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, 1999

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

         (State or other jurisdiction of incorporation or organization)

                      110 East Broadway, Missoula, Montana
--------------------------------------------------------------------------------

                    (Address of principal executive offices)
                                   81-0487794
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                     (I.R.S. Employer Identification Number)

                                   59802-4511
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                                   (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
National  Market  System  as of  September  8,  1999,  was $66.1  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  8, 1999,  there were issued and  outstanding  4,568,678
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, 1999.

         Part III of Form 10-K - Portions of the Proxy Statement for 1999 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  Security Bank  ("Western  Security" 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 June 30,
1999,  the Company had total assets of $1.0 billion,  deposits of $645.5 million
and stockholders' equity of $91.1 million (9.05% 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,  34 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,
multi-family, commercial, agriculture and construction real estate loans and non
real  estate  commercial,  agriculture  and  consumer  loans.  These  loans  are
generally  originated  for its primary  market area. 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.  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.
The name of Western Federal Savings Bank was changed to "Western  Security Bank"
in February 1998. Unless the context otherwise requires, reference herein to the
Company  includes  WesterFed,   Western  Security  and  its  subsidiaries  on  a
consolidated basis.

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,"  "significantly,"  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 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 and any unforseen  business risks related to
Year 2000 computer  issues-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.

                                       2
<PAGE>

Market Areas

         The Bank conducts  operations  through its 34 branch offices located in
18 counties located throughout Montana.

         Missoula.  In Missoula the Bank operates its main office and six branch
offices which  accounted for $146.4  million of Missoula  County's June 30, 1998
deposits,  or a  13.7%  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, the 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 six branches in the cities of Billings and
Laurel,  located in  Yellowstone  County.  Total deposits held by those branches
represented  $171.9 million of the county's  total June 30, 1998 deposits,  or a
11.3% market share.  Leading non-farm basic industries in Yellowstone County are
trade center activity,  transportation, oil and gas, and the Federal government.
In Billings, expansion of trade center activities continues.

         Helena.  Four Western  Security  offices are located in Helena and East
Helena, which is located in Lewis and Clark County. The four branches there have
total deposits of $45.2  million,  which accounts for 7.2% of the county's total
June 30,  1998  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 $40.9 million in deposits,
which is 4.6% of the county's total June 30, 1998 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 one  office  located  in the city of  Bozeman in
Gallatin  County.  Deposits  in the branch are $22.5  million  for a 3.7% market
share of the  county's  June 30, 1998 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.

        Hamilton. The Bank has one branch office in Hamilton, located in Ravalli
County,  where it holds  deposits of $17.5 million of the county's June 30, 1998
deposits for a 5.0% 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 $7.8 million in deposits and a 9.2% market share of the
county's  total  June  30,  1998  deposits.   The  local  economy  is  primarily
agricultural in nature.

         Lewistown. The Bank has one office in the city of Lewistown, located in
Fergus County. The branch has $29.8 million in deposits for a 16.8% market share
of the county's  total June 30, 1998  deposits.  The local  economy is primarily
agricultural in nature.

         Miles City. In Custer County,  the Bank has one branch located in Miles
City,  which  has $14.3  million  in  deposits  for a 6.1%  market  share of the
county's June 30, 1998 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 $9.0 million in deposits for a 11.2% market share of
the  county's  June 30,  1998 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 $25.5 million in deposits for a 21.3% market
share of the county's June 30, 1998 total deposits.

                                       3
<PAGE>

         Kalispell. The Bank has one branch located in the city of Kalispell, in
Flathead County. The branch has $6.4 million in deposits for a 0.7% market share
of the county's June 30, 1998 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 $18.9 million in deposits for a 8.1% market share of the
county's  June  30,  1998  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 $3.6 million in deposits for a 4.4% market share
of the county's  June 30, 1998 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 $10.0  million in  deposits  for a 6.6% market
share of the  county's  June 30,  1998  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 $16.4 million in deposits for a 15.4% market
share of the county's June 30, 1998 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 $41.8  million in deposits  for a 9.3% market
share of the county's June 30, 1998 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 $8.3 million in deposits for a 6.4% market share
of the county's  June 30, 1998 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,  commercial  real  estate,
consumer, multi-family,  agricultural, agricultural real estate and construction
loans.  With the 1997  merger  with  Security  Bank,  the Bank  acquired  a more
expansive  lending  portfolio,  including  loans  and  expertise  in  commercial
non-real estate and agricultural  services.  The Bank is also a major originator
and   servicer  of  Federal   Housing   Administration/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  Security may retain the
servicing rights on some loans. See "Originations,  Purchases and Sales of Loans
and  Mortgage-Backed  Securities." At June 30, 1999,  Western Security  serviced
loans with principal  balances of approximately  $223.4 million for others.  The
loan servicing fees earned provided a supplement to the Bank's earnings.

                                       4
<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,
                                --------------------------------------------------------------------------------------
                                      1999            1998               1997             1996             1995
                                ----------------- --------------- ----------------- ------------------ ---------------
                                 Amount  Percent  Amount  Percent   Amount  Percent   Amount  Percent  Amount  Percent
                                ------- --------- ------ -------- -------- -------- --------- -------- ------- -------
                                                              (Dollars in Thousands)
<S>                  <C>         <C>      <C>      <C>      <C>     <C>      <C>      <C>       <C>      <C>       <C>
Real Estate Loans:
  One- to four-family(1)........ $285,914  44.52%  $318,663  47.56% $348,577  53.85%  $280,853   74.69%  $247,331   76.94%
  Multi-family..................   41,619   6.48     42,716   6.38    40,237   6.21     19,939    5.30     18,985    5.91
  Commercial....................   75,666  11.78     64,150   9.57    50,049   7.73     18,318    4.87     12,399    3.86
  Agricultural..................   11,421   1.79     11,066   1.65     7,970   1.23         --      --         --      --
  Construction..................   12,542   1.95     17,523   2.62    19,858   3.07     12,977    3.45     10,742    3.34
                                 -------- ------   -------- ------  -------- ------   --------  ------   --------  ------
    Total real estate loans.....  427,162  66.52    454,118  67.78   466,691  72.06    332,087   88.31    289,457   90.05
                                 -------- ------   -------- ------  -------- ------   --------  ------   --------  ------

Other Loans:
  Commercial (non-real estate)..   40,237   6.27     34,384   5.13    28,924   4.47         --      --         --      --
  Agricultural (non-real estate)   23,193   3.61     24,036   3.59    18,866   2.91         --      --         --      --
  Loans to depositors, secured
by deposits.....................    1,745   0.27      3,194   0.48     4,101   0.63      2,337    0.62      2,138    0.67
  Indirect consumer loans.......   66,406  10.34     64,287   9.60    40,708   6.29      2,827    0.75         --      --
  Other consumer loans-real
estate secured..................   39,031   6.08     54,619   8.15    58,551   9.04     30,814    8.19     24,757    7.69
  Other consumer loans..........   44,385   6.91     35,352   5.27    29,772   4.60      8,003    2.13      5,112    1.59
                                 -------- ------   -------- ------  -------- ------   --------  ------   --------  ------
    Total other loans...........  214,997  33.48    215,872  32.22   180,922  27.94     43,981   11.69     32,007    9.95
                                 -------- ------   -------- ------  -------- ------   --------  ------   --------  ------
    Total gross loans...........  642,159 100.00%   669,990 100.00%  647,613 100.00%   376,068  100.00%   321,464  100.00%
                                          ======            ======           ======             ======             ======


Less:
  Unearned fees ................   (1,144)           (1,453)          (1,813)           (1,625)            (1,344)
  Undisbursed loan funds........   (3,611)           (5,178)          (9,489)           (4,245)            (4,988)
  Purchased discounts...........     (954)           (1,159)          (1,383)               --                 --
  Allowance for losses..........   (5,079)           (4,907)          (4,651)           (2,005)            (2,011)
                                 --------          --------         --------          --------           --------
   Total loans receivable, net.. $631,371          $657,293         $630,277          $368,193           $313,121
                                 ========          ========         ========          ========           ========
<FN>
(1)  Includes $10.1 million, $8.6 million, $13.7 million, $7.5 million, and $7.1
     million of FHA and VA loans at June 30, 1999,  1998,  1997, 1996, and 1995,
     respectively.
</FN>
</TABLE>

