 to create
two or more classes (or tranches) with different maturity or risk
characteristics designed to meet a variety of investor needs and preferences. 
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.  Investment practices of the Bank
prohibit the purchase of high risk REMICs.  The Bank held REMICs with a net
carrying value of $14.5 million at December 31, 1998.  REMICs may be sponsored
by private issuers, such as mortgage bankers or money center banks,

                                       11
<PAGE>
<PAGE>
or by U.S. Government agencies and government sponsored entities.  At December
31, 1998, the Bank did not own any privately issued REMICs.

     Thrift Bulletin Number 52 ("TB-52"), the OTS Policy Statement on
securities portfolio policies and unsuitable investment practices, requires
that institutions classify mortgage derivative products acquired, including
REMICs and certain tranches of CMOs, as "high-risk mortgage securities" if
such products exhibit greater price volatility than a benchmark fixed-rate
30-year mortgage-backed pass-through security.  Institutions may only hold 
high-risk mortgage securities to reduce interest-rate risk in accordance with
safe and sound practices and must also follow certain prudent safeguards in
the purchase and retention of such securities.  At December 31, 1998, the Bank
held $4.8 million securities that are identified under TB-52 as "high-risk
mortgage securities."  The Bank also evaluates its mortgage-backed securities
portfolio annually for compliance with applicable regulatory requirements,
including testing for identification of high risk investments pursuant to
Federal Financial Institutions Examination Council standards.

     Derivatives also 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 Bank's investment
policy does not permit investment in such "off balance sheet" derivative
instruments.

     Of the Bank's $45.4 million mortgage-backed securities portfolio at
December 31, 1998, $9.3 million had contractual maturities within six years
and $36.1 million had contractual maturities over six years.  The actual
maturity of a mortgage-backed security may be 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 a loss
of any premiums paid and thereby reduce 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 Bank may be subject to reinvestment risk because, to the
extent that the Bank's mortgage-backed securities amortize or prepay faster
than anticipated, the Bank 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 are segmented and
paid in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations.  A particular tranche of REMICs
may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches.

                                       12
<PAGE>
<PAGE>
     The following table sets forth information regarding the Bank's
mortgage-backed securities (including REMICs) activity for the periods
indicated.
                                                                               
                                               Year Ended December 31,
                                              -------------------------
                                                 1998            1997
                                                 ----            ----
                                                    (In Thousands)

 Beginning balance . . . . . . . . . . . . .   $47,641         $35,566
                                               -------         -------
 Mortgage-backed securities purchased. . . .    21,835          19,996     

 Amortization of premiums and discounts            141             (15)
 Principal repayments and change in
  fair market value. . . . . . . . . . . . .   (24,248)         (7,906)
                                               -------         -------
    Ending balance . . . . . . . . . . . . .   $45,369         $47,641
                                               =======         =======
   
    The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio at the dates indicated.

                                               At December 31,
                                  -------------------------------------------
                                        1998                   1997
                                  ------------------    ---------------------
                                            Percent                 Percent
                                  Amount    of Total    Amount      of Total
                                  ------    --------    ------      --------
                                           (Dollars in Thousands)
Mortgage-backed securities:
 REMIC . . . . . . . . . . . .    $14,549    32.07%     $12,956      27.19%
 GNMA. . . . . . . . . . . . .      6,862    15.13        5,302      11.13
 FNMA. . . . . . . . . . . . .     16,547    36.47       14,448      30.33
 FHLMC . . . . . . . . . . . .      7,411    16.33       14,935      31.35
                                  -------   ------      -------     ------
   Total . . . . . . . . . . .    $45,369   100.00%     $47,641     100.00%
                                  =======   ======      =======     ======

                                       13
<PAGE>
<PAGE>
     The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities portfolio as of December 31, 1998:

                                  Contractual Maturities
                             Due in Year(s) Ended December 31,
                      ------------------------------------------------
                                                              2015
                                              2002    2005    and
                                              to      to      There-
                      1999    2000    2001    2004    2014    after   Total
                      ----    ----    ----    ----    ----    -----   -----
                                          (In Thousands)
Mortgage-backed
 securities. . . . . $1,777  $2,514  $1,663  $3,311  $9,947  $26,157  $45,369
                     ======  ======  ======  ======  ======  =======  =======

     The following table sets forth the carrying value of the Bank's
investment securities portfolio, short-term investments and FHLB stock at the
dates indicated.

                                                     At December 31,
                                                     ---------------
                                                     1998       1997
                                                     ----       ----
                                                      (In Thousands)
Investment securities held to maturity:
 U.S. Government securities. . . . . . . . . .      $   --    $    --
 U.S. agency securities. . . . . . . . . . . .          --      1,500
                                                    ------    -------
   Total held-to-maturity securities . . . . .       1,500
Securities available-for-sale(1 and 2) . . . .       4,995      7,911
Interest-bearing deposits. . . . . . . . . . .       3,061      1,825
FHLB stock . . . . . . . . . . . . . . . . . .       1,361      1,261
                                                    ------    -------
   Total . . . . . . . . . . . . . . . . . . .      $9,417    $12,497
                                                    ======    =======

(1)  Includes FHLMC common stock and mutual funds.
(2)  Excludes mortgaged-backed securities.

                                       14
<PAGE>
<PAGE>
<TABLE>

     The following table sets forth certain information regarding the carrying values, weighted average
yields and maturities of the Bank's available-for-sale investment securities portfolios as of December
31, 1998.

                                        More Than      More Than
                                        One to         Five to         More Than            Total
                     One Year or Less   Five Years     Ten Years       Ten Years    Investment Securities
                     ----------------  ------------- --------------  ------------   ---------------------
                      Carry-    Aver-  Carry- Aver-  Carry-   Aver-  Carry- Aver-   Carry- Aver-
                      ing       age    ing    age    ing      age    ing    age     ing    age     Market
                      Value     Yield  Value  Yield  Value    Yield  Value  Yield   Value  Yield   Value
                      -----     -----  -----  -----  -----    -----  -----  -----   -----  -----   -----
                                                        (Dollars in Thousands)
<S>                   <C>       <C>    <C>    <C>    <C>      <C>    <C>    <C>     <C>     <C>    <C>
Securities available-
 for-sale. . . . . .  $3,459 (1)   --    --     --   $1,536   7.30%    --     --    $4,995  7.30%  $4,995
                      ========== ====  ====   ====   ======   ====   ====   ====    ======  ====   ======

(1) Consists of FHLMC common stock and mutual funds.

                                                         15
</TABLE>
<PAGE>
<PAGE>
Deposit Activities and Other Sources of Funds

     General.  Deposits and loan repayments are the major sources of the
Bank's 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 through the FHLB-Seattle may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources.  At December 31, 1998, the Bank had $4.0 million in
borrowings from the FHLB.

     Deposit Accounts.  Substantially all of the Bank's depositors are
residents of south-central Montana.  Deposits are attracted from within the
Bank's market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market 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 its deposit accounts, the Bank considers
current market interest rates, profitability to the Bank, matching deposit and
loan products and its customer preferences and concerns.  The Bank reviews its
deposit mix and pricing weekly.

     The following table sets forth certain information concerning the Bank's
time deposits and other interest-bearing deposits at December 31, 1998.

Weighted
Average                                                             Per-
Inter-                                                              centage
est    Original      Checking and                Minimum            of Total
Rate   Term          Savings Deposits            Amount  Balance    Deposits
----   ----          ----------------            ------  -------    --------
                                                      (In Thousands)

2.38%  None          NOW accounts                 $200   $  9,954     14.99%
3.00   None          Regular savings                 5     13,929     20.97
3.25   None          Money market accounts       1,000      4,805      7.23

                     Certificates of deposit:
                     -----------------------
4.75   1-3 months    Fixed term, fixed rate        500        807      1.22
5.07   4-6 months    Fixed term, fixed rate        500      6,214      9.36
5.28   7-12 months   Fixed term, fixed rate        500     11,403     17.17
5.48  13-24 months   Fixed term, fixed rate        500      7,644     11.51
5.73  25-36 months   Fixed term, fixed rate        500      6,256      9.42
6.16  37-48 months   Fixed term, fixed rate        500        904      1.36
6.45  49-120 months  Fixed term, fixed rate        500      3,773      5.68
5.52  Various        Jumbo certificates        100,000        724      1.09
                                                          -------    ------
                                                           66,413    100.00%
         Accrued interest on deposits                          93    ======
                                                          -------
         Total                                            $66,506
                                                          =======

                                       16
<PAGE>
<PAGE>
     The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December
31, 1998.

    Maturity Period                               Amount
    ---------------                               ------
                                              (In Thousands)

Three months or less . . . . . . . . . . .       $  849
Over three through six months. . . . . . .          540
Over six through 12 months . . . . . . . .          839
Over 12 months . . . . . . . . . . . . . .          617
                                                 ------
     Total . . . . . . . . . . . . . . . .       $2,845
                                                 ======
Time Deposits by Rates

     The following table sets forth the time deposits in the Bank classified
by rates at December 31, 1998.
                          
                                                  Amount
                                                  ------
                                              (In Thousands)

      3.00 - 5.00% . . . . . . . . . . . .      $ 7,016
      5.01 - 7.00% . . . . . . . . . . . .       29,331
   7.01 - 8.00%. . . . . . . . . . . . . .        1,378
                                                -------
Total. . . . . . . . . . . . . . . . . . .      $37,725
                                                =======

    The following table sets forth the amount and maturities of time deposits
at December 31, 1998.

                                                 Amount Due
                                ----------------------------------------------
                                December  December  December  December
                                   31,       31,      31,       31,
                                  1999      2000     2001      2002    Total
                                  ----      ----     ----      ----    -----
                                                (In Thousands)

  Time deposits. . . . . . . . . $26,577   $7,649   $2,149    $1,350  $37,725
Accrued interest on              =======   ======   ======    ======
 certificate accounts. . . . . .                                           93
    Total. . . . . . . . . . . .                                      -------
                                                                      $37,818
                                                                      =======
Savings Activities

    The following table sets forth the deposit activities of the Bank for the
periods indicated.

                                      Year Ended December 31,
                                    --------------------------
                                       1998            1997
                                       ----            ----
                                          (In Thousands)
Net decrease before interest
 credited. . . . . . . . . . . . .   $(3,405)       $(3,876)              
Interest credited. . . . . . . . .     2,959          3,037              
Net decrease in                      -------        -------
 deposits. . . . . . . . . . . . .   $  (446)       $  (839)
                                     =======        =======

                                       17
<PAGE>
<PAGE>
Borrowings

     While savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes, the
Bank also relies upon advances from the FHLB-Seattle to supplement its supply
of lendable funds, to meet deposit withdrawal requirements and to fund the
purchase of investment and mortgage-backed securities.  At December 31, 1998,
the Bank was eligible to borrow up to approximately $22.0 million, and had
borrowed $4.0 million.

     The FHLB-Seattle functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions. 
As a member, the Bank 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 United States 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.

     The following table sets forth information concerning only short-term
borrowings (those maturing within one year or less) the Bank had during the
periods indicated.

                                               Year Ended December 31,
                                              -------------------------
                                               1998                1997
                                               ----                ----
                                                (Dollars in Thousands)

Short-term FHLB advances:
  Average balance outstanding. . . . . . .    $   333           $    --
  Maximum amount outstanding at any
    month-end during the period. . . . . .      2,000             1,000
  Weighted average interest rate 
    during the period. . . . . . . . . . .       4.72%             5.78%
Total short-term borrowings at 
  end of period. . . . . . . . . . . . . .      2,000                --

For complete information on all borrowings of the Company see Note 8 of the
Notes to Consolidated Financial Statements in the Annual Report incorporated
herein by reference.

                                       18
<PAGE>
<PAGE>
Subsidiary Activities

    Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that at least one-half of any amount in
excess of 1% is used primarily for community, inner-city and community
development projects.  The Bank's investment in its service corporation, Dime
Service Corporation, did not exceed these limits at December 31, 1998.

    Dime Service Corporation is a wholly owned subsidiary of the Bank.  It was
established in 1985 to purchase and operate an insurance agency business.  In
1992 and 1993, Dime Service Corporation purchased the insurance business of
two local insurance agencies.  Dime Service Corporation presently engages in
full service property and casualty insurance activities under the name "Dime
Insurance Agency."  At December 31, 1998, the Bank's investment in Dime
Service Corporation was $417,000.  Dime Service Corporation had total assets
of approximately $535,000 at December 31, 1998, and net income of
approximately $52,000 for the year ended December 31, 1998.  See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
contained in Company's Annual Report incorporated herein by reference.

                                 REGULATION 

General

     The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits.  The activities of federal savings institutions are governed by the
Home Owners' Loan Act of 1933, as amended ("HOLA") and, in certain respects,
the Federal Deposit Insurance Act ("FDIA"), and the regulations issued by the
OTS and the FDIC to implement these statutes.  These laws and regulations
delineate the nature and extent of the activities in which federal savings
associations may engage.  Lending activities and other investments must comply
with various statutory and regulatory capital requirements.  In addition, the
Bank's relationship with its depositors and borrowers is also regulated to a
great extent, especially in such matters as the ownership of deposit accounts
and the form and content of the Bank's mortgage documents.  The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions.  There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements.  The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.  Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Corporation, the Bank
and their operations.  The Corporation, as a savings and loan holding company,
is also required to file certain reports with, and otherwise comply with the
rules and regulations of the OTS.

Federal Regulation of Savings Associations

     Office of Thrift Supervision.  The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury.  The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board. 
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.

     Federal Home Loan Bank System.  The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB").  The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.

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     The Bank, as a member of the FHLB-Seattle, is required to acquire and
hold shares of capital stock in the FHLB-Seattle in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB-Seattle.  The Bank is in compliance with this requirement with
an investment in FHLB-Seattle stock of $1.4 million at December 31, 1998.

     Among other benefits, the FHLB provides a central credit facility
primarily for member institutions.  It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System.  It
makes advances to members in accordance with policies and procedures
established by the FHLB and the Board of Directors of the FHLB-Seattle.

     Federal Deposit Insurance Corporation.  The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions.  The FDIC maintains two separate insurance funds:
the Bank Insurance Fund ("BIF") and the SAIF.  As insurer of deposits, the
FDIC has examination, supervisory and enforcement authority over all savings
associations.  The Bank's accounts are insured by the SAIF up to the maximum
extent permitted by law.

     Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period.  The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized.  An institution is also placed in one of three
supervisory subcategories within each capital group.  The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds.  An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.

     On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was
enacted, which, among other things, imposed a special one-time assessment on
SAIF member institutions, including the Bank, to recapitalize the SAIF.  As a
result of the DIF Act and the special one-time assessment, 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 the Bank, 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 0.065% 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 are charged an assessment to help pay interest on the
FICO bonds at a rate of approximately .013%.  Full pro rata sharing of the
FICO payments between BIF and SAIF members will occur until the earlier of
December 31, 1999, or the date the BIF and SAIF are merged.

     The FDIC is authorized to raise the assessment rates in certain
circumstances.  The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future.  If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank.

     Under the Federal Deposit Insurance Act (FDIA"), insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the OTS.  Management of the Bank
does not know of any  practice, condition or violation that might lead to
termination of deposit insurance.

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     Liquidity Requirements.  Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 4.0%) of its net withdrawable accounts plus short-term
borrowings.  Monetary penalties may be imposed for failure to meet liquidity
requirements.

     Prompt Corrective Action.  Each federal banking agency is required by law
to implement a system of prompt corrective action for institutions that 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 leverage 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, a
Tier I risk-based capital ratio of 4.0% or more and a leverage 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%, a Tier I risk-based capital ratio that
is less than 4.0% or a leverage 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%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage 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 is
engaging in an unsafe or unsound practice.  The OTS may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized.

     An institution generally must file a written capital restoration plan
that 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 December 31, 1998, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.

     Standards for Safety and Soundness.  The federal banking regulatory
agencies have prescribed, by regulation, to establish 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 OTS
determines that the 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.  Management is aware
of no conditions relating to these safety and soundness standards which would
require submission of a plan of compliance.

     Qualified Thrift Lender Test.  All savings associations, including Empire
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations.  This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis.  As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code.  Under either

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test, such assets primarily consist of residential housing related loans and
investments.  At December 31, 1998, Empire Federal met the test and its QTL
percentage was 93.87%.

     Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL.  If an association does not requalify and coverts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF.  If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state.  In addition, the
Bank is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends.  If such association
has not requalified or converted to a national bank within three years after
the failure, it must divest of all investments and cease all activities not
permissible for a national bank.  In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties.  If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies.

     Capital Requirements.  Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital.  Savings associations must meet all of the standards in
order to comply with the capital requirements.  The Corporation is not subject
to any minimum capital requirements.

     OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets).  Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities.  In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries. 
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance.  In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions. 
See "-- Federal Regulation of Banks -- Prompt Corrective Action."
 
     As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks.  The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%.  All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%.  The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement.  No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Bank.

     Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
 
     Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets.  Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined.  Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated

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debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
and (iii) general valuation loan and lease loss allowances up to 1.25% of
risk-weighted assets.

     The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets.  Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets.  The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due.  Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight.  Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio.  The book
value of assets in each category is multiplied by the weighting factor (from
0% to 100%) assigned to that category.  These products are then totalled to
arrive at total risk-weighted assets.  Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule.  These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included as risk-weighted assets.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule.  Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements.  A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS.  A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule.  The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets.  That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement.  Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data.  The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis.  Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure.  In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in
lieu of the OTS-calculated amount.  The OTS has postponed the date that the
component will first be deducted from an institution's total capital until
savings associations become familiar with the process for requesting an
adjustment to its interest rate risk component.

     At December 31, 1998, Empire Federal's core capital of approximately
$27.6 million, or 26.2% of adjusted total assets, was $24.4 million in excess
of the OTS requirement of $3.2 million, or 3% of adjusted total assets.  As of
such date, the Bank's tangible capital of approximately $27.6 million, or
26.2% of adjusted total assets, was $26.0 million in excess of the OTS
requirement of $1.6 million, or 1.5% of adjusted total assets.  Finally, at
December 31, 1998, the Bank had risk-based capital of approximately $29.2
million or 66.3% of total risk-weighted assets, which was $25.7 million in
excess of the OTS risk-based capital requirement of $3.5 million or 8% of
risk-weighted assets.
     
     Limitations on Capital Distributions.  OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers.  In addition, OTS regulations require the Bank to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of

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dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
 
     A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution). 
A Tier 1 savings association may make (without application but upon prior
notice to, and no objection made by, the OTS) capital distributions during a
calendar year up to 100% of its net income to date during the calendar year
plus one-half its surplus capital ratio (i.e., the amount of capital in excess
of its fully phased-in requirement) at the beginning of the calendar year or
the amount authorized for a Tier 2 association.  Capital distributions in
excess of such amount require advance notice to the OTS.  A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution).  Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement.  Capital
distributions exceeding this amount require prior OTS approval.  Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution).  Tier
3 associations may not make any capital distributions without prior approval
from the OTS.

     The Bank is currently meeting the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during the year.

     Loans to One Borrower.  Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower. 
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion.  The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units.  At December 31, 1998, the
Bank's limit on loans to one borrower was $3.6 million.  At December 31, 1998,
the Bank's largest aggregate amount of loans to one borrower was $2.2 million,
all of which were performing according to their original terms.

     Activities of Associations and Their Subsidiaries.  When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require.  Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.

     The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA. 
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary.  The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF.  If so, it may require that no SAIF member
engage in that activity directly.

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     Transactions with Affiliates.  Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank.  A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA.  Generally, Sections 23A and 23B:  (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms substantially
the same, or at least as favorable to the institution or subsidiary, as those
provided to a non-affiliate.  The term "covered transaction" includes the
making of loans, the purchase of assets, the issuance of a guaranty and
similar types of transactions.

     Three additional rules apply to savings associations:  (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B.  Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks.  The Bank has not been significantly
affected by the rules regarding transactions with affiliates.

     The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder.  Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk
of repayment.  Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the
Bank's capital position, and requires certain board approval procedures to be
followed.  The OTS regulations, with certain minor variances, apply Regulation
O to savings institutions.

