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, 1998

                                       OR

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

                         COMMISSION FILE NUMBER 0-22772

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

                Delaware                                        81-0487794
      (State or other jurisdiction                           (I.R.S. Employer
    of incorporation or organization)                     Identification Number)
                                                                   
  110 East Broadway, Missoula, Montana                          59802-4511
(Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code: (406) 721-5254

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

          Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days.  YES [X]    NO [ ].

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant,  computed by reference to the closing price of such stock on the
NASDAQ National Market System as of September 15, 1998, was $89.2 million.  (The
exclusion from such amount of the market value of the shares owned by any person
shall  not be deemed  an  admission  by the  registrant  that such  person is an
affiliate of the registrant.)

     As of  September  15,  1998,  there were issued and  outstanding  5,588,862
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, 1998.

          Part III of Form 10-K -- Portions of the Proxy Statement for
                      1998 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 which time the
Company  issued a total of  4,436,657  shares of its common  stock.  At June 30,
1998,  the Company had total assets of $1.0 billion,  deposits of $636.4 million
and stockholders' equity of $109.7 million (10.73% 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 two loan
servicing  offices.  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.  The Company  issued  1,150,175
shares of WesterFed  Common Stock,  options to acquire  94,696 common shares and
committed  to pay  $25,995,480  in cash  for all of the  outstanding  shares  of
Security Bancorp Common Stock, for total consideration  (based on the $18.49 per
share average closing price of WesterFed  Common Stock as reported on the NASDAQ
National  Market  System for the twenty  business  days from  January  16,  1997
through  February 12,  1997) of $48.7  million.  In  addition,  as of such date,
Security  Bank,  a  federally  chartered  stock  savings  bank and  wholly-owned
subsidiary  of Security  Bancorp,  merged with and into the Bank. At the time of
the  merger,  Security  Bancorp  had  assets on a  consolidated  basis of $372.6
million,  deposits of $286.5 million and stockholders'  equity of $30.8 million.
After having received regulatory  approval,  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"  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--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.

                                       2

<PAGE>

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

Market Areas

     The Bank conducts  operations through its main office in Missoula,  Montana
and its 33 branch offices and 2  administrative  offices in 18 diverse  counties
located throughout the State.

     Missoula.  In  Missoula  the Bank  operates  its main office and six branch
offices which accounted for a total of $144.9 million of Missoula  county's June
30, 1997 deposits,  or a 15.0% market share, the latest date such information is
available.   Missoula  county's  non-farm  basic  industries  are  trade  center
activity, wood and paper products, motor carriers,  Federal government,  and the
University of Montana.  Major employers include Missoula Community Hospital, St.
Patrick's Hospital,  Stone Container (a paper mill), Louisiana Pacific (particle
board manufacturing), the University of Montana and the U.S. Forest Service.

     Billings.  The Bank  operates  six  branches in the cities of Billings  and
Laurel,  located in  Yellowstone  county.  Total deposits held by those branches
represented  $173.6 million of the county's  total June 30, 1997 deposits,  or a
11.7% market share.  Leading non-farm basic industries in Yellowstone county are
trade center activity,  transportation,  oil and gas, and Federal government. In
Billings, expansion of trade center activities continues.

     Helena.  Four  Western  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 $47.0  million,  which accounts for 6.7% of the county's total
June 30,  1997  deposits.  Lewis  and  Clark  county's  basic  leading  non-farm
industries are State government,  Federal government, and trade center activity.
Helena continues to be a regional health and financial services center.

     Great Falls.  The Bank operates  three branches in the city of Great Falls,
located in Cascade  county.  These branches hold $39.2 million in deposits which
is 4.6% of the  county's  total June 30,  1997  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 $23.2 million for a 4.1% market share of the
county's June 30, 1997 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 $18.7 million of the county's June 30, 1997
deposits for a 6.0% 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 $7.5 million in deposits and a 8.5% market share of the county's
total June 30, 1997  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 $30.0 million in deposits for a 17.4% market share
of the county's  total June 30, 1997  deposits.  The local  economy is primarily
agricultural in nature.

                                       3

<PAGE>

     Miles  City.  In Custer  county,  the Bank has one branch  located in Miles
City,  which  has $13.5  million  in  deposits  for a 6.0%  market  share of the
county's June 30, 1997 total deposits.  Ranching is an important  segment of the
local economy.

     Hardin.  The Bank has one branch located in the city of Hardin, in Big Horn
county.  The branch has $8.4 million in deposits for a 11.5% market share of the
county's  June  30,  1997  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 22.4% market share
of the county's June 30, 1997 total deposits. Anaconda continues to benefit from
restoration activities related to environmental superfund sites.