                                       5
<PAGE>

         The following table  illustrates  the interest rate  sensitivity of the
Bank's loan  portfolio  at June 30, 1999.  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
                                                                     (Dollars in Thousands)
                    ----------------------------------------------------------------------------------------------------------------
                    One-to-Four Family    Multi-Family       Commercial        Agricultural      Construction     Total Real Estate
                    ------------------ -----------------  ----------------  -----------------  ----------------  -------------------
                              Weighted          Weighted          Weighted           Weighted          Weighted            Weighted
Due During Years               Average           Average           Average            Average           Average             Average
Ending June 30,       Amount    Rate    Amount    Rate     Amount    Rate    Amount    Rate     Amount    Rate     Amount      Rate
------------------- --------  -------  --------  -------  -------  -------  --------  -------  -------- -------  ----------  -------
<S>                 <C>         <C>     <C>        <C>    <C>        <C>     <C>        <C>    <C>        <C>      <C>         <C>
2000                $ 50,445    7.57%   $ 7,513    8.29%  $13,978    8.65%   $ 1,407    8.68%  $11,793    8.90%    $ 85,136    8.01%
2001                  26,409    7.72      4,697    8.92     9,444    8.45      1,990    8.57       187    8.22       42,727    8.06
2002                  19,108    7.65      2,658    8.96     9,860    8.60        797    8.99        69    8.37       32,492    8.08
2003 to 2004          30,716    7.58      7,735    8.66    24,697    8.31      2,361    8.14       456    8.37       65,965    8.01
2005 to 2009          69,039    7.42      8,354    8.72    12,831    8.86      3,610    8.59        17    8.50       93,851    7.78
2010 to 2014          35,607    7.32      9,316    9.53     4,140    8.12        723    8.55        20    8.50       49,806    7.82
2015 and Following    54,590    7.27      1,346    8.32       716    9.27        533    9.16        --      --       57,185    7.34
                    --------    ----    -------    ----   -------    ----    -------    ----   -------    ----     --------    ----
Total               $285,914    7.47%   $41,619    8.84%  $75,666    8.52%   $11,421    8.56%  $12,542    8.86%    $427,162    7.86%
                    ========    ====    =======    ====   =======    ====    =======    ====   =======    ====     ========    ====
</TABLE>

<TABLE>
<CAPTION>
                                                  Non-Real Estate
                                               (Dollars in Thousands)
                    ---------------------------------------------------------------------------                Total Real Estate and
                        Commercial        Agricultural         Consumer   Total Non-Real Estate                    Non-Real Estate
                    ------------------ -----------------  ----------------  -------------------                  -------------------
                              Weighted          Weighted          Weighted           Weighted                             Weighted
Due During Years               Average           Average           Average            Average                              Average
Ending June 30,       Amount    Rate    Amount    Rate     Amount    Rate    Amount    Rate                       Amount    Rate
------------------- --------  -------  --------  -------  -------  -------  --------  ---------                  --------  ---------
<S>                 <C>         <C>     <C>        <C>    <C>        <C>     <C>        <C>                        <C>         <C>
2000 (1)            $ 25,458    8.39%   $15,590    8.90%  $42,884    9.09%   $83,932    8.84%                      $169,068    8.42%
2001                   5,250    8.13      1,902    8.93    28,648    9.09     35,800    8.94                         78,527    8.46
2002                   4,758    8.14      1,045    9.18    25,134    9.10     30,937    8.95                         63,429    8.50
2003 to 2004           3,833    8.08      1,726    8.75    33,726    9.01     39,285    8.91                        105,250    8.35
2005 to 2009             629    9.30      2,406    8.51    16,658    9.58     19,693    9.44                        113,544    8.07
2010 to 2014             309   10.30        270    8.36     4,444   10.03      5,023    9.96                         54,829    8.02
2015 and Following        --      --        254    8.54        73    8.83        327    8.61                         57,512    7.35
                    --------    ----    -------    ----   -------    ----    -------    ----                       --------    ----
Total                $40,237    8.33%   $23,193    8.85% $151,567    9.16%  $214,997    8.97%                      $642,159    8.23%
                    ========    ====    =======    ====   =======    ====    =======    ====                       ========    ====
<FN>
(1)  Includes demand loans and loans having no stated maturity.
</FN>
</TABLE>

                                       6
<PAGE>

         The  following  table sets forth the dollar amount of all loans at June
30, 1999 that have fixed interest rates,  and that are  contractually  due after
June 30, 2000 and have floating or adjustable  interest  rates that change after
June 30, 2000.
                                                 Floating or
                                                 Adjustable
                               Fixed Rates          Rates          Total
                                               (In Thousands)

Real Estate:
   One- to four-family.... $       269,892    $     16,022    $     285,914
   Multi-family...........          30,234          11,385           41,619
   Commercial.............          31,298          44,368           75,666
   Agricultural...........           3,413           8,009           11,421
   Construction...........          11,907             635           12,542
Other loans
   Agricultural...........          36,325           3,912           40,237
   Commercial ............          21,551           1,642           23,193
   Consumer...............         149,868           1,698          151,567
                            --------------    ------------    -------------


   Total.................. $       554,488    $     87,671    $     642,159
                            ==============    ============    =============



         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, 1999, based on the above, the Bank's regulatory  loans-to-one-borrower limit
was approximately  $11.5 million. On the same date, the Bank's largest amount of
loans to one  borrower  or  group of  related  borrowers  was 74 loans  totaling
approximately  $7.4 million,  secured by multi-family  residential  property and
leased  equipment,  and these loans were  performing  in  accordance  with their
contractual terms at June 30, 1999.

         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 Security assesses both the borrower's ability
to repay the loan and the adequacy of the proposed security.  Initially, Western
Security's  loan  underwriters  analyze the loan  application  and the  property
involved.  Western  Security  also  utilizes  the  Federal  Home  Loan  Mortgage
Corporation (FHLMC) automated  underwriting  software "Loan Prospector." 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 Security also obtains  information  concerning the
income,  financial  condition,  employment  and credit history of the applicant.
Western Security's policy is to require title, fire and extended hazard coverage
on its real estate loans.

         If the loan terms and  borrower  meet  Western  Security's  established
underwriting  criteria  and the loan  amount  does not exceed  FHLMC  conforming
limits,  the loan may be approved by action of one to three  members of the loan
committee  depending on  individual  authority.  Applications  approved by "Loan
Prospector" do not require  further  approval.  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 $500,000 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

                                       7
<PAGE>

applications are designed primarily to determine the borrower's ability to repay
and the more  significant  items on the 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
also requires flood insurance to protect the property securing its interest when
the property is located in a designated flood hazard area.

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, 1999, $285.9 million, or 44.5%, 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
Security are secured by properties located in the Bank's primary market area.

         Historically,  Western  Security  originated  for  retention in its own
portfolio,  30-year  fixed-rate loans secured by one- to-four family residential
real  estate.  However,  in order to reduce its  exposure to changes in interest
rates,  Western  Security  attempts to originate  adjustable rate mortgage loans
("ARMs"),  subject to market conditions and consumer preference.  As a result of
continued  consumer demand for long term fixed-rate loans,  particularly  during
periods of  relatively  low interest  rates,  Western  Security 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
may retain the servicing of the  conventional  loans it originates  and sells to
FHLMC.  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.  See  "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations -  Quantitative  and  Qualitative
Disclosures  About Market Risk" in the Annual Report  incorporated  by reference
herein as Exhibit 13.

         The Bank has  offered  ARMs 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  Security  are  subject  to
adjustment at stated  intervals based on a margin over a specified index and are
subject to lifetime adjustment limits.

         Western  Security  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  Security 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, 1999, the Bank had $52.9 million of one-to four-family ARM loans.

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

                                       8
<PAGE>


requires  private  mortgage  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
Security  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  Security'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  $240,000  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 Security, due to its acquisition of Security Bank, has a mature
portfolio of multi-family and commercial real estate loans. New originations are
handled through the Bank's business  division to allow a full line of commercial
products and services as a part of the customer relationship.

         Western Security'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 125% 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
Security 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 adverse  conditions in the
economy  generally to a greater extent than  residential  loans. In dealing with
these risk factors,  Western  Security  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% and 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,
1999,  $41.6  million,  or 6.5%  of the  Bank's  loan  portfolio,  consisted  of
multi-family  loans and $75.7  million,  or 11.8% of the Bank's loan  portfolio,
consisted of commercial  real estate loans.  In general,  under Office of Thrift
Supervision  ("OTS")  regulations,  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, 1999,  $11.4  million,  or 1.8% of the

                                       9
<PAGE>

Bank's loan portfolio,  consisted of agricultural real estate loans. In general,
OTS  regulations  total  investments in  agricultural  real estate loans may not
exceed 400% of the Bank's capital.