     Community Reinvestment Act.  Under the Community Reinvestment Act
("CRA"), a federal statute, all federally-insured financial institutions have
a continuing and affirmative obligation consistent with safe and sound
operations to help meet all the credit needs of its delineated community.  The
CRA does not establish specific lending requirements or programs nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to meet all the credit needs of its
delineated community.  The CRA requires the federal banking agencies, in
connection with regulatory examinations, to assess an institution's record of
meeting the credit needs of its delineated community and to take such record
into account in evaluating certain regulatory applications filed by an
institution.  The CRA requires public disclosure of an institution's CRA
rating.  The Bank received a "satisfactory" rating as a result of its latest
evaluation.

     Regulatory and Criminal Enforcement Provisions.  Under the FDIA, the OTS
has primary enforcement responsibility over savings institutions and has the
authority to bring action against all "institution-affiliated parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution.  Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal
of officers or directors, receivership, conservatorship or termination of
deposit insurance.  Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or $1.0 million per day in especially egregious
cases.  Under the FDIA, the FDIC has the authority to recommend to the
Director of the OTS that enforcement action be taken with respect to a
particular savings institution.  If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances.  Federal
law also establishes criminal penalties for certain violations.

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Savings and Loan Holding Company Regulations

     General.  The Corporation is a savings and loan holding company within
the meaning of HOLA.  As such, the Corporation is registered with the OTS and
is subject to OTS regulations, examinations, supervision and reporting
requirements.  The Corporation is also subject to the information, proxy
solicitation, insider trading restrictions, and other requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act").

     Holding Company Acquisitions.  The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof.  They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25 percent of the voting shares of such holding company,
from acquiring control of any savings association not a subsidiary of such
savings and loan holding company, unless the acquisition is approved by the
OTS.

     Holding Company Activities.  As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions. 
If the Corporation acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company.  There generally are more restrictions on the activities of a
multiple savings and loan holding company than a unitary savings and loan
holding company.  Specifically, if either federally insured subsidiary savings
association fails to meet the QTL test, the activities of the Corporation and
any of its subsidiaries (other than the Corporation or other federally insured
subsidiary savings associations) would thereafter be subject to further
restrictions.  The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof which is not an insured
association shall commence or continue for more than two years after becoming
a multiple savings and loan association holding company or subsidiary thereof,
any business activity other than: (i) furnishing or performing management
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies.  Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple holding company.

     Qualified Thrift Lender Test.  The HOLA requires that any  savings and
loan holding company that controls a savings association that fails the
qualified thrift lender test, as explained under "-- Federal Regulation of
Banks -- Qualified Thrift Lender Test," must, within one year after the date
on which the association ceases to be a qualified thrift lender, register as
and be deemed a bank holding company subject to all applicable laws and
regulations.

                                 TAXATION

Federal Taxation

     General.  The Corporation and the Bank report their income on a calendar
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's 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
Bank or the Corporation.

     Tax Bad Debt Reserves.  For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts") were permitted to establish a reserve for bad debts and
to make annual additions thereto, which

                                       26
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additions may, within specified formula limits, have been deducted in arriving
at their taxable income.  The Bank's deduction with respect to "qualifying
loans," which are generally loans secured by certain interests in real
property, may have been computed using an amount based on the Bank's actual
loss experience, or a percentage equal to 8% of the Bank's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve.  The Bank's deduction with respect to
nonqualifying loans was computed under the experience method, which
essentially allows a deduction based on the Bank's actual loss experience over
a period of several years.  Each year the Bank selected the most favorable way
to calculate the deduction attributable to an addition to the tax bad debt
reserve.

     Federal legislation repealed the reserve method of accounting for bad
debt reserves for tax years beginning after December 31, 1995.  As a result,
savings associations are no longer able to calculate their deduction for bad
debts using the percentage-of-taxable-income method.  Instead, savings
associations are required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings association or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years.  This legislation also requires savings
associations to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability.  At December 31, 1998, the Bank's post-1987 reserves were
negligible. The recapture may be suspended for up to two years if, during
those years, the institution satisfies a residential loan requirement.  The
Bank met the residential loan requirement for the taxable year ending December
31, 1998.

     Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions
to its bad debt reserve.  Instead, the Bank would be required to deduct bad
debts as they occur and would additionally be required to recapture its bad
debt reserve deductions ratably over a multi-year period.  At December 31,
1998, the Bank's total bad debt reserve for tax purposes was approximately
$3.3 million.  Among other things, the qualifying thrift definitional tests
required the Bank to hold at least 60% of its assets as "qualifying assets." 
Qualifying assets generally include cash, obligations of the United States or
any agency or instrumentality thereof, certain obligations of a state or
political subdivision thereof, loans secured by interests in improved
residential real property or by savings accounts, student loans and property
used by the Bank in the conduct of its banking business.  Under current law, a
savings association will not be required to recapture its pre-1988 bad debt
reserves if it ceases to meet the qualifying thrift definitional tests.
 
     Distributions.  To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Bank's taxable income.  Nondividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in
partial or complete liquidation.  However, dividends paid out of the Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Bank's bad debt reserve.  Thus, any dividends to the Corporation that would
reduce amounts appropriated to the Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Bank.  The
amount of additional taxable income attributable to 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, if, the Bank makes a "nondividend
distribution," then approximately one and one-half times the amount so used
would be includable in gross income for federal income tax purposes, assuming
a 35% corporate income tax rate (exclusive of state and local taxes).  See
"REGULATION -- Federal Regulation of Banks -- Limitations on Capital
Distributions" for limits on the payment of dividends by the Bank.  The Bank
does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserve.

     Corporate Alternative Minimum Tax.  The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%.  The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item

                                       27
<PAGE>
<PAGE>
for purposes of computing the AMTI.  In addition, only 90% of AMTI can be
offset by net operating loss carryovers.  AMTI is increased by an amount equal
to 75% of the amount by which the Bank'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, 1997, an environmental tax of .12% of the excess of AMTI
(with certain modification) over $2.0 million is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid.

     Dividends-Received Deduction and Other Matters.  The Corporation may
exclude from its income 100% of dividends received from the Bank 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 Corporation and the Bank will not
file a consolidated tax return, except that if the Corporation or the Bank
owns more than 20% of the stock of a corporation distributing a dividend, then
80% of any dividends received may be deducted.

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

State Taxation  

     The Company is subject to the Montana Corporation License Tax, which is
imposed at the rate of 6.75% of Montana taxable income.  There have not been
any audits of the Company's state tax returns during the past five years.

Competition

     The Bank operates in an extremely competitive market for the attraction
of savings deposits (its primary source of lendable funds) and in the
origination of loans.  Historically, its most direct competition for savings
deposits has come from commercial banks, thrift institutions and credit unions
operating in its market area.  Some of these commercial banks are subsidiaries
of large regional holding companies having vastly greater resources than the
Bank at their disposal.  At December 31, 1998, there were 22 commercial banks
(including branch offices), two thrift institutions (in addition to the Bank)
and two credit unions in Park, Gallatin and Sweet Grass Counties. 
Particularly in times of high market interest rates, the Bank has faced
competition for investors' funds from short-term money market securities and
corporate and U.S. Government securities.  The Bank competes for loan
originations with mortgage bankers, thrift institutions, credit unions and
commercial banks.  Such competition for deposits and loans may limit the
Bank's future growth and earnings prospects.

Personnel

     As of December 31, 1998, the Bank had 36 full-time employees 13 of which
are employed by Dime Service Corporation and five part-time employees, none of
whom were represented by a collective bargaining unit.  The Bank believes its
relationship with its employees is good.

Item 2.  Description of Property
--------------------------------

     The Bank has three offices.   The main office is located at 123 South
Main Street, Livingston, Montana 59047.  The main office was opened in 1923
and the present square footage is approximately 15,000 feet.  Beginning in
September 1995, the Bank subleased part of this building to the Human Resource
Development Counsel, District IX.   The Bank purchased the building effective
July 1, 1998, which was approved by the OTS, for $750,000.  The sellers
accepted a 10-year 9% note as payment.  The net book value of the property and
equipment, including land previously owned, is $1,025,000.

                                       28
<PAGE>
<PAGE>
     The Bank has branch offices located at 101 McLeod Street, Big Timber,
Montana 59011 and at 5 West Mendenhall Street, Bozeman, Montana 59715.  The
Big Timber branch office consists of approximately 2,000 square feet, was 
opened in 1980 in connection with the merger of the Big Timber Building and
Loan Association, and relocated to its current facility in 1984.  At December
31, 1998, the net book value of the property and equipment was $215,000.  The
Bozeman branch office consists of approximately 7,000 square feet, was opened
in 1958 in connection with the merger with Pioneer Building and Loan
Association and relocated to its current facility in 1971.  At December 31,
1998, the net book value of the property and equipment was $828,000.  The net
book value of the Bank's premises and equipment at December 31, 1998 was $2.1
million.

     The Bank's subsidiary, Dime Service Corporation, leases offices in
Livingston and Big Timber, Montana.  The Livingston office is 2,500 square
feet and the Big Timber office is 365 square feet.  There are no written lease
agreements for these two offices.

Item 3.  Legal Proceedings
--------------------------

     From time to time, the Bank is involved in routine legal proceedings
occurring in the ordinary course of business.  At December 31, 1998, the Bank
was not a party to any legal proceedings that management of the Bank believed
would be materially adverse to the financial condition, results of operations,
cash flows or capital ratios of the Bank.

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

     No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1998.

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

     The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report is incorporated herein by
reference.

Item 6.  Management's Discussion and Analysis of Plan of Operation
------------------------------------------------------------------

     The required information is contained in section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report and is incorporated herein by reference.

Item 7.  Financial Statements
-----------------------------

     The Company's consolidated financial statements required herein are
contained in the Annual Report and are incorporated herein by reference.

Item 8.  Changes in and Disagreements With Accountants on Accounting and
------------------------------------------------------------------------
Financial Disclosure
--------------------

     No changes in or disagreements with the Corporation's independent
accountants on accounting and financial disclosure has occurred during the
past 24 months.

                                       29
<PAGE>
<PAGE>
                                PART III
                                
Item 9.  Directors, Executive Officers, Promoters and Control Persons;
----------------------------------------------------------------------
Compliance with Section 16(b) of the Exchange Act
-------------------------------------------------

     The information contained under the sections captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and Management," "Proposal
I   Electing Directors" and "Compliance with Section 16(a) of the Exchange
Act" in the Company's definitive proxy statement for the Company's Annual
Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.

Item 10.  Executive Compensation
--------------------------------

     The information contained under the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein
by reference.

Item 11.  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 "Voting Securities and Security
          Ownership of Certain Beneficial Owners and Management" in the Proxy
          Statement.

     (b)  Security Ownership of Management

          Information required by this item is incorporated herein by
          reference to the section captioned "Proposal I   Electing Directors"
          in the Proxy Statement.

     (c)  Management of the Company knows of no 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
          Registrant.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

     The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" and
"Voting Securities and Principal Holders Thereof" in the Proxy Statement.

                                       30
<PAGE>
<PAGE>
Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

     (a)  Exhibits
     
     3.1  Certificate of Incorporation of Empire Federal Bancorp, Inc. (1)
     3.2  Bylaws of Empire Federal Bancorp, Inc. (1)
     10.1 Employment Agreement with Beverly D. Harris (3)
     10.2 Employment Agreement with William H. Ruegamer
     10.3 Employee Stock Ownership Plan (1)
     10.4 Management Recognition and Development Plan (2)
     10.5 Stock Option Plan (2)
     11   Statement regarding computation of earning per share (see Note 1 to
          the Notes to Consolidated Financial Statements in the Company's
          Annual Report)
     13   Annual Report to Stockholders for the year ended December 31, 1998
     21   Subsidiaries of the Registrant
     23   Consent of Independent Auditors
     27   Financial Data Schedule

--------------------
(1)  Incorporated by reference to the Corporation's Registration Statement on
     Form SB-1, File No. 333-12653.
(2)  Incorporated by reference to the Registrant's Annual Meeting Proxy
     Statement dated March 16, 1998.
(3)  Incorporated by reference to the Registrant's Annual Report on Form
     10-KSB for the fiscal year ended December 31, 1998.

     (b)  Report on Form 8-K
     
          No Forms 8-K were filed during the quarter ended December 31, 1998.

                                       31
<PAGE>
<PAGE>
                                SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
     
                                   EMPIRE FEDERAL BANCORP, INC.


Date:  March 26, 1999          By: s/s/ William H. Ruegamer
       --------------              ---------------------------------------
                                   William H. Ruegamer
                                   President and Chief
                                   Executive Officer
                                   (Duly Authorized Representative)

     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
registrant and in the capacities and on the dates indicated.

By: s/s William H. Ruegamer                            March 26, 1999
    ------------------------------------               --------------
    William H. Ruegamer
    President and Chief Executive Officer
   (Principal Executive Officer)

By: s/s Beverly D. Harris                              March 26, 1999
    ------------------------------------               --------------
    Beverly D. Harris
    Vice Chairman and Director

By: s/s Walter J. Peterson Jr.                         March 26, 1999
    ------------------------------------               --------------
    Walter J. Peterson Jr.
    Chairman of the Board

By: s/s John R. Boe                                    March 26, 1999
    ------------------------------------               --------------
    John R. Boe
    Director

By: s/s Edwin H. Doig                                  March 26, 1999
    ------------------------------------               --------------
    Edwin H. Doig
    Director

By: s/s Sanroe J. Kaisler Jr.                          March 26, 1999
    ------------------------------------               --------------
    Sanroe J. Kaisler Jr.
    Director

By: s/s Walter R. Sales                                March 26, 1999
    ------------------------------------               --------------
    Walter R. Sales
    Director

By: s/s Burton Wastcoat                                March 26, 1999
    ------------------------------------               --------------
    Burton Wastcoat
    Director

                                       32
<PAGE>
<PAGE>
                               Exhibt 10-2
                                
                           EMPLOYMENT AGREEMENT

     THIS AGREEMENT is dated January 6, 1999, by and between EMPIRE FEDERAL
SAVINGS BANK (the "Savings Bank"); EMPIRE FEDERAL BANCORP, INC., a Delaware
corporation (the "Company"); and WILLIAM H. RUEGAMER (the "Executive").

     WHEREAS, the Company and the Savings Bank wish to assure themselves of
the services of Executive for the period provided in this Agreement; and

     WHEREAS, Executive is willing to serve in the employ of the Company and
the Savings Bank on a full-time basis for said period;

     NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:

1.   TERMS AND RESPONSIBILITIES.
     During the period of his employment hereunder, Executive agrees to serve
as President and Chief Executive Officer of the Company and the Savings Bank. 
During said period, Executive also agrees to serve, if elected, as a director
of the Company or any subsidiary or affiliate of the Company and the Savings
Bank.

2.   TERMS AND DUTIES.
     (a)  The term of this Agreement shall commence on January 1, 1999 (or
such earlier date as may be decided by the parties) (the "effective date"),
and shall continue for a period of thirty-six (36) full calendar months
thereafter.  The Board of Directors of the Savings Bank and the Company (the
"Boards") and the Executive may extend this agreement for an additional term,
at their pleasure.

     (b)  During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder, including activities and services related to the organization, 
operation and management of the Company and the Savings Bank; provided,
however, that, with the approval of the Boards, as evidenced by a resolution
of such Boards, from time to time, Executive may serve or continue to serve,
on the boards of directors of, and hold any other offices or positions in,
companies or organizations, which, in such Boards' judgment, will not present
any conflict of interest with the Company or the Savings Bank, or materially
affect the performance of Executive's duties pursuant to this Agreement.

3.   COMPENSATION AND REIMBURSEMENT.
     (a)  The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2 herein. 
The Company and the Savings Bank, collectively, shall pay Executive as
compensation a salary of $115,000.00 per year ("Base Salary").  Such Base
Salary shall be payable in accordance with the customary payroll practices of
the Company and the Savings Bank.   In addition to the Base Salary provided in
Section 3(a), the Company and the Savings Bank shall provide Executive at no
cost to Executive with all such other benefits as are provided uniformly to
permanent full-time employees of the Company and the Savings Bank.

     (b)  The Company and the Savings Bank will provide Executive with
employee benefit plans, arrangements and perquisites substantially equivalent
to those provided to other senior executives to the Company and the Savings
Bank.  Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive
benefits under any employee benefits plans including, but not limited to,
pension plans, medical coverage, or any other employee benefit plan or
arrangement made available by the Company and the

                                       33
<PAGE>
<PAGE>
Savings Bank in the future to its senior executives and key management
employees, subject to, and on a basis consistent with, the terms, conditions
and overall administration of such plans and arrangements.  Nothing paid to
Executive under any such plan or arrangement will be deemed to be in lieu of
other compensation to which Executive is entitled under this Agreement, except
as provided under Section 5(e).
 
     The Savings Bank shall also pay Executive $104,166.00 in compensation
benefits in three annual installments of $34,722.00 each, due on the 1st day
of June in each of the years 1999, 2000, and 2001.  In the event Executive is
terminated for cause, or in the event that Executive voluntarily resigns or
fails to fulfill his duties under this Agreement, any unpaid compensation due
under the terms of this paragraph shall be forfeited.

     (c)  In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Company and the Savings Bank shall provide Executive with a
Company and/or Savings Bank owned late-model vehicle and shall pay or
reimburse Executive for all insurance, taxes, fuel, maintenance, and any other
related expenses of said vehicle and for all reasonable travel and other
obligations under this Agreement and may provide such additional compensation
in such form and in such amounts as the Boards may from time to time
determine.

     (d)  In addition to the compensation set forth in subparagraphs (a), (b),
and (c) above, the Company and the Savings Bank shall pay or reimburse
Executive for all reasonable relocation expenses incurred by Executive moving
his home and family from Billings, Montana, to Livingston, Montana, not to
exceed the sum of $20,000.00.

4.   PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
     (a)  Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply.  As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following:  (i) the
termination by the Company and the Savings Bank of Executive's full-time
employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof; disability, as defined in Section 6(a) hereof; death;
retirement, as defined in Section 7 hereof; or Termination for Cause, as
defined in Section 8 hereof; (ii) Executive's resignation from the Company and
the Savings Bank's employ, upon (A) unless consented to by Executive, a
material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of lesser
responsibility, importance, or scope from the position and attributes thereof
described in Sections 1 and 2, above, (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, or (C) the liquidation or dissolution of the Company or the
Savings Bank.  Upon the occurrence of any event described in clauses (A), (B),
or (C), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed four (4) calendar months after the event giving rise to said right to
elect.

     (b)  Upon the occurrence of an Event of Termination, the Company and the
Savings Bank shall pay Executive, or, in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the payments due
to Executive for the remaining term of the Agreement, provided, however, that
if the Company or the Savings Bank are not in compliance with their minimum
capital requirements or if such payments would cause the Company or the
Savings Bank's capital to be reduced below their minimum capital requirements,
such payments shall be deferred until such time as the Company and the Savings
Bank are in capital compliance.  All payments made pursuant to this Section
4(b) shall be paid in substantially equal monthly installments over the
remaining term of this Agreement following Executive's termination; provided,
however, that if the remaining term of the Agreement is less than one (1) year
(determined as of Executive's Date of Termination), such payments and benefits
shall be paid to executive in a lump sum within thirty (30) days of the Date
of Termination.

                                       34
<PAGE>
<PAGE>
     (c)  Upon the occurrence of an Event of Termination, the Company and the
Savings Bank will cause to be continued medical coverage substantially
identical to the coverage maintained by the Company and the Savings Bank for
Executive prior to his termination.  Such coverage shall cease upon the
expiration of the remaining term of this Agreement.

5.   CHANGE IN CONTROL.
     (a)  No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the Company or the Savings Bank.  For
purposes of this Agreement, a "Change in Control" of the Company or the
Savings Bank shall be deemed to occur if and when (a) an offeror other than
the Company purchases shares of the common stock of the Company or the Savings
Bank pursuant to a tender or exchange offer for such shares, (b) any 
person(as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934) is or becomes the beneficial owner, directly or
indirectly, of securities of the Company or the Savings Bank representing 25%
or more of the combined voting power of the Company's then outstanding
securities, (c) the membership of the board of directors of the Company or the
Savings Bank changes as a result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Company or the Savings Bank approve a
merger, consolidation, sale or disposition of all or substantially all of the
Company's or the Savings Bank's assets, or a plan of partial or complete
liquidation.

