<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 
         For the fiscal year ended June 30, 1997

                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the transition period from                     to
                                        -------------------     ----------------


                         COMMISSION FILE NUMBER 0-22772


                         WESTERFED FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

                  Delaware                            81-0187794
      (State or other jurisdiction of      (I.R.S. Employer Identification  
       incorporation or organization)                   Number)

    110 East Broadway, Missoula, Montana              59802-4511
  (Address of principal executive offices)            (Zip Code) 
 
       Registrant's telephone number, including area code: (406) 721-5254

           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 $.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
requirements for the past 90 days. YES X NO___.
                                            
        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

        The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the closing price of such stock on the
NASDAQ National Market System as of September 15, 1997, was $115.9 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)

        As of September 15, 1997, there were issued and outstanding 5,577,129
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for
the fiscal year ended June 30, 1997.

         Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.

<PAGE>

                                     PART I
                                     ------

Item 1.  Business

General

         WesterFed Financial Corporation (the "Company"), a Delaware
corporation, is a unitary savings and loan holding company which was organized
in 1994 at the direction of Western Federal Savings Bank of Montana ("Western
Federal" or the "Bank") for the purpose of owning all of the outstanding stock
of the Bank to be issued in connection with the Bank's conversion from mutual to
stock form (the "Conversion"). The Conversion was completed on January 6, 1994
at which time the Company issued a total of 4,436,657 shares of its common
stock. At June 30, 1997, the Company had total assets of $955.6 million,
deposits of $630.9 million and stockholders' equity of $104.3 million (10.91% of
total assets).

         The Company's results of operations are dependent primarily on net
interest income and fee income. Net interest income is the difference between
the interest income earned on its loans, mortgage-backed securities, and
investment portfolio and its cost of funds, consisting of interest paid on its
deposits and borrowed money ("spread"). The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.

         The Company serves the financial needs of communities throughout
Montana through its main office located in Missoula, 36 branch offices and one
loan servicing office. The Company attracts deposits from the general public and
uses the deposits, together with borrowings and other funds, to originate loans
secured by mortgages on owner-occupied one- to four-family residences in its
primary market area. To a lesser extent, the Company also originates
multi-family, commercial, agriculture and construction real estate loans and non
real estate commercial, agriculture and consumer loans in its market areas. The
Company also invests in mortgage-backed securities, investment securities and
other short-term liquid assets.

         On February 28, 1997, the Company completed its acquisition of Security
Bancorp (the "Acquisition"). The Acquisition was accounted for as a purchase
transaction and accordingly, the consolidated statement of income includes the
results of operations of Security Bancorp commencing March 1, 1997. Under this
method of accounting, assets and liabilities of Security Bancorp are adjusted to
their estimated fair value and combined with the historical recorded book value
of the assets and liabilities of the Company. The actual revaluation of Security
Bancorp's net assets acquired is subject to the completion of studies and
evaluations by management. The Company issued 1,150,175 shares of WesterFed
Common Stock, options to acquire 94,696 common shares and committed to pay
$25,995,480 in cash for all of the outstanding shares of Security Bancorp Common
Stock, for total consideration (based on the $18.49 per share average closing
price of WesterFed Common Stock as reported on the NASDAQ National Market System
for the twenty business days from January 16, 1997 through February 12, 1997) of
$48.7 million. In addition, as of such date, Security Bank, a federally
chartered stock savings bank and wholly owned subsidiary of Security Bancorp,
merged with and into the Bank. At the time of the merger, Security Bancorp had
assets on a consolidated basis of $372.6 million, deposits of $286.5 million and
stockholders equity of $30.8 million. Unless the context otherwise requires,
reference herein to the company includes WesterFed, Western Federal and its
subsidiaries on a consolidated basis. See "Management's Discussion and Analysis
- Acquisition Completed" in the Annual Report to the Shareholders attached
hereto as Exhibit 13 (the "Annual Report").

Forward-Looking Statements

         When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking

                                        2

<PAGE>



statements, which speak only as of the date made, and to advise readers that
various factors--including regional and national economic conditions,
substantial changes in levels of market interest rates, credit and other risks
of lending and investment activities and competitive and regulatory
factors--could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.

         The Company does not undertake--and specifically disclaims any
obligation--to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.

Market Areas

         The Bank conducts operations through its main office in Missoula,
Montana and its 35 branch offices and 2 administrative offices in 18 diverse
counties located throughout the State.

         Missoula. In Missoula the Bank operates six branch offices which
accounted for a total of $144.7 million of Missoula county's June 30, 1996
deposits, or a 16.2% market share, the latest date such information is
available. Missoula county's non-farm basic industries are trade center
activity, wood and paper products, motor carriers, Federal government, and the
University of Montana. Major employers include Missoula Community Hospital, St.
Patrick's Hospital, Stone Container (a paper mill), Louisiana Pacific (particle
board manufacturing), the University of Montana and the U.S. Forest Service.

         Billings. The Bank operates seven branches in the cities of Billings
and Laurel, located in Yellowstone county. Total deposits held by those branches
represented $177.9 million of the county's total June 30, 1996 deposits, or a
12.2% market share. Leading non-farm basic industries in Yellowstone county are
trade center activity, transportation, oil and gas, and Federal government. In
Billings, expansion of trade center activities continues.

         Helena. Four Western Federal offices are in Helena and East Helena,
which is located in Lewis and Clark county. The four branches there have total
deposits of $46.2 million, which accounts for 6.5% of the county's total June
30, 1996 deposits. Lewis and Clark county's basic leading non-farm industries
are state government, Federal government, and trade center activity. Helena
continues to be a regional health and financial services center.

         Great Falls. The Bank operates three branches in the city of Great
Falls, located in Cascade county. These branches hold $39.6 million in deposits
which is 4.7% of the county's total June 30, 1996 deposits. In Great Falls, the
leading non-farm basic industries are Malmstrom Air Force Base, and trade center
activity. Agriculture has a major influence on the economy of Great Falls with
the surrounding counties being the state's leading wheat producers.

         Bozeman. The Bank has two offices located in the city of Bozeman in
Gallatin county. Deposits in the branches are $19.8 million for a 3.7% market
share of the county's June 30, 1996 total deposits. Leading non-farm basic
industries in Gallatin county are Montana State University, selected
manufacturing, and non-resident travel. The county's economy continues to
benefit from growth in non-resident travel. The Bank anticipates closing one
branch in Bozeman in early 1998 as a result of the consolidation made possible
by the merger of Security Bank.

         Hamilton. The Bank has one branch office in Hamilton, located in
Ravalli county, where it holds deposits of $16.3 million of the county's June
30, 1996 deposits for a 5.5% market share. Ravalli county has benefitted
recently from an influx of retirees.

         Conrad. One Bank office is located in the city of Conrad in Pondera
county. This branch has $8.1 million in deposits and a 9.1% market share of the
county's total June 30, 1996 deposits. The local economy is primarily
agricultural in nature.


                                        3

<PAGE>

         Lewistown. The Bank has two offices in the city of Lewistown, located
in Fergus county. The branches have $29.0 million in deposits for a 17.0% market
share of the county's total June 30, 1996 deposits. The local economy is
primarily agricultural in nature. The Bank anticipates closing one branch in
Lewistown in early 1998 as a result of the consolidation made possible by the
merger of Security Bank.

         Miles City. In Custer county, the Bank has one branch located in Miles
City, which has $13.9 million in deposits for a 6.6% market share of the
county's June 30, 1996 total deposits. Ranching is an important segment of the
local economy.

         Hardin. The Bank has one branch located in the city of Hardin, in Big
Horn county. The branch has $8.9 million in deposits for a 12.1% market share of
the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.

         Anaconda. The Bank has one branch located in the city of Anaconda, in
Deer Lodge county. The branch has $28.1 million in deposits for a 25.6% market
share of the county's June 30, 1996 total deposits. Anaconda continues to
benefit from resotration activities related to environmental superfund sites.

         Kalispell. The Bank has one branch located in the city of Kalispell, in
Flathead county. The branch has $6.8 million in deposits for a 0.9% market share
of the county's June 30, 1996 total deposits. Kalispell's economy is supported
by natural resource industries and non-resident travel.

         Havre. The Bank has one branch located in the city of Havre, in Hill
county. The branch has $26.1 million in deposits for a 11.3% market share of the
county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.

         Malta. The Bank has one branch located in the city of Malta, in
Phillips county. The branch has $3.8 million in deposits for a 4.7% market share
of the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.

         Sidney. The Bank has one branch located in the city of Sidney, in
Richland county. The branch has $8.7 million in deposits for a 6.0% market share
of the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.

         Plentywood. The Bank has one branch located in the city of Plentywood,
in Sheridan county. The branch has $16.8 million in deposits for a 15.4% market
share of the county's June 30, 1996 total deposits. The local economy is
primarily agricultural in nature.

         Butte. The Bank has one branch located in the city of Butte, in
Silverbow county. The branch has $40.4 million in deposits for a 9.0% market
share of the county's June 30, 1996 total deposits. Butte is a trade center and
continues to be supported by various mining activities.

         Glasgow. The Bank has one branch located in the city of Glasgow, in
Valley county. The branch has $8.2 million in deposits for a 6.2% market share
of the county's June 30, 1996 total deposits. The local economy is primarily
agricultural in nature.

Lending Activities

         General. Historically the principal lending activity of the Bank has
been the origination, for portfolio and for sale, of first mortgage loans
secured by owner-occupied one-to-four family residential properties located in
its primary market areas. More recently, in order to increase the yield and
better manage the interest rate sensitivity of its portfolio, and in order to
provide more comprehensive financial services to communities in its market
areas, the Bank now also originates commercial real estate, consumer,
multi-family, and construction loans. With the 1997 merger with Security Bank,
Western Federal acquired a more expansive lending portfolio, including loans and
expertise in commercial non-real estate and agricultural services. The Bank is
also a major

                                        4

<PAGE>

originator and servicer of Federal Housing Adminstration/Veterans Administration
("FHA/VA") loans, which are subsequently purchased by the Montana Board of
Housing ("MBOH").

         When fixed-rate conventional mortgage loans with terms over 15 years
are routinely sold into the secondary market, Western Federal generally retains
the servicing rights on these loans, except for those loans sold pursuant to
loan correspondent agreements. See "- Originations, Purchases and Sales of Loans
and Mortgage-Backed Securities." At June 30, 1997, Western Federal serviced
loans with principal balances of approximately $268.6 million for others. The
loan servicing fees earned provided a supplement to the Bank's earnings.





                                        5

<PAGE>

         Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.

<TABLE>
<CAPTION>
                                                                        At June 30,
                                                       1997                 1996                1995
                                                 ----------------    -----------------    ----------------
                                                 Amount   Percent    Amount    Percent    Amount   Percent      
                                                 ------   -------    ------    -------    ------   -------      
                                                                                        (Dollars in Thousands)
<S>                                           <C>          <C>      <C>         <C>      <C>        <C>  
Real Estate Loans: 
  One- to four-family(1)....................  $ 348,577    53.82%   $280,853    74.69%   $247,331   76.94%
  Multi-family..............................     40,237     6.21      19,939     5.30      18,985    5.91 
  Commercial................................     50,049     7.73      18,318     4.87      12,399    3.86 
  Agricultural..............................      7,970     1.23         ---      ---         ---     ---   
  Construction..............................     19,858     3.07      12,977     3.45      10,742    3.34 
                                              ---------  -------    --------  -------    --------  ------
    Total real estate loans.................    466,691    72.06     332,087    88.31     289,457   90.05 
                                              ---------  -------    --------  -------    --------  ------

Other Loans:
  Commercial (non-real estate)..............     28,924     4.47         ---      ---         ---     ---   
  Agricultural (non-real estate)............     18,866     2.91         ---      ---         ---     ---   
  Loans to depositors, secured by deposits..      4,101     0.63       2,337     0.62       2,138    0.67 
  Indirect consumer loans...................     40,708     6.29       2,827     0.75         ---     ---   
  Other consumer loans - real estate secured     58,551     9.04      30,814     8.19      24,757    7.69 
  Other consumer loans......................     29,772     4.60       8,003     2.13       5,112    1.59 
                                              ---------  -------    --------  -------    --------  ------
    Total other loans.......................    180,922    27.94      43,981    11.69      32,007    9.95 
                                              ---------  -------    --------  -------    --------  ------
    Total gross loans.......................    647,613   100.00%    376,068   100.00%    321,464  100.00%
                                                          ======               ======              ======

Less:
  Unearned fees and discounts...............     (1,813)              (1,625)              (1,344)                
  Undisbursed loan funds....................     (9,489)              (4,245)              (4,988)                
  Purchased discounts.......................     (1,383)                 ---                  ---                
  Allowance for losses......................     (4,651)              (2,005)              (2,011)                
                                              ---------             --------             --------    
    Total loans receivable, net.............  $ 630,277             $368,193             $313,121                
                                              =========             ========             ========              
</TABLE>
<TABLE>
<CAPTION>
                                                                 At June 30,
                                                      1994                      1993
                                               --------------------      -------------------
                                                Amount    Percent         Amount     Percent
                                                ------    -------         ------     -------
                                              (Dollars in Thousands)
<S>                                            <C>          <C>          <C>          <C>  
Real Estate Loans: 
  One- to four-family(1)....................   $230,700     81.85%       $192,950     79.75%
  Multi-family..............................     14,430      5.12          11,801      4.88
  Commercial................................     11,300      4.01          13,215      5.46
  Agricultural..............................        ---       ---             ---       ---
  Construction..............................      7,866      2.79           8,764      3.62
                                               --------   -------        --------   -------
    Total real estate loans.................    264,296     93.77         226,730     93.71
                                               --------   -------        --------   -------
Other Loans:
  Commercial (non-real estate)..............        ---       ---             ---       ---
  Agricultural (non-real estate)............        ---       ---             ---       ---
  Loans to depositors, secured by deposits..      2,034      0.72           1,839      0.76
  Indirect consumer loans...................        ---       ---             ---       ---
  Other consumer loans - real estate secured     10,150      3.60           7,800      3.22
  Other consumer loans......................      5,387      1.91           5,577      2.31
                                               --------   -------        --------   -------
    Total other loans.......................     17,571      6.23          15,216      6.29
                                               --------   -------        --------   -------
    Total gross loans.......................    281,867    100.00%        241,946    100.00%
                                                           ======                    ======
Less:
  Unearned fees and discounts...............     (1,301)                   (1,017)
  Undisbursed loan funds....................     (3,696)                   (5,723)
  Purchased discounts.......................        ---                       ---
  Allowance for losses......................     (2,030)                   (2,058)
                                                -------                  --------    
    Total loans receivable, net.............    $274,840                 $233,148
                                                ========                 ========
</TABLE>
----------
(1)  Includes $13.7 million, $7.5 million, $7.1 million, $8.9 million, and $12.5
     million of FHA and VA loans at June 30, 1997, 1996, 1995, 1994 and 1993,
     respectively.
                                        6
<PAGE>