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, 1999, $40.2 million, or 6.3% of the Bank's loan
portfolio,  consisted of commercial  non-real estate loans and $23.2 million, or
3.6% of the Bank's loan  portfolio,  consisted of  agricultural  non-real estate
loans.

Construction Lending

         Historically,  construction lending for one- to four-family  residences
has always  been an  important  part of  Western  Security'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 Security 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,  1999,
approximately $12.5 million, or 2.0% 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 Security 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
Security'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.

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 -
Quantitative and Qualitative Disclosures About Market Risk" in the Annual Report
incorporated by reference herein as Exhibit 13.

                                       10
<PAGE>

         The Bank currently  originates  substantially all of its consumer loans
in its primary market areas. At June 30, 1999, the Bank's consumer loans totaled
$151.6 million, or 23.6%, of the Bank's loan portfolio.

         Western Security 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 May and June, 1999,  Western Security sold its credit card portfolio
and began phasing out its dealer finance  lending  program.  This was done after
management  determined that these two programs were not returning desired levels
of  profitability  and were hindering  return on assets and equity.  At June 30,
1999, the Bank had $66.4 million of indirect dealer finance loans.

         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,
1999 the Bank had $8.4 million outstanding under this program with an additional
$7.3  million  in unused  lines of credit  available  to  borrowers  under  this
program.

         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  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, 1999,  $1.2 million,
or  approximately  0.8%  of the  consumer  loan  portfolio  was 90  days or more
delinquent),  there can be no assurance that  delinquencies will not increase in
the future.

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

         In  addition  to  originating  and  purchasing  loans  for its own loan
portfolio, Western Security 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 Security  generally receives in
return FHLMC participation certificates or cash for non-recourse sales to FHLMC.
During fiscal 1999, Western Security sold or securitized $14.9 million of loans,
with servicing retained,  to FHLMC and other institutional  investors (exclusive
of sales pursuant to loan correspondent agreements discussed below).

         Western  Security  currently  has loan  correspondent  agreements  with
mortgage banking firms under which Western Security agrees to originate and sell
primarily  conventional,  FHA and VA loans to such firms.  Under these programs,
Western Security  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  Security  retains  any loan
origination  fees and negotiates the retention of discount  points.  Under these
programs,  the  borrower  locks  in  an  interest  rate,  and  Western  Security
concurrently  obtains a purchase commitment from the correspondent that does not
require delivery unless the loan is

                                       11
<PAGE>

closed.  Western  Security'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  Security can be required to repurchase  any
loan which  becomes 60 days or more  delinquent  within four months of the sale.
During fiscal 1999,  Western  Security  sold $90.2 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, 1999,  Western  Security has rarely had to repurchase a delinquent loan
from a loan correspondent.

         Western  Security also  participates  in loan programs  financed by the
Montana  Board of Housing  ("MBOH").  Under  these  programs,  Western  Security
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
Security retains servicing rights on all loans sold to the MBOH.

         When loans or  participations  are sold  (other  than in respect of the
agreements with correspondent  institutions  described above),  Western Security
may retain 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 Security was servicing mortgage loans for others in the amount of $223.4
million at June 30, 1999.

         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
Security's sales of loans or  participations  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  Security in the event of
default,   except  in  the  case  of  the  loan  agreements  with  correspondent
institutions discussed above. Western Security 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.

                                       12
<PAGE>


         The following  table sets forth the loan and  mortgage-backed  security
activity for the periods indicated.
                                                       Year Ended June 30,
                                               ---------------------------------
                                                   1999       1998         1997
                                               ---------  ----------  ----------
                                                        (In Thousands)
Beginning of Period:
   Loans, net..................................$657,293    $630,277    $368,193
   Mortgage-backed securities, net............. 126,433     149,169     104,947
                                               --------    --------    --------
      Total loans and mortgage-backed
      securities receivable, net, at
      beginning of period...................... 783,726     779,446     473,140
                                               --------    --------    --------
Loan Originations:
   Real Estate:
      One- to four-family...................... 158,586     149,959      97,732
      Multi-family.............................   6,775       5,107       4,101
      Commercial and agricultural..............  32,863      28,649       6,069
      Construction.............................  21,787      28,127      13,650
                                               --------    --------    --------
       Total real estate loan originations..... 220,011     211,842     121,552
                                               --------    --------    --------
  Other Loans:
     Commercial................................  36,959      44,245      11,684
     Agricultural..............................  19,643      19,420       9,024
     Consumer..................................  81,234      91,202      84,569
                                               --------    --------    --------
         Total other loan originations......... 137,836     154,867     105,277
                                               --------    --------    --------
   Total loan originations..................... 357,847     366,709     226,829
                                               --------    --------    --------
Purchases:
   Real estate loans...........................      --       1,055       1,488
   Loans purchased in acquisition .............      --          --     218,281
   Mortgage-backed securities..................  58,499       6,990       6,928
   Mortgage-backed securities
     purchased in acquisition .................      --          --      91,467
                                               --------    --------    --------
     Total real estate loans and mortgage-
       backed securities purchased
       and converted...........................  58,499       8,045     318,164
                                               --------    --------    --------
     Total real estate loans and mortgage-
       backed securities originated,
       purchased and converted................. 416,346     374,754     544,993
                                               --------    --------    --------
Principal Repayments and Sales:
Principal Repayments:
   Loans....................................... 278,981     244,519     127,723
   Mortgage-backed securities..................  31,764      26,616      23,010
Sales:
   Real estate loans available-for-sale........ 105,129      96,520      54,582
   Mortgage-backed securities..................      --       3,193      31,932
                                               --------    --------    --------
         Total principal repayments,
             sales and conversions............. 415,874     370,848     237,247
                                               --------    --------    --------
Net loan and mortgage-backed securities
   activity ...................................     472       3,906     307,746
Changes in allowance for losses,               --------    --------    --------
   undisbursed loan funds, and unearned
   fees and discounts:
   Real estate loans...........................     341         291      (2,209)
   Mortgage-backed securities..................     (63)         58         689
Change in unrealized loss on mortgage-
   backed securities available for sale........  (1,356)         25          80
                                               --------    --------    --------
End of Period:
   Loans, net.................................. 631,371     657,293     630,277
   Mortgage-backed securities.................. 151,749     126,433     149,169
                                               --------    --------    --------
         Total loans and mortgage-backed
             securities receivable, net,
             at end of period..................$783,120    $783,726    $779,446
                                               ========    ========    ========

                                       13
<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 when past
due for over 30-days and a forbearance agreement or resolution may 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, 1999.

<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     94  $4,410   1.54%       25   $1,111   0.39%     22     $  948   0.33%     141    $6,469   2.26%
Multi-family            1      82   0.20        --       --     --      --         --     --        1        82   0.20
Commercial             21     777   0.67         3       30   0.03       6        106   0.09       30       913   0.79
Agricultural            6     866   2.50         4      715   2.07      10      1,097   3.17       20     2,678   7.74
Construction            1     180   1.44         1       79   0.63       3        456   3.64        5       715   5.70
Consumer              217   2,440   1.61        72      439   0.29      89      1,217   0.80      378     4,096   2.70
                      ---  ------              ---   ------            ---     ------             ---   -------
Total                 340  $8,755              105   $2,374            130     $3,824             575   $14,953
                      ===  ======              ===   ======            ===     ======             ===   =======
</TABLE>

         The following table sets forth the Bank's loan  delinquencies  by type,
by amount and by percentage of type at June 30, 1998.

<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   104  $5,789   1.82%      26    $1,174     0.37%   49     $2,409     0.76%   179    $9,372    2.94%
Multi-family.....       2     267   0.63      ---       ---      ---     1         89     0.21      3       356    0.83
Commercial ......       5     173   0.18        4       270     0.27     5         77     0.08     14       520    0.53
Agricultural.....       8     140   0.40        1       416     1.19   ---        ---      ---      9       556    1.58
Construction.....      10     915   5.22        2        61     0.35     3        362     2.07     15     1,338    7.46
Consumer.........     239   2,658   1.69      102     1,033     0.66   139      1,678     1.07    480     5,369    3.41
                      ---  ------             ---    ------            ---     ------             ---   -------
    Total........     368  $9,942             135    $2,954            197     $4,615             700   $17,511
                      ===  ======             ===    ======            ===     ======             ===   =======
</TABLE>
                                       14

<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  Security  internally
classifies its assets on a regular basis. On the basis of management's review of
its  assets,  at June 30,  1999 on a net  basis,  the Bank had  classified  $9.8
million as Substandard, $348,000 as Doubtful and $7,000 as Loss.