     (b)  If any events described in Section 5(a) hereof constituting a Change
in Control have occurred or the Board of the Savings Bank or the Company has
reasonably determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent involuntary termination following the effective
date of a Change in Control (or voluntary termination following the effective
date of a Change in Control following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits (other
than a reduction affecting the Company or the Savings Bank's personnel
generally), or relocation of his principal place of employment by more than
thirty-five (35) miles from its location immediately prior to the Change in
Control), unless such termination is because of his death, retirement as
provided in Section 7, termination for Cause, or termination for Disability.

     (c)  Upon the occurrence of a Change in Control followed by Executive's
termination of Employment, the Company and the Savings Bank shall pay
Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a sum equal to 2.99 times Executive's "base
amount," within the meaning of Section 280G(b)(3) of the Internal Revenue Code
of 1986 ("Code"), as amended.  Such payment shall be made in a lump sum paid
within ten (10) days of Executive's Date of Termination.

     (d)  Upon the occurrence of a Change in Control followed by Executive's
termination of Employment, the Company or the Savings Bank will cause to be
continued medical coverage substantially identical to the coverage maintained
by the Company and the Savings Bank for Executive prior to his severance.  
Such coverage and payments shall cease upon the expiration of thirty-six (36)
months.

     (e)  Upon the occurrence of a Change in Control, Executive shall be
entitled to receive benefits due him under, or contributed by the Company or
the Savings Bank on his behalf, or pursuant to any retirement, incentive,
profit sharing, bonus, performance, disability or other employee benefit plan
maintained by the Savings Bank or the Company on Executive's behalf to the
extent that such benefits are not otherwise paid to Executive upon a Change in
Control.

     (f)  Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section would be deemed to include an "excess parachute
payment" under Section 280G of the Code, then, at the election of Executive,
(i) such payments or benefits shall be payable or provided to Executive over
the minimum period necessary to reduce the present value of such payments or
benefits to an amount which is one dollar ($1.00) less than three (3) times
Executive's "base amount" under Section 280G(b)(3) of the

                                       35
<PAGE>
<PAGE>
Code or (ii) Executive shall receive the amount payable under Section 5(c) as
the sole benefit payable under this Section 5.

6.   TERMINATION FOR DISABILITY.
     (a)  If during the term of this Agreement, the Executive becomes so
disabled or incapacitated that he is unable to perform the duties of Chief
Executive Officer and President, the Company or Savings Bank shall pay to him
Sixty-five percent (65%) of the fixed salary specified above herein during the
term of such disability or incapacity, but not beyond the terms of this
agreement.  In addition, the Company or the Savings Bank will cause to be
continued medical coverage substantially identical to the coverage maintained
by the Company and the Savings Bank prior to his disability, but not beyond
the term of this Agreement.

     (b)  The disability pay shall be reduced by the amount, if any, paid to
Executive under any plan of the Company and the Savings Bank providing
disability benefits to Executive.

7.   TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
     Termination by the Company and the Savings Bank of Executive based on
"Retirement" shall mean retirement at or after attaining age sixty-five (65)
or in accordance with any retirement arrangement established by Executive's
consent with respect to him.  Upon termination of Executive upon Retirement,
Executive shall be entitled to all benefits under any retirement plan of the
Savings Bank or the Company and other plans to which Executive is a party. 
Upon the death of Executive during the term of this Agreement, the Company and
the Savings Bank shall pay to Executive's estate the compensation due to
Executive through the last day of the calendar month in which his death
occurred.

8.   TERMINATION FOR CAUSE.
     (a)  Employer may terminate Executive's employment hereunder upon Ten
(10) days prior written notice, if due to Executive's personal dishonesty,
misconduct, breach of fiduciary duty involving personal profit, willful
violation of any law, rule or regulation (other than minor traffic violations
or similar offenses) or final cease-and-desist order, material breach of any
provision of this Agreement, or any other similar cause, including failure to
perform duties in accordance with the instructions of the Company or its Board
of Directors.

     (b)  If Executive's employment is terminated pursuant to this paragraph,
employer shall pay to Executive the compensation payable to Executive for the
month in which such termination occurs, prorated to the day of termination,
including accrued vacation, holiday, and other benefits described herein. 
After such payment is made, employer shall have no further financial
obligation to Executive pursuant to this Agreement.  Regardless of the
effective date of termination of Executive's employment hereunder, employer
may require Executive to quit employer's premises at any time following
delivery of written notice of termination hereunder.

     (c)  Any stock options granted to Executive under any stock option plan
or any unvested awards granted under any other stock benefit plan of the
Savings Bank, the Company, or any subsidiary or affiliate thereof, shall
become null and void effective upon Executive's receipt of Notice of
Termination for Cause, pursuant to Section 9 hereof, and shall not be
exercisable by Executive at any time subsequent to such Termination for Cause.
     
9.   REQUIRED PROVISIONS.
     (a)  The Company and the Savings Bank may terminate Executive's
employment at any time, but any termination by the Company and the Savings
Bank, other than Termination for Cause, shall not prejudice Executive's right
to compensation or other benefits under this Agreement.  Executive shall not
have the right to receive compensation or other benefits for any period after
Termination for Cause as defined in Section 8 herein.

     (b)  If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Company's or the Savings Bank's affairs by
a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and (G)(1)), the Company's and
the Savings Bank's obligations under

                                       36
<PAGE>
<PAGE>
the Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings.  If the charges in the notice are dismissed, the
Company and the Savings Bank may, in their discretion, (i) pay Executive all
or part of the compensation withheld while their contract obligations were
suspended and (ii) reinstate (in whole or in part) any of their obligations
that were suspended.
 
     (c)  If Executive is removed and/or permanently prohibited from
participating in the conduct of the Company's or the Savings Bank's affairs by
an order issued under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(4) or (g)(1)), all obligations of the Company and the Savings Bank
under the Agreement shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.

     (d)  If the Company or the Savings Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this paragraph shall not affect any 
vested rights of the parties.

     (e)  All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Company and the Savings Bank); (i) by the Director
of the Office of Thrift Supervision (the "Director") or his designee at the
time the Federal Deposit Insurance Corporation or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Company or the Savings Bank under the authority contained in Section 13(c)
of the FDIA or (ii) by the Director, or his designee at the time the Director
or such designee approves a supervisory merger to resolve problems related to
operation of the Company or the Savings Bank or when the Company or the
Savings Bank is determined by the Director to be in an unsafe or unsound
condition.  Any rights of the parties that have already vested, however, shall
not be affected by such action.

     (f)  Any payments made to Executive pursuant to this Agreement or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.

10.  NOTICE.
     Any purported termination by the Company or the Savings Bank or by
Executive shall be communicated by Notice of Termination to the other parties
hereto.  For purposes of this Agreement, a "Notice of Termination" shall mean
a written notice which shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision so indicated.

11.  NON-COMPETITION.
     (a)  Upon any termination of Executive's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, Executive agrees to
not compete with the Savings Bank and/or the Company for a period of one (1)
year following such termination in the cities of Livingston, Bozeman, and Big
Timber, Montana, or any other community in which the Savings Bank has
established an office.  Executive agrees that during such period and within
said cities, Executive shall not work or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes
with the depository, lending or other business activities of the Savings Bank
and/or the Company.  The parties hereto, recognizing that irreparable injury
will result to the Savings Bank and/or the Company, its business and property
in the event of Executive's breach of this Subsection 11(a), agree that in the
event of any such breach by Executive, the Savings Bank and/or the Company
will be entitled, in addition to any other remedies and damages available, to
an injunction to restrain the violation hereof by Executive, Executive's
partners, agents, servants, employers, employees, and all persons acting for
or with Executive.  Executive represents and admits that in the event of the
termination of his employment pursuant to Section 8 hereof, Executive's
experience and capabilities are such that Executive can obtain employment in a
business engaged in other lines and/or of a different nature than the Savings
Bank and/or the Company, and that the enforcement of a remedy by way of
injunction will not prevent Executive from earning a livelihood.  Nothing
herein will be construed as prohibiting the Savings Bank and/or the Company
from

                                       37
<PAGE>
<PAGE>
pursuing any other remedies available to the Savings Bank and/or the Company
for such breach or threatened breach, including the recovery of damages from
Executive.

     (b)  Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Company and the
Savings Bank and affiliates thereof, as it may exist from time to time, is a
valuable, special and unique asset of the business of the Company and the
Savings Bank.  Executive will not, during or after the term of his employment,
disclose any knowledge of the past, present, planned or considered business
activities of the Company or the Savings Bank or affiliates thereof to any
person, firm, corporation, or other entity for any reason or purpose
whatsoever.  Notwithstanding the foregoing, Executive may disclose any
knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and
activities of the Company and the Savings Bank.  In the event of a breach or
threatened breach by Executive of the provisions of this Section, the Company
and the Savings Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Company and the Savings Bank
or affiliates thereof, or from rendering any services to any person, firm,
corporation, or other entity to whom such knowledge, in whole or in part, has
been disclosed or is threatened to be disclosed.  Nothing herein will be
construed as prohibiting the Company and the Savings Bank from pursuing any
other remedies available to them for such breach or threatened breach,
including the recovery of damages from Executive.

12.  NO ATTACHMENT.
     (a)  Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrances, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to effect any such action shall be
null, void, and of no effect.
     
     (b)  This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Savings Bank, the Company, and their respective successors and
assigns.

13.  MODIFICATION AND WAIVER.
     This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.

14.  SEVERABILITY.
     If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.

15.  HEADINGS FOR REFERENCE ONLY.
     The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.

16.  GOVERNING LAW.
     This Agreement shall be governed by the laws of the State of Montana,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or
state law or regulation, the provisions of such law or regulation shall
prevail.  Venue for any dispute or controversy arising out of or in connection
with this agreement shall be in Park County, Montana.

17.  INDEMNIFICATION.
     The Company and the Savings Bank shall provide Executive (including his
heirs, executors and administrators) with coverage under the Bank's directors'
and officers' liability insurance policy. The Savings Bank shall

                                       38
<PAGE>
<PAGE>
indemnify Executive in accordance with the Savings Bank's indemnification
policy and federal regulations presently in effect or as hereinafter may be
amended.

18.  SUCCESSOR TO THE SAVINGS BANK OR THE COMPANY.
     The Savings Bank and the Company shall require any successor assignee,
whether direct or indirect, by purchase, merger, consolidation or otherwise,
to all or substantially all the business or assets of the Savings Bank or the
Company, expressly and unconditionally to assume and agree to perform the
Savings Bank's and the Company's obligations under this Agreement, in the same
manner and to the same extent that the Savings Bank and the Company would be
required to perform if no such succession or assignment had taken place.

19.  DUPLICATE ORIGINALS.
     This Agreement shall be executed in duplicate, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument.

     IN WITNESS WHEREOF, the Savings Bank and Company hereto have caused this
Agreement to be executed and their seals to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all
on the 6th day of January, 1999.

                                            "Savings Bank"

                                    EMPIRE FEDERAL SAVINGS BANK
ATTEST:
                               By:  s/s  Beverly D. Harris
                                    ----------------------------------
s/s Ann Worthington            Its  President
---------------------               ----------------------------------

                                              "Company"

                                    EMPIRE FEDERAL BANCORP, INC.
ATTEST:   
                               By:  s/s Beverly D. Harris
                                    ----------------------------------
s/s Ann Worthington            Its          President
---------------------               ----------------------------------
          (SEAL)


                                             "Executive"
WITNESS:                            s/s  William H. Ruegamer
                                    ----------------------------------
s/s Joseph T. Swindlehurst          WILLIAM H. RUEGAMER
--------------------------

                                       39
<PAGE>
<PAGE>

                                   Exhibit 13

                        Annual Report to Stockholders

<PAGE>

<PAGE>


                             1998 ANNUAL REPORT


                         EMPIRE FEDERAL BANCORP, INC.
         

<PAGE>

<PAGE>

                             TABLE OF CONTENTS
                                                                    Page
                                                                    ----

        Letter to Stockholders ...................................     1
        Selected Consolidated Financial Information...............     2
        Management's Discussion and Analysis of 
        Financial Condition and Results of Operations.............     5 
        Independent Auditors' Report..............................    17
        Consolidated Financial Statements.........................    18
        Notes to Consolidated Financial Statements................    22
        Common Stock Information..................................    43
        Directors and Officers....................................    44
        Corporate Information.....................................    45

                                __________

BUSINESS OF THE COMPANY

     Empire Federal Bancorp, Inc. (the Corporation) is a savings and loan
holding company headquartered in Livingston, Montana.  Its principal
subsidiary is Empire Federal Savings Bank (the Bank) (the Corporation and the
Bank shall at times be referred to as the "Corporation") which operates three
branches in south-central Montana.  The Corporation was incorporated on
September 20, 1996, for the purpose of becoming the holding company for the
Bank, upon its conversion from a federal mutual savings and loan association
to a federal stock association.  As part of the conversion process the
association's name was changed from "Empire Federal Savings and Loan
Association" to "Empire Federal Savings Bank".  The sale of stock by the
Corporation was completed and the conversion process finished on January 23,
1997.  The financial and other information contained in this Annual Report are
presented as if the conversion had been completed on December 31, 1996.  On
December 31, 1998, the Corporation had total assets of $109.2 million, total
deposits of $66.4 million, and stockholders' equity of $36.3 million.  The
Corporation's principal activity is holding the stock of the Bank. 
Accordingly, the information set forth in this report, including the
consolidated financial statements and related notes, relates primarily to the
Bank.

     The Bank was organized under the statutes of the State of Montana as
Empire Federal Building and Loan Association ("the Association"), and was
authorized to begin business on May 25, 1923.  The Association was granted
membership in the Federal Home Loan Bank System on March 3, 1933, and obtained
insurance of accounts from the Federal Savings and Loan Insurance Corporation
on August 12, 1937.  At a meeting held August 11, 1952, members of the
Association voted a name change to Empire Savings and Loan Association to keep
in step with modern terminology for the business.  On January 5, 1959, the
Association merged with the Pioneer Building and Loan Association of Bozeman
and continued the services of  Pioneer to the Bozeman community.  On June 25,
1970, the state-chartered Association converted to a federal charter and
changed its name to Empire Federal Savings and Loan Association.  On September
30, 1980, Empire Federal Savings merged with  Big Timber Building and Loan
Association and opened its doors to business in Big Timber.

     In 1985 the Bank formed a service corporation, Dime Service Corporation
and purchased the book of insurance of United Agencies in Livingston, and
began operation as Dime Insurance Agency, an independent insurance agency,
with offices in Livingston, Bozeman and Big Timber, Montana.

     The Bank is a community oriented financial institution which obtains
funds primarily through savings and checking deposits from the general public,
from repayment of loans, and from borrowings and retained earnings.  These
funds are used primarily to make first lien loans to borrowers for the
purchase of new and existing homes, or for the construction of homes.  The
Bank also makes home equity loans for a wide variety of purposes, finances
other types of real estate, and invests in obligations of the U. S. government
and its agencies.

<PAGE>


<PAGE>

                      [Empire Federal Bancorp Letterhead]


To Our Shareholders:

      1998 was a year of change for Empire Federal Bancorp, Inc. and its
subsidiary, Empire Federal Savings Bank.

      Your companies lost a senior officer when Ernest A. Sandberg died of
cancer on September 5.  Mr. Sandberg was Secretary-Treasurer and Chief
Financial Officer of Empire Federal Bancorp and Executive Vice-President at
Empire Federal Savings Bank.  He had been the chief lending officer of the
bank since 1969, and his leadership has been sorely missed.  Linda Alkire has
replaced Mr. Sandberg as Chief Financial Officer of the Company and Ann
Worthington is the Company's new secretary.

       Beverly D. Harris, who will be retiring during 1999, has assumed the
position of Vice Chairman of both companies, while William H. Ruegamer has
succeeded Mrs. Harris as President and Chief Executive Officer.  Mr. Ruegamer
brings over thirty years of community banking experience to his new position. 
His expertise will be invaluable to us as we work towards our goal of becoming
a full service community bank before the end of 1999.

      We will continue to offer our traditional home mortgages, savings, and
consumer checking accounts, while adding commercial and consumer products. 
Offering friendly, accurate and efficient service to our customers will remain
our highest priority.

      Net income for 1998 was $1,245,000 as compared to $1,586,000 in 1997. 
Our return on average assets was 1.15%.  The decline in net income is
primarily due to the accelerated vesting of shares awarded under the
Management Recognition and Development Plan to Mr. Sandberg's estate.  Net
income for the year would have been $1,515,000 had the accelerated vesting not
occurred.  Earnings per share were $.56 and cash dividends paid in 1998 were
$732,000 or $.32 per share.  During 1998, 369,698 shares of company common
stock were repurchased for $5,311,000 at an average price of $14.37 per share. 
The company had regulatory approval to purchase another 221,132 shares of
common stock during 1999, and this repurchase was completed as of March 5,
1999.  In spite of the repurchase of $5.3 million in company stock, our assets
remained relatively stable at $109.2 million.  Much of the cost of the stock
was offset by Federal Home Loan Bank advances of $4.0 million.  Savings
deposits decreased by $446,000.

      Loans outstanding increased by $3.8 million during 1998.  We have no
non-accrual loans, nor real estate acquired through foreclosure.

      At December 31, 1998, the Company's consolidated equity capital amounted
to $36.3 million, or 33% of total assets which is significantly in excess of
all regulatory requirements.  Net book value per share on December 31, 1998,
was $16.33.

      Our work on potential Y2K problems continued in 1998.  We purchased and
installed new teller equipment and software which has been tested for
compliance.  In addition we replaced our telephone system, and we continue to
work with our third party vendors in assessing their readiness.

      We have a highly capable staff, excellent asset quality, along with
experienced leadership, and a capital base which will allow us to expand our
franchise and increase long term shareholder value.  We look forward with
confidence to the challenges and opportunities which lie ahead.  Your
continued support is greatly appreciated.
        
Sincerely,

/s/William H. Ruegamer                          /s/Beverly D. Harris
William H. Ruegamer                             Beverly D. Harris
President & CEO                                 Vice Chairman

                                  1

<PAGE>

<PAGE>

                 SELECTED CONSOLIDATED FINANCIAL INFORMATION

     The following tables set forth certain information concerning the
consolidated financial position and results of operation of the Corporation at
the dates and for the periods indicated.  This information is qualified in its
entirety by reference to the detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Annual Report.  The
Corporation changed its fiscal year end from June 30 to December 31 in
connection with the Conversion.