         The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract matures. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>

                                                                           Real Estate
                            -------------------------------------------------------------------------------
                               One-to-Four Family            Multi-Family               Construction   
                            -------------------------------------------------------------------------------
                                           Weighted                   Weighted                   Weighted                   
     Due During Years                       Average                    Average                    Average                    
     Ending June 30,            Amount         Rate         Amount        Rate         Amount       Rate   
-----------------------------------------------------------------------------------------------------------    
<S>                        <C>                 <C>    <C>                 <C>    <C>                 <C>               
1998 (1)                    $      1,330        9.04%  $        233        9.71%  $      16,918       7.81%   
1999                               1,434        8.65%         1,281        8.72%            319      10.00%  
2000                                 722        9.03%           643        9.23%          2,421      10.00%  
2001 and 2002                     10,014        8.60%         2,767        9.22%            ---          --   
2003 and 2007                     33,140        8.21%         6,067        8.84%            200       9.00%   
2008 and 2012                    146,844        7.62%        19,104       10.03%            ---          --   
2013 and Following               155,093        7.77%        10,142        8.47%            ---          -- 
                            -------------------------------------------------------------------------------  
Total                       $    348,577        7.78%  $     40,237        9.35%  $      19,858       8.12%   
                            ===============================================================================

</TABLE>
<TABLE>
<CAPTION>
                                                                      Real Estate
                            --------------------------------------------------------------------------------
                                   Commercial                 Agriculture              Total Real Estate
                            --------------------------------------------------------------------------------
                                          Weighted                   Weighted                     Weighted
     Due During Years                      Average                    Average                      Average
     Ending June 30,           Amount         Rate          Amount       Rate          Amount         Rate
------------------------------------------------------------------------------------------------------------
<S>                         <C>               <C>    <C>                 <C>    <C>                   <C>  
1998 (1)                    $      1,374      9.66%  $        177        9.65%  $     20,032          8.05%
1999                               4,060      9.79%            47        8.75%         7,141          9.37%
2000                                 799      9.32%            90        9.62%         4,675          9.62%
2001 and 2002                      3,857      9.26%           491        8.74%        17,129          8.85%
2003 and 2007                     10,043      8.96%         1,271        9.11%        50,721          8.46%
2008 and 2012                     20,003      9.02%         1,286        8.76%       187,237          8.02%
2013 and Following                 9,913      9.29%         4,608        8.54%       179,756          7.92%
                            --------------------------------------------------------------------------------
Total                       $     50,049      9.17%  $      7,970        8.72%  $    466,691          8.10%
                            ================================================================================
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                          Non-Real Estate 
                          ---------------------------------------------------------------------------------------------------------
                                 Commercial                 Agriculture                 Consumer              Total Non-Real Estate
                          ---------------------------------------------------------------------------------------------------------
                                         Weighted                   Weighted                   Weighted                   Weighted
     Due During Years                    Average                    Average                    Average                     Average
     Ending June 30,         Amount        Rate         Amount        Rate         Amount        Rate          Amount       Rate 
-----------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>                <C>    <C>                 <C>    <C>                 <C>     <C>                <C> 
1998 (1)                  $      7,370       9.30%  $      9,941        9.45%  $      13,538       9.38%   $     30,849       9.38%
1999                             6,494       8.81%           706        9.49%          6,688       9.22%         13,888       9.04%
2000                             2,211       9.10%           743       10.34%         11,491       9.30%         14,445       9.32%
2001 and 2002                    9,403       8.51%         2,950        9.18%         48,864       9.19%         61,217       9.08%
2003 and 2007                    2,684       9.57%         3,327        7.75%         21,317       9.62%         27,328       9.39%
2008 and 2012                      762       8.79%           699        8.72%         31,179       9.94%         32,640       9.89%
2013 and Following                 ---          --           500        9.23%             55       8.94%            555       9.20%
                          ---------------------------------------------------------------------------------------------------------
Total                     $     28,924       8.93%  $     18,866        9.11%  $     133,132       9.46%   $    180,922       9.34%
                          =========================================================================================================

                            Total Real Estate and      
                                Non-Real Estate         
                          ----------------------------                                              
                                         Weighted      
                                          Average       
                             Amount         Rate 
                          ----------------------------       
<S>                       <C>                   <C>
1998 (1)                  $     50,881          8.86%   
1999                            21,029          9.15%   
2000                            19,120          9.39%   
2001 and 2002                   78,346          9.03%   
2003 and 2007                   78,049          8.79%   
2008 and 2012                  219,877          8.30%   
2013 and Folling               180,311          7.92%
                          ----------------------------   
                          $    647,613          8.44% 
                          ============================
</TABLE>  
                                              


(1) Includes demand loans and loans having no stated maturity.


                                        7

<PAGE>


         The following table sets forth the dollar amount of all loans at June
30, 1997 that have fixed interest rates, those that are contractually due after
June 30, 1998 and have floating or adjustable interest rates that change after
June 30, 1998.

<TABLE>
<CAPTION>
                                                                                    Floating or
                                                                                     Adjustable
                                                                  Fixed Rates           Rates                Total
                                                                 -------------     --------------          ---------
                                                                                   (In Thousands)

Real Estate:
<S>                                                                  <C>                <C>                 <C>     
   One- to four-family....................................           $248,686           $ 21,302            $269,988
   Multi-family...........................................             31,517              2,583              34,100
   Commercial.............................................             26,192             10,309              36,501
   Agricultural...........................................              1,152              4,575               5,727
   Construction...........................................             81,682                200              81,882
Other loans
   Agricultural...........................................              7,005                318               7,323
   Commercial ............................................             11,147                254              11,401
   Consumer...............................................             38,348                481              38,829
                                                                     --------           --------            --------

   Total..................................................           $445,729           $ 40,022            $485,751
                                                                     ========           ========            ========
</TABLE>

         Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1997, based on the above, the Bank's regulatory loans-to-one-borrower limit
was $12.7 million. On the same date, the Bank's largest amount of loans to one
borrower was approximately $6.5 million and are currently performing in
accordance with their contractual terms.

         Residential real estate loans are originated by employees who are
compensated on a salary or commission basis. In the case of commissioned loan
officers, processing and loan underwriting are handled by other personnel. In
the loan approval process, Western Federal assesses both the borrower's ability
to repay the loan and the adequacy of the proposed security. Initially, Western
Federal's loan underwriters analyze the loan application and the property
involved. As part of the loan application process, qualified outside appraisers
inspect and appraise the security property. All appraisals are subsequently
reviewed by staff underwriters. Western Federal also obtains information
concerning the income, financial condition, employment and credit history of the
applicant. Western Federal's policy is to require title, fire and extended
hazard coverage on its real estate loans.

         If the loan terms and borrower meet Western Federal's established
underwriting criteria and the loan amount does not exceed $100,000, the loan may
be approved by action of two members of the loan committee. Real estate loans
that exceed $100,000 must be approved by three loan committee members, one of
which must be a loan policy committee member or one of five selected senior loan
committee members. Business division loan officers have individual approval
limits based upon their experience and expertise. All loans (other than
conforming jumbo residential loans) in excess of $500,000 must be approved by
the Board of Directors. The loan committee presently consists of certain branch
managers, certain employee loan originators, and the members of the loan policy
committee. The loan policy committee presently consists of seven senior officers
of the Bank. In addition, the Bank employs one- to four-family residential
underwriters who have no origination duties and can approve residential loans up
to Freddie Mac limits. Loan policy members have individual authority up to
$250,000 within this specialty area.

         All of the Bank's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's written appraisal policy) by qualified appraisers. The loan
applications are designed primarily to determine the borrower's ability to repay
and the more significant items on the

                                        8

<PAGE>

application are verified through use of credit reports, financial statements,
tax returns and/or verifications of employment.

         The Bank requires evidence of marketable title and lien position as
well as appropriate title insurance (except on certain home equity loans) on all
loans secured by real property and requires fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan. The Bank
may also require flood insurance to protect the property securing its interest.

One- to Four-Family Residential Real Estate Lending

         The cornerstone of the Bank's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied
one- to four-family residences. At June 30, 1997, $348.6 million, or 53.8%, of
the Bank's loan portfolio consisted of permanent loans on one- to four-family
residences. Substantially all of the residential loans originated by Western
Federal are secured by properties located in the Bank's primary market areas.

         Historically, Western Federal originated for retention in its own
portfolio, 30-year fixed-rate loans secured by one- to-four family residential
real estate. In order to reduce its exposure to changes in interest rates,
Western Federal originates adjustable rate mortgage loans ("ARMs"), subject to
market conditions and consumer preference. As a result of continued consumer
demand, particularly during periods of relatively low interest rates, for long
term fixed-rate loans, Western Federal has continued to originate loans for sale
in the secondary market in amounts and at rates which are monitored for
compliance with the Bank's asset/liability management policy.

         The Bank's loans are underwritten and documented to permit their sale,
consistent with the Bank's asset/liability management objectives. Since under
the Bank's current policy, it may sell or securitize all of the newly originated
fixed-rate loans with terms of more than 15 years, the Bank's fixed-rate loans
are originated with terms which conform to secondary market standards (i.e.,
FHLMC standards). Such loans may be held for sale until they are sold or
securitized. Most of the Bank's newly originated fixed-rate residential loans
have contractual terms to maturity of 15 to 30 years. The Bank's decision to
hold or sell these loans is based on its asset/liability management policy and
goals and the market conditions for mortgages at any period in time. The Bank
typically retains the servicing of the conventional loans it originates and
sells to FHLMC. During fiscal 1997, the Bank sold $26.0 million of loans with
servicing retained. See "- Originations, Purchases and Sales of Loans and
Mortgage-Backed Securities" for information regarding fees received by the Bank
in connection with loans serviced for others. At June 30, 1997, the Bank had
$167.2 million of fixed-rate one- to four-family residential loans with
remaining terms of 15 years or less and $83.0 million of fixed-rate loans with
remaining terms greater than 15 years in its loan portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Interest Rate Risk Management" in the Annual Report incorporated by reference
herein as Exhibit 13.

         The Bank has offered ARM loans at rates, terms and points determined in
accordance with market and competitive factors. The programs currently offered
generally meet the standards and requirements of the secondary market for
residential loans. The Bank's current one- to four-family residential ARMs are
fully amortizing loans with contractual maturities of up to 30 years. The
interest rates on the ARMs originated by Western Federal are subject to
adjustment at stated intervals based on a margin over a specified index and are
subject to lifetime adjustment limits.

         Western Federal presently offers several ARM products. The primary
offering utilizes the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of one year plus a margin depending on property type.
This loan adjusts annually subject to a limitation on the annual increase to 2%
and overall life of loan limitation of 6%. Western Federal also offers various
other ARM products for portfolio or on a correspondent basis which are available
for sale into the secondary market. ARM products held in portfolio do not permit
negative amortization of principal and carry no prepayment restrictions. At June
30, 1997, the Bank had $95.6 million of one-to four-family ARM loans.

         It is Western Federal's present policy generally not to lend more than
97% of the appraised value in the case of first mortgage loans secured by real
property. Western Federal presently requires private mortgage

                                        9

<PAGE>

insurance in specified amounts on all conventional residential loans with
loan-to-value ratios at origination exceeding 80%. The terms of the private
mortgage insurance have generally provided that Western Federal would receive a
payment equal to 17% to 30%, depending on the initial loan-to-value ratio, of
the outstanding principal amount of the loan if there has been a default, plus
costs of foreclosure.

         Substantially all of Western Federal's present real estate loans
(excluding mortgage-backed securities) are secured by properties located in
Montana. In view of the prevailing level of real estate values in the Bank's
market areas, the Bank rarely originates loans in excess of $214,600 (the
Federal Home Loan Mortgage Corporation ("FHLMC") one-family maximum).

         The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank has enforced due-on-sale clauses in its mortgage contracts for the purpose
of increasing its loan portfolio yield. ARM loans may be assumed provided home
buyers meet the Bank's underwriting standards and the applicable fees are paid.

Multi-Family and Commercial Real Estate Lending

         Western Federal, due to its acquisition of Security Bank, has a mature
portfolio of multi-family and commercial real estate loans. New originations are
handled through a Business Division to allow a full line of commercial products
and services as a part of the customer relationship.

         Western Federal's lending guidelines generally require, in the case of
loans secured by multi-family or commercial income-producing property, that the
property securing such loans generate gross cash flow of 120% or more of all
operating expenses, including debt service but excluding depreciation, and have
a loan-to-value ratio of no more than 75%. Higher debt coverage ratios or lower
loan-to-value ratios may apply depending on property type and market.

         The multi-family loans are generally secured by income producing
properties and may be made for the purchase or refinance of multi-family
residential properties. The commercial real estate loans originated by Western
Federal are primarily secured by office buildings, small shopping centers,
motels, warehouses, and other income-producing properties. Commercial real
estate lending entails significant additional risks as compared with residential
property lending. Commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project and as such may be subject to a greater extent than
residential loans to adverse conditions in the economy generally. In dealing
with these risk factors, Western Federal generally limits itself to a real
estate market and/or borrowers with which it has knowledge and experience. The
Bank also makes loans issued under the SBA's 504(B) program. Under this program,
the borrower's down payment may be as little as 10%. Under this program, the
Bank funds 50% of the acquisition price with the SBA guaranteed loan financing
40% of the acquisition price in a subordinated position. While the borrower's
equity contribution is limited to 10%, the Bank's loan to value ratio does not
exceed 50%. At June 30, 1997, $40.2 million, or 6.2% of the Bank's loan
portfolio, consisted of multi-family loans and $50.0 million, or 7.7% of the
Bank's loan portfolio, consisted of commercial real estate loans. In general,
total investments in commercial real estate loans may not exceed 400% of the
Bank's capital.