         The  following  table  sets  forth  as of  June  30,  1999  the  Bank's
classified  assets by type. No multi-family  real estate loans,  commercial real
estate or construction loans were classified at June 30, 1999.


                                       (In Thousands)
                          --------------------------------------
                          Substandard  Doubtful  Loss     Total
                          -----------  --------  ----    -------
One-to-four family........ $ 1,168      $ --     $--     $ 1,168
Multi-family..............     829        --      --         829
Commercial Real Estate....     279        --      --         279
Agriculture Real Estate...   1,469        --      --       1,469
Construction..............     636        --      --         636
Commercial ...............     281        --      --         281
Agriculture ..............   3,925        --      --       3,925
Consumer..................   1,204       348       7       1,559
                           -------      ----     ---     -------
Total..................... $ 9,791      $348     $ 7     $10,146
                           =======      ====     ===     =======

         Non-Performing  Assets.  Loans are reviewed  periodically  and any loan
whose  collectibility  is doubtful is placed on  non-accrual  status.  All loans
other than one- to  four-family  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.  Residential,
or one- to four-family,  real estate loans are placed on non-accrual status when
either principal or interest is 120 days or more past due.

         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  Security as a result of foreclosure or
by deed in lieu of foreclosure is classified as other 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 net realizable 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.

                                       15
<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,
                                            -----------------------------------------------------
                                             1999        1998         1997        1996      1995
                                            ------      ------      -------      -----     -----
                                                             (Dollars in Thousands)
<S>                                        <C>          <C>         <C>         <C>       <C>
Non-accruing loans:
Real Estate:
     One- to four-family...................$   521      $1,967       $  842      $  21     $  --
     Multi-family..........................     --          89           --         --        --
     Commercial............................     --          35           --         --       166
     Construction..........................    112         362           --         --        --
Agriculture non-real estate................  1,098          --           --         --        --
Commercial non-real estate.................    106          32          102         --        --
Consumer...................................  1,212       1,504          573        383       153
                                            ------      ------       ------     ------    ------
     Total.................................  3,049       3,989        1,517        404       319
                                            ------      ------       ------     ------    ------
Accruing loans delinquent 90 days or more:
Real Estate
     One- to four-family...................    426         442          231        288       253
     Multi-family..........................     --          --           --         --        --
     Commercial............................     --          --           --         --        --
     Construction..........................    344          --           --         --        --
Agriculture non-real estate................     --          --           --         --        --
Commercial non-real estate.................     --          10           --         --        --
Consumer...................................      5         174          605         23         1
                                            ------      ------       ------     ------    ------
     Total.................................    775         626          836        311       254
                                            ------      ------       ------     ------    ------
Foreclosed assets:
Real Estate:
     One- to four-family...................    238         279           --         --        --
     Multi-family..........................     --          --           --         --        --
     Commercial............................     --          --           --         --        --
     Land..................................     26          28           --         --        --
Consumer ..................................    106         114           82         --        --
                                            ------      ------       ------     ------    ------
     Total.................................    370         421           82         --        --
                                            ------      ------       ------     ------    ------
Total non-performing assets................ $4,194      $5,036       $2,435      $ 715     $ 573
                                            ======      ======       ======     ======    ======
Total as a percentage of total assets......  0.42%        0.49%        0.25%      0.13%     0.10%
                                            ======      ======       ======     ======    ======
Total allowance for loan losses
   to non-performing loans
   (exclusive of foreclosed)............... 132.85%     106.33%      197.66%    280.42%   350.35%
                                            ======      ======       ======     ======    ======
Total allowance for loan losses to total
   non-performing assets................... 121.13%      97.44%      191.01%    280.42%   350.35%
                                            ======      ======       ======     ======    ======
</TABLE>

         For the year ended June 30,  1999,  gross  interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms amounted to approximately $223,000.

         At June 30, 1999, Western Security's  non-accruing loans were comprised
of twelve one- to four-family  loans totaling  $521,000,  one construction  loan
totaling $112,000,  ten agriculture non-real estate loans totaling $1.1 million,
six commercial non-real estate loans totaling $106,000 and eighty-seven consumer
loans totaling $1.2 million.  Accruing loans  delinquent 90 days or more at June
30,  1999,  includes  ten  one- to  four-family  loans  totaling  $426,000,  two
construction  loans totaling  $344,000 and two consumer  loans  totaling  $5,000
which were 100%  secured by savings  accounts.  These  loans  continue to accrue
interest due to management's belief that the borrowers will repay these loans.

         At June 30, 1999,  there were $238,000 in seven  foreclosed real estate
loans and $26,000 in one foreclosed commercial land loans.

                                       16
<PAGE>

         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, 1999,  there were no other loans identified by the Bank with respect
to 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 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.


                                       17

<PAGE>

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

<TABLE>
<CAPTION>
                                                                        Year Ended June 30,
                                                            -------------------------------------------
                                                             1999      1998     1997      1996     1995
                                                            ------    ------    -----    -----    -----
                                                                           (Dollars in Thousands)

<S>                                                        <C>        <C>      <C>      <C>      <C>
Balance at beginning of period............................ $ 4,907    $4,651   $2,005   $2,011   $2,030
                                                            ------    ------    -----    -----    -----
Charge-Offs:
Real Estate:
     One- to four-family..................................    (177)       --      (53)      --       (2)
     Commercial ..........................................      --        --      (43)      --       --
Other:
     Commercial...........................................     (49)      (26)     (47)      --       --
     Consumer.............................................  (1,002)     (611)    (110)     (11)     (26)
                                                            ------    ------    -----    -----    -----
Total charge-offs.........................................  (1,228)     (637)    (253)     (11)     (28)
                                                            ------    ------    -----    -----    -----
Recoveries:
Other:
     Commercial...........................................       6         3       --       --       --
     Consumer.............................................      94        50       18        5        9
                                                            ------    ------    -----    -----    -----
Total recoveries..........................................     100        53       18        5        9
                                                            ------    ------    -----    -----    -----
Net charge-offs...........................................  (1,128)     (584)    (235)      (6)     (19)
Provisions charged to operations..........................   1,300       840      400       --       --
Reserves acquired.........................................      --        --    2,481       --       --
                                                            ------    ------    -----    -----    -----
Balance at end of period.................................. $ 5,079    $4,907   $4,651   $2,005   $2,011
                                                            ======    ======    =====    =====    =====

Ratio of net charge-offs during the period to average loans
     outstanding during the period........................    0.18%     0.09%    0.05%    0.00%    0.18%
                                                            ======    ======    =====    =====    =====
Ratio of net charge-offs during the period to average non-
     performing assets during the period .................   25.21%    11.92%   13.12%    1.39%    2.91%
                                                            ======    ======    =====    =====    =====
Ratio of allowance for loan losses to loans receivable, net   0.80%     0.74%    0.73%    0.54%    0.64%
                                                            ======    ======    =====    =====    =====
</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,
                           ----------------------------------------------------------------------------------------------
                                   1999             1998                1997                1996              1995
                           -----------------  -----------------  -----------------   -----------------  -----------------
                                     Percent            Percent            Percent             Percent            Percent
                                    of Loans           of Loans           of Loans            of Loans           of Loans
                                     in Each            in Each            in Each             in Each            in Each
                                    Category           Category           Category            Category           Category
                                    to Total           to Total           to Total            to Total           to Total
                            Amount    Loans    Amount    Loans    Amount    Loans     Amount    Loans    Amount    Loans
                           -------- --------  -------- --------  -------- --------   -------- --------  -------- --------
                                                           (Dollars in Thousands)
<S>                         <C>        <C>      <C>      <C>      <C>      <C>       <C>       <C>     <C>      <C>
Real Estate:
     One- to four- family.  $  838     18.56%   $ 927    47.56%   $2,244   53.82%    $  539    74.69%  $  175   76.94%
     Multi-family.........     305      6.75      300     6.38       259    6.21        136     5.30       12    5.91
     Commercial...........     710     15.72      550     9.57       479    7.73        152     4.87       75    3.86
     Agricultural.........     210      4.65      150     1.65       471    1.23         --       --       --      --
     Construction.........     156      3.45      250     2.62       128    3.07        164     3.45        5    3.34
Other loans:
     Commercial ..........     468     10.36      450     5.13        --    4.47         --       --       --      --
     Agricultural ........     460     10.19      400     3.59        --    2.91         --       --       --      --
     Consumer.............   1,369     30.32    1,480    23.50       918   20.56        126    11.69      132    9.95
Unallocated...............     563        --      400       --       152      --        888       --    1,612      --
                            ------    ------   ------   ------    ------  ------     ------   ------   ------
      Total...............  $5,079    100.00%  $4,907   100.00%   $4,651  100.00%    $2,005   100.00%  $2,011  100.00%
                            ======    ======   ======   ======    ======  ======     ======   ======   ======  ======
</TABLE>

                                                                          19
<PAGE>

Investment Activities

         Securities.  As part of its asset/liability  management  strategy,  the
Company invests 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, 1999,
the Company 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, 1999,  the Bank owned $79.9 million of bank  qualified
local government 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, 1999, the Bank's
liquidity ratio (liquid assets as a percentage of net  withdrawable  savings and
current borrowings) was 20.54% as compared to the OTS requirement of 4.0%.