     Kalispell.  The Bank has one branch  located in the city of  Kalispell,  in
Flathead county. The branch has $5.8 million in deposits for a 0.7% market share
of the county's June 30, 1997 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 $22.8 million in deposits for a 9.9% market share of the
county's  June  30,  1997  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 $3.9  million in deposits for a 4.7% market share of the
county's  June  30,  1997  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 $9.1  million in deposits for a 6.1% market share of the
county's  June  30,  1997  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 $17.0  million in deposits  for a 16.2% market
share of the  county's  June 30,  1997  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 $39.3 million in deposits for a 8.6% market share of the
county's June 30, 1997 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 $8.0  million in deposits for a 6.2% market share of the
county's  June  30,  1997  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 generally retains the
servicing  rights on these loans,  except for those loans sold  pursuant to loan
correspondent  agreements.  See "Originations,  Purchases and Sales of Loans and
Mortgage-Backed  Securities." At June 30, 1998,  Western Security serviced loans
with principal  balances of  approximately  $260.3 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,
                                       ---------------------------------------------------------------------------------------------
                                              1998               1997               1996               1995               1994
                                       -----------------  -----------------  -----------------  -----------------  -----------------
                                        Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent
                                       --------  -------  --------  -------  --------  -------  --------  -------  --------  -------
                                                                          (Dollars in Thousands)
<S>                                    <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>
Real Estate Loans:
  One- to four-family(1) ............  $318,663   47.56%  $348,577   53.82%  $280,853   74.69%  $247,331   76.94%  $230,700   81.85%
  Multi-family ......................    42,716    6.38     40,237    6.21     19,939    5.30     18,985    5.91     14,430    5.12
  Commercial ........................    64,150    9.57     50,049    7.73     18,318    4.87     12,399    3.86     11,300    4.01
  Agricultural ......................    11,066    1.65      7,970    1.23         --      --         --      --         --      --
  Construction ......................    17,523    2.62     19,858    3.07     12,977    3.45     10,742    3.34      7,866    2.79
                                       --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
      Total real estate loans .......   454,118   67.78    466,691   72.06    332,087   88.31    289,457   90.05    264,296   93.77

Other Loans:
  Commercial (non-real estate) ......    34,384    5.13     28,924    4.47         --      --         --      --         --      --
  Agricultural (non-real estate) ....    24,036    3.59     18,866    2.91         --      --         --      --         --      --
  Loans to depositors, secured by
    deposits ........................     3,194    0.48      4,101    0.63      2,337    0.62      2,138    0.67      2,034    0.72
  Indirect consumer loans ...........    64,287    9.59     40,708    6.29      2,827    0.75         --      --         --      --
  Other consumer loans--real estate
    secured .........................    54,619    8.15     58,551    9.04     30,814    8.19     24,757    7.69     10,150    3.60
  Other consumer loans ..............    35,352    5.28     29,772    4.60      8,003    2.13      5,112    1.59      5,387    1.91
                                       --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
      Total other loans .............   215,872   32.22    180,922   27.94     43,981   11.69     32,007    9.95     17,571    6.23
                                       --------  ------   --------  ------   --------  ------   --------  ------   --------  ------
      Total gross loans .............   669,990  100.00%   647,613  100.00%   376,068  100.00%   321,464  100.00%   281,867  100.00%
                                                 ======             ======             ======             ======             ======
Less:
  Unearned fees .....................    (1,453)            (1,813)            (1,625)            (1,344)            (1,301)
  Undisbursed loan funds ............    (5,178)            (9,489)            (4,245)            (4,988)            (3,696)
  Purchased discounts ...............    (1,159)            (1,383)                --                 --                 --
  Allowance for losses ..............    (4,907)            (4,651)            (2,005)            (2,011)            (2,030)
                                       --------           --------           --------           --------           --------
      Total loans receivable, net ...  $657,293           $630,277           $368,193           $313,121           $274,840
                                       ========           ========           ========           ========           ========
</TABLE>
----------
(1)  Includes $8.6 million,  $13.7 million,  $7.5 million, $7.1 million and $8.9
     million,  of FHA and VA loans at June 30, 1998,  1997, 1996, 1995, and 1994
     respectively.

                                       5

<PAGE>

     The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at June 30, 1998. 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>  
1999 ............  $ 76,186    7.89%  $  9,222    8.38%  $ 17,664    9.31%  $  1,371    8.59%  $ 12,733    9.43%  $117,176    8.32%
2000 ............    31,080    7.64      2,699    9.18      3,198    8.70      1,599    9.03      3,434    9.71     42,010    8.04
2001 ............    21,948    7.60      4,170    8.99      8,057    8.82      1,678    8.66        274    8.77     36,127    8.09
2002 and 2003 ...    30,360    7.63      5,267    9.05     16,781    8.96      2,570    8.61        493    8.99     55,471    8.22
2004 and 2008 ...    77,056    7.53      8,476    8.84     13,542    9.02      2,569    8.76        429    8.97    102,072    7.87
2009 and 2013 ...    34,807    7.62     11,441    9.27      2,631    9.30        723    8.48        160    8.54     49,762    8.10
2014 and
  Following .....    47,226    7.52      1,441    8.60      2,277    9.43        556    9.19         --      --     51,500    7.65
                   --------    ----   --------    ----   --------    ----   --------    ----   --------    ----   --------    ----
Total ...........  $318,663    7.64%  $ 42,716    8.93%  $ 64,150    9.07%  $ 11,066    8.71%  $ 17,523    9.45%  $454,118    8.06%
                   ========    ====   ========    ====   ========    ====   ========    ====   ========    ====   ========    ====
</TABLE>

<TABLE>
<CAPTION>
                                                   Non-Real Estate
                   ------------------------------------------------------------------------------   Total Real Estate and
                       Commercial         Agriculture         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>
1999 (1) ........  $ 18,916    9.07%  $ 17,205    9.40%  $ 40,268    9.37%   $ 76,389     9.30%      $193,565     8.71%
2000 ............     4,411    8.42      1,105    9.07     28,972    9.38      34,488     9.25         76,498     8.59
2001 ............     4,525    8.44      1,456    9.04     26,276    9.38      32,257     9.23         68,384     8.63
2002 and 2003 ...     5,359    8.71      1,577    9.24     37,466    9.42      44,402     9.33         99,873     8.72
2004 and 2008 ...       790    9.35      2,136    8.60     19,391    9.86      22,317     9.72        124,389     8.21
2009 and 2013 ...       383   10.28        248    8.59      5,036   10.34       5,667    10.26         55,429     8.32
2014 and
  Following .....        --      --        309    8.54         43    8.79         352     8.57         51,852     7.66
                   --------   -----   --------    ----   --------   -----    --------    -----       --------     ----
Total ...........  $ 34,384    8.90%  $ 24,036    9.26%  $157,452    9.47%   $215,872     9.36%      $669,990     8.48%
                   ========   =====   ========    ====   ========   =====    ========    =====       ========     ====
</TABLE>
----------
(1)  Includes demand loans and loans having no stated maturity.