Agricultural Real Estate Lending

         The majority of the Bank's agricultural real estate loans are secured
by first liens on farm and ranch land located within the State of Montana. The
Bank's current policy is that loans on agricultural land may be made up to 65%
of the appraised value or purchase price, whichever is less. Underwriting
guidelines require that the cash flow generated by the borrower must be 110% to
125% of the annual debt service, depending on the leverage position of the
borrower. Loans secured by agricultural land are adjustable rate loans tied to
the two, three, or five year treasury constant maturity index plus a margin
established by management. The loans are amortized up to twenty years. At June
30, 1997, $8.0 million, or 1.2% of the Bank's loan portfolio, consisted of
agricultural real estate loans. In general, total investments in agricultural
real estate loans may not exceed 400% of the Bank's capital.


                                       10

<PAGE>

Commercial and Agricultural Non-Real Estate Lending

         The Bank is permitted to make secured and unsecured loans for
commercial, corporate, business and agricultural purposes, including issuing
letters of credit and engaging in inventory financing and commercial leasing
activities. In general, the Bank's total investment in such loans is limited
such that at any one time it generally may not exceed 20% of assets, as defined
in OTS regulations. At June 30, 1997, $28.9 million, or 4.5% of the Bank's loan
portfolio, consisted of commercial non-real estate loans and $18.9 million, or
2.9% of the Bank's loan portfolio, consisted of agricultural non-real estate
loans.

Consumer Lending and Unused Lines of Credit

         Management believes that offering consumer loan products helps expand
the Bank's customer base and creates stronger ties to its existing customer
base. In addition, because consumer loans generally have shorter terms to
maturity and/or adjustable rates and carry higher rates of interest than do
residential mortgage loans, they can be valuable asset/liability management
tools. See "Management's Discussion and Analysis of Financial Condition -
Interest Rate Risk Management" in the Annual Report incorporated by reference
herein as Exhibit 13.

         The Bank currently originates substantially all of its consumer loans
in its market areas. At June 30, 1997, the Bank's consumer loans totaled $129.0
million, or 19.9%, of the Bank's loan portfolio.

         Western Federal offers a variety of real estate secured consumer loans
for various purposes with terms up to fifteen years. The majority of lending is
for home improvement, personal vehicles, equity loans and other personal
purposes.

         In addition, Western Federal offers an in-house credit card program
with the credit card receivables owned by Western Federal. The credit cards are
provided as an additional service to Western Federal customers. At June 30,
1997, Western Federal had $2.2 million of credit card receivables outstanding.
In addition, on such date, Western Federal had $9.4 million in unused lines of
credit available to cardholders under this program.

         The Bank also offers an open-end equity line of credit secured by real
estate with an interest rate indexed to the prime rate of interest. At June 30,
1997 the Bank had $8.3 million outstanding under this program with an additional
$4.2 million in unused lines of credit available to borrowers under this
program.

         Early in 1996, Western Federal engaged the services of a
manager/consultant to initiate a Dealer Finance Program to conduct indirect
lending activities for automobiles, trucks, and recreational vehicles and boats.
The manager/consultant hired and trained personnel in order to start operations
by May 1, 1996. As of June 30, 1997, receivables for Dealer Finance totaled
$40.7 million. Western Federal, consistent with its consumer loan policies,
considers Dealer Finance an additional opportunity to expand the installment
portfolio offering better yields. New accounts are cross-sold to extend
relationships and expand customer base.

         Consumer loan terms vary according to the type of collateral, term of
the loan, and credit-worthiness of the borrower. Unsecured loans are offered to
borrowers for a variety of purposes and personal needs. These are generally
fully amortizing with loan terms of 48 months or less. Underwriting for all
unsecured lending is substantially the same.

         The Bank's secured lending for vehicles, household goods, mobile homes,
and real estate secured utilizes established loan-to-value ratios and restricted
terms to match the age and condition of the security. The underwriting standards
employed by the Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to meet payments on the proposed loan along with his existing
obligations. In addition to the credit-worthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.

         Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. In

                                       11

<PAGE>

addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various Federal and state laws,
including Federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered on such loans. Although the level of delinquencies in the
Bank's consumer loan portfolio has generally been low (at June 30, 1997, $1.2
million, or approximately 0.93% of the consumer loan portfolio was 90 days or
more delinquent), there can be no assurance that delinquencies will not increase
in the future.

Construction Lending

         Historically, construction lending for one- to four-family residences
has always been an important part of Western Federal's commitment to the
communities it serves. Loans to individuals are either 12-month fixed-rate loans
or long-term variable rate construction/permanent loans which provide for a
six-month construction period before converting to a fully amortizing 29
1/2-year or less adjustable-rate loan. Occasionally, Western Federal originates
construction loans to builders for the speculative construction of one- to
four-family homes. Such loans are generally 12-month, fixed-rate loans and are
generally limited to one to five properties per builder. The Bank occasionally
makes acquisition and development loans to credit worthy borrowers for
residential projects within the Bank's market area. At June 30, 1997,
approximately $19.9 million, or 3.1% of the Bank's loan portfolio, consisted of
construction loans.

         Most of the Bank's construction loans have been originated with
fixed-rates of interest. One- to four-family construction loans are generally
made in amounts of up to a maximum loan-to-value ratio of 90%. Prior to making a
commitment to fund a construction loan, the Bank requires an appraisal of the
property. Western Federal obtains personal guarantees for substantially all of
its construction loans. The Bank generally requires that both borrowers and
guarantors provide personal financial statements. Virtually all of Western
Federal's construction loans have been located in its primary market areas.

         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 generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive origination and other loan fees. In addition, such loans are
generally made for relatively short terms. Nevertheless, construction lending to
persons other than owner occupants is generally considered to involve a higher
level of credit risk than one- to four-family residential lending due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on construction projects, real estate
developers and managers. In addition, the nature of these loans is such that
they are more difficult to evaluate and monitor. The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project with a value which is insufficient to assure full repayment.
Because defaults in repayment may not occur during the construction period it
may be difficult to identify problem loans at an early stage.

Originations, Purchases and Sales of Loans and Mortgage-Backed Securities

         In addition to originating and purchasing loans for its own loan
portfolio, Western Federal from time to time participates in secondary mortgage
market activities by selling whole loans and participations in loans to FHLMC
and various institutional purchasers. Western Federal generally receives in
return FHLMC participation certificates or cash for non-recourse sales to the
FHLMC. During fiscal 1997, Western Federal sold or securitized $26.0 million of
loans, with servicing retained, to the FHLMC and other institutional investors
(exclusive of sales pursuant to loan correspondent agreements discussed below).

         Western Federal currently has loan correspondent agreements with
mortgage banking firms under which Western Federal agrees to originate and sell
primarily conventional, FHA and VA loans to such firms. Under these programs,
Western Federal processes loan applications and originates loans in accordance
with the buyers' underwriting policies. The loans, together with all servicing
rights, are then sold to such firms and Western Federal retains any loan
origination fees and negotiates the retention of discount points. Under these
programs, the borrower locks in an interest rate, and Western Federal
concurrently obtains a purchase commitment from

                                       12

<PAGE>

the correspondent that does not require delivery unless the loan is closed.
Western Federal's risk is generally limited to its failure to comply with the
agreement with the correspondent institution or loan underwriting and
documentation requirements of such institution, which could result in rejection
of the loan by the purchaser after closing. However, under some of the
correspondent agreements, Western Federal can be required to repurchase any loan
which becomes 60 days or more delinquent within four months of the sale. During
fiscal 1997, Western Federal sold $28.6 million of loans pursuant to
correspondent agreements. While no prediction can be made as to loan repurchases
which may be required pursuant to correspondent agreements in the future, as of
June 30, 1997, Western Federal has never had to repurchase a delinquent loan
from a loan correspondent.

         Western Federal also participates in loan programs financed by the
Montana Board of Housing ("MBOH"). Under these programs, Western Federal
originates loans according to standards, underwriting, and qualifications
prescribed by the MBOH which are then purchased by the MBOH with funds generated
by tax-exempt revenue bonds. Loans are generally priced at a discount to market
interest rates for the benefit of low- to moderate-income borrowers. Western
Federal retains servicing rights on all loans sold to the MBOH.

         Typically, when loans or participations are sold (other than in respect
of the agreements with correspondent institutions described above), Western
Federal retains responsibility for collecting and remitting loan payments,
inspecting the properties, making certain insurance and tax payments on behalf
of borrowers and otherwise servicing the loans, and receives a fee for
performing this service. Sales of whole loans, participation interests and
mortgage-backed securities generate income (or loss) at the time of sale,
produce future servicing income and provide funds for additional lending and
other purposes. Western Federal was servicing mortgage loans for others in the
amount of $268.6 million at June 30, 1997.

         Prior to the issuance of Statement of Financial Accounting Standards
("SFAS") No. 125, see Note 1 of the Notes to Consolidated Financial Statements
in the Annual Report incorporated by reference herein as Exhibit 13, the
contractual right to service mortgage loans that had been originated and sold
had an economic value that was not recognized in the Bank's financial
statements. SFAS No. 125 provides that the Bank recognize as a separate asset
rights to service loans for others, regardless of how those servicing rights are
acquired. Rights to service loans must also be assessed for impairment based on
the fair value of the servicing assets. The value results from the future income
stream of the servicing fees, the availability of the cash balances associated
with escrow funds collected monthly for real estate taxes and insurance, the
availability of the cash from monthly principal and interest payments from the
collection date to the remittance date, and the ability of the Bank to
cross-sell other products and services. The actual value of a servicing
portfolio is dependent upon such factors as the age, maturity, and prepayment
rate of the loans in the portfolio, the average dollar balance of the loans, the
location of the collateral property, the average amount of escrow funds held,
the interest rates and delinquency experience on the loans, the types of loans
and other factors.

         The marketability of loans, loan participations and mortgage-backed
securities depends on the purchasers' investment limitations, general market and
competitive conditions, mortgage loan demand, and other factors. Western
Federal's sales of loans or participation are generally "without recourse"
(i.e., without remedy against the seller by the purchaser if the borrower
defaulted on payment under the loan) against Western Federal in the event of
default, except in the case of the loan agreements with correspondent
institutions discussed above. Western Federal does have contingent liability on
sold loans under warranty of conforming origination to FHLMC.

         Gains or losses on the sale of mortgage loans and loan participations
are recognized and a premium or discount is recorded at the time of sale in an
amount reflecting the difference between the contractual interest rate of the
loans sold and the current market rate of interest. Any deferred premium or
discount is amortized using an interest method.


                                       13

<PAGE>

         The following table sets forth the loan origination and mortgage-backed
security origination, purchase, and sale activity for the periods indicated.

<TABLE>
<CAPTION>
                                                                                        Year Ended June 30,
                                                                            ---------------------------------------
                                                                               1997           1996           1995
                                                                            ----------     ---------     ----------
                                                                                         (In Thousands)
<S>                                                                         <C>            <C>           <C>   
Beginning of Period:    
   Loans, net............................................................   $  368,193     $ 313,121     $  274,840
   Mortgage-backed securities, net.......................................      104,947       143,825        145,025
                                                                            ==========     =========     ==========    
      Total loans and mortgage-backed securities receivable, net, at
      beginning of period................................................   $  473,140     $ 456,946     $  419,865  
                                                                            ----------     ---------     ----------
Loan Originations:
   Real Estate:
      One- to four-family................................................   $   97,732     $ 111,355     $   93,604
      Multi-family.......................................................        4,101         1,215            ---
      Commercial.........................................................        6,032         3,318            ---
      Agricultural.......................................................           37           ---            ---
      Construction.......................................................       13,650        17,775          7,973
                                                                            ----------     ---------     ----------
         Total real estate loan originations.............................      121,552       133,663        101,577
                                                                            ----------     ---------     ---------- 
   Other Loans:
     Commercial..........................................................       11,684           ---            ---
     Agricultural........................................................        9,024           ---            ---
     Consumer............................................................       84,569        31,884         28,178
                                                                            ----------     ---------     ----------
         Total other loan originations...................................      105,277        31,884         28,178
                                                                            ----------     ---------     ----------
   Total loan originations...............................................      226,829       165,547        129,755
                                                                            ----------     ---------     ----------
Purchases and Conversions:
   Real estate loans.....................................................        1,488         7,022          2,127
   Loans purchased in acquisition .......................................      218,281           ---            ---
   Mortgage-backed securities............................................        6,928        21,881         21,705
   Mortgage-backed securities purchased in acquisition ..................       91,467           ---            ---
   Mortgage loans converted to mortgage-backed securities................          ---           ---          3,885
                                                                            ----------     ---------     ----------
         Total real estate loans and mortgage-backed securities purchased      
             and converted...............................................      318,164        28,903         27,717
                                                                            ----------     ---------     ----------
         Total real estate loans and mortgage-backed securities originated,    
             purchased and converted.....................................      544,993       194,450        157,472 
                                                                            ----------     ---------     ----------
Principal Repayments and Sales:
Principal Repayments:
   Loans.................................................................      127,723        87,041         54,862
   Mortgage-backed securities............................................       23,010        29,631         17,257
Sales:
   Real estate loans.....................................................       54,582        31,186         33,463
   Mortgage-backed securities............................................       31,932        30,723         10,031
Real estate loans converted to mortgage-backed securities................          ---           ---          3,885
                                                                            ----------     ---------     ----------
         Total principal repayments, sales and conversions...............      237,247       178,581        119,498
                                                                            ----------     ---------     ----------
Net loan and mortgage-backed securities activity.........................      307,746        15,869         37,974
                                                                            ----------     ---------     ----------  
Changes in allowance for losses, undisbursed loan funds, and unearned
   fees and discounts:
   Real estate loans.....................................................       (2,209)          730         (1,391)
   Mortgage-backed securities............................................          689           498           (279)
Change in unrealized loss on securities available for sale...............           80          (903)           777  
                                                                            ----------     ---------     ----------
End of Period:
   Loans, net............................................................      630,277       368,193        313,121  
   Mortgage-backed securities............................................      149,169       104,947        143,825
                                                                            ----------     ---------     ----------
         Total loans and mortgage-backed securities receivable, net,        
             at end of period............................................   $  779,446     $ 473,140     $  456,946
                                                                            ==========     =========     ==========
</TABLE>
                                       14

<PAGE>

Non-Accruing Loans and Delinquencies

         Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of real estate loans, a late notice is sent
15 days after the due date. If the delinquency is not cured by the thirtieth
day, a second notice is mailed and, if appropriate, the borrower is contacted by
telephone. Additional written and verbal contacts are made with the borrower
between 60 and 90 days after the due date.