<PAGE>
<TABLE>

                                                At December 31                   At June 30,   
                                          --------------------------       -----------------------
                                          1998       1997       1996       1996     1995      1994
                                          ----       ----       ----       ----     ----      ---- 
                                                                   (In Thousands)

SELECTED FINANCIAL 
 CONDITION DATA:

Total assets........................... $109,201   $109,801   $115,874   $86,810   $85,495    $86,143
Cash and interest-bearing deposits.....    5,154      2,904     30,990     2,499     2,196      2,098
Investment and mortgage-backed
 securities available-for-sale..........  39,866     36,496     13,768    13,877     1,192      1,081
Investment and mortgage-backed 
 securities held-to-maturity............  10,498     20,556     26,188    25,196    39,441     38,805
Loans receivable, net...................  49,499     45,714     41,704    41,882    39,432     41,387
Deposits................................  66,413     66,859     67,698    68,548    67,064     68,336
Advances from FHLB......................   4,000         --         --     1,500     1,751      2,189
Total equity, substantially restricted..  36,301     40,598     39,610    15,876    15,500     14,475
          

                                                Year          Six Months
                                                Ended           Ended
                                             December 31,    December 31       Year Ended June 30, 
                                            --------------       ----      ------------------------
                                            1998      1997       1996      1996      1995      1994
                                            ----      ----       ----      ----      ----      ----
                                                                  (In Thousands)
<S>                                       <C>        <C>        <C>       <C>       <C>        <C>
SELECTED OPERATING DATA:        

Interest income.........................  $7,665     $7,709     $3,230    $6,304    $6,305     $6,272
Interest expense........................   3,036      3,118      1,626     3,310     2,938      2,641
                                          ------     ------     ------    ------    ------     ------
  Net interest income...................   4,629      4,591      1,604     2,994     3,367      3,631
Provision for loan losses...............      20         20         --        55        --         --
                                          ------     ------     ------    ------    ------     ------
  Net interest income after
   provision for loan losses............   4,609      4,571      1,604     2,939     3,367      3,631
                                          ------     ------     ------    ------    ------     ------
Non-interest income:
  Insurance commission income...........     624        652        336       688       691        589
  Customer service charges..............     216        188         86       145       130        149
Other income............................      32         19         17        45        36         37

                                          ------     ------     ------    ------    ------     ------
   Total non-interest income............     872        859        439       878       857        775
          
                                 (table continued on following page) 

</TABLE>
                                                     2

<PAGE>

            

<PAGE>

<TABLE>
                                                Year          Six Months
                                                Ended           Ended
                                             December 31,        Dec.         Year Ended June 30, 
                                            --------------       ----      ------------------------
                                            1998      1997       1996      1996      1995      1994
                                            ----      ----       ----      ----      ----      ----
                                                                  (In Thousands)
Non-interest expense:
  <S>                                      <C>       <C>         <C>      <C>       <C>       <C>
  Compensation and benefits...............  2,156     1,621       807      1,615     1,542     1,385
  Occupancy and equipment.................    378       363       171        340       264       268
  Deposit insurance premiums .............     72        78        56        185       226       177
  SAIF special assessment.................     --        --       451         --        --        --
  Other general and administrative........    729       750       355        646       651       674
  Provision for losses on real 
   estate owned...........................     --        --        --         --        --        --      
                                           ------    ------    ------     ------    ------    ------
     Total non-interest expense...........  3,335     2,812     1,840      2,786     2,683     2,504
                                           ------    ------    ------     ------    ------    ------
    Income before income taxes............  2,146     2,618       203      1,031     1,541     1,902
Income tax expense........................    901     1,032        61        399       589       713
Income before cumulative effect of
 change in accounting principle...........  1,245     1,586       142        632       952     1,189
Cumulative effect of change in
 accounting for income taxes..............     --        --        --         --        --        56
                                           ------    ------    ------     ------    ------    ------
   Net income............................. $1,245    $1,586    $  142     $  632    $  952    $1,245
                                           ======    ======    ======     ======    ======    ======
</TABLE>

<TABLE>
                                            At or For the   At or For the
                                                Year          Six Months
                                                Ended           Ended            At or For the    
                                             December 31,    December 31,      Year Ended June 30, 
                                            --------------   ------------  ------------------------
                                            1998      1997       1996      1996      1995      1994
                                            ----      ----       ----      ----      ----      ----
  
<S>                                         <C>        <C>       <C>        <C>       <C>       <C>
SELECTED FINANCIAL RATIOS(1):
Performance Ratios:
Return on average assets (net income 
 divided by average assets)(2)............   1.15%     1.43%     0.32%      0.72%     1.12%     1.47%
Return on average equity (net income
 divided by average equity)(2)............   3.26      3.95      1.74       3.99      6.33      9.13
Dividend payout ratio (dividends 
 declared per share divided by net
 income per share)........................  57.14     33.58        --         --        --        -- 
Average interest-earning assets 
 to average interest-bearing 
 liabilities ............................. 154.90    155.55    121.86     119.33    118.48    117.34
Net interest income after provision
 for loan losses to total
 non-interest expense(2).................. 138.19    162.55     87.21     105.49    125.49    145.02
Interest rate spread......................   2.82      2.66      2.90       2.80      3.33      3.87
Net yield on average interest-earning 
 assets...................................   4.40      4.28      3.72       3.57      3.97      4.43
Efficiency ratio (non-interest
 expense divided by the sum of net
interest income and non-interest 
 income)(1)...............................  60.63    51.59      90.05      71.95     63.52     56.83

</TABLE>
                      (table continued on, and footnotes on, following page)

                                                3
<PAGE>


 <PAGE>

<TABLE>
                                            At or For the   At or For the
                                                Year          Six Months
                                                Ended           Ended            At or For the    
                                             December 31,    December 31,      Year Ended June 30, 
                                            --------------   ------------  ------------------------
                                            1998      1997       1996      1996      1995      1994
                                            ----      ----       ----      ----      ----      ----
<S>                                         <C>      <C>       <C>         <C>       <C>       <C>
Equity Ratios:
Average equity to average assets
 (average equity divided
 by average total assets)................   35.27    36.32      18.19      18.11     17.07     16.08
Equity to assets at year end.............   33.24    36.97      34.18      18.29     18.13     16.80

Asset Quality Ratios:
Non-performing assets to total assets....      --       --         --         --        --       0.02
Non-performing loans to total assets.....      --       --         --         --        --       0.02
Non-performing loans to net loans........      --       --         --         --        --       0.04
Allowance for loan losses, real estate
 owned and other repossessed assets to 
 non-performing assets...................       *        *          *          *         *     966.67
Allowance for loan losses to total
 loans outstanding.......................    0.44     0.41       0.46       0.46      0.36       0.34

</TABLE>

<TABLE>
                                                  At
                                              December 31,   December 31,       At June 30, 
                                            --------------   ------------  ------------------------
                                            1998      1997       1996      1996      1995      1994
                                            ----      ----       ----      ----      ----      ----

<S>                                       <C>       <C>       <C>         <C>        <C>       <C>         

OTHER DATA:

Number of:
 Real estate loans outstanding............   702       714        731        744        765       824
 Deposit accounts.........................10,078    10,368     10,598     10,632     10,623    10,692
 Full-service offices.....................     3         3          3          3          3         3
                 
*  Not meaningful.
(1)     Annualized, where appropriate, for the six months ended December 31, 1996.
(2)     Includes special SAIF assessment of $451,000 for the six months ended December 31, 1996.

</TABLE>
                                                        4
<PAGE>

<PAGE>

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

General

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

Operating Strategy

     The business of the Bank consists principally of attracting deposits from
the general public and using such deposits to originate mortgage loans secured
primarily by one- to four-family residences.  The Bank also invests in
interest-bearing deposits, investment grade federal agency securities and
mortgage-backed securities.  The Bank plans to continue to fund its assets
primarily with deposits, although FHLB advances have been used as a
supplemental source of funds.  

     The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits.  Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.  The Bank's
profitability is also affected by the level of other income and expenses. 
Other income consists of service charges on checking and NOW accounts and
other fees, and insurance commissions.  Other expenses include compensation
and employee benefits, occupancy expenses, deposit insurance premiums,
equipment and data servicing expenses, professional fees and other operating
costs.  The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the attendant actions
of the regulatory authorities.

     The Bank's strategy is to operate as a conservative, well-capitalized,
profitable institution dedicated to offering a fully line of community banking
services and to  providing quality service to all customers.  The Bank
believes that it has successfully implemented its strategy by (i) maintaining
strong capital levels, (ii) maintaining effective control over operating
expenses to attempt to achieve profitability under differing interest rate
scenarios, (iii) emphasizing local loan originations, and (iv) emphasizing
high-quality customer service with a competitive fee structure.

Year 2000 Issues

      As the Year 2000 approaches, significant concerns have been expressed
regarding the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the Year
2000 and thereafter.  Many existing application software products were
designed to accommodate only a two digit year.  The Bank's operating,
processing and accounting operations are computer reliant and could be
affected by the Year 2000 issues.  Both the Bank and the Corporation are
reliant on third-party vendors for most of their data processing needs as well
as certain other significant functions and services.

      For  nearly two years the Bank has been investigating and addressing
potential Year 2000 problems.  In the course of this process Empire has
examined its computer systems, phone systems, mailing and fax capabilities,
office environmental systems, and servicer relationships related to daily
business processing, ATM processing, ACH processing, check processing, wire
transfers processing, travelers check processing, and all other relevant
out-sourced services.  The general plan for

                                     5

<PAGE>

<PAGE>

addressing Year 2000 problems has been established by Corporation management,
and is currently on schedule with respect to implementation of that plan.  As
of December 31, 1998 all areas of potential impact directly addressable by the
Bank appear to be Year 2000 compliant.   Areas to be addressed by third-party
vendors have been represented as either fully compliant or on schedule for
full compliance.  The Corporation's plan for full Year 2000 compliance,
including a comprehensive second round of testing of third-party  provided
data systems, is scheduled to be complete by April 15, 1999.  The first round
of testing, focusing on critical operational systems, occurred in mid-November
1998 and was successful.

      The primary negative impact of the potential Year 2000 problem existed
in the Bank's  Olivetti-America 8-window teller hardware/software system
previously used in all three offices.  This system had known Year 2000
problems as well as other inadequacies relevant to current needs on the
working teller line.  During December 1998 the Bank replaced the existing
teller system with a PC-based teller system working internally at each office
with a Local Area Network (LAN) and tied together to the central office and
our primary servicer by a Wide Area Network (WAN).  This conversion  solved
the potential Year 2000 problem in the teller system, and also positioned the
Bank to take maximum advantage of current technology in banking as it enters
the 21st Century.  The cost of conversion and re-training and implementation
of the new PC-based system is approximately $225,000.  Most of the estimated
cost will be for the new teller system and will be depreciated over five
years.

      Because the Bank's operations are dependent on its computer systems and
those of third parties, the failure of these systems to be Year 2000 compliant
could cause substantial disruption of the Bank's business and could have a
material adverse financial impact.  Factors that might have material adverse
effects include, but are not limited to:  (1) loss of customers to other
financial institutions, resulting in a loss of revenue, if the Bank's third
party vendors are unable to properly process customer transactions; (2) the
failure of governmental agencies such as the Federal Home Loan Bank of Seattle
to provide funds to the Bank which could impair the Bank's ability to fund
loans and deposit withdrawals; (3) concern on the part of depositors that Year
2000 issues could impair access to their deposit account balances could result
in the Bank experiencing deposit outflows prior to December 31, 1999; and (4) 
increased personnel costs could be incurred if additional staff is required to
manually perform functions that inoperative systems would have otherwise
performed.  At the present time, it is not possible to determine whether any
such events are likely to occur, or to quantify any potential negative impact
they may have on the bank's future results of operations and financial
condition.  Because substantially all of the Bank's loan portfolio consists of
loans to individuals rather than to commercial enterprises, management
believes that Year 2000 issues will not impair the ability of the Bank's
borrowers to repay their debt.

      While the Corporation currently has no reason to believe that the cost
of addressing such issues will materially affect  Bank's products, services or
ability to compete effectively, no assurance can be made that the Corporation
or the third-party vendors on which is relies will become Year 2000 compliant
in a successful and timely fashion.  Nevertheless, the Corporation does not
believe that the cost of addressing the Year 2000 issues will be a material
event or uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions,
nor does it believe that the costs or the consequences of incomplete or
untimely resolutions of its Year 2000 issues represent a known material event
or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be indicative of
future financial condition.

Financial Condition

     Consolidated assets decreased by approximately $600,000, or 0.5%, from
$109.8 million at December 31, 1997, to $109.2 million at December 31, 1998.

     The consolidated balance sheet was not materially affected by market
conditions between December 31, 1997, and December 31, 1998.  Net maturities
and payments of $10.1 million reduced investment and mortgage-backed
held-to-maturity

                                     6

<PAGE>

<PAGE>

securities from $20.6 million at December 31, 1997, to $10.5  million at
December 31, 1998.  Net loans increased $3.8 million, or 8.3% of which $3.2
million consisted primarily of permanent and construction loans of 1-4
dwelling units and multi-family units.

     Deposits decreased by $446,000 or 0.7% to $66.4 million at December 31,
1998, from $66.9 million at December 31, 1997.

     Stockholders' equity decreased from $40.6 million at December 31, 1997,
to $36.3 million at December 31, 1998.  The change is the result of net income
of $1.2 million, the release of ESOP shares in the amount of $212,000 and an
increase of $628,000 related to the increase in market value of securities
available-for-sale.  In addition, during fiscal 1998 the Management
Recognition and Development Plan ("MRDP") purchased, through a trust funded by
the Company, 53,684 additional shares of Company shares for a total cost of
$927,000.  In addition, 35,425 shares of MRDP vested and unearned MRDP
compensation was reduced by $589,000.  Stockholders' equity was also decreased
by the payments of $732,000 in dividends.  During the year ended December 31,
1998, the Company repurchased 369,698 shares of its common stock in the open
market for an average price of $14.37 per share for a total of $5.3 million.

Asset Quality

     At December 31, 1998, the Bank did not have any nonaccrual loans or
troubled debt restructuring.  At December 31, 1998, Empire had ten loans that
were delinquent over 30 days amounting to $1.1 million of which two loans
amounting to $12,000 were delinquent over 90 days.  The Bank had no real
estate acquired through foreclosure at December 31, 1998.

Results of Operations

     The operating results of the Bank depend primarily on its net interest
income.  The Bank's net interest income is determined by its interest rate
spread, which is the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities
and the degree of mismatch in the maturity and repricing characteristics of
its interest- earning assets and interest-bearing liabilities.  The Bank's net
earnings are also affected by the establishment of provisions for loan losses
and the level of its other non-interest income, including insurance commission
income and deposit service charges, as well as its other expenses and income
tax provisions.

Comparison of Results of Operations for the Year Ended December 31, 1998 and
1997

      Net Income.  Net income was $1.2 million for the year ended December 31,
1998, as compared to $1.6 million for the same period in 1997.  The $341,000
decline in net income is caused primarily by the accelerated vesting of shares
awarded under the Management Recognition and Development Plan ("MRDP").  Under
the terms of the MRDP, shares awarded are vested and amortized to expense over
a 60-month period; however, upon the death of a participant, the vesting is
accelerated.  On September 5, 1998, the Chief Financial Officer of the Company
passed away, and 25,921 shares were released to the officer's estate.  The
accelerated vesting of deferred compensation amounted to $395,000 which was
charged to compensation expense in September 1998.  Net income for the year
ending December 31, 1998,  would have been $1.5 million if the accelerated
vesting would not have occurred.

      Interest Income.  Total interest income increased by $43,000, or 0.6%,
for the year ended December 31, 1998, as compared to the same period in 1997. 
The increase in interest on mortgage loans of $355,000 was attributable to the
increase in the average balance of loans outstanding from $44.1 million for
the year ended December 31, 1997, to $48.7 million for the year ended December
31, 1998.  This increase in volume was partially offset by a decrease in the
average yield from 8.44% for the year ended December 31, 1997, to 8.37% for
the same period in 1998.  Interest on mortgage-backed securities increased
$78,000 from $2.9 million for the year ended December 31, 1997, to $3.0
million for the comparable period in

                                      7

<PAGE>

<PAGE>

1998 as a result of an increase in average outstanding mortgage-backed
securities of $721,000 and an increase in the average yield from 6.57% to
6.64%.  Offsetting these increases were decreases in interest on investment
securities and other interest of $269,000 and $207,000 respectively.  These
decreases are the result of the reinvestment of maturing securities and
interest bearing deposits in mortgage loans and mortgage-backed securities, as
previously noted.

      Interest Expense.  Total interest expense decreased by $82,000 for the
year ended December 31, 1998, as compared to the same period in 1997.  The
decrease was the result of a $80,000 decrease in interest on deposits and a
$2,000 decrease in other interest expense.

      Average deposits for the year ended December 31, 1998, amounted to $66.5
million as compared to $67.3 million for the same period in 1997.  The decline
in deposit interest is the result of this decline in average outstanding
deposits for the year ended December 31, 1998, and a reduction in the average
cost of deposits from 4.49% to 4.42% for the year ended December 31, 1997, as
compared to the same period for 1998.

      Other interest expense of $98,000 for the year ended December 31, 1997,
related primarily to the interest paid for stock over-subscription on the
stock issuance date of January 23, 1997.  Interest expense of $96,000 for the
comparable period in 1998 is related to the debt associated with the purchase
of the main office building and FHLB borrowings.

      Provision for Loan Losses.  The provision for loan losses was
approximately $20,000 for the years ended December 31, 1998 and 1997.  At the
end of both years, the level of reserves was deemed to be adequate by
management.  Loan loss reserves as a percentage of loans was .44% at December
31, 1998, and .41% at December 31, 1997. Management's periodic evaluation of
the adequacy of the allowance is based on factors such as the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, current and prospective economic conditions, peer group
comparisons, and independent appraisals.  In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses.  Such agencies may require the
Bank to provide additions to the allowance based upon judgments different from
management.  Assessment of the adequacy of the allowance for credit losses
involves subjective judgments regarding future events, and thus, there can be
no assurance that additional provisions for credit losses will not be required
in future periods. Although management uses the best information available,
future adjustments to the allowance may be necessary due to economic,
operating, regulatory and other conditions that may be beyond the Bank's
control.  Any increase or decrease in the provision for loan losses has a
corresponding negative or positive effect on net income.

      Non-Interest Income.  Non-interest income increased $13,000 for the year
ended December 31, 1998, as compared to the same period in 1997 primarily as
the result of a $41,000 increase in customer service charges and other
non-interest income, offset by a decrease in commissions and profit sharing
contingencies from insurance companies of $28,000.

      Insurance commissions received from Dime are the largest component of
non-interest income.  Insurance commissions of $624,000 and $652,000 were
received for the years ended December 31, 1998, and 1997, respectively.  The
decrease in commission income resulted primarily from decreases in premiums
and commissions from key companies represented by Dime.

      Non-Interest Expense.  Total non-interest expense increased $524,000 for
the year ended December 31, 1998, compared to the year ended December 31,
1997.  This increase was largely the result of an increase in compensation and
benefits of $535,000, or 33.01% from $1.6 million for the year ended December
31, 1997, to $2.2 million for the comparable period in 1998.  The primary
cause of this increase is the previously discussed accelerated vesting of
25,921 shares of the MRDP as the result of the death of the Chief Financial
Officer of the Company.  The accelerated vesting of deferred compensation
resulted in a $395,000 charge to compensation expense in September 1998.  In
addition, vested shares of the 

                                     8


<PAGE>

<PAGE>

MRDP resulted in a charge of $194,000 for the year ended December 31, 1998. 
The MRDP became effective in January 1998.

      Income Taxes.  Income taxes decreased $130,000 from the year ended
December 31, 1997, as compared to the same period in 1998 as the result of the
decrease in income before income taxes.  The effective combined federal and
state tax rate was 42.01% and 39.43% for the years ended December 31, 1998 and
1997, respectively.  The increase in the 1998 federal and state tax rate is
the result of a portion of the MRDP charge for the year ended December 31,
1998 not being deductible.

Comparison of Results of Operations for the Year Ended December 31, 1997 and
1996

      Net Income.  Net income increased by $1.1 million, or 223.81%, to $1.6
million for the year ended December 31, 1997, from $490,000 for the same
period in 1996  This increase can be attributed to several factors:  In
September 1996 the FDIC imposed a special assessment intended to recapitalize
the SAIF, which lowered 1996 income.  The Bank's assessment was $451,000 on a
pre-tax basis ($268,000 on an after-tax basis).  In addition, interest income
increased by $1.3 million for the year ended December 31, 1997 as compared to
the same period in 1996 from the investment of approximately $23.1 million in
net proceeds from the sale of stock, and an increase in net loans of $4.0
million.  Net income for the year ended December 31, 1997, also increased
because of the reduced cost of interest-bearing deposits and a reduction in
deposit insurance premiums.

      Net Interest Income.  Net interest income increased $1.4 million, or
45.34%, to $4.6 million for the year ended December 31, 1997, from $3.2
million for the same period in 1996.  The increase in net interest income
primarily reflected an increase in the volume of average interest earning
assets attributed to the $23.1 million of net proceeds from the sale of stock. 

      Interest Income.  Total interest income increased by $1.3 million, or
20.11%, to $7.7 million for the year ended December 31, 1997, from $6.4
million for the same period in 1996.  The increase was primarily attributable
to the net investment of $23.1 million in investments and mortgage-backed
securities available-for-sale with stated rates ranging from 5.5% to 7.52% and
maturities ranging from 1998 to 2024.  These investments represent a majority
of the proceeds from the sale of stock, most of which were received in late
December 1996.