                                       6

<PAGE>

     The  following  table sets forth the dollar amount of all loans at June 30,
1998 that have fixed interest rates, those that are contractually due after June
30, 1999 and have floating or adjustable  interest  rates that change after June
30, 1999.

                                                        Floating or
                                             Fixed       Adjustable
                                             Rates         Rates          Total
                                           --------     -----------     --------
                                                       (In Thousands)
Real Estate:
  One- to four-family ...................  $298,841       $19,822       $318,663
  Multi-family ..........................    35,552         7,164         42,716
  Commercial ............................    38,080        26,070         64,150
  Agricultural ..........................     3,175         7,891         11,066
  Construction ..........................    17,203           320         17,523
Other loans
  Agricultural ..........................    31,874         2,510         34,384
  Commercial ............................    22,359         1,677         24,036
  Consumer ..............................   156,605           847        157,452
                                           --------       -------       --------
      Total .............................  $603,689       $66,301       $669,990
                                           ========       =======       ========

     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, 1998, based
on  the  above,   the   Bank's   regulatory   loans-to-one-borrower   limit  was
approximately  $13.0  million.  On the same date,  the Bank's  largest amount of
loans to one  borrower  or  group of  related  borrowers  were to two  different
entities,  58  loans  totaling  approximately  $6.1  million  each,  secured  by
multi-family  residential  property and leased  equipment,  and these loans were
performing in accordance with their contractual terms at June 30, 1998.

     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. 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.  Business  division loan officers
have individual  approval limits based upon their experience and expertise.  All
loans (other than conforming jumbo residential loans) in excess of $500,000 must
be approved by the Board of Directors.  The loan committee presently consists of
certain branch managers,  certain employee loan originators,  and the members of
the loan policy committee. The loan policy committee presently consists of seven
senior  officers of the Bank. In addition,  the Bank employs one- to four-family
residential  underwriters  who  have  no  origination  duties  and  can  approve
residential loans up to Freddie Mac limits.  Loan policy members have individual
authority up to $250,000 within this specialty area.

                                       7

<PAGE>

     All of the Bank's lending is subject to its written underwriting  standards
and loan origination procedures.  Decisions on loan applications are made on the
basis of detailed  applications  and property  valuations  (consistent  with the
Bank's written appraisal policy) by qualified appraisers.  The loan applications
are designed primarily to determine the borrower's ability to repay and the more
significant items on the application are verified through use of credit reports,
financial statements, tax returns and/or verifications of employment.

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

One- to Four-Family Residential Real Estate Lending

     The cornerstone of the Bank's lending program has long been the origination
of long-term  permanent  loans  secured by mortgages on  owner-occupied  one- to
four-family  residences.  At June 30, 1998,  $318.7  million,  or 47.6%,  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 currently emphasizes the origination of 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
typically  retains 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 - Interest Rate Risk
Management" 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, 1998, the Bank had $75.6 million of one-to four-family ARM loans.

                                       8

<PAGE>

     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 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  $227,150  (the
Federal Home Loan Mortgage Corporation ("FHLMC") one-family maximum).

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

Multi-Family and Commercial Real Estate Lending

     Western  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,
1998,  $42.7  million,  or 6.4%  of the  Bank's  loan  portfolio,  consisted  of
multi-family  loans and $64.2  million,  or 9.6% 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.

                                       9

<PAGE>

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, 1998,  $11.1  million,  or 1.6% of the 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,  1998,  $34.4  million,  or 5.1% of the  Bank's  loan
portfolio,  consisted of commercial  non-real estate loans and $24.0 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,  1998,
approximately $17.5 million, or 2.6% 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.

                                       10

<PAGE>

Consumer Lending and Unused Lines of Credit

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

     The Bank currently  originates  substantially  all of its consumer loans in
its primary market areas.  At June 30, 1998,  the Bank's  consumer loans totaled
$157.5 million, or 23.5%, 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 addition,  Western  Security offers an in-house credit card program with
the credit card  receivables  owned by Western  Security.  The credit  cards are
provided as an additional  service to Western  Security  customers.  At June 30,
1998, Western Security had $2.5 million of credit card receivables  outstanding.
In addition,  on such date, Western Security had $9.0 million in unused lines of
credit available to cardholders under this program.

     The Bank also  offers an  open-end  equity  line of credit  secured by real
estate with an interest rate indexed to the prime rate of interest.  At June 30,
1998 the Bank had $7.9 million outstanding under this program with an additional
$4.6  million  in unused  lines of credit  available  to  borrowers  under  this
program.