         In the event a real estate loan payment is past due for 90 days or
more, the Bank performs an in-depth review of the loan's status, the condition
of the property and circumstances of the borrower. Based upon the results of the
review, the Bank may negotiate and accept a repayment program with the Borrower,
accept a voluntary deed in lieu of foreclosure or, when deemed necessary,
initiate foreclosure proceedings. If foreclosed on, real property is sold at a
public sale and the Bank may bid on the property to protect its interest. A
decision as to whether and when to initiate foreclosure proceedings is made by
the Credit Supervisor with the consent of the Loan Servicing Manager and at
least one Loan Policy Committee member and is based on such factors as the
amount of the outstanding loan in relation to the original indebtedness, the
extent of delinquency and the borrower's ability and willingness to cooperate in
curing the delinquencies.

         Consumer loans are charged off if they remain delinquent for 120 days.
The Bank's procedures for repossession and sale of consumer collateral are
subject to various requirements under Montana consumer protection laws.

         Delinquencies on commercial properties are vigorously pursued at the
30-day stage and a forbearance agreement or resolution must be negotiated to
prevent further legal action.

         The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1997.

<TABLE>
<CAPTION>
                                             Loans Delinquent For:
                    -----------------------------------------------------------------------------
                         30-59 Days               60-89 Days                90 Days and Over        Total Delinquent Loans
                    -------------------------- -------------------------  -----------------------  -------------------------
                                    Percent                     Percent                  Percent                    Percent
                                    of Loan                     of Loan                  of Loan                    of Loan
                    Number  Amount  Category   Number  Amount   Category  Number Amount  Category  Number  Amount   Category
                    ------  ------  --------   ------  ------   --------  ------ ------  --------  ------  ------   --------
                                                              (Dollars in Thousands)
<S>                   <C>     <C>      <C>       <C>     <C>      <C>       <C>     <C>     <C>     <C>     <C>       <C>
One- to four-family   136  $2,748     0.79%      55    $1,087    0.31%      62   $1,073    0.31%    253   $4,908     1.41%
Multi-family.....     ---     ---      ---        1        88    0.22      ---      ---     ---       1       88     0.22
Commercial Real                                                                                                 
   Estate........       3     286     0.57        2       155    0.31      ---      ---     ---       5      441     0.88
Commercial Non-                                                                                                        
  Real Estate....       9     110     1.38      ---       ---     ---        2      102    1.28      11      212     2.66
Agricultural Non-                                                                                                      
  Real Estate....       4     329     1.74      ---       ---     ---      ---      ---     ---       4      329     1.74
Construction.....       2     126     0.63        2       137    0.69      ---      ---     ---       4      263     1.32
Consumer.........     123   1,064     0.80       82     1,018    0.76      127    1,178    0.88     332    3,260     2.45
                     ----  ------              ----    ------             ----   ------            ----   ------
    Total........     277  $4,663               142    $2,485              191   $2,353             610   $9,501
                     ====  ======              ====    ======             ====   ======            ====   ======

         The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1996.


                                            Loans Delinquent For:
                    -----------------------------------------------------------------------------
                         30-59 Days               60-89 Days                90 Days and Over        Total Delinquent Loans
                    -------------------------- -------------------------  -----------------------  -------------------------
                                    Percent                     Percent                  Percent                    Percent
                                    of Loan                     of Loan                  of Loan                    of Loan
                    Number  Amount  Category   Number  Amount   Category  Number Amount  Category  Number  Amount   Category
                    ------  ------  --------   ------  ------   --------  ------ ------  --------  ------  ------   --------
                                                              (Dollars in Thousands)
One- to four-family    26  $  866     0.31%       7      $414    0.15%      11     $309    0.11%     44   $1,589     0.57%
Multi-family.....       1     238     1.19      ---       ---      ---     ---      ---      ---      1      238     1.19
Commercial.......     ---     ---      ---      ---       ---      ---     ---      ---      ---    ---      ---      ---
Construction.....       2     240     1.85      ---       ---      ---     ---      ---      ---      2      240     1.85
Consumer.........      48     571     1.30       52       358     0.82      47      406     0.92    147    1,335     3.04
                      ---  ------               ---      ----              ---     ----            ----   ------
    Total........      77  $1,915                59      $772               58     $715             194   $3,402
                      ===  ======               ===      ====              ===     ====            ====   ======
</TABLE>


                                       15

<PAGE>

         Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC 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 savings association will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified Loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified Loss, or charge off such amount. Western Federal internally
classifies its assets on a regular basis. On the basis of management's review of
its assets, at June 30, 1997 on a net basis, the Bank had classified $1.8
million as Substandard, $26,000 as Doubtful and $28,000 as Loss.

         The following table sets forth as of June 30, 1997 the Bank's
classified assets by type. No multi-family real estate loans, commercial real
estate or construction loans were classified at June 30, 1997.

<TABLE>
<CAPTION>
                             One- to
                           Four-Family      Commercial
                           Real Estate    Non-Real Estate      Consumer      Total
                       ------------------------------------------------------------
                                                  (In Thousands)
<S>                            <C>                <C>            <C>          <C>
Substandard............    $     860         $     169        $     762  $    1,791
Doubtful...............          ---                15               11          26
Loss...................          ---               ---               28          28
                            --------          --------         --------   ---------
     Total.............    $     860         $     184        $     801  $    1,845
                            ========          ========         ========   =========
</TABLE>

         Non-Performing Assets. Loans are reviewed periodically and any loan
whose collectibility is doubtful is placed on non-accrual status. Real estate
loans are placed on non-accrual status when either principal or interest is 90
days or more past due, unless, in the judgment of management, collectibility is
considered highly probable and collection efforts are in progress, in which case
interest would continue to accrue.

         An allowance is established for uncollectible interest on loans that
are contractually 90 days or more past due. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent cash payments are received until
the loans are brought less than 90 days past due with respect to both principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.

         Real estate acquired by Western Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value at the date of
foreclosure. Any write-down resulting therefrom is charged to the allowance for
loan losses. Upon disposition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized to the extent of net realizable value.

         The Bank considers loans as in-substance foreclosed if the borrower has
little or no equity in the property based upon its current fair value, if
repayment can be expected only to come from operation or sale of the collateral
and if the borrower has effectively abandoned control of the collateral or has
continued to retain control of the collateral but because of the current
financial status of the borrowers, it is doubtful the borrower will be able to
repay in the foreseeable future.
                                       16

<PAGE>



         The following table sets forth the amounts and categories of
non-performing assets in the Bank's loan portfolio. For all periods presented,
the Bank did not have any troubled debt restructurings (which involve forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than market rates). Foreclosed assets include assets acquired in
settlement of loans, and are recorded at the lower of the related loan balance,
less any specific allowance for loss, or fair value at the date of foreclosure.

<TABLE>
<CAPTION>
                                                                             At June 30,
                                                  ---------------------------------------------------------------
                                                      1997         1996         1995         1994         1993
                                                  ---------------------------------------------------------------
                                                                       (Dollars in Thousands)
<S>                                                  <C>            <C>          <C>          <C>            <C>
Non-accruing loans:
Real Estate:
     One- to four-family.........................     $  842        $  21       $  ---       $  119       $  253
     Multi-family................................        ---          ---          ---          ---          ---
     Commercial..................................        ---          ---          166          207           43
     Construction................................        ---          ---          ---          ---          ---
Commercial non-real estate.......................        102          ---          ---          ---          ---
Consumer.........................................        573          383          153            9          109
                                                        ----         ----       ------       ------       ------
     Total.......................................      1,517          404          319          335          405
                                                      ------         ----       ------       ------       ------

Accruing loans delinquent 90 days or more:
Real Estate
     One- to four-family.........................        231          288          253          425          367
     Multi-family................................        ---          ---          ---          ---          ---
     Commercial..................................        ---          ---          ---          ---          ---
     Construction................................        ---          ---          ---          ---          ---
Commercial non-real estate.......................        ---          ---          ---          ---          ---
Consumer.........................................        605           23            1            5           11
                                                       -----        -----       ------       ------       ------
     Total.......................................        836          311          254          430          378
                                                       -----        -----       ------       ------       ------

Foreclosed assets:
Real Estate:
     One- to four-family.........................        ---          ---          ---           85           64
     Multi-family................................        ---          ---          ---          ---          ---
     Commercial..................................        ---          ---          ---          ---          ---
     Construction ...............................        ---          ---          ---          ---          ---
Consumer ........................................         82          ---          ---          ---          ---
                                                       -----       ------       ------       ------       ------
     Total.......................................         82          ---          ---           85           64
                                                       -----       ------       ------       ------       ------

Total non-performing assets......................     $2,435         $715       $  573       $  850       $  847
                                                      ======         ====       ======       ======       ======
Total as a percentage of total assets............      0.25%        0.13%        0.10%        0.16%        0.21%
                                                       ====         ====         ====         ====         ====
Total allowance for loan losses to non-performing
   loans (exclusive of foreclosed)...............    197.66%      280.42%      350.35%      265.36%      262.84%
                                                     ======       ======       ======       ======       ======
Total allowance for loan losses to total
   non-performing assets.........................    191.01%      280.42%      350.35%      238.82%      242.98%
                                                     ======       ======       ======       ======       ======
</TABLE>
         For the year ended June 30, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to approximately $71,000.

         At June 30, 1997, Western Federal's non-accruing loans were comprised
of 24 one- to four-family loans totaling $842,000, 2 commercial non-real estate
loans totaling $102,000 and 68 consumer loans totaling $573,000. Accruing loans
delinquent 90 days or more at June 30, 1997, included 40 loans totaling $231,000
secured by one- to four-family real estate and 59 consumer loans totaling
$605,000, of which 49 loans representing $527,000 were on loans 100% secured by
savings accounts. These loans continue to accrue interest due to management's
belief that the borrowers will repay these loans.

         There were no foreclosed real estate loans at June 30, 1997.

         Other Loans of Concern. In addition to the classified assets and
non-performing loans and foreclosed assets set forth in the preceding tables, as
of June 30, 1997, there were no other loans identified by the Bank with respect
to the majority of which known information about the possible credit problems of
the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of

                                       17

<PAGE>



the borrowers to comply with present loan repayment terms and which may result
in the future inclusion of such items in the non-performing asset categories.

         Management has considered the Bank's non-performing assets and other
loans "of concern" assets in establishing its allowance for loan losses.

         Loan Loss Reserve Analysis. The allowance for estimated loan losses is
established through a provision for losses on loans based on management's
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of all
loans of which full collectibility may not be reasonably assured, considers the
estimated net realizable value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate allowance for loan losses. In
determining the general reserves under these policies historical charge-offs and
recoveries, changes in the mix and levels of the various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. The Bank also requires additional reserves for all delinquent
loans and other loans of concern.

         While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.

         The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>

                                                                              Year Ended June 30,
                                                              ------------------------------------------------------
                                                                1997        1996        1995        1994       1993
                                                              ------------------------------------------------------
                                                                            (Dollars in Thousands)
<S>                                                             <C>          <C>          <C>        <C>       <C>
Balance at beginning of period............................     $2,005      $2,011      $2,030      $2,058     $2,096
                                                               ------      ------      ------      ------     ------

Charge-Offs:
Real Estate:
     One- to four-family..................................       (53)         ---         (2)        (15)        (6)
     Commercial ..........................................       (43)         ---         ---         ---        ---
Other:
     Commercial...........................................       (47)
     Consumer.............................................      (110)        (11)        (26)        (22)       (48)
                                                              -------     -------    --------     -------    -------
Total charge-offs.........................................      (253)        (11)        (28)        (37)       (54)
                                                               ------     -------    --------     -------   --------
Recoveries:
Other:
     Consumer.............................................         18           5           9           9         16
                                                                -----      ------      ------      ------     ------
Total recoveries..........................................         18           5           9           9         16
                                                                -----      ------      ------      ------     ------
Net charge-offs...........................................      (235)         (6)        (19)        (28)       (38)
Provisions charged to operations..........................        400         ---         ---         ---        ---
Reserves acquired.........................................      2,481         ---         ---         ---        ---
                                                               ------      ------      ------      ------     ------
Balance at end of period..................................     $4,651      $2,005      $2,011      $2,030     $2,058
                                                               ======      ======      ======      ======     ======

Ratio of net charge-offs during the period to average loans
     outstanding during the period........................      0.05%        ---%       0.01%       0.01%      0.02%
                                                               =====      ======        ====        ====       ====

Ratio of net charge-offs during the period to average non-
     performing assets during the period .................      1.31%       1.39%       2.91%       3.27%      4.73%
                                                                ====        ====        ====        ====       ====
</TABLE>

                                       18

<PAGE>



         The following table sets forth the distribution of the Bank's allowance
for loan losses at the dates indicated is summarized as follows:

<TABLE>
<CAPTION>
                                                                    At June 30,
                                    ---------------------------------------------------------------------------
                                              1997                     1996                   1995             
                                    ---------------------------------------------------------------------------
                                                   Percent                  Percent                  Percent   
                                                  of Loans                 of Loans                 of Loans   
                                                   in Each                  in Each                  in Each   
                                                  Category                 Category                 Category   
                                                  to Total                 to Total                 to Total   
                                      Amount        Loans       Amount       Loans       Amount       Loans
                                    ------------------------------------------------------------------------    
                                                            (Dollars in Thousands)
<S>                                      <C>        <C>         <C>         <C>          <C>          <C>      
Real Estate:
     One- to four- family.......... $   829       53.82%     $   539        74.69%   $  175          76.94%    
     Multi-family..................     312        6.21          136         5.30        12           5.91     
     Commercial....................     420        7.73          152         4.87        75           3.86     
     Agricultural..................     139        1.23          ---        ---         ---          ---       
     Construction..................     323        3.07          164         3.45         5           3.34     
Other loans:
     Commercial ...................     455        4.47          ---        ---         ---          ---       
     Agricultural .................     371        2.91          ---        ---         ---          ---       
     Consumer......................   1,263       20.56          126        11.69       132           9.95     
Unallocated........................     539       ---            888        ---       1,612          ---       
                                     ------      ------       ------       ------    ------         ------     
      Total........................  $4,651      100.00%      $2,005       100.00%   $2,011         100.00%    
                                     ======      ======       ======       ======    ======         ======     

                                                     At June 30,
                                   -------------------------------------------------
                                             1994                   1993
                                   -------------------------------------------------
                                                    Percent               Percent
                                                   of Loans              of Loans
                                                    in Each               in Each
                                                   Category              Category
                                                   to Total              to Total
                                       Amount        Loans      Amount     Loans
                                   -------------------------------------------------
                                                   (Dollars in Thousands)
Real Estate:
     One- to four- family..........  $  175       81.85%      $  175        79.75%
     Multi-family..................      10        5.12           10         4.88
     Commercial....................      65        4.01           75         5.46
     Agricultural..................     ---         ---          ---          ---
     Construction..................     ---        2.79          ---         3.62
Other loans:
     Commercial ...................     ---         ---          ---          ---
     Agricultural .................     ---         ---          ---          ---
     Consumer......................     150        6.23          163         6.29
Unallocated........................   1,630         ---        1,635          ---
                                     ------      ------       ------       ------
      Total........................  $2,030      100.00%      $2,058       100.00%
                                     ======      ======       ======       ======
</TABLE>




                                       19

<PAGE>



Investment Activities

         Securities. As part of its asset/liability management strategy, the
Company and the Bank invest in U.S. and local government and agency securities,
high quality short- and medium-term securities, primarily investment grade
corporate obligations and mutual funds and interest-bearing deposits. At June
30, 1997, the Company and the Bank did not own any securities of a single issuer
which exceeded 10% of the Company's stockholders' equity, other than U.S.
government or federal agency obligations. At June 30, 1997, the Bank owned $2.4
million of bank qualified local goverment agency securities.