      Interest income on loans increased $156,000, or 4.38%, from $3.5 million
for the year ended December 31, 1997, to $3.7 million for the same period in
1997.  The increase is attributable to the increase in the average balance of
loans outstanding from $41.4 million for the period ended December 31, 1996,
to $44.1 million for the same period in 1997.  This increase in volume was
offset by a decrease in average yield from 8.62% for the year ended December
31, 1996, to 8.44% for the same period in 1997.

      Interest Expense.  Total interest expense was $3.1 million for the year
ended December 31, 1997, as compared to $3.3 million for the same period in
1996.  The $141,000, or 4.33%, decrease was the result of a $185,000 decrease
in interest on deposits offset by an increase of $44,000 in other interest
expense.

      The decline in deposit interest is caused by a reduction of $1.8 million
in average outstanding deposits for the year ended December 31, 1996, from
$68.9 million to $67.1 million for the same period in 1997.  In addition to
the decline in average deposits, the average cost of deposits for the year
ended December 31, 1996, was 4.65% and for the same period in 1997, the
average cost declined to 4.49%.

      Other interest expense of $53,000 for the year ended December 31, 1996,
related primarily to short-term borrowings from the FHLB.  There were only
nominal borrowings from the FHLB during the year ended December 31, 1997;
however, 

                                  9

<PAGE>

<PAGE>

during this period, $63,000 in interest was paid to stock subscribers on stock
issuance date of January 23, 1997.  Also included in other interest expense
for 1997 is $32,000 related to the debt associated with the purchase of the
main office building in July 1997.

      Provision for Loan Losses.  The provision for loan losses was $20,000
for the year ended December 31, 1997, as compared to a $55,000 provision in
the same period in 1996.  During the year ended December 31, 1997, the Bank
charged off $20,000 of mortgage loans.  Management's analysis of the loan
portfolio determined that the reserve would be restored to $200,000.  At the
end of both years, the level of reserves was deemed to be adequate by
management.  Loan loss reserves as a percentage of loans was .41% at December
31, 1997, and .46% at December 31, 1996. Management's periodic evaluation of
the adequacy of the allowance is based on factors such as the Bank's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, current and prospective economic conditions, peer group
comparisons, and independent appraisals.  In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowance for loan losses.  Such agencies may require the
Bank to provide additions to the allowance based upon judgments different from
management.  Assessment of the adequacy of the allowance for credit losses
involves subjective judgments regarding future events, and thus, there can be
no assurance that additional provisions for credit losses will not be required
in future periods. Although management uses the best information available,
future adjustments to the allowance may be necessary due to economic,
operating, regulatory and other conditions that may be beyond the Bank's
control.  Any increase or decrease in the provision for loan losses has a
corresponding negative or positive effect on net income.

      Non-Interest Income.  Non-interest income increased $3,000 for the year
ended December 31, 1997, as compared to the same period in 1996 primarily as
the result of a $25,000 increase in customer service charges.  This increase
was partially offset by a decrease in commissions and profit sharing
contingencies from insurance companies of $14,000.

      Insurance commissions received from Dime Insurance are the largest
component of non-interest income.  Insurance commissions of $652,000 and
$666,000 were received for the years ended December 31, 1997, and 1996,
respectively.  The decrease in commission income resulted primarily from
increased competition and reduced premiums and commissions from key companies
represented by Dime.

      Non-Interest Expense.  Total non-interest expense decreased $343,000 for
the year ended December 31, 1997, compared to the same period in 1996.  This
net change was the result of several factors:
       
      .     On September 30, 1996, the FDIC imposed a one-time special
            assessment to all thrift institutions intended to recapitalize the
            SAIF.  The Bank's assessment was $451,000.
        
      .     Compensation and benefits, while remaining relatively stable for
            the years ending December 31, 1997, and 1996, did include a
            $204,000 charge for 1997 related to the newly adopted ESOP.  For
            the same period in 1996, a bonus accrual of $139,000 and a pension
            accrual of $71,000 was recorded.  For the year ending December 31,
            1997, no provision for the pension was made because of the fully
            funded status of the plan.  The bonus paid in 1997 was $68,000.

      .     Deposit insurance premiums decreased by $71,000, or 47.63%, from
            $150,000 for the year ended December 31, 1996, to $78,000 for the
            same period in 1997 because of the recapitalization of SAIF in
            1996.

      .     Other non-interest expense increased $94,000, or 16.98%, from the
            year ended December 31,1996, to the same period in 1997.  The
            increase includes a $28,000 increase in accounting expense caused
            by the additional audit required for the change in fiscal year, 
            increased advertising and stationery costs of $23,000 and investor
            relations

                                     10

<PAGE>

<PAGE>

            and legal costs of $78,000 associated with being a public company.
            Dime Insurance expenses declined approximately $20,000 in 1997,
            partially offsetting the increase.

      Income Taxes.  Income taxes increased $716,000 from the year period
ended December 31, 1996, as compared to the same period in 1997 as the result
of the increase in income before income taxes.  The effective combined federal
and state tax rate was 39.43% and 39.20% for the year ended December 31, 1997,
and 1996, respectively.

                                       11

<PAGE>

<PAGE>
<TABLE>

     The following tables set forth certain information for the periods indicated 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 and average yields
and costs.  Such yields and costs for the periods indicated are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the periods presented.  Average
balances for 1997 are derived from month-end balances.  Management does not believe that the use of
month-end balances for 1997 instead of daily balances has caused any material difference in the
information presented.
                                                                      Year Ended
                                At December 31,                       December 31,             
                                -------------- --------------------------------------------------------
                                    1998                   1998                          1997 
                                -------------- --------------------------     -------------------------
                                    Yield/     Average             Yield/     Average             Yield/
                                     Cost      Balance   Interest   Cost      Balance   Interest   Cost
                                     ----      -------   --------   ----      -------   --------   ----
                                                 (Dollars in Thousands)
<S>                                 <C>       <C>         <C>       <C>      <C>          <C>      <C>  
Interest-earning assets:
 Loans receivable.................  7.96%     $ 48,699    $4,077    8.37%    $ 44,120    $3,722    8.44%
 Mortgage-backed securities.......  6.65        45,501     3,019    6.64       44,780     2,942    6.57  
 Investment securities............  3.25(4)      6,643       323    4.86       10,444       592    5.67   
 Other interest-earning assets(1).  5.63         4,271       246    5.76        7,806       453    5.80 
                                    ----      --------    ------    ----     --------    ------    ----
   Total interest-earning assets..  7.07       105,114     7,665    7.29      107,150     7,709    7.19  
Non-interest-earning assets.......               3,124                          3,394
                                              --------                       --------                    
 Total assets.....................            $108,238                       $110,544                     
                                              ========                       ========
Interest-bearing liabilities:
 NOW accounts.....................  2.29         9,632       227    2.36       10,356       262    2.53  
 Money market accounts............  3.25         5,034       168    3.35        4,681       169    3.61  
 Regular savings..................  3.00        13,956       436    3.12       13,790       452    3.28  
 Certificates of deposit..........  5.49        37,846     2,109    5.57       38,477     2,138    5.56
                                    ----      --------    ------    ----     --------    ------    ----  
   Total deposits.................  4.33        66,468     2,940    4.42       67,304     3,021    4.49  
 Other liabilities................  5.56         1,393        96    6.87        1,579        97    6.14   
                                    ----      --------    ------    ----     --------    ------    ----
    Total interest-bearing                                                                 
      liabilities.................  4.41        67,861     3,036    4.47       68,883     3,118    4.53   
                                    ----                            ----                           ----
Non-interest-bearing liabilities..               2,202                          1,376
                                              --------                       --------                   
Total liabilities.................              70,063                         70,259                    
Retained earnings.................              38,175                         40,285
                                              --------                       --------  
Total liabilities and retained
  earnings........................            $108,238                       $110,544  
                                              ========                       ========
 Net interest income..............                        $4,629                         $4,591           
                                                          ======                         ======
 Interest rate spread(2)..........  2.66%                           2.82%                         2.66%
                                    ====                            ====                          ==== 
 Net yield on interest-earning 
   assets(3)......................                                  4.40%                         4.28%
                                                                    ====                          ====
Ratio of average interest-earning
 assets to average interest-
 bearing liabilities..............                                154.90%                       155.55%
                                                                  ======                        ======

(1)    Includes interest-bearing deposits in other financial institutions and dividends on FHLB stock.    
(2)    Interest-rate spread represents the difference between the average yield on interest-earning
       assets and the average cost of interest-bearing liabilities.
(3)    Net yield on interest-earning assets represents net interest income as a percentage of average
       interest-earning assets.
(4)    Includes $3.1 million of FHLMC stock with dividend rate of 1%  per annum.

</TABLE>

                                                        12

<PAGE>
<PAGE>
<TABLE>
Rate/Volume Analysis

      The following table sets forth the effects of changing rates and volumes on net interest income of
the  Bank.  Information is provided with respect to (i) effects on net interest income attributable to
changes in volume (changes in volume multiplied by prior rate); (ii) effects on net interest income
attributable to changes in rate (changes in rate multiplied by prior volume); (iii) changes in
rate/volume (change in rate multiplied by change in volume); and (iv) the net change (the sum of the
prior columns).
        
                                                                        Year Ended
                                  Year Ended December 31,        December 31, 1997 Compared
                                  1998, Compared to Year              to Year Ended
                                  Ended December 31, 1997           December 31, 1996
                                    Increase (Decrease)             Increase (Decrease)
                                           Due to                         Due to
                                --------------------------    ------------------------------
                                                Rate/                           Rate/        
                                Volume   Rate  Volume  Net     Volume    Rate  Volume    Net  
                                ------   ----  ------  ---     ------    ----  ------    ---    
                                                   (In Thousands)
<S>                             <C>     <C>    <C>    <C>      <C>      <C>    <C>     <C>         
Interest-earning assets:
 Loans receivable...............$  386  $ (29) $  (2) $ 355    $   206  $ (46) $  (4)  $  156
 Mortgage-backed securities.....    47     29      1     77        614    (82)   (20)     512
 Investment securities..........  (346)   184   (107)  (269)       299     40     64      403
 Other interest-earning assets..  (202)   ( 8)     3   (207)       316    (36)   (60)     220
                                ------  -----  -----   ----     ------  -----   ----   ------
    Total interest-earning
       assets...................  (115)   176   (105)    44      1,435   (124)   (20)   1,291
                                ------  -----  -----   ----     ------  -----   ----   ------
Interest expense:
 Deposits.......................  ( 38)   (44)     1   ( 81)      (101)   (82)    (2)    (185)
 Other liabilities..............   (11)    12     (2)    (1)        42      1      1      (44)
                                ------  -----  -----   ----     ------  -----   ----   ------
    Total interest-bearing 
      liabilities...............   (49)   (32)    (1)   (82)       (59)   (81)    (1)    (141)
                                ------  -----  -----   ----     ------  -----   ----   ------
Net change in net interest
 income.........................$  (66) $ 208  $(104)  $ 38     $1,494  $ (43)  $(19)  $1,432
                                ======  =====  =====   ====     ======  =====   ====   ======  
</TABLE>
                                                                     13
PAGE
<PAGE>

Asset and Liability Management and Interest Rate Risk

      General.  The ability to maximize net interest income depends largely
upon achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates.  Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time.  The difference, or the interest rate repricing "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates.  A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities, and is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets.  Generally, during a period of rising interest
rates, a negative gap within shorter maturities would result in a decrease in
net interest income.  Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.

      The Bank has perceived its market niche to be that of a traditional
thrift lender that originates fixed rate residential loans for its portfolio
and purchases fixed rate U.S. Government and agency investment securities and
mortgage-backed securities to supplement its lending activities.  The Bank
uses its capital position to absorb the adverse consequences of the increased
interest rate risk associated with this strategy.  As an integral part of this
strategy, the Bank has historically concentrated its lending activity on the
origination of long-term, fixed-rate, residential one- to four-family mortgage
loans and commercial real estate and multi-family loans.  As of December 31,
1998, 94.1% of the Bank's total loans, were fixed rate loans and 79.0% of its
investments and mortgage-backed securities had fixed interest rates.

      The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk.  The Bank has a high level
of interest rate risk as a result of its policies to make fixed-rate,
residential one- to four-family real estate loans and to purchase fixed rate
investment and mortgage-backed securities, which are longer term in nature
than the short-term characteristics of its liabilities for customer deposit
accounts.  Because of its capital position, the Bank has accepted the above
average interest rate risk associated with fixed-rate loans and fixed-rate
investment and mortgage-backed securities in an effort to maximize yield.  See
"-- Liquidity and Capital Resources."

Interest Rate Sensitivity of Net Portfolio Value

      The following table is provided to the Bank by the OTS and illustrates
the change in net portfolio value at December 31, 1998 based on OTS
assumptions.  No effect has been given to any steps that management of the
Bank may take to counter the effect of the interest rate movements presented
in the table.  

                                                 Net Portfolio as % 
      Basis                                     of  Portfolio Value
   Point ("bp")        Net Portfolio Value         of Assets           
    Change     ----------------------------   ---------------------
   in Rates    $ Amount  $ Change  % Change   NPV Ratio     Change
   --------    --------  --------  --------   ---------     ------
                          (Dollars in Thousands)

    400  bp    $24,105   $ (8,435)   (26)%      24.07%      (527) bp
    300  bp     26,672     (5,869)   (18)%      25.82       (351) bp
    200  bp     28,837     (3,703)   (11)%      27.20       (213) bp
    100  bp     30,944     (1,597)   ( 5)%      28.46        (87) bp
      0         33,540                          29.33       
   (100) bp     32,683        143      0%       29.25         (8) bp
   (200) bp     32,686        145      0%       29.08        (26) bp
   (300) bp     33,117        577      2%       29.17        (17) bp
   (400) bp     33,131        591      2%       28.99        (34) bp

                                   14

<PAGE>

<PAGE>

     Under the OTS interest rate risk capital rule (implementation of which
has been postponed), those institutions with greater than "normal" levels of
interest rate risk will be subject to an interest rate risk component in
calculating their risk-based capital ratio.  An institution with a "normal"
level of interest rate risk is defined as one whose "Measured Interest Rate
Risk" is less than 2.0%.

     The following table is provided by the OTS and is based on the
calculations in the previous table.  

                                                   December 31, December 31,
                                                       1998        1997  
                                                       ----        ----
RISK MEASURES:  200 BP RATE SHOCK
Pre-Shock NPV Ratio:  NPV as % of PV of Assets .....  29.33%      27.44%    
Exposure Measure:  Post-Shock NPV Ratio.............  27.20       24.91        
Sensitivity Measure:  Change in NPV Ratio...........  213 bp      254 bp       
     
     As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table.  For
example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates.  Also, the interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates. 
Additionally, certain assets, such as  substantially all of the Bank's ARM
loans, have features that restrict changes in interest rates on a short-term
basis (1.5% to 2.0% per adjustment period) and over the life of the asset
(generally 5% over the life).  Furthermore, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could likely deviate significantly from those assumed in
calculating the table.  Therefore, the data presented in the table should not
be relied upon as indicative of actual results.

Liquidity and Capital Resources

     The Bank's primary sources of funds are proceeds from principal and
interest payments on loans, maturing securities and certificates of deposit. 
The proceeds from the sale of available-for-sale securities and FHLB advances
are additional sources of liquidity.  While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.

     The primary investing activity of the Bank has been the origination of
one- to four-family mortgage loans.  During the year ended December 31, 1998,
the Bank originated mortgage loans in the amounts of $17.2 million.  During
this period, the Bank purchased mortgage-backed securities of $21.8 million. 
The Bank also invests in investment grade federal agency securities.

     The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities.  During the year ended December 31, 1998 and 1997,
the Bank used its sources of funds primarily to fund loan commitments and to
pay deposit withdrawals.

     The Bank uses cash flows generated from operating, investing and
financing activities to meet its liquidity requirements.  See Consolidated
Statements of Cash Flows included as part of the Consolidated Financial
Statements.

     Like most thrift institutions, deposits, particularly certificates of
deposit, have been the primary source of external funds for the Bank.  By
offering interest rates that are competitive with or at a slight premium to
the average rate paid by local competitors, the Bank has had limited success
in lengthening the maturity of its certificate of deposit portfolio.  At
December 31, 1998, certificates of deposit amounted to $37.7 million, or 56.8%
of total deposits, 

                                       15

<PAGE>

<PAGE>

including $11.1 million which were scheduled to mature in more than one year
after December 31, 1998.  At December 31, 1998, $26.6 million of certificates
of deposit were scheduled to mature within one year.  Historically, the Bank
has been able to retain a significant amount of maturing deposits.  Management
of the Bank believes it has adequate resources to fund all loan commitments by
deposits and, if necessary, FHLB-Seattle advances and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.

     The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
4.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings.  The OTS recently eliminated short term ratios.  The
Bank's liquidity ratio at December 31, 1998, was 18.32%.  The Bank
consistently maintains liquidity levels in excess of regulatory requirements,
and believes this is an appropriate strategy for proper asset and liability
management.

     The Bank is required to maintain specific amounts of capital pursuant to
OTS requirements.  As of December 31, 1998, the Bank was in compliance with
all regulatory capital requirements which were effective as of such date with
tangible, core and risk-based capital ratios of 26.2%, 26.2% and 66.3%,
respectively.  For a detailed discussion of regulatory capital requirements
and a numerical presentation of the Bank's capital levels relative to
regulatory requirements, see Note 13 of Notes to the Consolidated Financial
Statements. 

Impact of New Accounting Pronouncements and Regulatory Policies

     In June 1998, the Statement of Financial Account Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was
issued.  SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value.  SFAS No. 133 requires that
changes in the derivatives fair value be recognized currently in earnings
unless specific accounting criteria are met.  Management of the Company is
currently assessing the affect, if any, on the financial statements of
implementing SFAS No. 133.  The Company will be required to adopt the standard
on January 1, 2000.

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 generally require the measurement of financial
position and operating results in terms of historical dollars, without
considering the change in the relative purchasing power of money over time due
to inflation.  The primary impact of inflation is reflected in the increased
cost of the Bank's operations.  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.  

                                    16
<PAGE>

<PAGE>

                          [Letterhead of KPMG]


                      Independent Auditors' Report

The Board of Directors and Stockholders
Empire Federal Bancorp, Inc.:

We have audited the accompanying consolidated balance sheets of Empire Federal
Bancorp, Inc. and  subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the years then ended.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. 

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Empire
Federal Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles. 

/s/ KPMG LLP

 Billings, Montana
 February 17, 1999

                                  17
  
<PAGE>


<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES

                       Consolidated Balance Sheets

                                                         December 31,
                                             -------------------------------
          Assets                                   1998              1997
          ------                             ------------        -----------

Cash and due from banks                      $  2,092,487           1,078,823 
Interest-bearing deposits                       3,061,310           1,825,208
                                              -----------         -----------
   Cash and cash equivalents                    5,153,797           2,904,031

Investment and mortgage-backed securities      39,865,809          36,495,581
Investment and mortgage-backed securities 
 held-to-maturity (estimated market value 
 of $10,582,975 and $20,802,359 at
 December 31, 1998 and 1997, respectively)     10,497,993          20,556,279
Loans receivable, net                          49,499,156          45,713,508
Stock in Federal Home Loan Bank of Seattle,     1,360,600           1,261,100
Accrued interest receivable                       353,145             427,496
Income tax receivable                              46,899                  --
Premises and equipment, net                     2,140,807           2,051,238
Prepaid expenses and other assets                 282,965             391,670
                                              -----------         -----------
   Total assets                              $109,201,171         109,800,903
                                              ===========         ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
 Deposits                                     $66,412,597          66,859,092
 Advances from Federal Home Loan Bank           4,000,000                  --
 Note payable                                     647,443             698,136
 Advances from borrowers for taxes and insurance  232,492             208,258
 Accrued expenses and other liabilities           291,260             451,362
 Income taxes payable                                  --              63,243
 Deferred income taxes                          1,316,255             922,424
                                              -----------         -----------
   Total liabilities                           72,900,047          69,202,515
                                              -----------         -----------
Stockholders' equity:
 Preferred stock, par value $.01 per share,
 250,000 shares authorized, none issued 
 and outstanding                                       --                  --
 Common stock, par value $.01 per share,
 4,000,000 shares authorized, 2,592,100 issued     25,921              25,921
 Additional paid-in capital                    25,277,770          25,208,225
 Unearned ESOP and MRDP compensation           (2,501,054)         (1,935,430)
 MRDP shares acquired                            (432,215)           (801,875)
 Retained earnings, substantially restricted   17,327,635          16,815,367
 Treasury shares acquired, at cost, 369,698    (5,310,819)                 --
 Accumulated other comprehensive income         1,913,886           1,286,180
                                              -----------         -----------
   Total stockholders' equity                  36,301,124          40,598,388
                                              -----------         -----------
Commitments and contingencies

   Total liabilities and stockholders'equity $109,201,171         109,800,903
                                              ===========         ===========

See accompanying notes to consolidated financial statements.