         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 15 of the Notes to Consolidated  Financial
Statements in the Annual Report  incorporated by reference herein as Exhibit 13.
At June 30, 1999 the Bank had no structured notes.

         The  following  tables  set forth  the  composition  of the  securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                   At June 30,
                                   -----------------------------------------------
                                        1999             1998            1997
                                   --------------  ---------------  --------------
                                    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....   $     --   0.00% $  2,994   2.39% $18,804  23.76%
 U.S. Government obligations...         --   0.00       100   0.08      297   0.38
 Corporate obligations.........      6,985   6.20    11,473   9.15    5,980   7.55
 Other investments.............      2,250   2.00     2,280   1.82    2,385   3.01
                                  -------- ------  -------- ------  ------- ------
  Total investment securities
    held-to-maturity ..........      9,235   8.20    16,847  13.44   27,466  34.70
                                  -------- ------  -------- ------  ------- ------
Investments available-for-sale:
Federal agency obligations.....     79,985  70.99    89,781  71.62   45,969  58.08
Corporate obligations..........     23,374  20.74    18,720  14.93    5,675   7.17
 Other.........................         82   0.07        10   0.01       39   0.05
                                  -------- ------  -------- ------  ------- ------
  Total investments
    available for sale ........    103,441  91.80   108,511  86.56   51,683  65.30
                                  -------- ------  -------- ------  ------- ------
Total investment securities....   $112,676 100.00% $125,358 100.00% $79,149 100.00%
                                  ======== ======  ======== ======  ======= ======
Average remaining life or term to
repricing of securities                 37 mos.          33 mos.         41 mos.
</TABLE>

         For  information  regarding  the  estimated  market value of investment
securities  at June 30,  1999,  see Notes 1 and 3 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, 1999.

<TABLE>
<CAPTION>

                                                                      At June 30, 1999
                                                    --------------------------------------------------
                                                  Less Than 1 to 5  5 to 10 Over 10
                                                    1 Year  Years    Years   Years   Total   Securities
                                                     Cost    Cost    Cost    Cost     Cost   Market Value
                                                    ------  -------  -----  ------  --------  --------
                                                                   (Dollars in Thousands)
<S>                                                <C>      <C>      <C>    <C>     <C>       <C>
Investments held-to-maturity:
 U.S. government securities....................... $    --  $    --  $  --  $   --  $     --  $     --
 Federal agency obligations.......................      --       --     --      --        --        --
 Corporate obligations............................   2,994    3,991     --      --     6,985     6,995
 Other investments................................      38       --    567   1,645     2,250     2,260
                                                   -------  -------  -----  ------  --------  --------

  Total investment securities held-to-maturity ...   3,032    3,991    567   1,645     9,235     9,255
                                                   -------  -------  -----  ------  --------  --------


Investments available-for-sale:
 Federal agency obligations.......................   3,608   75,837     --   1,879    81,324    79,985
 Corporate obligations............................   7,248   15,761     --     499    23,508    23,374
 Other investments................................       3       --     --      --         3        82
                                                   -------  -------  -----  ------  --------  --------

  Total investments available for sale............  10,859   91,598     --   2,378   104,835   103,441
                                                   -------  -------  -----  ------  --------  --------


Total securities.................................. $13,891  $95,589  $ 567  $4,023  $114,070  $112,696
                                                   =======  =======  =====  ======  ========  ========


Average weighted yield............................    6.02%    5.63%  7.06%   7.00%     5.73%
                                                   =======  =======  =====  ======  ========
</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 $22,000.  At June 30, 1999,
the book value of the CMOs was $65.1  million.  The book value of all the Bank's
mortgage-backed   securities   at  June  30,  1999  was  $151.7   million.   See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Quantitative and Qualitative  Disclosures About Market Risk" in the
Annual Report  incorporated by reference herein as Exhibit 13. At June 30, 1999,
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, 1999.  The Bank also holds $8.0 million
of mortgage-backed securities issued by private institutions.

         For  information  regarding  the  estimated  market  values of mortgage
backed securities at June 30, 1999, see Notes 1 and 4 of 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.


                                                        At June 30,
                                                ---------------------------
                                                  1999     1998      1997
                                                -------  --------  --------
                                                       (In Thousands)
Issuers:
 Federal Home Loan Mortgage Corporation....... $ 42,632  $ 51,776  $ 66,070
 Federal National Mortgage Association........   17,047     7,721    12,344
 Government National Mortgage Association.....   19,004    15,218    18,850
 Collateralized Mortgage
       Obligations - federal agency...........   65,102    48,578    45,815
 Other........................................    7,964     3,140     6,090
                                               --------  --------  --------


     Total.................................... $151,749  $126,433  $149,169
                                               ========  ========  ========



                                       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, 1999.
<TABLE>
<CAPTION>

                                                                                         Market    June 30,
                                             1 - 3     3 - 5   5 - 10  10 - 15  Over 15   Value      1999
                                             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....$     --  $ 2,657  $23,748  $    --  $ 1,177  $     --  $ 27,582
 Federal National Mortgage Corporation.....      --       --       26       --       --        --        26
 Government National Mortgage Association..      --       --       27       --   10,777        --    10,804
 Collateralized Mortgage Obligations -
 Federal Agency............................      --      220    6,238      516   36,319        --    43,293
 Other ....................................      --       --       --       --    2,015        --     2,015
                                            -------   ------  -------  -------  -------  --------  --------

     Subtotal..............................      --    2,877   30,039      516   50,288        --    83,720
                                            -------   ------  -------  -------  -------  --------  --------
Available for sale:

 Federal Home Loan Mortgage Corporation....      --    1,648    5,013    1,947    6,608     (171)    15,045
 Federal National Mortgage Corporation.....      --      940       --   11,563    4,939     (421)    17,021
 Government National Mortgage Association..      --       --    4,813    3,241      327     (151)     8,230
 Collateralized Mortgage Obligations
      Federal Agency ......................     421    2,550    2,021    1,855   15,597     (634)    21,810
 Other ....................................      --       --       --       --    5,923       --      5,923
                                            -------   ------  -------  -------  -------  --------  --------

      Subtotal.............................     421    5,138   11,847   18,606   33,394   (1,377)    68,029
                                            -------   ------  -------  -------  -------  --------  --------

          Total............................   $ 421   $8,015  $41,886  $19,122  $83,682  $(1,377)  $151,749
                                            =======   ======  =======  =======  =======  ========  ========

</TABLE>

         The  following  schedule  sets  forth  the  contractual   maturity  and
repricing of the Bank's mortgage-backed  securities portfolio,  net, at June 30,
1999.  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 After 5   After 10           Market   June 30,
                                     1 Year  Through  Through  Through Through   Through  Over 15    Value     1999
                                    or Less  2 Years  3 Years  5 Years 10 Years  15 Years  Years   Adjustment  Total
                                    -------  -------  -------  ------- --------  -------  -------  ----------  -----
                                                                   (In Thousands)
<S>                                  <C>      <C>      <C>     <C>     <C>     <C>       <C>        <C>      <C>
Mortgage-Backed Securities
  Held-to-Maturity................   $   --   $   --   $  --   $2,657  $23,802 $    --   $13,969    $  --    $40,428
Mortgage-Backed Securities
  Available-for-Sale..............   13,028       --      --      942    9,826  16,752     6,414     (743)    46,219

Collateralized Mortgage Obligations
  Held-to-Maturity................    8,487       --      --      220      817      --    33,768       --     43,292

Collateralized Mortgage Obligations
  Available-for-Sale..............       --      421      --    2,548    2,021   1,856    15,598     (634)    21,810
                                    -------  -------  ------  -------  ------- -------   -------  -------   --------

     Total........................  $21,515   $  421 $    -- $  6,367  $36,466 $18,608   $69,749  $(1,377)  $151,749
                                    =======  =======  ======  =======  ======= =======   =======  =======   ========
</TABLE>


         Cash  Surrender  Value of Life  Insurance  Policies.  Western  Security
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, 1999 the Bank had $6.9  million in cash  surrender  value of life  insurance
policies.