         The Bank is required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and is also
permitted to make certain other securities investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-Liquidity and Capital Resources" in the Annual Report incorporated by reference
herein as Exhibit 13. Cash flow projections are regularly reviewed and updated
to assure that adequate liquidity is provided. As of June 30, 1997, the Bank's
liquidity ratio (liquid assets as a percentage of net withdrawable savings and
current borrowings) was 9.4% as compared to the OTS requirement of 5.0%.

         The Bank will, in order to reduce interest rate risk, purchase
financial instruments that lock in a spread between interest-earning assets and
interest-bearing liabilities. While these types of financial instruments limit
risk, they also reduce the Bank's ability to maximize profits during periods of
favorable interest trends. See Note 14 of the Notes to Consolidated Financial
Statements in the Annual Report incorporated by reference herein as Exhibit 13.
At June 30, 1997 the Bank had three structured notes totaling $4.7 million
wherein their interest rate is based upon a fraction of the increase or decrease
in a specified index. These securities have variable interest rates and were
purchased to enable the Bank to increase its interest income when interest rates
increase. The market value of these securities at June 30, 1997 was $4.6 million
and mature in 1998.

         On July 1, 1994, the Company and the Bank adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
investment securities not categorized as either held to maturity or trading
account securities are classified as securities available for sale. See Note 1
of the Notes to Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13.

         The following tables set forth the composition of the securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>

                                                                                At June 30,
                                                      -------------------------------------------------------------
                                                              1997                 1996                 1995
                                                      -------------------- -------------------- -------------------
                                                         Book      % of       Book      % of       Book      % of
                                                         Value     Total      Value     Total      Value     Total
                                                      -------------------------------------------------------------
                                                                         (Dollars in Thousands)
<S>                                                       <C>        <C>       <C>      <C>        <C>         <C>
Investments held-to-maturity:
 Federal agency obligations..........................  18,804       23.76%   4,010     8.91%   $ 6,518       10.45%
 U.S. Government obligations.........................     297        0.38      ---      ---        ---         ---
 Corporate obligations...............................   5,980        7.55    5,333    11.86      6,272       10.06
 Other investments...................................   2,385        3.01        4     0.01          4        0.01
                                                       ------      ------   ------   ------    -------      ------
  Total investment securities held-to-maturity ......  27,466       34.70    9,347    20.78     12,794       20.52
                                                      -------      ------   ------   ------    -------      ------
Investments available-for-sale:
Federal agency obligations...........................  45,969       58.08   32,630    72.54     47,557       76.25
Corporate obligations................................   5,675        7.17    2,980     6.62      2,020        3.23
Other................................................      39        0.05       27     0.06        ---       ---
                                                      -------      ------  -------    -----    -------      ------
  Total investments available for sale...............  51,683       65.30   35,637    79.22     49,577       79.48
                                                      -------       -----  -------    -----    -------      ------
Total investment securities.......................... $79,149      100.00% $44,984   100.00%   $62,371      100.00%
                                                      =======      ======  =======   ======    =======      ======

Average remaining life or term to repricing of 
 securities..........................................  41 mos.              27 mos.             42 mos.

</TABLE>

         For information regarding the estimated market value of the securities
at June 30, 1997, see Note 4 of the Notes to Consolidated Financial Statements
in the Annual Report incorporated by reference herein as Exhibit 13.

                                       20

<PAGE>



         The following table sets forth the composition and maturities of the
investment securities portfolio as of June 30, 1997.
<TABLE>
<CAPTION>

                                                                                At June 30, 1997
                                                     -------------------------------------------------------------------------------
                                                       Less Than     1 to 5        5 to 10       Over 10
                                                        1 Year        Years         Years         Years         Total Securities
                                                     -------------------------------------------------------------------------------
                                                      Book Value   Book Value    Book Value    Book Value   Book Value  Market Value
                                                     -------------------------------------------------------------------------------
                                                                             (Dollars in Thousands)
  <S>                                                     <C>          <C>           <C>          <C>             <C>          <C>
Investments held-to-maturity:
 U.S. government securities.......................    $   198    $      99       $   ---      $    ---       $    297     $    298
 Federal agency obligations.......................        ---       18,804           ---           ---         18,804       18,988
 Corporate obligations............................        ---        5,980           ---           ---          5,980        6,046
 Other investments................................        ---          106           235         2,044          2,385        2,396
                                                     --------      -------        ------        ------        -------       ------
  Total investment securities held-to-maturity ...        198       24,989           235         2,044         27,466       27,728
                                                      -------       ------        ------       -------         ------       ------

Investments available-for-sale:
 Federal agency obligations.......................     12,215       32,258           ---         1,594         46,067       45,969
 Corporate obligations............................      3,925        1,697           ---           ---          5,622        5,675
 Other investments................................          3          ---           ---           ---              3           39
                                                     --------     --------       -------      --------      ---------     --------
  Total investments available for sale............     16,143       33,955           ---         1,594         51,692       51,683
                                                       ------       ------       -------        ------         ------       ------

Total securities..................................    $16,341      $58,944        $  235        $3,638        $79,158      $79,411
                                                      =======      =======        ======        ======        =======      =======

Average weighted yield............................      5.80%       6.74%          6.75%        7.69%          6.59%
                                                        ====        ====           ====         ====           ====
</TABLE>


                                       21

<PAGE>



         Mortgage-Backed Securities. The Bank purchases mortgage-backed
securities to supplement residential loan production. The type of securities
purchased is based upon the Bank's asset/liability management strategy and
balance sheet objectives. For instance, most of the mortgage-backed investments
purchased by the Bank over the last several years have had adjustable interest
rates or short or intermediate effective terms to maturity. In addition, the
Bank has purchased investment grade, fixed-rate and variable-rate Collateralized
Mortgage Obligations ("CMOs") having estimated average lives from one to twenty
years. CMOs are securities derived by reallocating cash flows from
mortgage-backed securities or from pools of mortgage loans held by a trust. The
CMOs acquired by the Bank are not interest-only or principal-only or residual
interests except for one interest-only CMO totaling $25,000. At June 30, 1997,
the book value of the CMOs was $45.8 million. The book value of all the Bank's
mortgage-backed securities at June 30, 1997 was $149.2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Risk Management" in the Annual Report incorporated by
reference herein as Exhibit 13. At June 30, 1997, the Bank did not own
mortgage-backed securities of a single issuer which exceeded 10% of the
Company's stockholders' equity, other than U.S. government agency obligations.

         The Bank's mortgage-backed securities are classified as either
held-to-maturity or available-for-sale. Those mortgage-backed securities
classified as held-to-maturity are carried at amortized cost in the Bank's
financial statements. While those mortgage-backed securities classified as
available-for-sale are carried at fair value.

         Substantially all of the Bank's mortgage-backed securities are backed
by federal agencies or have received the highest rating by a nationally
recognized rating agency as of June 30, 1997. The Bank also holds $6 million of
mortgage-backed securities issued by private institutions.

         On July 1, 1995, the Company and Bank adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Accordingly,
mortgage-backed securities not categorized as either held to maturity or trading
account securities are classified as securities available for sale. See Note 1
of the Notes to Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13.

         The following table sets forth the book value of the mortgage-backed
securities portfolio, net, in dollar amounts as of the dates indicated.

<TABLE>
<CAPTION>
                                                                            At June 30,
                                                               ---------------------------------------
                                                                  1997           1996           1995
                                                               ---------------------------------------
                                                                                               (In
                                                                                            Thousands)
<S>                                                              <C>              <C>            <C>
Issuers:
 Federal Home Loan Mortgage Corporation....................    $  66,070        $77,105       $106,747
 Federal National Mortgage Association.....................       12,344         16,674         17,880
 Government National Mortgage Association..................       18,850          2,067          2,873
 Collateralized Mortgage Obligations - federal agency......       45,815          9,101         16,217
 Collateralized Mortgage Obligations - private issuer......          ---            ---            108
 Other.....................................................        6,090            ---            ---
                                                              ----------  -------------  -------------

     Total.................................................     $149,169       $104,947       $143,825
                                                                ========       ========       ========
</TABLE>

                                       22

<PAGE>



         The following table sets forth the contractual maturities, without
giving effect to repricing, of the mortgage-backed securities portfolio, net, at
June 30, 1997.

<TABLE>
<CAPTION>
                                                                                                Market     June 30,
                                              1 - 3     3 - 5   5 - 10    10 - 15  Over 15       Value       1997
                                              Years     Years    Years     Years    Years     Adjustment    Total
                                             ---------------------------------------------------------------------
                                                                          (In Thousands)
<S>                                            <C>        <C>      <C>        <C>    <C>          <C>        <C>
Held-to-Maturity:
 Federal Home Loan Mortgage Corporation..... $  ---   $  2,968  $ 8,546   $34,964   $3,152     $  ---  $   49,630
 Federal National Mortgage Corporation......    ---        ---      ---       ---      ---        ---         ---
 Government National Mortgage Association...    ---        ---       43    18,248      ---        ---      18,291
 Collateralized Mortgage Obligations -
 Federal Agency.............................    ---        ---      519     8,512   36,784        ---      45,815
 Other .....................................    ---        ---      ---     4,045      ---        ---       4,045
                                             ------     ------  -------   ----------------     ------    --------
                                                ---      2,968    9,108    65,769   39,936        ---     117,781
                                             ------      -----   ------    ------  -------     ------     -------

Available for sale:
 Federal Home Loan Mortgage Corporation.....    ---        ---      ---       ---   16,496       (56)      16,440
 Federal National Mortgage Corporation......    ---        ---      ---       ---   12,372       (28)      12,344
 Government National Mortgage Association...    ---        ---        1       ---      561        (3)         559
 Other .....................................    ---        ---      ---       ---    2,004         41       2,045
                                             ------     ------  ------- ---------  -------      -----     -------
                                                ---        ---        1       ---   31,433       (46)      31,388
                                             ------     ------   ------ ---------   ------     ------     -------
          Total............................. $  ---   $  2,968  $ 9,109   $65,769  $71,369     $ (46)  $  149,169
                                             =======    ======    =====    =======  ======     ======     =======
</TABLE>


                                       23

<PAGE>



         The following schedule sets forth the contractual maturity and
repricing of the Bank's mortgage-backed securities portfolio, net, at June 30,
1997. Those which have adjustable or renegotiable interest rates are shown as
maturing in the period during which the contract is subject to repricing.
<TABLE>
<CAPTION>

                                                     After 1      After 2      After 3   
                                         1 Year      Through      Through      Through   
                                         or Less     2 Years      3 Years      5 Years   
                                       ------------------------------------ -------------
                                                        (In Thousands)
<S>                                       <C>          <C>          <C>          <C>          <C>
Mortgage-Backed Securities
Held-to-Maturity...................... $ 25,446    $     ---   $     ---       $2,968    

Mortgage-Backed Securities Available-
for-Sale..............................   31,433          ---         ---          ---    

Collateralized Mortgage Obligations...   10,383          ---         ---          ---    
                                       --------    ---------   ---------     --------    

     Total............................  $67,262    $     ---   $     ---       $2,968    
                                        =======    =========   =========       ======    

(Continued)
                                        After 5     After 10                   Market
                                        Through      Through      Over 15       Value
                                       10 Years     15 Years       Years     Adjustment       Total
                                       ----------------------- -------------------------- ---------
                                                        (In Thousands)
Mortgage-Backed Securities
Held-to-Maturity......................   $8,589     $34,963   $      ---      $    ---     $ 71,966

Mortgage-Backed Securities Available-
for-Sale..............................        1         ---          ---          (46)       31,388

Collateralized Mortgage Obligations...      519       1,427       33,486           ---       45,815
                                       --------     -------      -------       -------     --------

     Total............................   $9,109     $36,390      $33,486       $  (46)     $149,169
                                         ======     =======      =======        ======      ========
</TABLE>





                                       24

<PAGE>



         Cash Surrender Value of Life Insurance Policies. Western Federal
currently maintains Key Person Insurance coverage on certain of its executive
officers. The purpose of this insurance purchase was twofold: (1) Key Person
Insurance coverage for the Bank on those job positions and (2) funding of death
and salary continuation plan benefits for certain of those employees. At June
30, 1997 the Bank had $6.1 million in cash surrender value of life insurance
policies, of which $2.7 million was a result of the Acquisition.

Sources of Funds

         General. Deposit accounts have traditionally been the principal source
of the Bank's funds for use in lending and for other general business purposes.
In addition to deposits, the Bank derives funds from loan repayments and cash
flows generated from operations. Scheduled loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied. Other potential sources of funds available to the Bank
include borrowings from the Federal Home Loan Bank ("FHLB") of Seattle and other
borrowings.

         Deposits. The Bank attracts both short-term and long-term deposits by
offering a wide assortment of accounts and rates. The Bank offers regular
savings accounts, NOW accounts, non-interest bearning demand accounts, money
market accounts and certificates of deposits with varying maturities. Western
Federal has not actively sought deposits outside of its primary market area.
Western Federal does not have any brokered deposits at this time but may
consider the use of such funds in the future to fund loan growth. The Bank also
accepts deposits of $100,000 or more from municipalities and individuals within
its market area.