     Western Security engaged the services of a manager/consultant to initiate a
Dealer Finance  Program,  which began May 1, 1996, to conduct  indirect  lending
activities for automobiles,  trucks, and recreational  vehicles and boats. As of
June 30, 1998,  receivables  for Dealer Finance  totaled $64.3 million.  Western
Security,  consistent with its consumer loan policies,  considers Dealer Finance
an additional  opportunity to expand the installment  portfolio  offering better
yields.  New accounts are identified for  cross-selling to extend  relationships
and expand customer base.

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

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

     Consumer loans may entail  greater risk than  residential  mortgage  loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly  depreciable assets such as automobiles.  In such cases, any repossessed
collateral  for defaulted  consumer  loans may not provide  adequate  sources of
repayment  for  the  outstanding  loan  balances  as a  result  of  the  greater
likelihood  of  damage,  loss  or  depreciation.   In  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, 1998,  $1.7 million,
or  approximately  1.1%  of the  consumer  loan  portfolio  was 90  days or more
delinquent),  there can be no assurance that  delinquencies will not increase in
the future.

                                       11

<PAGE>

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 the FHLMC.
During fiscal 1998, Western Security sold or securitized $29.0 million of loans,
with  servicing  retained,  to  the  FHLMC  and  other  institutional  investors
(exclusive of sales pursuant to loan correspondent agreements discussed below).

     Western 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 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 1998,  Western Security sold $67.5
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, 1998, Western Security has never 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.

     Typically,  when loans or participations are sold (other than in respect of
the  agreements  with  correspondent   institutions  described  above),  Western
Security  retains  responsibility  for  collecting  and remitting loan payments,
inspecting the properties,  making certain  insurance and tax payments on behalf
of  borrowers  and  otherwise  servicing  the  loans,  and  receives  a fee  for
performing  this  service.  Sales of whole loans,  participation  interests  and
mortgage-backed  securities  generate  income  (or  loss)  at the  time of sale,
produce future  servicing  income and provide funds for  additional  lending and
other purposes.  Western Security was servicing mortgage loans for others in the
amount of $260.3 million at June 30, 1998.

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

                                       12

<PAGE>

     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  participation  are generally  "without  recourse"
(i.e.,  without  remedy  against  the seller by the  purchaser  if the  borrower
defaulted on payment  under the loan) against  Western  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.


                                       13

<PAGE>

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

                                                        Year Ended June 30,
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
                                                          (In Thousands)
Beginning of Period:
--------------------
  Loans, net ....................................  $630,277  $368,193  $313,121
  Mortgage-backed securities, net ...............   149,169   104,947   143,825
                                                   --------  --------  --------
      Total loans and mortgage-backed securities
        receivable, net, at beginning of period .  $779,446  $473,140  $456,946
                                                   --------  --------  --------
Loan Originations:
------------------
  Real Estate:
    One- to four-family .........................  $149,959  $ 97,732  $111,355
    Multi-family ................................     5,107     4,101     1,215
    Commercial and agricultural .................    28,649     6,069     3,318
    Construction ................................    28,127    13,650    17,775
                                                   --------  --------  --------
      Total real estate loan originations .......   211,842   121,552   133,663
                                                   --------  --------  --------
  Other Loans:
    Commercial ..................................    44,245    11,684        --
    Agricultural ................................    19,420     9,024        --
    Consumer ....................................    91,202    84,569    31,884
                                                   --------  --------  --------
      Total other loan originations .............   154,867   105,277    31,884
                                                   --------  --------  --------
      Total loan originations ...................   366,709   226,829   165,547
                                                   --------  --------  --------
Purchases and Conversions:
--------------------------
  Real estate loans .............................     1,055     1,488     7,022
  Loans purchased in acquisition ................        --   218,281        --
  Mortgage-backed securities ....................     6,990     6,928    21,881
  Mortgage-backed securities purchased
    in acquisition ..............................        --    91,467        --
  Real estate loans converted to mortgage-backed
    securities ..................................        --        --        --
                                                   --------  --------  --------
      Total real estate loans and mortgage-backed
        securities purchased and converted ......     8,045   318,164    28,903
                                                   --------  --------  --------
      Total real estate loans and mortgage-backed
        securities originate, purchased and
        converted ...............................   374,754   544,993   194,450
                                                   --------  --------  --------
Principal Repayments and Sales:
-------------------------------
  Principal Repayments:
    Loans .......................................   244,519   127,723    87,041
    Mortgage-backed securities ..................    26,616    23,010    29,631
  Sales:
    Real estate loans ...........................    96,520    54,582    31,186
    Mortgage-backed securities ..................     3,193    31,932    30,723
  Real estate loans converted to mortgage-backed
    securities ..................................        --       --         --
                                                   --------  --------  --------
      Total principal repayments, sales and
        conversions .............................   370,848   237,247   178,581
                                                   --------  --------  --------
Net loan and mortgage-backed securities activity      3,906   307,746    15,869
                                                   --------  --------  --------
Changes in allowance for losses, undisbursed
  loan funds, and unearned fees and discounts:
    Real estate loans ...........................       291    (2,209)      730
    Mortgage-backed securities ..................        58       689       498
Change in unrealized loss on securities
  available for sale ............................        25        80      (903)
                                                   --------  --------  --------
End of Period:
--------------
  Loans, net ....................................   657,293   630,277   368,193
  Mortgage-backed securities ....................   126,433   149,169   104,947
                                                   --------  --------  --------
      Total loans and mortgage-backed securities
        receivable, net, at end of period .......  $783,726  $779,446  $473,140
                                                   ========  ========  ========

                                       14
<PAGE>

Non-Accruing Loans and Delinquencies

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

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

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

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

     The following  table sets forth the Bank's loan  delinquencies  by type, by
amount and by percentage of type at June 30, 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    7.64
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>