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.

                                       23
<PAGE>

         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  bearing demand accounts,  money
market accounts and  certificates of deposits with varying  maturities.  Western
Security has not actively  sought  deposits  outside of its primary market area.
Western  Security  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
Security  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  Security  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 a rising  interest rate
environment while certificates of deposit are preferred by those depositors in a
declining 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.



                                       24

<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,
                                                ----------------------------------------------------------------
                                                       1999                   1998                   1997
                                                ------------------     ------------------    -------------------
                                                            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 (2.70 - 2.75%)..  $   89,975   13.94%    $  94,557    14.86%   $  102,923    16.31%
Money market accounts (2.96 - 4.98%)..........      75,398   11.68        55,464     8.71        49,062     7.78
NOW accounts (1.50%)..........................      77,899   12.07        74,673    11.73        76,582    12.14
Non-Interest bearing demand ..................      35,708    5.53        30,524     4.80        26,050     4.13
                                                ----------  ------     ---------   ------    ----------   ------
Total non-certificates........................     278,980   43.22       255,218    40.10       254,617    40.36
                                                ----------  ------     ---------   ------    ----------   ------
Certificates:

0.00 -  3.99%.................................       3,385    0.52         1,894     0.30         1,276     0.20
4.00 -  5.99%.................................     302,629   46.88       269,590    42.36       288,440    45.72
6.00 -  7.99%.................................      60,545    9.38       109,731    17.24        86,341    13.69
8.00 -  and over .............................          10      --             8       --           195     0.03
                                                ----------  ------     ---------   ------    ----------   ------
Total certificates............................     366,569   56.78       381,223    59.90       376,252    59.64
                                                ----------  ------     ---------   ------    ----------   ------
Total deposits................................  $  645,549  100.00%    $ 636,441   100.00%   $  630,869   100.00%
                                                ==========  ======     =========   ======    ==========   ======
</TABLE>


         The following  table sets forth the rate and maturity  information  for
the Bank's certificates of deposit as of June 30, 1999.


                          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:

September 30, 1999.....  $3,177  $ 82,438   $ 9,189      $ 3  $ 94,807   25.85%
December 31, 1999......     135    62,865    11,484       --    74,484   20.31
March 31, 2000.........      --    47,329    11,494       --    58,823   16.05
June 30, 2000..........      32    42,751     2,733       --    45,516   12.42
September 30, 2000.....      --    10,609     5,078       --    15,687    4.28
December 31, 2000......      --    12,335     5,679       --    18,014    4.91
March 31, 2001.........      --    11,620     6,657       --    18,277    4.99
June 30, 2001..........       6    11,909       292       --    12,207    3.33
September 30, 2001.....      --     5,544       445        7     5,996    1.64
December 31, 2001......      --     6,413       580       --     6,993    1.91
March 31, 2002.........       4     2,719       306       --     3,029    0.83
June 30, 2002..........      --     1,322     1,189       --     2,511    0.69
Thereafter.............      31     4,775     5,419       --    10,225    2.79
                         ------  --------   -------   ------  --------  ------

   Total...............  $3,385  $302,629   $60,545      $10  $366,569  100.00%
                         ======  ========   =======   ======  ========  ======

   Percent of total....    0.92%    82.56%    16.52%      --
                         ======  ========   =======   ======


         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, 1999.


<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....  $76,920 $64,976  $ 91,756  $83,061  $316,713
Certificates of deposit of $100,000 or more...    9,138   8,974    10,374    9,225    37,711
Public funds(1)...............................    8,749     534     2,209      653    12,145
                                                ------- -------  --------  -------  --------

Total certificates of deposit.................  $94,807 $74,484  $104,339  $92,939  $366,569
                                                ------- -------  --------  -------  --------
<FN>

-----------------------
(1)  Deposits from governmental and other public entities.
</FN>

</TABLE>

                                       25
<PAGE>

         For  additional  information  regarding the  composition  of the Bank's
deposits,  see Note 8 of the Notes to the Consolidated  Financial  Statements in
the Annual Report incorporated by reference herein as Exhibit 13.

         Borrowings. Western Security'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 of the Notes to 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 and other  borrowings  for the  periods
indicated.

                                                     Year Ended June 30,
                                               ------------------------------
                                                  1999      1998       1997
                                               --------   --------   --------
                                                             (In Thousands)
Maximum Balance:

  FHLB Advances............................... $257,277   $248,133   $190,338
  Collateralized Mortgage Obligations.........      511        775      1,117
  Other Borrowings and Repurchase Agreements..    7,416     26,099      8,101

Average Balance:

  FHLB Advances...............................  228,174    244,339    145,446
  Collateralized Mortgage Obligations.........      376        625        967
  Other Borrowings and Repurchase Agreements..    6,749     12,022      2,731


         The  following  table sets forth certain  information  as to the Bank's
FHLB advances, CMO's and other borrowings at the dates indicated.

                                                           June 30,
                                               ------------------------------
                                                1999        1998       1997
                                               --------   --------   --------
                                                   (Dollars in Thousands)

FHLB Advances................................. $244,048   $248,133   $190,338
Collateralized Mortgage Obligations...........      242        511        797
Other Borrowings and Repurchase Agreements....    6,895      6,542      8,101
                                               --------   --------   --------

  Total Borrowings............................ $251,185   $255,186   $199,236
                                               ========   ========   ========
Weighted Average Interest Rate
of FHLB Advances........................           5.53%      5.83%      6.14%
                                               ========   ========   ========
Weighted Average Interest Rate
of Collateralized Mortgage
Obligations...................................    11.48%     11.48%     11.37%
                                               ========   ========   ========
Weighted Average Interest Rate of
Other Borrowings and Repurchase
   Agreements.................................     4.34%      5.05%      5.30%
                                               ========   ========   ========


                                       26

<PAGE>

Interest Rate Caps and Interest Rate Swaps

         As explained  under  Quantitative  and  Qualitative  Disclosures  About
Market Risk  Discussion  and  Analysis  of  Financial  Condition  and Results of
Operations and Note 15 of the Notes to Consolidated  Financial Statements in the
Annual Report incorporated by reference herein as Exhibit 13, the Bank was party
to three interest rate exchange agreements.  These agreements were interest rate
cap agreements  covering a total of $15.0 million in notional  principal amounts
wherein the  interest  rate caps  entitle the Bank to receive  various  interest
payments 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,
1999 the amount of the  unamortized  premiums  paid related to the interest rate
cap transactions was $23,000.

Subsidiary Activities

        General.  The  Company has no direct  subsidiaries  other than the Bank.
Western  Security  has  three  wholly-owned  service  corporation  subsidiaries:
Service Corp. of Montana,  Inc. ("Service Corp."),  Western Security  Investment
Services,  Inc.  ("Western Security  Investment") and a special-purpose  finance
subsidiary,  Monte  Mac I,  Inc.  ("Monte  Mac").  At  June  30,  1999,  Western
Security's  investment  in the three wholly owned service  corporations  totaled
$2.5 million, or approximately 0.25% 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   Security's   service
corporations:

        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  Security's
investment in Service Corp. totaled $411,000 at June 30, 1999.

         Western Security Investment Services,  Inc. Western Security Investment
was acquired in February  1997, in connection  with the  acquisition of Security
Bancorp. Western Security Investment conducts a securities brokerage business in
Western  Security's  Missoula  and  Billings  offices and a real  estate  rental
business.  At June 30, 1999, Western  Security's  investment in Western Security
Investment totaled $579,000.

         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  Security to Monte
Mac. The transferred FHLMC certificates had a book value of $1.0 million at June
30,  1999.  Western  Security's  investment  in Monte  Mac as of June 30,  1999,
included   approximately  $0.8  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

                                       27
<PAGE>

of  Seattle  and is  subject  to  certain  limited  regulation  by the  Board of
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 April, 1999 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,  1999,  was
approximately  $195,000.   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, 1999,
the Bank's lending limit under this restriction was approximately $11.5 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

                                       28
<PAGE>

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 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.  See Note 2 of the Notes to  Consolidated
Financial  Statements in the Annual Report  incorporated by reference  herein as
Exhibit 13. 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.