         The flow of deposits is influenced by general economic conditions,
changes in money market and prevailing interest rates and competition. The
variety of accounts offered by the Bank has allowed it to be competitive in
obtaining funds and to respond to changes in consumer demand. However, the Bank
has become more susceptible to short term fluctuations in deposit flows, as
customers have become more interest rate conscious. In setting rates, Western
Federal regularly evaluates (i) its internal cost of funds, (ii) the rates
offered by competing institutions, (iii) its investment and lending
opportunities, (iv) its liquidity position and (v) its asset/liability position.
In order to decrease the volatility of its deposits, Western Federal imposes
penalties on early withdrawal on its certificates of deposit.

         Based on its experience, the Bank believes that the majority of its
regular savings, NOW, non-interest bearing demand accounts, and money market
accounts are relatively stable sources of deposits. The Bank believes that a
portion of regular savings and money market accounts represent certain
depositors' preference for short-term investments in declining interest rate
environment while certificates of deposit are preferred by those depositors in a
rising interest rate environment. The Bank's ability to attract and maintain
certificates of deposit, and the rates paid thereon, has been and will continue
to be significantly affected by market rates.

         The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>

                                                      Year Ended June 30,
                                        ----------------------------------------------
                                           1997              1996              1995
                                        ----------------------------------------------
                                                        (In Thousands)
<S>                                        <C>                <C>              <C>
Opening balance.......................  $  350,212          $344,155          $349,121
Purchased deposits....................     287,046               ---               ---
Deposits..............................   1,701,486           805,427           788,328
Withdrawals...........................  (1,723,664)         (815,161)         (807,009)
                                        ----------          --------          --------
Balance before interest credited......     615,080           334,421           330,440
Interest credited.....................      15,789            15,791            13,715
                                          --------          --------          --------
Ending balance........................    $630,869          $350,212          $344,155
                                          ========          ========          ========

Net increase (decrease)...............    $280,657          $  6,057          $ (4,966)
                                          ========          ========          ========

Percent increase (decrease)...........       80.14%             1.76%             (1.42)%
                                             =====              ====               ====
</TABLE>

                                       25

<PAGE>
         The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.

<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                              ----------------------------------------------------------------
                                                     1997                  1996                   1995
                                              ----------------------------------------------- ----------------
                                                          Percent                Percent              Percent
                                              Amount     of Total    Amount     of Total     Amount  of Total
                                              ----------------------------------------------------------------
                                                                 (Dollars in Thousands)
<S>                                             <C>         <C>       <C>         <C>         <C>      <C>
Transactions and Savings Deposits:

Passbook and savings accounts (2.75 - 3.00%).. $102,923     16.31%  $ 64,889    18.53%    $ 65,607      19.06%
Money market accounts (2.96 - 4.98%)..........   49,062      7.78     24,018     6.86       25,923       7.53
NOW accounts (1.50 - 2.25%)...................   76,582     12.14     49,848    14.23       45,926      13.35
Non-Interest bearing demand ..................   26,050      4.13        ---   ---             ---      ---
                                               --------    ------   --------   ------     --------     ------
Total non-certificates........................  254,617     40.36    138,755    39.62      137,456      39.94
                                               --------    ------   --------   ------     --------     ------

Certificates:

0.00 -  3.99%.................................$   1,276      0.20%  $  1,731     0.49%    $  7,043       2.05%
4.00 -  5.99%.................................  288,440     45.72    159,275    45.48      131,238      38.13
6.00 -  7.99%.................................   86,341     13.69     50,447    14.41       68,381      19.87
8.00 -  and over .............................      195      0.03          4    -.--            37       0.01
                                               --------    ------   --------   ------     --------     ------
Total certificates............................  376,252     59.64    211,457    60.38      206,699      60.06
                                               --------   -------   --------   ------     --------     ------
Total deposits................................ $630,869    100.00%  $350,212   100.00%    $344,155     100.00%
                                               ========    ======   ========   ======     ========     ======
</TABLE>
         The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of June 30, 1997.

<TABLE>
<CAPTION>
                                       0.00-        4.00-        6.00-       8.00 or                  Percent
                                       3.99%        5.99%        7.99%       Greater        Total    of Total
                                   ------------ -------------------------------------------------------------
                                                                 (Dollars in Thousands)
Certificate accounts maturing in 
quarter ending:
<S>                                     <C>         <C>          <C>            <C>          <C>         <C>
September 30, 1997................   $   867      $ 91,489    $  15,005        $  92     $107,453      28.56%
December 31, 1997.................       360        61,596       11,081          103       73,140      19.44
March 31, 1998....................        25        41,263        8,382          ---       49,670      13.20
June 30, 1998.....................         4        36,142        8,342          ---       44,488      11.82
September 30, 1998................       ---        15,188        4,896          ---       20,084       5.34
December 31, 1998.................       ---        15,911        3,365          ---       19,276       5.12
March 31, 1999....................       ---        10,852        8,232          ---       19,084       5.07
June 30, 1999.....................        21         5,324        9,684          ---       15,029       3.99
September 30, 1999................       ---         2,311        2,550          ---        4,861       1.29
December 31, 1999.................       ---         1,677        3,346          ---        5,023       1.34
March 31, 2000....................       ---         1,457        4,068          ---        5,525       1.47
June 30, 2000.....................       ---           634        2,476          ---        3,110       0.83
Thereafter........................       ---         4,597        4,912          ---        9,509       2.53
                                     -------      --------      -------         ----     --------     ------
   Total..........................    $1,277      $288,441      $86,339         $195     $376,252     100.00%
                                      ======      ========      =======         ====     ========     ======

   Percent of total...............      0.34%        76.66%       22.95%        0.05%      100.00%
                                        ====         =====        =====         ====       ======
</TABLE>
         The following table sets forth the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
                                                                            Maturity
                                                 ---------------------------------------------------------------
                                                                 Over         Over
                                                  3 Months      3 to 6       6 to 12       Over 12
                                                  or Less       Months       Months        Months        Total
                                                 ---------------------------------------------------------------
                                                                         (In Thousands)
<S>                                                 <C>            <C>        <C>            <C>           <C>
Certificates of deposit less than $100,000....    $ 93,351      $67,687      $86,842      $ 92,644      $340,524
Certificates of deposit of $100,000 or more...       9,583        4,902        6,627         7,789        28,901
Public funds(1)...............................       4,519          551          689         1,068         6,827
                                                  --------     --------    ---------      --------     ---------
Total certificates of deposit.................    $107,453      $73,140      $94,158      $101,501      $376,252
                                                  ========      =======      =======      ========      ========
</TABLE>
-----------------------
(1) Deposits from governmental and other public entities.

                                       26

<PAGE>

         For additional information regarding the composition of the Bank's
deposits, see Note 9 of the Notes to the Consolidated Financial Statements in
the Annual Report incorporated by reference herein as Exhibit 13.

Borrowings. Western Federal's other available sources of funds include advances
from the FHLB of Seattle and other borrowings. As a member of the FHLB of
Seattle, the Bank is required to own capital stock in the FHLB of Seattle and is
authorized to apply for advances from the FHLB of Seattle. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Seattle may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.

         The Bank borrows funds from the FHLB of Seattle under its various fixed
rate, variable rate, and amortizing advance lending programs, with terms
requiring monthly interest payments. Principal payments are due monthly under
the amortizing advance program and upon maturity for all other advance programs.
The Bank is generally required to pay a commitment fee upon application and is
normally subject to a prepayment fee if the advance is prepaid by the Bank. See
Note 10 the Notes of Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13.

         The following table sets forth the maximum month-end balance and
average balance of FHLB advances, CMO's and other borrowings for the periods
indicated.
<TABLE>
<CAPTION>

                                                                                  Year Ended June 30,
                                                                      -----------------------------------------
                                                                        1997             1996            1995
                                                                      -----------------------------------------
                                                                                   (In Thousands)
        <S>                                                                 <C>            <C>             <C>
Maximum Balance:

  FHLB Advances...................................................    $190,338         $145,388        $133,119
  Collateralized Mortgage Obligations.............................       1,117            1,584           2,244
  Other Borrowings and Repurchase Agreements......................       8,101              ---             ---

Average Balance:

  FHLB Advances...................................................     145,446          134,211         112,343
  Collateralized Mortgage Obligations.............................         967            1,380           1,877
  Other Borrowings and Repurchase Agreements......................       2,731              ---             ---

 </TABLE>
         The following table sets forth certain information as to 
the Bank's FHLB advances and CMO's at the dates indicated.
<TABLE>
                                                                                        June 30,
                                                                      -----------------------------------------
                                                                        1997             1996            1995
                                                                      -----------------------------------------
                                                                                 (Dollars in Thousands)

<S>                                                                   <C>              <C>             <C>     
FHLB Advances.........................................................$190,338         $124,663        $133,119
Collateralized Mortgage Obligations...................................     797            1,175           1,585
Other Borrowings and Repurchase Agreements............................   8,101              ---             ---
                                                                      --------         --------        --------
  Total Borrowings....................................................$199,236         $125,838        $134,704
                                                                      ========         ========        ========
Weighted Average Interest Rate of FHLB Advances.......................    6.14%            6.26%           6.28%
                                                                          ====             ====           =====
Weighted Average Interest Rate of Collateralized Mortgage Obligations.   11.37%           11.27%          11.22%
                                                                         =====            =====           =====
Weighted Average Interest Rate of Other Borrowings and Repurchase
   Agreements.........................................................    5.30%             ---%            ---%
                                                                         =====              ===             ===
</TABLE>

Interest Rate Caps and Interest Rate Swaps

         As explained under Interest Rate Risk Management in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 14 of the Notes to Consolidated Financial Statements in the Annual Report
incorporated by reference herein as Exhibit 13, the Bank was party to two
interest rate exchange agreements. These two agreements were interest rate cap
agreements covering a total of $10.0 million in notional principal amounts
wherein the interest rate caps entitle the Bank to receive various interest
payments

                                       27

<PAGE>

in exchange for payment of a transaction fee, provided the three-month LIBOR
exceeds an agreed upon interest rate. Transaction fees paid in connection with
interest rate cap agreements are amortized to interest expense as an adjustment
of the interest cost of liabilities. Interest rate cap agreements are used to
manage interest rate risk by synthetically extending the life of interest
bearing liabilities. Because the Bank receives various interest payments if the
three-month LIBOR exceeds the agreed upon interest rate, the Bank is generally
at risk to the extent of the unamortized premium paid if the three-month LIBOR
does not exceed the agreed upon interest rate. At June 30, 1997 the amount of
the unamortized premiums paid related to the interest rate cap transactions was
$181,000.

Subsidiary Activities

         General. The Company has no direct subsidiaries other than the Bank.
Western Federal has four wholly owned service corporation subsidiaries:
WesterFed Insurance Services, Inc. ("WesterFed Insurance"), Service Corp. of
Montana, Inc. ("Service Corp."), SFS Industries Inc. ("SFS") and a
special-purpose finance subsidiary, Monte Mac I, Inc. ("Monte Mac"). At June 30,
1997, Western Federal's investment in the four wholly owned service corporations
totaled $3.1 million, or approximately 0.32% of unconsolidated assets, at such
date.

         Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest up to 50% of their total capital in
conforming loans to their service corporations in which they own more than 10%
of the capital stock. Federal associations are also permitted to invest an
unlimited amount in operating subsidiaries engaged solely in activities which a
federal association may engage in directly.

         The following is a description of Western Federal's service
corporations:

         Westerfed Insurance Services, Inc. Westerfed Insurance, which was
incorporated in 1981, is an insurance agency currently engaged in the sale of
tax deferred annuities and depositor group health insurance programs, although
it may offer a wider range of insurance services in the future. This subsidiary
was acquired by Western Federal in connection with its acquisition of Home
Federal in 1983. Western Federal's investment in WesterFed Insurance was
$157,000 at June 30, 1997. This subsidiary had an after-tax profit of $3,000 for
the fiscal year ended June 30, 1997.

         Service Corp. of Montana, Inc. Service Corp. was acquired December
1988, in connection with the acquisition of Great Falls Federal. This service
corporation owns and operates a 30-unit apartment complex in Lewistown, Montana
and a single family residence in Hamilton, Montana. Western Federal's investment
in Service Corp. totaled $392,000 at June 30, 1997.

         SFS Industries Inc. SFS was acquired in February 1997, in connection
with the acquisition of Security Bancorp. SFS conducts a securities brokerage
business under the name of Security Financial Services in Western Federal's
Billings Office and a real estate rental business. At June 30, 1997, Western
Federal's investment in SFS totaled $903,000.

         Monte Mac I, Inc. Monte Mac was formed in 1985 for the purpose of
participating in a collateralized mortgage obligation conduit program. Monte Mac
had participated in three series of CMO issuances. The CMOs are collateralized
by FHLMC participation certificates transferred by Western Federal to Monte Mac.
The transferred FHLMC certificates had a book value of $1.9 million at June 30,
1997. Western Federal's investment in Monte Mac as of June 30, 1997, included
approximately $1.1 million in FHLMC certificates in excess of collateralized
mortgage obligations. The payments received on the FHLMC certificates are used
to pay down the CMOs. If the CMOs are paid as originally projected, the
remaining investment in Monte Mac is expected to be minimal.

Regulation

         General. The Bank is a federally chartered Bank, the deposits of which
are federally insured and backed by the full faith and credit of the United
States Government. Accordingly, the Bank is subject to broad federal regulation
and oversight extending to all of its operations. The Bank is a member of the
FHLB of Seattle and is subject to certain limited regulation by the Board of


                                       28

<PAGE>


Governors of the Federal Reserve System (the "Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company is subject to federal
regulation and oversight. The purpose of the regulation of the Company and other
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund ("SAIF"), which together with
the Bank Insurance Fund (the "BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC"). As a result, the FDIC has
certain regulatory and examination authority over the Bank.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

         Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were September 1995 and March 1990,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves.

         All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
The Bank's OTS assessment for the fiscal year ended June 30, 1997, was
approximately $517,000. Savings associations (unlike the Bank) that are
classified as "troubled" (i.e., having a supervisory rating of "4" or "5" or
subject to a conservatorship) are required to pay higher premiums.

         The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.

         In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings association may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.

         The Bank's permissible lending limit for loans to one borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1997,
the Bank's lending limit under this restriction was $8.3 million. The Bank is in
compliance with the loans-to-one-borrower limitation.

         The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, asset
quality, earnings standards, internal controls and audit systems, interest rate
risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.