     The following  table sets forth the Bank's loan  delinquencies  by type, by
amount and by percentage of type at June 30, 1997.
<TABLE>
<CAPTION>
                                                        Loans Delinquent For:
                            ----------------------------------------------------------------------------
                                   30-59 Days                60-89 Days             90 Days and Over       Total  Delinquent Loans
                            ------------------------  ------------------------  ------------------------  -------------------------
                                             Percent                   Percent                   Percent                    Percent
                                             of Loan                   of Loan                   of Loan                    of Loan
                            Number  Amount  Category  Number  Amount  Category  Number  Amount  Category  Number   Amount  Category
                            ------  ------  --------  ------  ------  --------  ------  ------  --------  ------   ------  --------
                                                        (Dollars in Thousands)
<S>                           <C>   <C>       <C>       <C>   <C>       <C>       <C>   <C>       <C>       <C>    <C>       <C>
One- to four-family ......    136   $2,748    0.79%      55   $1,087    0.31%      62   $1,073    0.31%     253    $4,908    1.41%
Multi-family .............     --       --      --        1       88    0.22       --       --      --        1        88    0.22
Commercial ...............     12      396    0.50        2      155    0.31        2      102    0.13       16       653    0.83
Agricultural .............      4      329    1.74       --       --      --       --       --      --        4       329    1.74
Construction .............      2      126    0.63        2      137    0.69       --       --      --        4       263    1.32
Consumer .................    123    1,064    0.80       82    1,018    0.76      127    1,178    0.88      332     3,260    2.45
                              ---   ------              ---   ------              ---   ------              ---    ------
    Total ................    277   $4,663              142   $2,485              191   $2,353              610    $9,501
                              ===   ======              ===   ======              ===   ======              ===    ======
</TABLE>
                                       15
<PAGE>

     Classification  of Assets.  Federal  regulations  require that each savings
institution  classify  its own  assets  on a  regular  basis.  In  addition,  in
connection  with  examinations of savings  institutions,  OTS and FDIC examiners
have authority to identify  problem assets and, if appropriate,  require them to
be classified.  There are three classifications for problem assets: Substandard,
Doubtful and Loss.  Substandard  assets have one or more defined  weaknesses and
are characterized by the distinct  possibility that the savings association will
sustain some loss if the  deficiencies  are not corrected.  Doubtful assets have
the weaknesses of Substandard assets, with the additional  characteristics  that
the weaknesses  make collection or liquidation in full on the basis of currently
existing  facts,  conditions  and  values  questionable,  and  there  is a  high
possibility of loss. An asset classified Loss is considered uncollectible and of
such  little  value  that  continuance  as an  asset of the  institution  is not
warranted.  Assets classified as Substandard or Doubtful require the institution
to establish prudent general  allowances for loan losses. If an asset or portion
thereof is classified as Loss, the institution  must either  establish  specific
allowances  for loan  losses in the  amount of 100% of the  portion of the asset
classified  Loss,  or  charge  off  such  amount.  Western  Security  internally
classifies its assets on a regular basis. On the basis of management's review of
its  assets,  at June 30,  1998 on a net  basis,  the Bank had  classified  $5.1
million as Substandard, $362,000 as Doubtful and $16,000 as Loss.

     The  following  table sets forth as of June 30, 1998 the Bank's  classified
assets by type. No  multi-family  real estate loans,  commercial  real estate or
construction loans were classified at June 30, 1998.

                                                 (Dollars in Thousands)
                                       -----------------------------------------
                                       Substandard    Doubtful    Loss     Total
                                       -----------    --------    ----    ------
     One- to four-family ............     $2,833          --        --    $2,833
     Multi-family ...................        221          --        --       221
     Commercial Real Estate .........        327          --        --       327
     Construction ...................        247          --        --       247
     Commercial .....................        276          --        --       276
     Consumer .......................      1,198         362        16     1,576
                                          ------        ----      ----    ------
         Total ......................     $5,102        $362      $ 16    $5,480
                                          ======        ====      ====    ======

     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 fair value at the date of
foreclosure.  Any write-down resulting therefrom is charged to the allowance for
loan losses.  Upon  disposition,  all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized to the extent of net realizable value.

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

                                       16
<PAGE>

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

                                                     At June 30,
                                     -------------------------------------------
                                       1998     1997     1996     1995     1994
                                     -------  -------  -------  -------  -------
                                                (Dollars in Thousands)
Non-accruing loans:
Real Estate:
  One- to four-family .............  $1,967   $  842   $   21   $   --   $  119
  Multi-family ....................      89       --       --       --       --
  Commercial ......................      35       --       --      166      207
  Construction ....................     362       --       --       --       --
Commercial non-real estate ........      32      102       --       --       --
Consumer ..........................   1,504      573      383      153        9
                                     ------   ------   ------   ------   ------
    Total .........................   3,989    1,517      404      319      335
                                     ------   ------   ------   ------   ------
Accruing loans delinquent
  90 days or more:
Real Estate:
  One- to four-family .............     442      231      288      253      425
  Multi-family ....................      --       --       --       --       --
  Commercial ......................      --       --       --       --       --
  Construction ....................      --       --       --       --       --
Commercial non-real estate ........      10       --       --       --       --
Consumer ..........................     174      605       23        1        5
                                     ------   ------   ------   ------   ------
    Total .........................     626      836      311      254      430
                                     ------   ------   ------   ------   ------
Foreclosed assets:
Real Estate:
  One- to four-family .............     279       --       --       --       85
  Multi-family ....................      --       --       --       --       --
  Commercial ......................      --       --       --       --       --
  Land ............................      28       --       --       --       --
Consumer ..........................     114       82       --       --       --
                                     ------   ------   ------   ------   ------
    Total .........................     421       82       --       --       85
                                     ------   ------   ------   ------   ------
Total non-performing assets .......  $5,036   $2,435   $  715   $  573   $  850
                                     ======   ======   ======   ======   ======
Total as a percentage of
  total assets ....................    0.49%    0.25%    0.13%    0.10%    0.16%
                                     ======   ======   ======   ======   ======
Total allowance for loan losses to
  non-performing loans (exclusive
  of foreclosed) ..................  106.33%  197.66%  280.42%  350.35%  265.36%
                                     ======   ======   ======   ======   ======
Total allowance for loan losses to
  total non-performing assets .....   97.44%  191.01%  280.42%  350.35%  238.82%
                                     ======   ======   ======   ======   ======