                                    18

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES

                     Consolidated Statements of Income

                                                     Years Ended December 31,
                                                         1998          1997
Interest income:                                     -----------   ----------
 Loans receivable                                   $  4,077,146    3,721,737
 Mortgage-backed securities                            3,019,006    2,941,460
 Investment securities                                   323,107      591,839
 Other                                                   246,146      453,697
                                                     -----------   ----------
  Total interest income                                7,665,405    7,708,733
                                                     -----------   ----------
Interest expense:
 Passbook accounts                                       434,527      451,004
 NOW accounts                                            395,654      430,904
 Certificates of deposit                               2,110,278    2,138,715
 Advances from Federal Home Loan Bank                     34,413        2,268
 Note payable and other                                   61,312       95,306
                                                      ----------    ---------
  Total interest expense                               3,036,184    3,118,197
                                                      ----------    ---------
  Net interest income                                  4,629,221    4,590,536

Provision for loan losses                                 20,000       20,306
                                                      ----------    ---------
  Net interest income after provision for loan
   losses                                              4,609,221    4,570,230

Non-interest income:
 Insurance commission income                             624,238      651,913
 Customer service charges                                216,050      187,728
 Other                                                    32,093       19,355
                                                      ----------    ---------
  Total non-interest income                              872,381      858,996

Non-interest expense:
 Compensation and benefits                             2,155,606    1,620,664
 Occupancy and equipment                                 378,490      362,942
 Deposit insurance premiums                               71,917       78,338
 Data processing services                                107,082      102,384
 Other                                                   622,386      647,297
                                                      ----------    ---------
  Total non-interest expense                           3,335,481    2,811,625
                                                      ----------    ---------
  Income before income taxes                           2,146,121    2,617,601

Income taxes                                             901,523    1,032,000
                                                      ----------    ---------
  Net income                                          $1,244,598    1,585,601
                                                      ==========    =========
Basic earnings per share                              $      .56          .67
                                                      ==========    =========
Diluted earnings per share                            $      .56          .67
                                                      ==========    =========
See accompanying notes to consolidated financial statements.

                                    19

<PAGE>
<PAGE>
<TABLE>

                         EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES
             Consolidated Statements of Stockholders' Equity and Comprehensive Income
                            Years Ended December 31, 1998 and 1997
                                                                                     
                                                                                                          
                                                                                       Accumu-
                                        Unearned                                       lated      
                                         ESOP                                          other      Total
                             Additional  and MRDP    MRDP                  Treasury    compre-    stock-
                      Common  paid-in    compen-     shares     Retained    shares     hensive   holders'
                       stock  capital    sation     acquired    earnings    acquired   income     equity
                      ------ ---------- ---------- ----------- ----------  --------  --------  ----------
 <S>                 <C>     <C>        <C>          <C>        <C>         <C>        <C>     <C>    
Balances at
 December 31, 1996   $25,921 25,142,356 (2,073,680)     --      15,762,582       --    752,458 39,609,637

Repurchase of
 50,000 common
 shares for MRDP          --        --          --   (801,875)          --       --         --  (801,875)

ESOP shares
 committed to
 be released              --     65,869    138,250       --             --       --         --    204,119

Comprehensive income:
 Net income               --        --          --       --      1,585,601       --         --  1,585,601
 Increase in unrealized 
 gain on securities       --        --          --       --             --       --    533,722    533,722
  Comprehensive income, net                                                                     ---------
                                                                                                2,119,323

Cash dividends declared
 ($.225 per share)        --        --          --       --       (532,816)      --         --  (532,816)
                      ------ ----------  ---------    --------- ---------- --------- ---------  ---------
Balances 
at December 31, 1997  25,921 25,208,225 (1,935,430)   (801,875) 16,815,367       --  1,286,180 40,598,388

Repurchase of 53,684
 common shares for MRDP   --        --          --    (926,976)       --         --         --  (926,976)

Repurchase of 369,698
 shares of common stock   --        --          --        --          --  (5,310,819)       --(5,310,819)

ESOP shares committed
 to be released           --     73,371     138,240       --          --         --         --    211,611

Grant of 77,763
 MRDP shares              --     (3,826) (1,292,810) 1,296,636        --         --         --         --


MRDP shares vested        --         --     588,946       --          --         --         --    588,946

Comprehensive income:
 Net income               --         --          --       --   1,244,598         --         --  1,244,598
 Increase in unrealized
 gain on securities       --         --          --       --          --         --    627,706    627,706
  Comprehensive income, net                                                                    ----------
                                                                                                1,872,304
Cash dividends declared
 ($.32 per share)         --         --          --       --    (732,330)        --         --  (732,330)
                      ------ ---------- ----------- --------- ---------- ----------- --------- ----------
Balances at
 December 31, 1998   $25,921 25,277,770 (2,501,054) (432,215) 17,327,635 (5,310,819) 1,913,886 36,301,124
                      ====== ========== =========== ========= ========== =========== ========= ==========

See accompanying notes to consolidated financial statements.
</TABLE>

                                                       20

<PAGE>

                                                                                
                                    <PAGE>

                  EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                                                     Years Ended December 31,
                                                   -------------------------
                                                      1998              1997
                                                   ----------     ----------
Cash flows from operating activities:
 Net income                                       $ 1,244,598         585,601
 Adjustments to reconcile net income to net 
  cash provided by operating activities:
   Provision for loan losses                           20,000          20,306
   Depreciation                                       188,918         169,640
   Loss on retirement of premises and
     equipment, net                                     9,100              --
   Amortization of premiums and discounts on 
     loans and mortgage-backed securities, net       (141,612)         16,395
   Stock dividends reinvested in Federal Home 
     Loan Bank stock                                  (99,500)        (92,300)
   ESOP shares committed to be released               211,611         204,119
   MRDP compensation expense                          588,946              --
   Decrease (increase) in accrued interest
     receivable                                        74,351         (96,569)
   Decrease (increase) in prepaid expenses and
     other assets                                     108,705         (27,819)
   Decrease in accrued expenses and other
     liabilities                                     (160,102)        (19,432)
   Increase (decrease) in income taxes               (110,142)        103,243
   Increase (decrease) in deferred income taxes        (7,488)         50,716
                                                    ---------       ---------
     Net cash provided by operating activities      1,927,385       1,913,900
                                                    ---------       ---------
Cash flows from investing activities:
 Net change in loans receivable                    (3,805,089)     (4,030,224)
 Purchases of mortgage-backed securities
   available-for-sale                             (21,835,449)    (19,996,123)
 Purchases of investment securities available
   -for-sale                                         (510,528)    (10,866,995)
 Proceeds from maturities or called investment
   securities:
    Available-for-sale                              4,500,000       5,390,000
    Held-to-maturity                                1,500,000       1,200,000
 Principal payments on mortgage-backed
   securities:
    Held-to-maturity                                8,556,313       4,421,975
    Available-for-sale                             15,647,800       3,709,339
 Purchases of premises and equipment                 (287,587)       (149,238)
                                                   ----------     -----------
     Net cash provided by (used in) investing
      activities                                    3,765,460     (20,321,266)
                                                   ----------     -----------
Cash flows from financing activities:
 Net change in deposits                              (446,495)       (838,774)
 Proceeds from advances from Federal Home
   Loan Bank                                        5,250,000       1,300,000
 Repayment of advances from Federal Home
   Loan Bank                                       (1,250,000)     (1,300,000)
 Payments on note payable                             (50,693)        (51,864)
 Net change in advances from borrowers for taxes  
  and insurance                                        24,234          38,386
 Repayment of stock over subscription                      --      (6,987,070)
 Payments of dividends                               (732,330)       (532,816)
 Decrease in accrued offering costs                        --        (504,145)
 Purchase of stock for MRDP                          (926,976)       (801,875)
 Purchase of treasury stock                        (5,310,819)             --
                                                 ------------      -----------
     Net cash used in financing activities         (3,443,079)     (9,678,158)
                                                 ------------      -----------
Net increase (decrease) in cash and cash 
  equivalents                                       2,249,766     (28,085,524)

Cash and cash equivalents, beginning of year        2,904,031      30,989,555
                                                  -----------     -----------
Cash and cash equivalents, end of year             $5,153,797       2,904,031
                                                  ===========     ===========
Cash paid during the year for:
 Interest                                          $3,043,000       3,117,000
 Income taxes                                       1,022,000         878,000
                                                  ===========      ==========

See accompanying notes to consolidated financial statements.

                                     21

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

                      December 31, 1998 and 1997

(1)  Summary of Significant Accounting Policies 

(a)  General

     The accompanying consolidated financial statements include the accounts
     of Empire Federal Bancorp, Inc. (the Holding Company) and its      
     wholly-owned subsidiary, Empire Federal Savings Bank (Empire).  The 
     consolidated financial statements also include Dime Service Corporation
     (Dime), a wholly-owned subsidiary of Empire.  The Holding Company, Empire
     and Dime are herein referred to collectively as "the Company."  All
     significant intercompany balances and transactions have been eliminated
     in consolidation.

     Empire provides services to customers in south central Montana through a
     main office and two branches in three separate communities.  Empire 
     offers a variety of deposit products to its customers while concentrating
     its lending activities on real estate loans.  These real estate lending
     activities focus primarily on the origination of loans secured by one- to
     four-family residential real estate but also include the origination of
     multi-family, commercial real estate and home equity loans.  Empire is
     subject to competition from other financial service providers and is also
     subject to the regulations of certain federal and state agencies and
     undergoes periodic examinations by those regulatory authorities.

     Dime was formed in December 1985 to conduct business as an insurance
     agency.

(b)  Basis of Presentation

     The consolidated financial statements have been prepared in conformity 
     with generally accepted accounting principles.  In preparing the
     consolidated financial statements, management is required to make
     estimates and assumptions that affect the reported amounts of assets and
     liabilities as of the date of the balance sheet and income and expenses
     for the period.  Actual results could differ significantly from those
     estimates.

     Material estimates that are particularly susceptible to significant
     change in the near-term relate to the determination of the allowance for
     loan losses.  Management believes that the allowance for loan losses is
     adequate, however, future additions to the allowance may be necessary
     based on changes in factors affecting the borrowers' ability to repay.
     In addition, various regulatory agencies, as an integral part of their
     examination process, periodically review the allowance for loan losses. 
     Such agencies may require Empire to recognize additions to the allowance
     based on their judgments about information available to them at the time
     of their examination.

                                    22                     (Continued)

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements


(c)  Conversion to Stock Ownership

     Empire Federal Bancorp, Inc. was formed in September 1996 and is the
     holding company and owner of 100 percent of the common stock of Empire,
     a federally-chartered stock savings bank.  On January 23, 1997, Empire
     completed its conversion from a mutual to a federally-chartered capital
     stock savings bank at which time the Holding Company issued 2,592,100
     shares of common stock at $10 per share realizing $25,168,177 after
     deducting stock offering expenses of $752,723.  The Employee Stock
     Ownership Plan (the ESOP) borrowed $2,073,680 from the Holding Company to
     purchase 207,368 of these shares.  The Holding Company contributed
     $9,501,000 of the net offering proceeds to Empire.  Since, among other
     things, the offering proceeds and all required regulatory approvals to
     consummate the conversion were received prior to December 31, 1996, the
     conversion was accounted for as being effective December 31, 1996.

(d)  Cash Equivalents

     For purposes of the statements of cash flows, the Company considers all
     cash, daily interest demand deposits, amounts due from banks and
     interest-bearing deposits with banks with original maturities of three
     months or less to be cash equivalents.

(e)  Investment Securities

     Investment and mortgage-backed securities available-for-sale include
     securities that management intends to use as part of its overall
     asset/liability management strategy and that may be sold in
     response to changes in interest rates and resultant prepayment risk and
     other related factors.  Securities available-for-sale are carried at fair
     value and unrealized gains and losses (net of related tax effects) are
     excluded from earnings and reported as a separate component of
     stockholders' equity.  Investment securities and mortgage-backed
     securities, other than those designated as available-for-sale or trading,
     are comprised of debt securities for which the Company has the positive
     intent and ability to hold to maturity and are carried at cost. 
     Management determines the appropriate classification of investment and
     mortgage-backed securities as either available-for-sale or held-to-
     maturity at the purchase date.

     Declines in the fair value of available-for-sale or held-to-maturity
     securities below carrying value that are other than temporary are charged
     to expense as realized losses and the related carrying value reduced to
     fair value.

     The carrying value of debt securities is adjusted for amortization of
     premiums and accretion of discounts using the interest method over the
     estimated lives of the securities.  The cost of investments sold is
     determined by specific identification.


                                  23                      (Continued)

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(f)  Loans Receivable

     Loans receivable are stated at unpaid principal balances, less unearned
     discounts and net deferred loan origination fees.  Interest on loans is
     credited to income as earned.  Interest receivable is accrued only if
     deemed collectible.  Discounts on purchased loans are amortized using the
     level-yield method over the remaining period to contractual maturity,
     adjusted for anticipated prepayments.

     The allowance for loan losses is based on management's evaluation of the
     adequacy of the allowance, including an assessment of past loan loss
     experience, known and inherent risks in the portfolio, adverse situations
     that may affect the borrower's ability to repay, the estimated value of
     any underlying collateral, current economic conditions, and independent
     appraisals.

     Additions to the allowance arise from charges to operations through the
     provision for loan losses or from the recovery of amounts previously
     charged off.  The allowance is reduced by loans charged off.  Loans are
     charged off when management believes there has been permanent impairment
     of their carrying values.

     Accrued interest on loans that are contractually ninety days or more past
     due is generally charged off against income.  Interest is subsequently
     recognized only to the extent cash payments are received until, in
     management's judgment, the borrower's ability to make periodic interest
     and principal payments is reasonably assured, in which case the loan is
     returned to accrual status.

     The Company also provides an allowance for losses on specific loans which
     are deemed to be impaired.  Groups of small-balance homogeneous loans
     (generally residential real estate and consumer loans) are evaluated for
     impairment collectively.  A loan is considered impaired when, based upon
     current information and events, it is probable that the Company will be
     unable to collect, on a timely basis, all principal and interest
     according to the contractual terms of the loan's original agreement. 
     When a specific loan is determined to be impaired, the allowance for loan
     losses is increased through a charge to expense for the amount of the
     impairment.  The amount of the impairment is measured using cash flows
     discounted at the loan's effective interest rate, except when it is
     determined that the sole source of repayment for the loan is the
     operation or liquidation of the underlying collateral.  In such cases,
     the current value of the collateral, reduced by anticipated selling
     costs, will be used in place of discounted cash flows.  The Company uses
     the cash basis of income recognition on impaired loans.

     The Company's existing policies for evaluating the adequacy of the
     allowance for loan losses and policies for discontinuing the accrual of
     interest on loans are used to establish the basis for determining whether
     a loan is impaired.  At December 31, 1998 and 1997, no loans were
     classified as non-accrual or impaired.

(g)  Loan Origination Fees and Related Costs

     Loan origination fees and certain direct loan origination costs are
     deferred and the net fee or cost is recognized in interest income using
     the level-yield method over the contractual life of the loans.


                                   24                      (Continued)

<PAGE>


<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(h)  Stock in Federal Home Loan Bank

     Member institutions of the Federal Home Loan Bank (FHLB) System are 
     required to hold common stock of its district FHLB according to
     predetermined formulas.

(i)  Premises and Equipment 

     Premises and equipment are carried at cost less accumulated depreciation.
     Depreciation is provided using straight-line and accelerated methods over
     the estimated useful lives of 40 years for the buildings, 7 to 15 years
     for improvements and 3 to 15 years for furniture, fixtures and equipment.

(j)  Income Taxes

     Deferred tax assets and liabilities are recognized for the estimated
     future consequences attributable to differences between the financial
     statement carrying amounts of assets and liabilities and their
     respective tax bases.  The effect on deferred tax assets and liabilities
     of a change in tax rates is recognized in income in the period that
     includes the enactment date.

(k)  Earnings Per Share

     Basic earnings per share (EPS) is calculated by dividing net income
     available to common stockholders by the weighted average number of common
     shares outstanding during the period less unvested Management Recognition
     and Development Plan (MRDP) shares and unallocated ESOP shares.
     
     Diluted EPS is calculated by dividing net income by the weighted average
     number of common shares used to compute basic EPS plus the incremental
     amount of potential common stock determined by the treasury stock method.

(l)  Impairment of Long-Lived Assets

     Long-lived assets and certain identifiable intangibles are reviewed for
     impairment whenever events or circumstances indicate that the carrying
     amount of an asset may not be recoverable.  An impairment loss is
     recognized if the sum of the expected future cash flows is less than the
     carrying amount of the asset.  No assets were identified as impaired as
     of December 31, 1998 and 1997.

(m)  Stock-Based Compensation to Employees

     Compensation cost for stock-based compensation to employees is measured
     at the grant date using the intrinsic value method.  Under the intrinsic
     value method, compensation cost is the excess of the market price of the
     stock at the grant date over the amount an employee must pay to
     ultimately acquire the stock and is recognized over any related service
     period.

                                   25                      (Continued)

<PAGE>
     
<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(n)  Comprehensive Income

     The Company adopted the provisions of Statement of Financial Accounting
     Standards (SFAS) No. 130, "Reporting Comprehensive Income" effective
     January 1, 1998.  SFAS No. 130 requires companies to report comprehensive
     income which includes net income, as well as other changes in
     stockholders' equity that result from transactions and economic events
     other than those with stockholders.  The Company's only significant
     element of comprehensive income is unrealized gains and losses on
     available-for-sale securities.  There were no reclassification
     adjustments to other comprehensive income during the years ended December
     31, 1998 and 1997.  Unrealized gains reported as other comprehensive
     income during the years ended December 31, 1998 and 1997 are net of
     related income taxes of $627,706 and $533,722, respectively.

(o)  Reclassifications

     Certain reclassifications have been made to the 1997 financial statements
     to conform with the 1998 presentation.

(p)  New Accounting Pronouncements

     In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
     Hedging Activities" was issued.  SFAS No. 133 establishes accounting and
     reporting standards requiring that every derivative instrument (including
     certain derivative instruments embedded in other contracts) be recorded
     in the balance sheet as either an asset or liability measured at its fair
     value.  SFAS No. 133 requires that changes in the derivatives fair value
     be recognized currently in earnings unless specific hedge accounting
     criteria are met.  Management of the Company is currently assessing the
     effect, if any, on its financial statements of implementing SFAS No. 133.
     The Company will be required to adopt the standard on January 1, 2000.