         Insurance of Accounts and Regulation by the FDIC. The deposits of the
Bank are presently insured by the SAIF. Deposits are insured up to applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the United States Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order

                                       29

<PAGE>



to pose a serious risk to the SAIF or the BIF. The FDIC also has the authority
to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate the deposit insurance
if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk- based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

         The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

         For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF-insured deposits. As a result of the BIF
reaching its statutory reserve ratio, the FDIC revised the premium schedule for
BIF insured institutions to provide a range of 0.04% to 0.31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
 .27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally be
subject to higher deposit insurance premiums than BIF insured institutions
until, all things being equal, the SAIF attained its required reserve ratio.

         In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation was enacted in September 1996 that provides for a one-time
assessment to be imposed on all deposits assessed at the SAIF rates, as of March
31, 1995, in order to recapitalize the SAIF. It also provides for the merger of
the BIF and the SAIF on January 1, 1999 if no savings associations then exist.
The special assessment rate was established at .657% of deposits by the FDIC and
the resulting assessment of $2.3 million was paid in November, 1996. This
special assessment significantly increased noninterest expense and adversely
affected the Bank's results of operations for the year ended June 30, 1997. As a
result of the special assessment, the Bank's deposit insurance premiums were
reduced to $402,000 based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject to
change in future periods.

         Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment was limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. The FICO assessment for the
SAIF insured institutions will be $0.0648 per $100 deposits while BIF insured
institutions will pay $0.013 per $100 deposits until the year 2000 when the
assessment will be imposed at the same rate on all FDIC insured institutions.


                                       30

<PAGE>



         Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.

         The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity, adjusted to eliminate unrealized gains and
losses on certain available-for-sale securities and retained income, and certain
noncumulative perpetual preferred stock and related income. At June 30, 1997 the
Bank added back to capital $42,000 for losses on available-for-sale securities.
In addition, all intangible assets, other than a limited amount of purchased
mortgage servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. At June 30, 1997, the Bank had
intangible assets of $142,000 of unamortized purchased mortgage servicing
rights, $14,000 of which was required to be deducted from tangible capital and
goodwill and core deposit intangible relating to the purchase of Security
Bancorp of $20.8 million, all of which was required to be deducted from tangible
capital.

         The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries in determining tangible capital. In
determining compliance with the capital requirements, all subsidiaries engaged
solely in activities permissible for national banks or engaged in certain other
activities solely as agent for its customers are "includable" subsidiaries that
are consolidated for capital purposes in proportion to the Bank's level of
ownership, including the assets of includable subsidiaries in which the
association has a minority interest that is not consolidated for purposes of
generally accepted accounting principles ("GAAP"). For excludable subsidiaries
the debt and equity investments in such subsidiaries are deducted from assets
and capital. At June 30, 1997, the Bank was required to deduct $550,000 of its
investment in Service Corp. of Montana, Inc. and $903,000 of its investment in
SFS Industries under these rules.

         At June 30, 1997, the Bank had tangible capital of $79.8 million, or
8.5% of adjusted total assets, which is approximately $65.8 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.

         The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997, the Bank
had no such intangible assets.

         At June 30, 1997, the Bank had core capital equal to $79.8 million, or
8.5% of adjusted total assets, which is $51.7 million above the minimum leverage
ratio requirement of 3% as in effect on that date.

          The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1997, the Bank had no
capital instruments that qualify as supplementary capital and had $4.6 million
of general loss reserves, which was less than 1.25% of risk-weighted assets, and
were included in the $84.4 million of risk-based capital at June 30, 1997.

         Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had no such
exclusions from capital and assets at June 30, 1997.


                                       31

<PAGE>



         In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight
ranging from 0% to 100% based on the risk inherent in this type of asset. For
example, the OTS has assigned risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule will not become effective
until the OTS evaluates the process by which savings associations may appeal an
interest rate risk deduction determination. It is uncertain as to when this
evaluation may be completed. Any savings association with less than $300 million
in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. Based on June 30, 1997 OTS
interest rate risk information, the Bank would be required to make a deduction
from total capital in the amount of $2.8 million in calculating its risk-based
capital requirement had such rule been in effect on June 30, 1997. Based on the
Bank's excess risk-based capital of $38.0 million at June 30, 1997,
notwithstanding this $2.8 million deduction from capital, the Bank would
continue to exceed it's risk-based capital requirement.

         On June 30, 1997, the Bank had total risk-based capital of $84.4
million (including $79.8 million in core capital and $4.6 million in qualifying
supplementary capital) and risk-weighted assets of $582.0 million (including
$12,000 in converted off-balance sheet assets); or total risk-based capital of
14.5% of risk-weighted assets. This amount was $38.0 million above the current
8% requirement in effect on that date.

         The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.

          As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.

         Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to other general enforcement actions by the OTS and the FDIC including
the appointment of a conservator or a receiver.

         The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.

         The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. Holding Company shareholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue


                                       32

<PAGE>



additional shares of Common Stock, such issuance may result in the dilution in 
the percentage of ownership of the Holding Company.

         Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions on savings associations with respect to
their ability to make distributions of capital which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion. See "The Conversion--Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank" and "--
Restrictions on Repurchase of Stock."

         Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Western Federal may pay dividends in accordance with this general authority.

         Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."

         The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.

         Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources."
This liquid asset ratio requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.

         In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 9.4% and a short-term liquid
assets ratio of 4.0%.

         Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of


                                       33

<PAGE>



and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules. OTS accounting regulations, which may be made more stringent than
GAAP, require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.

         Qualified Thrift Lender Test. All savings associations, including the
Bank, 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 assets (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 test, such assets primarily consist
of residential housing related loans and investments. At June 30, 1997, the Bank
met the test and has always met the test since its effectiveness.

         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 converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If an association has not yet requalified and 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
association 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 the restrictions on bank holding
companies. See "- Company Regulation."

         Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.

         The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in October 1995 and received a rating of outstanding.

         Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the
Company. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiaries are not deemed
affiliates; however, the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.

         Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.


                                       34

<PAGE>



         Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.

         As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than Western Federal or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.

         If Western Federal fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See " - Qualified Thrift Lender Test."

         The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.

         Federal Securities Law. The Company is registered with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.

         Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.

         Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See " - Liquidity."

         Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

         Federal Home Loan Bank System. The Bank is a member of the FHLB of
Seattle, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of Seattle. At June 30, 1997, the Bank had $11.5 million in FHLB stock,
which was in compliance with this requirement.

                                       35

<PAGE>



In past years, the Bank has received substantial dividends on its FHLB stock.
Over the past five calendar years such dividends have averaged 9.00% and were
6.52% and 7.74% for calendar years 1995 and 1996 respectively.

         Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

         For the fiscal year ended June 30, 1997, dividends paid by the FHLB of
Seattle to the Bank totaled $712,000, which constitutes a $191,000 increase over
the amount of dividends received in fiscal year 1996. There can be no assurance 
that such dividends will continue in the future.

         Federal and State Taxation. The Company, the Bank, and its non-bank
subsidiaries file a consolidated federal income tax return using the accrual
method of accounting. For fiscal years beginning before January 1, 1997, Montana
state statute prevents filing of a consolidated Montana income tax return; thus,
separate returns are filed by the Company (including the non-bank subsidiaries)
and the Bank. Generally with some exceptions, including the Bank's reserve for
bad debts discussed below, the Company, the Bank and its subsidiaries are
subject to federal income taxes in the same manner as other corporations.

         The following discussion of tax matters is intended solely as a summary
and does not purport to be a comprehensive description of all the tax rules
applicable to the Company, the Bank, or its subsidiaries.

         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 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, including various types of mortgage-backed
securities, 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 non-qualifying reserve. The Bank's deduction with respect to
non-qualifying 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 method 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 can no longer 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. 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 current tax liability. The Bank's
post-1987 reserves that will be recaptured into income ratably over a six-year
period is $3.2 million. At June 30, 1997 the Bank's bad debt reserve for tax
purposes was approximately $13.8 million.

         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. 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 of 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.


                                       36

<PAGE>



         Corporate Alternative Minimum Tax - Federal tax law imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI
can be offset by net operating loss carry-overs. AMTI is increased by an amount
equal to 75% of the amount by which the Bank's adjusted current earnings exceed
its AMTI (determined without regard to this preference and prior to reduction
for net operating losses). Under prior law, 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 was treated
as a preference item for purposes of computing the AMTI. For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications) over $2.0
million was imposed on corporations, including the Company, whether or not an
alternative minimum tax is paid.

         Dividends-Received Deduction and Other Matters - The Company 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 Company and the Bank will not file a consolidated
tax return, except that if the Company 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.

         The Company and its consolidated subsidiaries have been audited by the
IRS with respect to consolidated federal income tax returns through June 30,
1989. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiaries and predecessors or, or entities
merged with and into, the Bank) would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank and its
consolidated subsidiaries.

         Montana Taxation - Under Montana taxation law, savings associations,
such as the Bank, are subject to corporation license tax, which incorporates or
is substantially similar to applicable provisions of the Federal Internal
Revenue Code. The corporation license tax is imposed on federal taxable income,
subject to certain adjustments at a rate of 6.75% for fiscal year 1997. Under
Montana law, a savings association is not allowed to make a deduction from gross
income for a reserve for bad debts in the computation of the Montana corporate
license tax or file a consolidated corporate license tax return with affiliated
companies.

         Delaware Taxation - As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.

Impact of New Accounting Standards

         See Note 1, Summary of Significant Accounting Policies and Note 15,
Recent Accounting Pronouncements Not Yet Adopted in Notes to Consolidated
Financial Statements in the Annual Report incorporated by reference herein as
Exhibit 13.

Competition

         Savings institutions generally face strong competition both in
originating real estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions, commercial
banks, and mortgage bankers who also make loans secured by real estate located
in the Bank's primary market areas. The Bank competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.

         The Bank faces substantial competition in attracting deposits from
other savings institutions, commercial banks, securities firms, money market and
mutual funds, credit unions and other investment vehicles. The ability of the
Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk, convenient locations and other factors. The Bank
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer oriented staff.

                                       37

<PAGE>



         The Bank estimates its market share of the savings deposits in the
counties where it has branch offices to be as follows:
<TABLE>
<CAPTION>


                                                  June 30, 1996
                 County                          Deposit Share(1)              City
----------------------------------------         ----------------     ----------------------
<S>                                                <C>                         <C>
Missoula................................            16.2%                           Missoula
Yellowstone.............................            12.2                 Billings and Laurel
Lewis & Clark...........................             6.5              Helena and East Helena
Cascade.................................             4.7                         Great Falls
Gallatin................................             3.7                             Bozeman
Ravalli.................................             5.5                            Hamilton
Pondera  ...............................             9.1                              Conrad
Fergus..................................            17.0                           Lewistown
Custer..................................             6.6                          Miles City
Big Horn ...............................            12.1                              Hardin
Deer Lodge..............................            25.6                            Anaconda
Flathead................................             0.9                           Kalispell
Hill....................................            11.3                               Havre
Phillips................................             4.7                               Malta
Richland................................             6.0                              Sidney
Sheridan................................            15.4                          Plentywood
Silverbow...............................             9.0                               Butte
Valley..................................             6.2                             Glasgow
</TABLE>
-----------------
(1)      Based on data supplied by Ferguson & Company Branch Source as of June
         1996, Western Federal held approximately a 6.9% market share of
         deposits in Montana. Based on this market share, Western Federal ranked
         4th out of 179 financial institutions located in Montana. See "- Market
         Areas" for information regarding the Bank's deposit share in each
         county in its market area.

         Western Federal's competition for residential real estate loans is
principally from mortgage bankers, other savings institutions, commercial banks
and other institutional lenders. Competition for commercial real estate loans is
primarily from commercial banks in Missoula and other savings institutions in
Missoula, Helena, Billings, Great Falls, and Bozeman. Competition for consumer
loans is from commercial banks, credit unions, other savings institutions and
consumer finance companies. Western Federal competes for loans principally
through the interest rates and loan fees charged. Western Federal's competition
for loans varies from time to time depending upon numerous factors, including
the general availability of lending funds and credit, economic conditions,
current interest rate levels, volatility in the mortgage markets and other
factors which are not readily predictable.

Executive Officers of the Company

         The following table sets forth certain information at June 30, 1997
regarding the executive officers of the Company and the Bank who are not also
directors.

<TABLE>
<CAPTION>

         Name              Age                        Position(s) Held
-------------------        ---     ---------------------------------------------------------------------------
<S>                        <C>                          <C>
Douglas G. Bardwell        55      Executive Vice President and Secretary of the Company and
                                   Executive Vice President and Chief Operating Officer of the Bank
James A. Salisbury         46      Treasurer and Chief Financial Officer of the Company and the Bank
Jack E. Lovell             60      Senior Vice President and Credit Administrator of the Bank
Dale W. Brevik             45      Senior Vice President and Marketing Director/Investor Relations of the Bank
Charles E. Eiseman         47      Senior Vice President/Montana Lending Manager of the Bank
</TABLE>


                                       38

<PAGE>



         The business experience of each executive officer who is not also a
director is set forth below.

         Douglas G. Bardwell. Mr. Bardwell became Executive Vice President and
Secretary of the Company in September 1993. Mr. Bardwell joined the Bank in
August 1973. He was appointed Chief Operating Officer in 1983 and Executive Vice
President in 1989. He also serves on the Board of Directors of WesterFed
Insurance Services, Inc., Monte Mac I, and Service Corporation of Montana. Mr.
Bardwell is responsible for the supervision of the Bank's savings and operations
departments. Mr. Bardwell is a graduate of the University of Montana.

         James A. Salisbury. Mr. Salisbury became Treasurer and Chief Financial
officer of the Company in September 1993. Mr. Salisbury joined Western Federal
as Treasurer and Chief Financial Officer in 1983. Prior to such time, he was
employed as the Chief Financial Officer for Home Federal from 1980 to 1983. From
1978 to 1980, he was in private practice as a certified public accountant.Mr.
Salisbury is responsible for the formulation and implementation of the policies
and objectives of the Bank's finance, accounting and audit function. He also
serves as Treasurer and Chief Financial Officer of Westerfed Insurance Services
Inc., Monte Mac I and Service Corporation of Montana. Mr. Salisbury is a
graduate of the University of Montana and is a certified public accountant.

         Jack E. Lovell. Mr. Lovell has been employed by Western Federal since
September 1975 and was promoted to Senior Vice President/Credit Administrator in
October, 1996. He has been Credit Administrator since 1979. As Credit
Administrator he is responsible for policy formulation related to all Credit
Administration and has direct oversight responsibility for Loan Servicing and
Quality Control Departments. Mr. Lovell is a graduate of the University of
Montana.