     For the year ended June 30, 1998,  gross  interest  income which would have
been recorded had the  non-accruing  loans been current in accordance with their
original terms amounted to approximately $271,000.

     At June 30, 1998, Western  Security's  non-accruing loans were comprised of
43 one- to four-family loans totaling $2.0 million, 1 multi-family loan totaling
$89,000,  1 commercial real estate loan totaling $35,000,  3 construction  loans
totaling $362,000,  3 commercial  non-real estate loans totaling $32,000 and 118
consumer loans totaling $1.5 million.  Accruing loans delinquent 90 days or more
at June 30, 1998,  includes 6 one- to  four-family  loans totaling  $442,000,  1
commercial  non-real estate loan totaling $10,000 and 21 consumer loans totaling
$174,000 of which all were loans 100% secured by savings  accounts.  These loans
continue to accrue interest due to  management's  belief that the borrowers will
repay these loans.

     There were  $279,000 in  foreclosed  real estate loans at June 30, 1998 and
$28,000 in one foreclosed commercial land loan.

                                       17

<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, 1998,  there were no other loans identified by the Bank with respect
to the majority of which known information about the possible credit problems of
the  borrowers  or  the  cash  flows  of the  security  properties  have  caused
management to have some doubts as to the ability of the borrowers to comply with
present  loan  repayment  terms and which may result in the future  inclusion of
such items in the non-performing asset categories.

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

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

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

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

                                                 Year Ended June 30,
                                     -------------------------------------------
                                       1998     1997     1996     1995     1994
                                     -------  -------  -------  -------  -------
                                                (Dollars in Thousands)
Balance at beginning of period ....  $4,651   $2,005   $2,011   $2,030   $2,058
                                     ------   ------   ------   ------   ------
Charge-Offs:
  Real Estate:
    One- to four-family ...........      --      (53)      --       (2)     (15)
    Commercial ....................      --      (43)      --       --       --
  Other:
    Commercial ....................     (26)     (47)      --       --       --
    Consumer ......................    (611)    (110)     (11)     (26)     (22)
                                     ------   ------   ------   ------   ------
Total charge-offs .................    (637)    (253)     (11)     (28)     (37)
                                     ------   ------   ------   ------   ------
Recoveries:
  Other:
    Commercial ....................       3       --       --       --       --
    Consumer ......................      50       18        5        9        9
                                     ------   ------   ------   ------   ------
Total recoveries ..................      53       18        5        9        9
                                     ------   ------   ------   ------   ------
Net charge-offs ...................    (584)    (235)      (6)     (19)     (28)
Provisions charged to operations ..     840      400       --       --       --
Reserves acquired .................      --    2,481       --       --       --
                                     ------   ------   ------   ------   ------
Balance at end of period ..........  $4,907   $4,651   $2,005   $2,011   $2,030
                                     ======   ======   ======   ======   ======
Ratio of net charge-offs during
  the period to average loans
  outstanding during the period ...    0.09%    0.05%      --%    0.01%    0.01%
                                     ======   ======   ======   ======   ======
Ratio of net charge-offs during
  the period to average non-
  performing assets during the
  period ..........................   11.92%   13.12%    1.39%    2.91%    3.27%
                                     ======   ======   ======   ======   ======
Ratio of allowance for loan
  losses to loans receivable,
  net .............................    0.74%    0.73%    0.54%    0.64%    0.73%
                                     ======   ======   ======   ======   ======