(2)  Investment and Mortgage-Backed Securities Available-For-Sale

     The amortized cost, unrealized gains and losses, and estimated fair
     values of investment and mortgage-backed securities available-for-sale at
     December 31 are as follows:

                                                  1998
                               ----------------------------------------------
                                              Gross     Gross      Estimated
                                Amortized  unrealized   unrealized     fair
                                 cost         gains    losses        value
                               -----------  ---------  ---------  -----------

United States Government and
   agency obligations          $1,489,495       46,005      --      1,535,500
FHLMC common stock                 55,291    3,037,709      --      3,093,000
Mutual funds                      360,528        8,420   (2,248)      366,700
                                ---------    ---------   -------    ---------
                                1,905,314    3,092,134   (2,248)    4,995,200

                                              (table continued on next page)

                                   26                        (Continued)


<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

                                  
                                              1998 (continued)
                              -----------------------------------------------
                                             Gross        Gross     Estimated
                              Amortized    unrealized   unrealized     fair
                                cost         gains        losses       value
                              ----------   -----------   ----------  --------

Mortgage-backed securities:
    GNMA certificates      $  5,442,915       10,971   (45,063)     5,408,823
    FHLMC certificates        4,200,511       17,988      (871)     4,217,628
    FNMA certificates        11,996,799       94,864   (25,448)    12,066,215
    REMIC certificates       13,182,753       49,605   (54,415)    13,177,943
                             ----------    ---------   --------    ----------
                             34,822,978      173,428   (125,797)   34,870,609
                             ----------    ---------   --------    ----------
                           $ 36,728,292    3,265,562   (128,045)   39,865,809
                             ==========    =========   ========    ==========
                                  
                                                    1997
                             ------------------------------------------------
                                            Gross         Gross     Estimated
                             Amortized    unrealized    unrealized     fair
                                cost        gains         losses       value
                             ---------    ----------    ----------   --------
United States Government and
  agency obligations        $5,489,495       57,955        (300)    5,547,150
FHLMC common stock              55,291    1,957,709         --      2,013,000
Mutual funds                   350,000        2,177        (749)      351,428
                             ---------    ---------       -----     ---------
                             5,894,786    2,017,841      (1,049)    7,911,578

Mortgage-backed securities:
     GNMA certificates       3,099,757       20,116         --      3,119,873
     FHLMC certificates      7,074,842        7,793     (53,610)    7,029,025
     FNMA certificates       7,268,364       95,183     (18,432)    7,345,115
     REMIC certificates     11,049,340       63,253     (22,603)   11,089,990
                            ----------    ---------     -------    ----------
                            28,492,303      186,345     (94,645)   28,584,003
                            ----------    ---------     -------    ----------
                           $34,387,089    2,204,186     (95,694)   36,495,581
                            ==========    =========     =======    ==========

The REMICs consist of twelve certificates which are backed by the FNMA or the
FHLMC.

All of the United States Government and agency obligations contractually
mature within five to ten years.  Contractual maturities of securities do not
reflect repricing opportunities present in many adjustable rate securities,
nor do they reflect expected shorter maturities based upon early prepayments
of principal.
                                   27                     (Continued)

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

     There were no sales of investment securities available-for-sale during
     the years ended December 31, 1998 and 1997.

     The Company has not entered into any interest rate swaps, options or
     future contracts.  All of the U.S. Government and agency obligations at 
     December 31, 1998 and 1997 have call features.

(3)  Investment and Mortgage-Backed Securities Held-to-Maturity

     The amortized cost, unrealized gains and losses, and estimated fair
     values of investment and mortgage-backed securities held-to-maturity at
     December 31 are summarized as follows:

                                                     1998
                                 --------------------------------------------
                                              Gross      Gross      Estimated
                                 Amortized  unrealized  unrealized     fair
                                  cost         gain      losses        value
                                 ---------  ----------  ----------  ---------
Mortgage-backed securities:
     GNMA certificates         $ 1,453,319     30,398      (3,163)  1,480,554
     FHLMC certificates          3,193,461     53,795     (16,129)  3,231,127
     FNMA certificates           4,480,501     59,531      (5,912)  4,534,120
     REMIC certificates          1,370,712        --      (33,538)  1,337,174
                                 ---------    -------     -------  ----------
                               $10,497,993    143,724     (58,742) 10,582,975
                                ==========    =======     =======  ==========
 
                                                     1997
                               -----------------------------------------------
                                               Gross       Gross    Estimated
                                Amortized    unrealized   unrealized    fair
                                   cost          gain       losses      value
                               -----------------------------------------------
United States Government and 
     agency obligations      $ 1,500,000        800       (1,650)   1,499,150
Mortgage-backed securities:
     GNMA certificates         7,906,441    117,352      (23,663)   8,000,130
     FHLMC certificates        7,102,309     98,543          --     7,200,852
     FNMA certificates         2,182,036     67,364          --     2,249,400
     REMIC certificates        1,865,493     13,934      (26,600)   1,852,827
                              ----------    -------      -------   ----------
                              19,056,279    297,193      (50,263)  19,303,209
                              ----------    -------      -------   ----------
                             $20,556,279    297,993      (51,913)  20,802,359
                              ==========    =======      =======   ==========
 
    The REMICs consist of two certificates which are backed by the FNMA and
    the FHLMC.

    There were no sales of investment securities held-to-maturity during the
    years ended December 31, 1998 and 1997.
                                   28                           (Continued)
<PAGE>


<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(4)  Loans Receivable, Net

     Loans receivable, net at December 31 are summarized as follows:

                                                1998                1997
                                           --------------       -------------
     First mortgage loans:     
        One to four family                  $39,941,492           38,177,958
        Multi-family                          4,730,581            3,162,272
        Commercial real estate                2,226,834            1,101,694
     Construction loans                         265,000            2,184,900
     Loans to depositors, secured by savings    473,940              590,673
     Other consumer loans                     2,595,351            3,095,275
                                             ----------           ---------- 
                                             50,233,198           48,312,772
Less:
     Unearned discounts                          (2,222)              (2,781)
     Undisbursed portion of mortgage loans     (207,939)          (2,085,461)
     Allowance for loan losses                 (220,000)            (200,000)
     Net deferred loan origination fees        (303,881)            (311,022)
                                             ----------           ---------- 
                                            $49,499,156           45,713,508
                                             ==========           ===========
 
     Loans receivable include approximately $3,000,000 and $3,500,000 in 
     adjustable rate mortgages at December 31, 1998 and 1997, respectively.

     Real estate loans serviced for others totaled approximately $33,000 and
     $100,000 at December 31, 1998 and 1997, respectively.

     A summary of activity in the allowance for loan losses for the years
     ended December 31 follows:

                                                  1998           1997
                                              ----------      ---------
     Balance at beginning of year            $   200,000        200,000
     Provision charged to expense                 20,000         20,306
     Losses charged against the allowance           --          (20,306)
                                              ----------      ---------
     Balance at end of year                  $   220,000        200,000
                                              ==========      =========
(5)  Accrued Interest Receivable

     Accrued interest receivable at December 31 is summarized as follows:

                                                   1998         1997  
                                               ---------     ---------
Loans receivable                              $  246,725       214,447
Mortgage-backed securities                        84,438       107,612
Investment securities and interest-bearing
deposits                                          21,982       105,437
                                               ---------     ---------
                                              $  353,145       427,496
                                               =========     =========

                                 29                            (Continued)

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(6)  Premises and Equipment 

     Premises and equipment at December 31 is summarized as follows:

                                                   1998          1997
                                             -----------     -----------
     Buildings and improvements             $  1,674,200       1,677,181
     Land                                        529,165         526,265
     Furniture, fixtures and equipment         1,157,569       1,081,345
                                             -----------     -----------
                                               3,360,934       3,284,791
     Accumulated depreciation                 (1,220,127)     (1,233,553)
                                             -----------     -----------
                                            $  2,140,807       2,051,238
                                             ===========     ===========
 
     The Company was a party to a long-term lease agreement with an officer
     and related individuals (lessor) for the Livingston, Montana main office.
     The lease expired in 1997 at which time the Company negotiated with the
     lessor to purchase the building.  The purchase of the building, at a cost
     of $750,000, was financed with a $722,000 note payable (see note 9). 
     Total lease expense under this agreement was $5,028 for the year ended
     December 31, 1997.

(7)  Deposits

     Deposits at December 31 are summarized as follows:<PAGE>
<TABLE>


                              Weighted                      1998                     1997
                            average rate at       ----------------------   -----------------------
                           December 31, 1998        Amount       Percent      Amount      Percent
                           -----------------      ----------     -------   -----------    ---------
 <S>                              <C>            <C>               <C>     <C>              <C>    
Passbook accounts                 3.00%          $13,928,934       21.0%   $13,572,343      20.3%
NOW accounts                      2.63%           14,757,910       22.2     14,838,604      22.2
                                                  ----------      -----     ----------     -----
                                                  28,686,844       43.2     28,410,947      42.5
                                                  ----------      -----     ----------     -----

Certificates of deposit:     3.01 to 4.00%               613        --             593       --
                             4.01 to 5.00%         7,015,207       10.6        755,165       1.1
                             5.01 to 6.00%        27,731,893       41.8     33,766,470      50.5
                             6.01 to 7.00%         1,600,384        2.4      1,872,483       2.8
                             7.01 to 8.00%         1,377,656        2.0      2,053,434       3.1
                                                  ----------      -----     ----------     -----
 Total certificates of
 deposit                          5.49%           37,725,753       56.8     38,448,145      57.5
                                                  ----------      -----     ----------     -----
                                  4.33%          $66,412,597      100.0%   $66,859,092     100.0%
                                                  ==========      =====     ==========     ===== 
 
</TABLE>

                                             30               (Continued)
<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

     Certificates of deposit at December 31, 1998 are scheduled to mature as
     follows:

               1999                             $ 26,577,529
               2000                                7,649,029
               2001                                2,148,621
               2002                                   89,281
               2003                                      --
               2004 and thereafter                 1,261,293
                                                  ----------
                                                $ 37,725,753
                                                  ==========

     Certificates of deposit of $100,000 or more are approximately $2,845,000
     and $2,554,000 at December 31, 1998 and 1997, respectively.  Amounts in
     excess of $100,000 are not insured by a federal agency.

     Accrued interest payable on deposits (included in accrued expenses and
     other liabilities) was approximately $93,000 and $100,000 at December 31,
     1998 and 1997, respectively.

(8)  Advances From Federal Home Loan Bank

     Advances from the Federal Home Loan Bank at December 31 are summarized as
     follows:
                                                     1998           1997
                                                  ----------     ----------
     4.72% Fixed Rate Advance, interest payable
       monthly, due October 1999                 $2,000,000             --
     5.01% Fixed Rate Advance, interest payable
       monthly, due October 2003                    500,000             --
     5.30% Fixed Rate Advance, interest payable
       monthly, due October 2005                    900,000             --
     5.53% Fixed Rate Advance, interest payable 
       monthly, Due October 2008                    600,000             --
                                                  ---------      ---------
                                                 $4,000,000             --
                                                  =========      =========
 
     These advances are collateralized by investments totaling approximately
     $29,167,000 at December 31, 1998.

     The weighted average interest rate on these advances was 5.01% at
     December 31, 1998.

     At December 31, 1998, Empire had a Cash Management Advance note with a
     maximum allowable advance of $5,490,200 maturing on March 18, 1999. 
     There was no outstanding balance as of December 31, 1998 and 1997.
 
                               31                          (Continued)

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(9)  Note Payable

     During 1997, the Company entered into an agreement with an officer of the
     Company and related individuals to purchase the Livingston, Montana main
     office building.  The purchase was financed with a long-term note.  The
     note is being paid in quarterly principal payments of $28,000 plus
     interest at 9%.  The note is secured by the building.

(10) Income Taxes

     Income tax expense for the years ended December 31 is summarized as
     follows:
                                  
                                    Federal           State         Total
                                 -----------       -----------    ---------- 
     1998:
       Current                 $     752,572           156,439       909,011
       Deferred                       (6,174)           (1,314)       (7,488)
                                 -----------       -----------    ---------- 
                               $     746,398           155,125       901,523
                                 ===========       ===========    ========== 
     1997:
       Current                 $     809,755           171,529       981,284
       Deferred                       41,814             8,902        50,716
                                 -----------       -----------    -----------
                               $     851,569           180,431     1,032,000
                                 ===========       ===========    ===========
 
     Income tax expense for the years ended December 31 differs from
     "expected" income tax expense (computed by applying the Federal corporate
     income tax rate of 34% to income before income taxes) as follows:

                                                         1998         1997
                                                     ----------   ----------
     Computed "expected" tax expense                 $ 729,681       889,984
     Increase (decrease) resulting from:              
      State taxes, net of Federal income tax benefit   102,383       119,084
      Compensation expense on MRDP vested shares not
        deductible                                      29,920          --
      Mark-to-market adjustment on ESOP shares
      committed to be released                          24,946        22,395
      Other                                             14,593           537
                                                      --------    ----------
                                                     $ 901,523     1,032,000
                                                      ========    ==========

                               32                         (Continued)

<PAGE>
<PAGE>
 
              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

Temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities that give rise to significant portions of
deferred tax assets and liabilities at December 31 are as follows:

                                                        1998          1997   
Deferred tax assets:                                ----------    ----------
  Allowance for loan losses                        $    84,601        76,910
  Deferred loan origination fees                       117,712       120,673
  Deferred compensation accrual                         26,534        43,319
  Vested MRDP shares                                    74,054          -
                                                    ----------    ----------
       Gross deferred tax assets                       302,901       240,902
                                                    ----------    ----------
Deferred tax liabilities:
  Federal Home Loan Bank stock dividends              (367,707)     (329,444)
  Prepaid deposit insurance premium                     (3,846)       (4,075)
  Unrealized gain on securities available-for-sale  (1,223,631)     (822,312)
  Other, net                                           (23,972)       (7,495)
                                                    ----------    ----------
       Gross deferred tax liabilities               (1,619,156)   (1,163,326)
                                                    ----------    ----------
       Net deferred tax liability                  $(1,316,255)     (922,424)
                                                    ==========    ==========
 
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized.  The ultimate realization of deferred tax
assets is dependent upon the existence of, or generation of, taxable income in
the periods in which those temporary differences are deductible.  Management
considers the scheduled reversal of deferred tax liabilities, taxes paid in
carryback years, projected future taxable income, and tax planning strategies
in making this assessment.  Based upon the level of historical taxable income
and estimates of future taxable income over the periods in which the deferred
tax assets are deductible, at December 31,1998 and 1997, management believes
it is more likely than not that the Company will realize the benefits of these
deductible differences.

Retained earnings at December 31, 1998 includes approximately $3,320,000 for
which no provision for Federal income tax has been made.  This amount
represents the base year tax bad debt reserve at December 31, 1986.  This
amount is treated as a permanent difference and deferred taxes are not
recognized unless it appears that this amount will be reduced and thereby
result in taxable income in the foreseeable future.  The Company is not
currently contemplating any changes in its business or operations which would
result in a recapture of this Federal bad debt reserve into taxable income.
                               
                                 33                          (Continued)
<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

(11)  Employee Benefit Plans

      Retirement Plan.  The Company has a noncontributory multi-employer
      trustee defined benefit pension plan.  Actuarially determined pension
      costs are funded as required by the trustee.  Information related to
      the Company's portion of the actuarial present value of benefits is not
      available.  Consulting actuaries to the plan have indicated the plan
      reached the ERISA full funding limitation during 1998 and 1997. 
      Contributions to the plan were $2,158 and $2,471 for the years ended
      December 31, 1998 and 1997, respectively.

      Employee Stock Ownership Plan (ESOP).  As part of the conversion
      discussed in note 1(c), an ESOP was established covering substantially
      all employees.  The ESOP borrowed $2,073,680 from the Holding
      Company and used the funds to purchase 207,368 shares of the common
      stock of the Company.  The loan is intended to be repaid by the ESOP
      over a period of 15 years principally from the Company's contributions
      to the ESOP and dividends on ESOP shares.  The cost of the shares
      acquired by the ESOP is considered unearned compensation and, as such,
      is recorded as a reduction of the Company's stockholders' equity. Shares
      purchased by the ESOP are held in a suspense account for allocation
      among participants as the loan is repaid.  Contributions to the ESOP and
      shares released from the suspense account are allocated among
      participants on the basis of their compensation in the year of
      allocation.  Benefits will vest upon the completion of five years of
      service.  Forfeitures are reallocated to remaining plan participants and
      may reduce the Company's contributions.  Benefits may be payable upon
      retirement, death, disability, or separation from service.

      Compensation expense is recorded equal to the fair value of shares held
      by the ESOP which are deemed committed to be released.  Shares are
      committed to be released on a straight-line basis over 15 years, which
      is the basis for the annual allocation of ESOP shares to participants. 
      For the years ended December 31, 1998 and 1997, ESOP principal and
      interest payments of approximately $300,000 and $296,000, respectively,
      were funded by Empire and Dime contributions of approximately $234,000
      and $249,000, respectively, to the ESOP.  The remainder of the ESOP
      payments were funded by dividends on ESOP shares.  During each of the
      years ended December 31, 1998 and 1997, 13,825 shares were committed to
      be released to participant accounts and the fair value of the remaining
      shares to be released in future years was approximately $2,673,000 at
      December 31, 1998.  Compensation expense relating to the ESOP shares was
      $211,611 and $204,119 for the years ended December 31, 1998 and 1997,
      respectively.

      Employment Contracts.  During 1997, the Company entered into a
      three-year employment contract with a senior officer.  In January 1999,
      the Company entered into a three-year employment agreement with the
      Company's new president and chief executive officer.  These agreements
      provide severance up to three times average annual compensation
      following a change in control of the Company.

      Stock Option Plan.  Effective July 1997, the Company's stockholders
      approved the Stock Option Plan.  The terms of the Stock Option Plan
      provide for the granting of options to acquire up to 259,210 shares of
      common stock to employees, officers and directors of the Company.  The
      options will vest over a five year period following the date of the
      grant of the options.
 
                                   34                          (Continued)

<PAGE>
<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

Changes in shares issuable under options granted for the years ended December
31, 1998 and 1997 are summarized as follows:
                                                          Weighted
                                                           average
                                                          exercise 
                                          Shares            price
                                        ----------       ----------
Balance at December 31, 1997                 -                -

Granted                                   217,984           16.625

Canceled                                    1,500           16.625

Became exercisable                           -                 -
                                        ---------        --------- 

Balance at December 31, 1998              217,984        $  16.625
                                        =========        =========
Exercisable at December 31, 1998           51,842        $  16.625
                                        =========        =========
 
The Company applies Accounting Principles Bulletin Opinion No. 25 in
accounting for its grants of options to employees and no compensation cost has
been recognized for its stock option grants in the financial statements.  Had
the Company determined compensation cost based on the fair value at the grant
ate for its stock options, the Company's net income and net income per share
for the years ended December 31, 1998 would have been as follows:


  Net income:  As reported                      $  1,244,598
               Pro forma                           1,028,256
                                                 ===========
  Basic earnings per share:   As reported       $        .56
                              Proforma                   .46
                                                 ===========
  Diluted earnings per share: As reported       $        .56
                              Pro forma                  .46
                                                 ===========

The per share weighted-average fair value of stock options granted during 1998
was $5.92, determined as of the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected dividend yield
of 2.24%, risk-free interest rate of 5.02%, volatility ratio of .35, and
expected life of 7 years.
 
Management Recognition and Development Plan (MRDP).  During July 1997, the
Company's stockholders approved the MRDP.  The terms of the MRDP provide for
the award of up to 103,684 of common shares to employees, officers and
directors of the Company.  The shares granted will vest over a five year
period following the date of grant.  During the years ended December 31, 1998
and 1997, the Company purchased 53,684 and 50,000 shares, respectively, for
issuance under the MRDP.  During January 1998, the Company granted 77,763
shares under this plan.  Compensation expense of $193,919 was recognized
during the year 
                             
                                35                           (Continued)

<PAGE>
<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

     ended December 31, 1998 for shares that vested during 1998.  Additional 
     compensation expense of $395,027 was recognized during the year ended
     December 31, 1998 related to 25,921 shares that vested immediately in
     September 1998 due to the death of one of the Company's officers.

(12) Earnings Per Share

     The following table sets forth the compilation of basic and diluted 
     earnings per share for the years ended December 31:

                                                       1998         1997
                                                     ---------   ---------
     Average outstanding shares during the year
       on which basic earnings per share 
       is calculated:                                2,215,804   2,376,277

     Add:  Incremental shares under stock option
             plans                                       2,467          -
           Incremental shares related to MRDP              845          -
                                                     ---------   --------- 
     Average outstanding shares on which diluted
       earnings per share is calculated              2,219,116   2,376,277
                                                     =========   =========
     Net income applicable to common stockholders   $1,244,598   1,585,601
                                                     =========   =========
     Basic earnings per share                       $      .56         .67
                                                     =========   =========
     Diluted earnings per share                     $      .56         .67
                                                     =========   =========

(13) Regulatory Capital

     Empire is required to meet three capital requirements: a tangible capital
     requirement equal to not less than 1.5% of tangible assets (as defined in
     the regulations); a core capital requirement, comprised of tangible
     capital adjusted for supervisory goodwill and other defined factors,
     equal to not less than 3.0% of tangible assets; and a risk-based capital
     requirement equal to at least 8.0% of all risk-weighted assets.  For
     risk-weighting, selected assets are given a risk assignment of 0% to
     100%.  Empire's total risk-weighted assets at December 31, 1998 and 1997
     were $44,035,000 and $40,452,000, respectively.
 