         Dale W. Brevik. Mr. Brevik has been with Western Federal since May 1979
and became Senior Vice President/Marketing Director/Investor Relations Manager
in October, 1996. He has served as Marketing Director since 1983. In addition to
his duties as Marketing Director, Mr. Brevik is the Investor Relations Manager
and coordinates new product development and oversees Western Federal's insurance
programs. Mr. Brevik is a graduate of the University of Montana.

         Charles E. Eiseman. Mr. Eiseman has been employed by Western Federal
since December 1975 and became Senior Vice President/Montana Lending Manager in
October, 1996. Since 1988, Mr. Eiseman's duties have included supervision of all
loan origination activities in all cities where Western Federal has loan
origination centers. Mr. Eiseman is a graduate of the University of Montana.

Employees

         At June 30, 1997, the Company had a total of 325 full-time employees
and 88 part-time employees. None of the Bank employees are represented by any
collective bargaining group. Management considers its employee relations to be
excellent.


                                       39

<PAGE>



Item 2.      Properties

         The following table sets forth information concerning the main office
and each branch office and loan production office of the Bank at June 30, 1997.
At June 30, 1997, the Bank's premises and equipment had an aggregate net book
value of approximately $24.8 million.

<TABLE>
<CAPTION>
                                 Year         Owned or        Lease Expiration          Net Book
             Location          Acquired        Leased               Date                  Value
-------------------------      --------       --------        ----------------     ----------------
                                                                                     (In Thousands)
<S>                               <C>           <C>                  <C>                  <C>
Main Office
-----------
  110 East Broadway              1957          Owned                N/A            $          19
  Missoula, Montana

Full Service Branches
---------------------

  100 East Broadway              1957          Owned               N/A(1)                    649
  Missoula, Montana
  2230 Brooks                    1966          Owned                N/A                      378
  Missoula, Montana
  1610 S. Third West             1977          Leased               (2)                        0
  Missoula, Montana
  2601 Garfield                  1979          Owned                N/A                    1,175
  Missoula, Montana
  321 Fuller                     1983          Owned                N/A                      457
  Helena, Montana
  101 Lane Avenue                1983          Owned                N/A                       73
  East Helena, Montana
  601 N. Montana                 1983          Leased          December 1997                   8
  Helena, Montana
  3171 N. Montana                1996          Owned                N/A                      356
  Helena, Montana
  1941 West Main at 20th         1983          Owned                N/A                      353
  Bozeman, Montana
  501 N. First Street            1980          Owned                N/A                    1,679
  Hamilton, Montana
  2425 10th Avenue South         1988          Owned                N/A                      458
  Great Falls, Montana
  25 Fifth Street North          1988          Owned                N/A                      916
  Great Falls, Montana
  900 Third Street, N.W.         1988          Owned                N/A                      171
  Great Falls, Montana
  424 West Main Street           1988          Owned                N/A                      182
  Lewistown, Montana
  702 South Main                 1988          Owned                N/A                      193
  Conrad, Montana
  2929 Third Avenue North        1991          Owned                N/A                    2,254
  Billings, Montana
  300 - 24th Street West         1991          Leased          December 1997                   1
  Billings, Montana
  1101 Main Street               1991          Owned                N/A                       65
  Miles City, Montana
  524 North Cheyenne Avenue      1991          Owned                N/A                       97
  Hardin, Montana
</TABLE>


                                       40

<PAGE>


<TABLE>
<CAPTION>
                                          Year         Owned or        Lease Expiration          Net Book
            Location                   Acquired        Leased               Date                  Value
  ---------------------------------    --------        --------        ----------------       --------------
                                                                                              (In Thousands)
             <S>                         <C>             <C>                <C>                    <C>
  219 North 26th Street                  1967          Owned                N/A                  1,841
  Billings, Montana
  219 North 26th Street (Corporate)      1967          Owned                N/A                      0
  Billings, Montana
  2401 Grand Avenue                      1975          Owned                N/A                  2,806
  Billings, Montana
  1546 Main Street                       1975          Owned                N/A                    513
  Billings, Montana
  2845 Old Hardin Road                   1997          Owned                N/A                    968
  Billings, Montana
  19 Montana Avenue                      1987          Owned                N/A                    508
  Laurel, Montana
  405 Main Street                        1979          Owned                N/A                    397
  Kalispell, Montana
  320 West Broadway                      1980          Owned                N/A                    960
  Missoula, Montana
  2350 South Reserve                     1995          Leased          December 1999               127
  Missoula, Montana
  221 Second Street NW                   1989          Owned                N/A                    390
  Sidney, Montana
  324 Third Avenue                       1989          Owned                N/A                  1,401
  Havre, Montana
  135 South Second Street East           1994          Owned                N/A                    131
  Malta, Montana
  125 Fourth Street South                1989          Leased             Monthly                    0
  Glasgow, Montana
  102 North Main                         1989          Owned                N/A                    353
  Plentywood, Montana
  1880 Harrison Avenue                   1994          Owned                N/A                  1,175
  Butte, Montana
  401 West Main                          1994          Owned                N/A                    717
  Lewistown, Montana
  307 East Park Street                   1994          Leased           March, 1998                 16
  Anaconda, Montana
  2901 West Main                         1996          Owned                N/A                    874
  Bozeman, Montana
Mortgage Loan Administration
----------------------------
  1100 South Avenue                      1993          Owned                N/A                  1,122
  Missoula, Montana
Construction in Progress                                                                           495
Land for future branch expansion                                                                   536
                                                                                           -----------
  Total                                                                                    $    24,814
                                                                                           ===========
</TABLE>
----------------------
(1) Includes lease for drive-up window which expires in May 2001.
(2) Lease is on a month-to-month basis.


                                       41

<PAGE>



  The Company replaced the existing branch in Hamilton with a new facility and
completed construction of a new branch in Helena during fiscal 1997. In
addition, land has been purchased in Helena and Billings for potential branch
facilities in the future.

  The Bank's accounting and record-keeping activities are maintained on an
on-line basis with an independent service bureau. The net book value of the
Bank's computer and other equipment (including furniture, fixtures and
automobiles) at June 30, 1997, totaled $3.2 million. In addition, subsidiaries
of the Bank hold properties and equipment with a net book value of $1.3 million.
See "Business - Subsidiary Activities."

Item 3.      Legal Proceedings

  From time to time, the Company and Western Federal are involved as plaintiff
or defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on the Company's
consolidated financial position or results of operations.

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

  No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.

                                     PART II

Item 5.      Market for the Registrant's Common Stock and Related Security 
             Holder Matters

  The caption "General Corporate and Stockholders' Information" contained in
excerpts from the Company's Annual Report (beginning at page 60 thereto) filed
at Exhibit 13 hereto is incorporated in its entirety by reference under this
Item 5.

Item 6.      Selected Financial Data

  The caption "Selected Consolidated Financial and Other Data" contained in
excerpts from the Company's Annual Report (beginning at page 8 thereto) filed at
Exhibit 13 hereto is incorporated in its entirety by reference under this Item
6.

Item 7.      Management's Discussion and Analysis of Financial Condition and 
             Results of Operations

  The caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in excerpts from the Company's Annual Report
(beginning at page 9 thereto) filed at Exhibit 13 hereto is incorporated in its
entirety by reference under this Item 7.

Item 8.      Financial Statements and Supplementary Data

  The caption "Consolidated Financial Statements" contained in excerpts from the
Company's Annual Report (beginning at page 26 thereto) filed at Exhibit 13
hereto is incorporated in its entirety by reference under this Item 8.

Item 9.      Changes in and Disagreements With Accountants on Accounting and
             Financial Disclosure

  There has been no Current Report on Form 8-K filed within 24 months prior to
the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.


                                       42

<PAGE>



                                    PART III

Item 10.     Directors and Executive Officers of the Registrant

  Information concerning Directors of the Registrant is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 28, 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year. See "Business - Executive Officers of the Company" in Part I of the
Form 10-K for information regarding executive officers.

Item 11.     Executive Compensation

  Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 28, 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.

Item 12.     Security Ownership of Certain Beneficial Owners and Management

  Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Corporation's definitive
Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on
October 28, 1997, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Stockholder
Return Performance Presentation", a copy of which will be filed not later than
120 days after the close of the fiscal year.

Item 13.     Certain Relationships and Related Transactions

  Information concerning certain relationships and transactions is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on October 28, 1997, except
for information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Stockholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal year.

                                     PART IV

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

(a)(1)  Financial Statements:

  The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended June 30, 1997, is incorporated by reference in
this Form 10-K Annual Report as Exhibit 13.
<TABLE>
<CAPTION>
                                                                                           Pages in
                                                                                            Annual
Annual Report Section                                                                       Report
---------------------                                                                      --------
<S>                                                                                            <C>
Consolidated Financial Information..........................................................   25

Independent Auditors' Report................................................................   26

Consolidated Balance Sheets -- June 30, 1996 and 1997.......................................   27

Consolidated Statements of Income -- Each of the Years in the Three-Year Period Ended
June 30, 1997...............................................................................   28
</TABLE>


                                       43

<PAGE>


<TABLE>
<CAPTION>

                                                                                                          Pages in
                                                                                                           Annual
Annual Report Section                                                                                      Report
---------------------                                                                                     --------
<S>                                                                                                          <C>
Consolidated Statements of Stockholders' Equity -- Each of the Years in the Three-Year
Period Ended June 30, 1997................................................................................   29

Consolidated Statements of Cash Flows -- Each of the Years in the Three-Year Period Ended
June 30, 1997.............................................................................................   30

Notes to Consolidated Financial Statements................................................................   31

Supplementary Financial Data..............................................................................   55
</TABLE>

(a)(2)  Financial Statement Schedules:

         All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.



                                       44

<PAGE>



(a)(3)  Exhibits:

<TABLE>
<CAPTION>

                                                                                                  Reference to Prior
                                                                                                   Filing of Exhibit
    Regulation S-K                                                                                  Number Attached
    Exhibit Number                                    Document                                          Hereto
    --------------     --------------------------------------------------------------------------- -----------------
          <S>                            <C>                                                          <C>
       2               Plan of acquisition, reorganization, arrangement, liquidation or succession       None
       3               (i)  Articles of Incorporation                                                      *
                       (ii) By-laws 
       4               Instruments defining the rights of security holders, including indentures           *
       9               Voting trust agreement                                                            None
      10.1             Stock Option and Incentive Plan                                                    **
      10.2             Employee Stock Ownership Plan                                                       *
      10.3             Recognition and Retention Plan                                                     **
      10.4             Salary Continuation Plan                                                            *
      10.5             Directors Deferred Compensation Plan                                                *
      10.6             Benefit Equalization Plan                                                           *
      10.7             Employment Agreements for Messrs. Grimes, Bardwell and Salisbury                   **
      10.8             Employment Agreements for Messrs. Brevik, Eiseman and Lovell and Ms.               **
                       Dumontier
      10.9             Annual Management Incentive Plan                                                   **
      10.10            Wage Continuation Agreements for Messrs. Grimes, Bardwell and Salisbury            **
      10.11            Equity Incentive Plan                                                              ***
      10.12            Employment Agreement for David W. Jorgenson, Elaine F. Hine, Stanley R.            ***
                       Hill and Scott W. Sanders
      11               Statement re: computation of per share earnings                                   None 
      12               Statement re: computation of ratios                                            Not required 
      13               Annual Report to Security Holders                                                  13 
      16               Letter re: change in certifying accountant                                        None
      18               Letter re: change in accounting principles                                        None
      19               Report furnished to security holders                                              None 
      21               Subsidiaries of Registrant                                                         21
      22               Published report regarding matters submitted to vote of security
                       holders                                                                           None
      23               Consent of experts and counsel                                                     23
      24               Power of Attorney                                                              Not required 
      27               Financial Data Schedule                                                            27
      28               Information from reports furnished to State insurance regulatory 
                       authorities                                                                       None
      99               Additional exhibits                                                               None
</TABLE>
-------------------------
*    Filed on September 21, 1993, as exhibits to the Registrant's Form S-1
     registration statement (Registration No. 33-69168) pursuant to the
     Securities Act of 1933. All of such previously filed documents are hereby
     incorporated herein by reference in accordance with Item 601 of Regulation
     S-K.
**   Filed on September 27, 1995, as the exhibits listed above to the
     Registrant's Annual Report on Form 10-K for the year ended June 30, 1995
     pursuant to the Securities Exchange Act of 1934 (File No. 0-22772). All of
     such previously filed documents are hereby incorporated herein by reference
     in accordance with Item 601 of Regulation S-K.
***  Filed on November 19, 1996, as the exhibits listed above to the
     Registrant's Form S-4 registration statements (Registration No.
     533-16428) pursuant to the Securities Act of 1933 all of such
     previously filed documents are hereby incorporated herein by reference.

(b)  Reports on Form 8-K:

         No reports on Form 8-K have been filed during the three-month period
ended June 30, 1997.

                                       45

<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.

                         WESTERFED FINANCIAL CORPORATION

Date:        September 29, 1997          By:   /s/ Lyle R. Grimes
                                               ------------------
                                               Lyle R. Grimes
                                               (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/ Lyle R. Grimes
       ----------------------------------------
       Lyle R. Grimes,  Chairman of  the Board,
       President, Chief Executive Officer and
       Director (Principal Executive and 
       Operating Officer)

Date:        September 29, 1997         


 By:    /s/ Dr. Marvin Reynolds
        -----------------------------
        Dr. Marvin Reynolds, Director

Date:        September 29, 1997

By:    /s/ Dr. Otto G. Klein, Jr.
       --------------------------------
       Dr. Otto G. Klein, Jr., Director

Date:        September 29, 1997

By:    /s/ John E. Roemer
       -----------------------------
       John E. Roemer, Vice Chairman

Date:        September 29, 1997

By:    /s/ Laurie C. DeMarois
       ----------------------------
       Laurie C. DeMarois, Director

Date:        September 29, 1997

By:    /s/ James A. Salisbury
       ------------------------------------------
       James A. Salisbury, Treasurer and Chief
       Financial Officer (Principal Financial and
       Accounting Officer)

Date:        September 29, 1997

By:    /s/ Robert F. Burke
       -------------------------
       Robert F. Burke, Director

Date:        September 29, 1997

By:    /s/ David W. Jorgenson
       -------------------------------------
       David W. Jorgenson, Director and Vice
       President

Date:        September 29, 1997

By:    /s/ William Leslie
       ------------------------
       William Leslie, Director

Date:        September 29, 1997