                                       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,
                                   -------------------------------------------------------------------------------------------------
                                          1998                1997                1996                1995                1994
                                   -----------------   -----------------   -----------------   -----------------   -----------------
                                             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 ...........  $  927     47.56%   $2,244     53.82%   $  539     74.69%   $  175     76.94%   $  175     81.85%
  Multi-family ..................     300      6.38       259      6.21       136      5.30        12      5.91        10      5.12
  Commercial ....................     550      9.57       479      7.73       152      4.87        75      3.86        65      4.01
  Agricultural ..................     150      1.65       471      1.23        --        --        --        --        --        --
  Construction ..................     250      2.62       128      3.07       164      3.45         5      3.34        --      2.79
Other loans:
  Commercial ....................     450      5.13        --      4.47        --        --        --        --        --        --
  Agricultural ..................     400      3.59        --      2.91        --        --        --        --        --        --
  Consumer ......................   1,480     23.50       918     20.56       126     11.69       132      9.95       150      6.23
Unallocated .....................     400        --       152        --       888        --     1,612        --     1,630        --
                                   ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
    Total .......................  $4,907    100.00%   $4,651    100.00%   $2,005    100.00%   $2,011    100.00%   $2,030    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, 1998, 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, 1998, the Bank owned $2.4 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, 1998, the Bank's  liquidity ratio (liquid
assets as a percentage of net withdrawable  savings and current  borrowings) was
18.8% 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, 1998 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,
                                                              ---------------------------------------------------------
                                                                     1998                1997                1996
                                                              -----------------    ----------------    ----------------
                                                                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 ...............................  $  2,994     2.39%   $18,804    23.76%   $ 4,010     8.91%
  U.S. Government obligations ..............................       100     0.08        297     0.38         --       --
  Corporate obligations ....................................    11,473     9.15      5,980     7.55      5,333    11.86
  Other investments ........................................     2,280     1.82      2,385     3.01          4     0.01
                                                              --------   ------    -------   ------    -------   ------
    Total investment securities held-to-maturity ...........    16,847    13.44     27,466    34.70      9,347    20.78
                                                              --------   ------    -------   ------    -------   ------
Investments available-for-sale:
  Federal agency obligations ...............................    89,781    71.62     45,969    58.08     32,630    72.54
  Corporate obligations ....................................    18,720    14.93      5,675     7.17      2,980     6.62
  Other ....................................................        10     0.01         39     0.05         27     0.06
                                                              --------   ------    -------   ------    -------   ------
    Total investments available for sale ...................   108,511    86.56     51,683    65.30     35,637    79.22
                                                              --------   ------    -------   ------    -------   ------
    Total investment securities ............................  $125,358   100.00%   $79,149   100.00%   $44,984   100.00%
                                                              ========   ======    =======   ======    =======   ======
Average remaining life or term to repricing of securities ..   33 mos.             41 mos.             27 mos.
</TABLE>

     For information  regarding the estimated  market value of the securities at
June 30, 1998, see Note 4 of the Notes to Consolidated  Financial  Statements in
the Annual Report incorporated by reference herein as Exhibit 13.

                                       20

<PAGE>

     The  following  table  sets forth the  composition  and  maturities  of the
investment securities portfolio as of June 30, 1998.

<TABLE>
<CAPTION>
                                                                                    At June 30, 1998
                                                     -----------------------------------------------------------------------------
                                                      Less Than     1 to 5       5 to 10      Over 10
                                                       1 Year        Years        Years        Years          Total Securities
                                                     ----------   ----------   ----------   ----------   -------------------------
                                                     Book Value   Book Value   Book Value   Book Value   Book Value   Market Value
                                                     ----------   ----------   ----------   ----------   ----------   ------------
                                                                                 (Dollars in Thousands)
<S>                                                    <C>          <C>          <C>          <C>         <C>           <C>     
Investments held-to-maturity:
  U.S. government securities ......................    $   100      $    --      $    --      $   --      $    100      $    100
  Federal agency obligations ......................         --           --        2,994          --         2,994         3,021
  Corporate obligations ...........................         --           --       11,473          --        11,473        11,560
  Other investments ...............................         72           --          236       1,972         2,280         2,293
                                                       -------      -------      -------      ------      --------      --------
    Total investment securities held-to-maturity ..        172           --       14,703       1,972        16,847        16,974
                                                       -------      -------      -------      ------      --------      --------
Investments available-for-sale:
  Federal agency obligations ......................     28,313       60,352           --       1,128        89,793        89,781
  Corporate obligations ...........................     10,974        7,683           --          --        18,657        18,720
  Other investments ...............................          3           --           --          --             3            10
                                                       -------      -------      -------      ------      --------      --------
    Total investments available for sale ..........     39,290       68,035           --       1,128       108,453       108,511
                                                       -------      -------      -------      ------      --------      --------
    Total securities ..............................    $39,462      $68,035      $14,703      $3,100      $125,300      $125,485
                                                       =======      =======      =======      ======      ========      ========
Average weighted yield ............................       5.51%        6.38%        6.75%       7.54%         6.14%
                                                          ====         ====         ====        ====          ====
</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, 1998, the book value of
the CMOs was $48.6  million.  The book value of all the  Bank's  mortgage-backed
securities at June 30, 1998 was $126.4 million. See "Management's Discussion and
Analysis of Financial  Condition  and Results of Operations - Interest Rate Risk
Management" in the Annual Report incorporated by reference herein as Exhibit 13.
At June 30, 1998,  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,  1998.  The  Bank  also  holds  $3.1  million  of
mortgage-backed securities issued by private institutions.

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

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

                                                            At June 30,
                                                  ------------------------------
                                                    1998       1997       1996
                                                  --------   --------   --------
                                                          (In Thousands)
Issuers:
  Federal Home Loan Mortgage Corporation .......  $ 51,776   $ 66,070   $ 77,105
  Federal National Mortgage Association ........     7,752     12,344     16,674
  Government National Mortgage Association .....    15,218     18,850      2,067
  Collateralized Mortgage Obligations--federal
    agency .....................................    48,578     45,815      9,101
  Other ........................................     3,109      6,090         --
                                                  --------   --------   --------
    Total ......................................  $126,433   $149,169   $104,947
                                                  ========   ========   ========

                                       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, 1998.