                                      36                      (Continued)

<PAGE>
<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

The following table presents, as of December 31, the extent to which Empire
exceeds, in dollars and percent, the minimum capital requirements:

                                                      1998
                                      -------------------------------------
                                       Actual      Requirement      Excess
                                      --------     -----------    ---------
Tangible capital:
  Dollar amount                      $27,619,000     1,582,000    26,037,000
  Percent of tangible assets                26.2%          1.5%         24.7%

Core capital:
  Dollar amount                      $27,619,000     3,164,000    24,455,000
  Percent of adjusted tangible assets       26.2%          3.0%         23.2%

Risk-based capital:
  Dollar amount                      $29,184,000     3,523,000    25,661,000
  Percent of risk-weighted assets           66.3%          8.0%         58.3%

                                                       1997
                                      -------------------------------------
                                       Actual      Requirement      Excess
                                      --------     -----------    ---------
Tangible capital:
  Dollar amount                      $26,238,000     1,607,000    24,631,000
  Percent of tangible assets                24.5%          1.5%         23.0%

Core capital 
  Dollar amount                      $26,238,000     3,213,000    23,025,000
  Percent of adjusted tangible assets       24.5%          3.0%         21.5%

Risk-based capital:
  Dollar amount                      $26,415,000     3,236,000    23,179,000
  Percent of risk-weighted assets           65.3%          8.0%         57.3%

Failure to comply with applicable regulatory capital requirements can result
in capital directives from the director of the Office of Thrift Supervision
(OTS), restrictions on growth and other limitations on a savings bank's
operations.

                                   37                          (Continued)
<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

Consolidated stockholders' equity differs from Empire's tangible, core, and
risk-based capital at December 31 as a result of the following (dollars
rounded to thousands):

                                           1998                 1997
                                       ------------        -------------
Consolidated stockholders' equity     $  36,301,000           40,598,000
Holding Company net assets               (6,351,000)         (12,708,000)
                                       ------------        -------------
   Empire capital                        29,950,000           27,890,000

Non-includable assets of Dime              (417,000)            (365,000)
Unrealized gains on certain 
available-for-sale securities            (1,914,000)          (1,286,000)
                                       ------------        -------------
   Tangible and core capital             27,619,000           26,238,000

Unrealized gains on certain 
available-for-sale securities             1,370,000                 --
Allowance for loan losses                   220,000              200,000
Assets required to be deducted              (25,000)             (23,000)
                                       ------------        -------------
   Risk-based capital                 $  29,184,000           26,415,000
                                       ============        =============
 
      In accordance with OTS regulations, at the time of conversion, Empire
      restricted a portion of retained earnings by establishing a liquidation
      account.  The liquidation account will be maintained for the benefit of
      eligible holders who continue to maintain their accounts in Empire after
      the conversion.  The liquidation account will be reduced annually to the
      extent that eligible account holders have reduced their qualifying
      deposits.  Subsequent increases will not restore an eligible account
      holder's interest in the liquidation account.  In the event of a
      complete liquidation of Empire, and only in such an event, each account
      holder will be entitled to receive a distribution from the liquidation
      account in an amount proportionate to the adjusted qualifying account
      balances then held.

      In addition, savings banks that before and after proposed dividend
      distributions meet or exceed their fully phased-in capital requirements,
      may make capital distributions with prior notice to the OTS during any
      calendar year up to 100% of year-to-date net income plus 50% of the
      amount in excess of their fully phased-in capital requirements as of the
      beginning of the calendar year.  However, the OTS may impose greater
      restrictions if an institution is deemed to be in need of more than
      normal supervision.  Empire currently exceeds its fully phased-in
      capital requirements and has been assessed as "well-capitalized" under
      the regulatory guidelines.

(14)  Financial Instruments With Off-Balance-Sheet Risk

      The Company is a party to financial instruments with off-balance-sheet
      risk in the normal course of business to meet the financing needs of its 
      customers.  These financial instruments include commitments to extend
      credit and involve, to varying degrees, elements of credit risk.


                                  38                      (Continued)

<PAGE>


<PAGE>
              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

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

     Financial instruments outstanding at December 31, 1998 whose contract
     amounts represent credit risk are fixed-rate commitments to extend credit
     totaling approximately $666,000.  These commitments generally contain a
     termination date of 30 days from date the commitment is approved.

(15) Financial Instruments With Concentration of Credit Risk

     At December 31, 1998, approximately $1,250,000 of the Company's loans
     receivable are secured by real property located outside of the Company's
     trade area of three counties in south central Montana.  Of this amount,
     approximately $840,000 are secured by properties located in southern
     California.

(16) Fair Value of Financial Instruments

     The Company is required to disclose the fair value for financial
     instruments, whether recognized or not recognized on the balance sheet. 
     A financial instrument is defined as cash, evidence of an ownership
     interest in an entity, or a contract that both imposes a contractual
     obligation on one entity to deliver cash or another financial instrument
     to a second entity.

     Quoted market prices are used for fair value when available, but do not
     exist for some of the Company's financial instruments, primarily loans,
     time deposits, notes payable and FHLB advances.  The fair value of these
     instruments has been derived from the OTS Net Portfolio Value Model (OTS
     Model).  The OTS Model primarily employs the static discounted cash flow
     method which estimates the fair value of loans and time deposits by
     discounting the cash flows the instruments are expected to generate by
     the yields currently available to investors on instruments of comparable
     risk and duration.  Therefore, to calculate present value, the OTS Model
     makes assumptions about the size and timing of expected cash flows and
     appropriate discount rates.  Different assumptions could materially
     change these instruments' estimated values. 
 
     The following assumptions and methods were used by the Company in
     estimating the fair value of its financial instruments:
 
     Financial Assets.  Due to the liquid nature of the instruments, the
     carrying value of cash and cash equivalents and interest-bearing deposits
     approximates fair value.  For all investment and mortgage-backed
     securities, the fair value is based upon quoted market prices.  The fair
     value of loans receivable was obtained from the OTS Model.  The fair
     value of accrued interest receivable approximates book value as the
     Company expects contractual receipt in the short-term.  The fair value of
     FHLB stock approximates redemption value.

                                   39                         (Continued)

<PAGE>

<PAGE>

              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

     Financial Liabilities.  The fair value of NOW and demand accounts and
     non-term savings deposits approximates book values as these deposits are
     payable on demand.  The fair value of time deposits was obtained from
     the OTS Model.  The fair value of notes payable and FHLB advances was
     obtained from the OTS Model.  The fair value of accrued interest payable
     approximates book value as the Company expects payment in the short-term.

     Off-Balance Sheet.  Commitments made to extend credit represent
     commitments for loan originations, the majority of which are contracted
     for immediate sale and therefore no fair value adjustment is necessary.

     Limitations.  Fair value estimates are made at a specific point in time,
     based on relevant market information and information about the financial
     instrument.  These estimates do not reflect any premium or discount that
     could result from offering for sale at one time the Company's entire
     holdings of a particular instrument.  Because no market exists for a
     significant portion of the Company's financial instruments, fair value
     estimates are based on judgments regarding comparable market interest
     rates, future expected loss experience, current economic conditions, risk
     characteristics of various financial instruments, and other factors. 
     These estimates are subjective in nature and involve uncertainties and
     matters of significant judgment and therefore cannot be determined with
     precision.  Changes in assumptions could significantly affect the
     estimates.

     Fair value estimates are based on existing on-and off-balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments.  Significant assets and
     liabilities that are not considered financial instruments include
     deferred tax assets and premises and equipment.  In addition, the tax
     effect of the difference between the fair value and carrying value of
     financial instruments can have a significant effect on fair value
     estimates and have not been considered in the estimates presented herein.

     The approximate book value and fair value of the Company's financial
     instruments as of December 31,are as follows:

<PAGE>
<TABLE>


                                             1998                          1997
                                       -----------------------         --------------------
                                       Carrying         Fair           Carrying      Fair
                                         Value         Value             Value       Value
                                       --------       --------         ----------   -------
<S>                                 <C>             <C>             <C>           <C>       
Financial Assets:
  Cash and cash equivalents         $ 2,092,000      2,092,000       1,079,000     1,079,000
  Interest-bearing deposits           3,061,000      3,061,000       1,825,000     1,825,000
  Investment and mortgage-backed
  securities available-for-sale      39,866,000     39,866,000      36,496,000    36,496,000
  Investment and mortgage-backed
  securities held-to-maturity        10,498,000     10,583,000      20,556,000    20,803,000
  Loans receivable, net              49,499,000     50,512,000      45,714,000    47,044,000
  Stock in Federal Home Loan 
  Bank of Seattle                     1,361,000      1,361,000       1,261,000     1,261,000
  Accrued interest receivable           353,000        353,000         427,000       427,000

</TABLE>

                                                  40           (Continued)


<PAGE>

<PAGE>
              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

<PAGE>

<TABLE>


                                             1998                          1997
                                       -----------------------         --------------------
                                       Carrying         Fair           Carrying      Fair
                                         Value         Value             Value       Value
                                       --------       --------         ----------   -------
<S>                                 <C>             <C>             <C>           <C>       
Financial Liabilities:
 Deposits                           $66,413,000     66,692,000      66,859,000     66,906,000
 FHLB advances and note payable       4,647,000      4,844,000         698,000        818,000
 Accrued interest payable                93,000         93,000         100,000        100,000

</TABLE>


<PAGE>

(17)  Other Non-Interest Expense

      Included in other non-interest expense are advertising expenses of
      $73,084 and $96,346 for the years ended December 31, 1998 and 1997,
      respectively.

(18)  Holding Company Information (Condensed)

      The summarized financial information for Empire Federal Bancorp, Inc. is
      presented below.

Condensed Balance Sheets:                               December 31,
                                              ----------------------------
                                                  1998             1997
                                              ----------        ---------- 
                            Assets
                            ------
Cash                                         $   224,576           265,541
Loan to Empire                                 6,050,000        12,500,000
Investment in Empire                          29,950,048        27,888,637
Income taxes receivable                           76,500             -
                                              ----------        ----------
     Total assets                            $36,301,124        40,654,178
                                              ==========        ==========

        Liabilities and Stockholders' Equity
        ------------------------------------
                                 
Other liabilities                            $     -                55,790
                                              ----------        ----------
     Total liabilities                             -                55,790
                                              ----------        ----------
Stockholders' equity:
     Common stock                                 25,921            25,921
     Additional paid-in capital               25,277,770        25,208,225
     Unearned ESOP and MRDP compensation      (2,501,054        (1,935,430)
     MRDP shares acquired                       (432,215)         (801,875)
     Retained earnings                        17,327,635        16,815,367
     Treasury stock                           (5,310,819)               -
     Accumulated other comprehensive income    1,913,886         1,286,180
                                              ----------        ----------
      Total stockholders' equity              36,301,124        40,598,388
                                              ----------        ----------
       Total liabilities and 
       stockholders' equity                 $ 36,301,124        40,654,178
                                              ==========        ==========

                                   41

<PAGE>
<PAGE>


              EMPIRE FEDERAL BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements

Condensed Statements of Income:
                                                 Years Ended December 31,
                                               ----------------------------
                                                   1998             1997
                                               ----------        ----------
Interest income - loan to Empire            $     572,672           688,457
Interest expense - over subscription                 --             (63,170)
Compensation expense - ESOP shares                (73,371)          (65,869)
Compensation expense - MRDP shares               (588,946)              --
Operating expenses                               (116,962)          (80,702)
                                               ----------        ----------
       Income (loss) before equity in 
         undistributed earnings of
         subsidiary and income taxes             (206,607)          478,716

   Equity in undistributed earnings of 
    subsidiary                                  1,433,705         1,316,885
                                               ----------        ----------
       Income before income taxes               1,227,098         1,795,601

   Income tax expense (benefit)                   (17,500)          210,000
                                               ----------        ----------
       Net income                            $  1,244,598         1,585,601
                                               ==========        ==========

Condensed Statements of Cash Flows:

Cash flows from operating activities 
   Net income                                $  1,244,598         1,585,601
   Adjustments to reconcile net income to net
    cash provided by operating activities:   
      Equity in undistributed earnings of
        subsidiary                             (1,433,705)       (1,316,885)
      Increase in income taxes                    (76,500)              --
      Increase (decrease) in other 
        liabilities                               (55,790)           33,800
      ESOP compensation                           211,611           204,119
      MRDP compensation expense                   588,946               --
                                               ----------        ----------
         Net cash provided by operating 
           activities                             479,160           506,635
                                               ----------        ----------
Cash flows from investing activities-principal
  payments from loan to Empire                  6,450,000           700,000
                                               ----------        ----------
Cash flows from financing activities:
  Repayment of stock over subscription                 --        (6,987,070)
  Cash dividends paid                            (732,330)         (532,816)
  Purchase of stock for MRDP                     (926,976)         (801,875)
  Purchase of treasury stock                   (5,310,819)              -- 
  Decrease in accrued offering costs                  --           (504,145)
                                               ----------        ----------
     Net cash used in financing activities     (6,970,125)       (8,825,906)
                                               ----------        ----------
Net decrease in cash                              (40,965)       (7,619,271)

Cash at beginning of year                         265,541         7,884,812
                                               ----------        ----------
Cash at end of year                           $   224,576           265,541
                                               ==========        ==========

                                   42

<PAGE>

<PAGE>

                        COMMON STOCK INFORMATION

     The common stock of the Corporation is traded in the over-the counter
market as reported on the Nasdaq National Market under the symbol "EFBC."  As
of March 2, 1999, there were approximately 424 stockholders of record.  The
Corporation estimates that, as of March 2, 1999, there were approximately
1,230 beneficial owners holding stock in nominee or "street" name.

     The Corporation presently pays quarterly cash dividends on the common
stock, subject to the discretion of the Board of Directors.  Dividend payments
by the Corporation depend primarily on the ability of the Bank to pay
dividends to the Corporation.  Under OTS regulations, the dollar amount of
dividends a federal savings association may pay depends upon the association's
capital surplus position and recent net income.  Generally, if an association
satisfies its regulatory capital requirements, it may make dividend payments
up to the limits prescribed in the OTS regulations.  However, institutions
that have converted to the stock form of ownership may not declare or pay a
dividend on, or repurchase any of, its common stock if the effect thereof
would cause the regulatory capital of the institution to be reduced below the
amount required for the liquidation account which was established in
accordance with OTS regulations and the Bank's Plan of Conversion.  In
addition, earnings of the Bank appropriated to bad debt reserves and deducted
for federal income tax purposes are not available for payment of cash
dividends without payment of taxes at the then current tax rate by the Bank on
the amount removed from the reserves for such distributions.  The Bank does
not contemplate any distribution that would limit the Bank's bad debt
deduction or create federal tax liabilities.  

     The stock prices shown below reflect the initial public offering ("IPO")
price and the high and low prices by quarter from January 23, 1997, the date
the Corporation's common stock began trading on the Nasdaq National Market,
through the quarter ended December 31, 1998.

                                                              
                                             Market Price         Cash
                                             ------------     Dividends Paid 
                                             High      Low      Per Share  
                                             ----      ---      ---------

     IPO. .                                $10.00    $  --       $  --    

     March 31, 1997........................ 13.25     12.75         --   
     April 1, 1997 - June 30, 1997......... 14.75     12.50       .075
     July 1, 1997 - September 30, 1997..... 17.75     14.33       .075
     October 1, 1997 - December 31, 1997... 18.25     15.38       .075
     January 1, 1998 - March 31, 1998...... 18.00     16.63       .075
     April 1, 1998 - June 30, 1998......... 17.63     14.75       .080
     July 1, 1998 - September 30, 1998..... 15.88     12.50       .080
     October 1, 1998 - December 31, 1998... 14.88     10.50       .085


                                      43

<PAGE>

<PAGE>

                      DIRECTORS  AND OFFICERS
                                 OF
        EMPIRE FEDERAL BANCORP, INC. AND EMPIRE FEDERAL SAVINGS BANK



Directors:

William H. Ruegamer                       Edwin H. Doig
President and Chief Executive Officer     Retired Registered Pharmacist
of the Corporation and the Savings Bank   Former owner and manager of
                                          Livingston Drug. 
Beverly D. Harris                               
Vice Chairman  of the Corporation         Sanroe J. Kaisler Jr.    
and the Savings Bank, President           Retired insurance broker and former
of Dime Service Corporation, Empire       partner and majority stockholder of
Federal Savings Bank's wholly-owned       Waite & Company, an insurance
subsidiary.                               company.
        
Walter J. Peterson, Jr.                   Walter R. Sales
Chairman of the Board of the Corporation, Retired rancher and former Montana
Vice President of Dime Service            Legislator.
Corporation
                                                               
John R. Boe                               Burton "Tony" Wastcoat
Retired teacher and vice principal of     Owner/ Broker
local junior high school in Big Timber,   Coldwell Banker - RCI Realty
and member of Board of Directors of
Pioneer Medical Center


Officers:

William H. Ruegamer                       Beverly D. Harris        
President and Chief Executive Officer     Vice Chairman of the
of the Corporation and the Savings Bank   Corporation and the Savings Bank

Linda M. Alkire                           Ann Worthington
Chief Financial Officer and Treasurer of  Secretary of the Corporation
the Corporation and the Savings Bank      and the Savings Bank


                                    44

<PAGE>


<PAGE>

                           CORPORATE INFORMATION

Corporate Headquarters                     Transfer Agent

123 South Main Street                      Registrar and Transfer Co. 
Livingston, Montana                        Cranford, New Jersey
                                                     
Independent Auditors                       Common Stock
                                                     
KPMG LLP                                   Traded Over-the-Counter/
Billings, Montana                          National Market System   
                                           Nasdaq Symbol: EFBC
General Counsel                                       
                                           10-KSB Information            
        
Huppert and Swindlehurst, P.C.                       
Livingston, Montana                        A copy of the Form 10-KSB will be  
                                           furnished without charge to
                                           stockholders record upon written
                                           request to the Secretary,
Special Securities Counsel                 Empire Federal Bancorp, Inc., 123 
                                           South Main Street, Livingston, 
Breyer & Associates, P.C.                  Montana 59047.
Washington, DC                                    

                      ___________________________

Annual Meeting

     The Annual Meeting of Stockholders will be held on Thursday, May 27,
1999, at 12:30 p.m., Mountain Daylight Time, at the Corporation's main office
located at 123 South Main Street, Livingston, Montana.


                                  45

<PAGE>



<PAGE>

                                Exhibit 21
                                
                      Subsidiaries of the Registrant



Parent

Empire Federal Bancorp, Inc.

                                      Percentage          Jurisdiction or
Subsidiaries(a)                       of Ownership     State of Incorporation
---------------                       ------------     ----------------------

Empire Federal Savings Bank              100%              United States

The Dime Service Corporation (b)         100%              Montana

-----------------------
(a)  The operation of the Corporation's wholly owned subsidiaries are included
     in the Corporation's Financial Statements contained in Item 7 of this
     Report.
(b)  The Dime Service Corporation is the wholly owned subsidiary of Empire
     Federal Savings Bank.

                                       40
<PAGE>

<PAGE>

                                Exhibit 23

                      Consent of Independent Auditors

<PAGE>

<PAGE>

                               [KPMG Letterhead]



                         Independent Accountants' Consent
                         --------------------------------                      
   
The Board of Directors and Stockholders
Empire Federal Bancorp, Inc.

We consent to incorporation by reference in the registration statement (No.
333-48511) on Form S-8 of Empire Federal Bancorp, Inc., of our report dated
February 17, 1999 relating to the consolidated balance sheets of Empire
Federal Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for the years then ended, which report
appears in the December 31, 1998 annual report on Form 10-KSB of Empire
Federal Bancorp, Inc.

                                   /s/KPMG LLP

Billings, Montana
March 26, 1999

<PAGE>