         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
non-cumulative  perpetual  preferred  stock and related  income.  All intangible
assets must be deducted from tangible  capital for  calculating  compliance with
the requirement.  At June 30, 1999, the Bank had unamortized  purchased mortgage
servicing rights of $602,000 and goodwill and core deposit  intangible  relating
to the purchase of Security  Bancorp of $18.8  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, 1999, the Bank was required to deduct  $568,000 of its
investment in Service Corp. of Montana,  Inc. and $579,000 of its  investment in
Western Security Investment under these rules.

         At June 30, 1999, the Bank had tangible  capital of $71.3  million,  or
7.2% of adjusted total assets,  which is  approximately  $56.5 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, 1999, the Bank
had no such intangible assets.

                                       29
<PAGE>

         At June 30, 1999, the Bank had core capital equal to $71.3 million,  or
7.2% of adjusted total assets, which is $31.8 million above the minimum leverage
ratio requirement of 3% as in effect on that date.

         The OTS risk-based capital 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, 1999,  the Bank had no capital  instruments  that  qualify as  supplementary
capital and had $5.1 million of general loss reserves, which was less than 1.25%
of  risk-weighted  assets,  and were included in the $76.4 million of risk-based
capital at June 30, 1999.

         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, 1999.

         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.

         On June 30,  1999,  the  Bank had  total  risk-based  capital  of $76.4
million  (including $71.3 million in core capital and $5.1 million in qualifying
supplementary  capital) and  risk-weighted  assets of $622.9 million  (including
$66,000 in converted  off-balance sheet assets);  or total risk-based capital of
12.3% of risk-weighted  assets.  This amount was $26.6 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.

                                       30
<PAGE>

         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
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.

         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 Security may pay dividends in accordance with this general authority.

         The OTS  regulations  permit a  savings  association  to make a capital
distribution  without  notice to the OTS (unless it is a subsidiary of a holding
company)  provided  that it has a CAMELS 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.  The OTS may
object to a capital  distribution  if it would  constitute  an unsafe or unsound
practice.

         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 4%.
The Bank's regulatory ratio was 20.5% at June 30, 1999.

         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, 1999, the Bank
met the test and has always met the test since its effectiveness.

                                       31
<PAGE>

         Any savings association that fails to meet the QTL test must convert to
a national bank charter,  unless it re-qualifies as a QTL and thereafter remains
a QTL. If an  association  does not  re-qualify  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  re-qualified  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  re-qualified  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 September, 1998 and received a rating of satisfactory.

         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.

         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  Security 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.

                                       32
<PAGE>

         If Western  Security  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, 1999,  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,  1999,  the Bank had $14.6  million in FHLB stock,
which was in  compliance  with this  requirement.  In past  years,  the Bank has
received  substantial  dividends on its FHLB stock.  Over the past five calendar
years such  dividends  have averaged 7.57% and were 8.00% and 7.75% for calendar
years 1997 and 1998 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.

                                       33
<PAGE>

         For the fiscal year ended June 30, 1999,  dividends paid by the FHLB of
Seattle to the Bank totaled $1.1 million which  constitutes  a $80,000  increase
over the amount of  dividends  received  in fiscal  year  1998.  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 and Montana income tax return using the
accrual method of accounting. For fiscal years beginning before January 1, 1997,
Montana state statute  prevented  filing of a  consolidated  Montana  income tax
return  including  the Bank;  thus,  separate  returns were filed by the Company
(including the non-bank subsidiaries) and the Bank. Generally,  the Company, the
Bank and its non-bank  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 non-bank 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.  These 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 institutions can no longer calculate their deduction for bad debts using
the percentage-of-taxable-income method. Instead, such institutions are required
to compute their  deductions  based on specific  charge-offs  during the taxable
year when they otherwise qualify to use the experience method.  This legislation
also  requires  savings  institutions  to recapture  into income over a six-year
period  their  post-1987  additions  to  their  tax bad debt  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, 1999 the Bank's bad debt reserve for tax purposes was  approximately
$2.0 million. (See Note 12 of the Notes to Consolidated  Financial Statements in
the Annual Report incorporated by reference as Exhibit 13.)

         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).

         Dividends-Received  Deduction  and  Other  Matters  - The  Company  may
eliminate from its taxable income  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.  In the  opinion of  management,  any  examination  of still open  returns
(including returns of subsidiaries and predecessors, or entities merged with and
into the Company or the Bank) would not result in a deficiency  which could have
a material  adverse effect on the financial  condition of the Company,  the Bank
and its consolidated subsidiaries.

                                       34
<PAGE>

         Montana Taxation - Under Montana  taxation law,  savings  institutions,
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 1999.

         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 16,
Recent  Accounting  Pronouncements  Not Yet  Adopted  in Notes  to  Consolidated
Financial  Statements in the Annual Report  incorporated by reference  herein as
Exhibit 13.

Competition

         The Bank generally faces strong  competition both in originating  loans
and in attracting  deposits.  Competition in originating  loans comes  primarily
from other savings  institutions,  commercial banks,  mortgage  bankers,  credit
unions,  insurance companies and government agencies who also make loans 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,  a  customer  oriented  staff,
advertising and a branch network in twenty Montana cities.

                                       35

<PAGE>



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


                                June 30, 1998
            County            Deposit Share(1)              City

Missoula....................        13.7%        .......................Missoula
Yellowstone.................        11.3         ............Billings and Laurel
Lewis & Clark...............         7.2         .........Helena and East Helena
Cascade.....................         4.6         ....................Great Falls
Gallatin....................         3.7         ........................Bozeman
Ravalli.....................         5.0         .......................Hamilton
Pondera  ...................         9.2         .........................Conrad
Fergus......................        16.8         ......................Lewistown
Custer......................         6.1         .....................Miles City
Big Horn ...................        11.2         .........................Hardin
Deer Lodge..................        21.3         .......................Anaconda
Flathead....................         0.7         ......................Kalispell
Hill........................         8.1         ..........................Havre
Phillips....................         4.4         ..........................Malta
Richland....................         6.6         .........................Sidney
Sheridan....................        15.4         .....................Plentywood
Silverbow...................         9.3         ..........................Butte
Valley......................         6.4         ........................Glasgow

-----------------
(1)  Based on data supplied by Sheshunoff  Information Services as of June 1998,
     Western  Security  held  approximately  a 6.4% market  share of deposits in
     Montana. Based on this market share, Western Security ranked 4th out of 183
     financial   institutions   located  in  Montana.  See  "Market  Areas"  for
     information regarding the Bank's deposit share in each county in its market
     area.

         Western  Security'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 Security  competes for loans  principally
through the interest rates and loan fees charged. Western Security'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, 1999
regarding  the  executive  officers of the Company and the Bank who are not also
directors.


         Name              Age              Position(s) Held
--------------------    --------- ----------------------------------------------
James A. Salisbury         48      Executive Vice President, Treasurer
                                        and Chief Financial Officer
                                        of the Company and the Bank
Charles E. Eiseman         49      Senior Vice President/Western Region
Marcia Johnson             40      Senior Vice President/Central Operations
John Cromwell              60      Senior Vice President/Human Resource Director

                                       36


<PAGE>


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

         James A. Salisbury.  Mr. Salisbury became Treasurer and Chief Financial
officer of the Company in September 1993. Mr.  Salisbury joined Western Security
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 Western Security  Investment
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.

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

        Marcia Johnson.  Ms. Johnson has been with Western  Security since 1981.
Prior to her appointment as Senior Vice President/Central  Operations Manager in
July 1999, she served as Vice President/Western  Region Loan Administrator.  Ms.
Johnson is a graduate of the University of Montana.

        John Cromwell.  Mr. Cromwell  joined Western  Security as Vice President
and Director of Human  Resources in December of 1997.  Mr.  Cromwell has over 25
years experience in bank human  resources.  He was elected Senior Vice President
in July 1999. He is responsible for compensation,  benefits, personnel, training
and the  formulation of Personnel  Policies and  Procedures.  Mr.  Cromwell is a
graduate  of  Rocky  Mountain  College,  Billings  and  is  a  certified  Senior
Professional in Human Resources by the Society for Human Resource Management.

Employees

         At June 30, 1999,  the Company had a total of 338  full-time  employees
and 42 part-time  employees.  None of the Bank employees are  represented by any
collective bargaining group.

                                       37

<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, 1999.
At June 30, 1999,  the Bank's  premises and  equipment had an aggregate net book
value of approximately $28.3 million.


                                    Year
                                  Acquired       Owned or      Lease Expiration
                 Location        or Leased        Leased             Date
--------------------------------------------------------------------------------

Main Office
  110 East Broadway                 1957          Owned              N/A
  Missoula, Montana
Full Service Branches
  100 East Broadway                 1957          Owned             N/A(1)
  Missoula, Montana
  2230 Brooks                       1966          Owned              N/A
  Missoula, Montana
  1610 S. Third West                1977          Leased       July 1, 1999(2)
  Missoula, Montana
  2601 Garfield                     1979          Owned              N/A
  Missoula, Montana
  321 Fuller                        1983          Owned              N/A
  Helena, Montana
  101 Lane Avenue                   1983          Owned              N/A
  East Helena, Montana
  601 N. Montana                    1983          Leased      December 31, 1999
  Helena, Montana
  3171 N. Montana                   1996          Owned              N/A
  Helena, Montana
  501 N. First Street               1980          Owned              N/A
  Hamilton, Montana
  2425 10th Avenue South            1988          Owned              N/A
  Great Falls, Montana
  25 Fifth Street North             1988          Owned              N/A
  Great Falls, Montana
  900 Third Street, NW              1988          Owned              N/A
  Great Falls, Montana
  702 South Main                    1988          Owned              N/A
  Conrad, Montana
  2929 Third Avenue North           1991          Owned              N/A
  Billings, Montana
  1101 Main Street                  1991          Owned              N/A
  Miles City, Montana
  524 North Cheyenne Avenue         1991          Owned              N/A
  Hardin, Montana
  219 North 26th Street             1967          Owned              N/A
  Billings, Montana
  2675 King Avenue West            1995(3)        Owned              N/A
  Billings, Montana
  2401 Grand Avenue                 1975          Owned              N/A
  Billings, Montana
  1546 Main Street                  1975          Owned              N/A
  Billings, Montana

                                       38
<PAGE>

                                    Year
                                  Acquired       Owned or      Lease Expiration
                 Location        or Leased        Leased             Date
--------------------------------------------------------------------------------

  2845 Old Hardin Road              1997          Owned              N/A
  Billings, Montana
  19 Montana Avenue                 1987          Owned              N/A
  Laurel, Montana
  405 Main Street                   1979          Owned              N/A
  Kalispell, Montana
  320 West Broadway                1980(4)        Leased       January 1, 2008
  Missoula, Montana
  2350 South Reserve                1995          Leased      December 30, 1999
  Missoula, Montana
  221 Second Street NW              1989          Owned              N/A
  Sidney, Montana
  324 Third Avenue                  1989          Owned              N/A
  Havre, Montana
  135 South Second Street East      1994          Owned              N/A
  Malta, Montana
  125 Fourth Street South           1989          Leased          Monthly(5)
  Glasgow, Montana
  102 North Main                    1989          Owned              N/A
  Plentywood, Montana
  1880 Harrison Avenue              1994          Owned              N/A
  Butte, Montana
  401 West Main                     1994          Owned              N/A
  Lewistown, Montana
  307 East Park Street              1994          Leased        March 1, 2008
  Anaconda, Montana
  2901 West Main                    1995          Leased        April 15, 2031
  Bozeman, Montana
Loan Administration
   1100 South Avenue                1993          Owned              N/A
   Missoula, Montana
  1105 West Sussex                  1998          Owned              N/A
  Missoula, Montana

----------------------
(1)  Includes lease for drive-up window which expires in May 2001.
(2)  Contract being negotiated - verbal agreement - 1 year extension
(3)  Branch opened 12/97
(4)  Property sold 12/97 - leased for 10 years.
(5)  Lease is on a month-to-month basis.

                                       39

<PAGE>



         The  Company  purchased  property  in Missoula to build a branch in the
expanding  Missoula  marketing area. The sale of the branch at 1941 West Main in
Bozeman, Montana was completed this year.

         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, 1999, totaled $4.7 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  Security  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 Stockholders

         No  matter  was  submitted  to a vote of  stock  holders,  through  the
solicitation of proxies or otherwise, during the quarter ended June 30, 1999.

                                     PART II

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

        The section "General Corporate and Stockholders'  Information" contained
in the Company's  Annual Report  (beginning at page 55 thereto) filed at Exhibit
13 hereto is incorporated in its entirety by reference under this Item 5.

Item 6. Selected Financial Data

        The section "Selected  Consolidated  Financial and Other Data" contained
in the Company's Annual Report (beginning at page 5 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 section "Management's Discussion and Analysis of Financial Condition
and Results of Operations"  contained in the Company's Annual Report  (beginning
at page 6 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  section  "Consolidated   Financial  Statements"  contained  in  the
Company's  Annual  Report  (beginning  at page 24  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.

                                       40

<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 Company's definitive Proxy Statement for the Annual
Meeting of  Stockholders  scheduled to be held on October 26,  1999,  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 Company's  definitive  Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on October 26, 1999, 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 Company's definitive
Proxy Statement for the Annual Meeting of  Stockholders  scheduled to be held on
October  26,  1999,   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 Company's  definitive Proxy Statement
for the Annual Meeting of Stockholders scheduled to be held on October 26, 1999,
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.


                                       41
<PAGE>



                                     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, 1999 is incorporated by reference in
this Form 10-K Annual Report as Exhibit 13.

                                                                       Pages in
                                                                        Annual
Annual Report Section                                                   Report

Independent Auditors' Report............................................  24

Consolidated Balance Sheets -- June 30, 1998 and 1999...................  25

Consolidated Statements of Income --
Each of the Years in the Three-Year Period Ended
June 30, 1999...........................................................  26

Consolidated Statements of Stockholders' Equity
and Comprehensive Income -- Each of the Years
in the Three-Year Period Ended June 30, 1999............................  27

Consolidated Statements of Cash Flows -- Each of the
 Years in the Three-Year Period Ended
June 30, 1999...........................................................  28

Notes to Consolidated Financial Statements..............................  29

Supplementary Financial Data............................................  55


(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.


                                       42

<PAGE>



(a)(3)  Exhibits:

                                                              Reference to Prior
                                                               Filing of Exhibit
 Regulation S-K                                                 Number Attached
 Exhibit Number           Document                                 Hereto
----------------   ----------------------------------------   ------------------
  2         Plan of acquisition, reorganization, arrangement,           None
            liquidation or succession
  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                None
            to vote of security holders
 23         Consents of experts and counsel                              23
 24         Power of Attorney                                       Not required
 27         Financial Data Schedule                                      27
 99         Additional exhibits                                         None
-------------------------

*    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  statement  (Registration No. 533-16428)
     pursuant to the Securities Act of 1933 of such  previously  filed documents
     are hereby incorporated herein by reference in accordance with "Item 601 of
     Regulation S-K."

(b)  Reports on Form 8-K:

         No reports on Form 8-K have been filed  during the  three-month  period
ended June 30, 1999.

                                       43
<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 24, 1999                  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 24, 1999

By:    /s/ Dr. Marvin Reynolds
       -----------------------------------------------
       Dr. Marvin Reynolds, Director
Date:  September 24, 1999

By:    /s/ Dr. Otto G. Klein, Jr.
       -----------------------------------------------
       Dr. Otto G. Klein, Jr., Director
Date:  September 24, 1999

By:    /s/ John E. Roemer
       -----------------------------------------------
       John E. Roemer, Vice Chairman
Date:  September 24, 1999

By:    /s/ Laurie C. DeMarois
       -----------------------------------------------
       Laurie C. DeMarois, Director
Date:  September 24, 1999

By:    /s/ James A. Salisbury
       -----------------------------------------------
       James A. Salisbury, Treasurer and Chief
       Financial Officer (Principal Financial and
       Accounting Officer)
Date:  September 24, 1999

By:    /s/ Robert F. Burke
       -----------------------------------------------
       Robert F. Burke, Director
Date:  September 24, 1999

By:    /s/ David W. Jorgenson
       -----------------------------------------------
       David W. Jorgenson, Director and Vice
       President
Date:  September 24, 1999

By:    /s/ William Leslie
       -----------------------------------------------
       William Leslie, Director
Date:  September 24, 1999