<TABLE>
<CAPTION>
                                                                                               Market     June 30,
                                               1 - 3    3 - 5   5 - 10   10 - 15   Over 15      Value       1998
                                               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 .....  $ --   $2,342  $34,980   $    --   $ 2,186      $ --      $ 39,508
  Federal National Mortgage Corporation ......    --       --       --        --        --        --            --
  Government National Mortgage Association ...    --       --       37    14,776        --        --        14,813
  Collateralized Mortgage Obligations--
    Federal Agency ...........................    --       --      398     7,906    36,601        --        44,905
  Other ......................................    --       --       --     3,072        --        --         3,072
                                                ----   ------  -------   -------   -------      ----      --------
    Subtotal .................................    --    2,342   35,415    25,754    38,787        --       102,298
                                                ----   ------  -------   -------   -------      ----      --------
Available for sale:
  Federal Home Loan Mortgage Corporation .....    --       --    1,992        --    10,273         3        12,268
  Federal National Mortgage Corporation ......    --       --       --        --     7,742       (21)        7,721
  Government National Mortgage Association ...    --        1       --        --       437         4           442
  Collateralized Mortgage Obligations--
    Federal Agency ...........................    --       --       --        --     3,711        (7)        3,704
  Other ......................................    --       --       --        --        --        --            --
                                                ----   ------  -------   -------   -------      ----      --------
    Subtotal .................................    --        1    1,992        --    22,163       (21)       24,135
                                                ----   ------  -------   -------   -------      ----      --------
      Total ..................................  $ --   $2,343  $37,407   $25,754   $60,950      $(21)     $126,433
                                                ====   ======  =======   =======   =======      ====      ========
</TABLE>

     The following schedule sets forth the contractual maturity and repricing of
the Bank's  mortgage-backed  securities portfolio,  net, at June 30, 1998. 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      1998
                                          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 .....................  $20,034    $ --    $2,342   $6,431   $28,618   $    --    $ --      $ --     $ 57,425
Mortgage-Backed Securities
  Available-for-Sale ...................   20,444      --         1       --        --        --      --       (14)      20,431
Collateralized Mortgage Obligations
  Held-to-Maturity .....................    9,792      --        --    1,415        59    33,607      --        --       44,873
Collateralized Mortgage Obligations
  Available-for-Sale ...................    3,711      --        --       --        --        --      --        (7)       3,704
                                          -------    ----    ------   ------   -------   -------    ----      ----     --------
      Total ............................  $53,981    $ --    $2,343   $7,846   $28,677   $33,607    $ --      $(21)    $126,433
                                          =======    ====    ======   ======   =======   =======    ====      ====     ========
</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, 1998 the
Bank had $6.7 million in cash surrender value of life insurance policies.

                                       23

<PAGE>

Sources of Funds

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

     Deposits.  The Bank attracts  both  short-term  and  long-term  deposits by
offering a wide  assortment  of  accounts  and rates.  The Bank  offers  regular
savings  accounts,  NOW accounts,  non-interest  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,
                                                  ------------------------------------------------------------
                                                         1998                 1997                 1996
                                                  ------------------   ------------------   ------------------
                                                             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%) ...  $ 94,557    14.86%   $102,923    16.31%   $ 64,889    18.53%
Money market accounts (2.96 - 4.98%) ...........    55,464     8.71      49,062     7.78      24,018     6.86
NOW accounts (1.50%) ...........................    74,673    11.73      76,582    12.14      49,848    14.23
Non-Interest bearing demand ....................    30,524     4.80      26,050     4.13          --       --
                                                  --------   ------    --------   ------    --------   ------
Total non-certificates .........................   255,218    40.10     254,617    40.36     138,755    39.62
                                                  --------   ------    --------   ------    --------   ------
Certificates:
-------------
0.00 - 3.99% ...................................  $  1,894     0.30%   $  1,276     0.20%   $  1,731     0.49%
4.00 - 5.99% ...................................   269,590    42.36     288,440    45.72     159,275    45.48
6.00 - 7.99% ...................................   109,731    17.24      86,341    13.69      50,447    14.41
8.00 - and over ................................         8       --         195     0.03           4       --
                                                  --------   ------    --------   ------    --------   ------
Total certificates .............................   381,223    59.90     376,252    59.64     211,457    60.38
                                                  --------   ------    --------   ------    --------   ------
Total deposits .................................  $636,441   100.00%   $630,869   100.00%   $350,212   100.00%
                                                  ========   ======    ========   ======    ========   ======
</TABLE>

     The following  table sets forth the rate and maturity  information  for the
Bank's certificates of deposit as of June 30, 1998.

<TABLE>
<CAPTION>
                                      0.00-     4.00-      6.00-    8.00% or               Percent
                                      3.99%     5.99%      7.99%     Greater     Total    of Total
                                     ------   --------   --------   --------   --------   --------
                                                        (Dollars In Thousands)
Certificate accounts maturing
in quarter ending:
<S>                                  <C>      <C>        <C>          <C>      <C>          <C>   
  September 30, 1998 ..............  $1,268   $ 84,590   $  8,656     $  8     $ 94,522     24.80%
  December 31, 1998 ...............     413     65,626     14,524       --       80,563     21.13
  March 31, 1999 ..................      76     42,534     17,866       --       60,476     15.86
  June 30, 1999 ...................     115     36,467      9,996       --       46,578     12.22
  September 30, 1999 ..............      --      7,108      8,872       --       15,980      4.19
  December 31, 1999 ...............      22      7,639     11,217       --       18,878      4.95
  March 31, 2000 ..................      --      7,065     10,802       --       17,867      4.69
  June 30, 2000 ...................      --      7,375      2,665       --       10,040      2.63
  September 30, 2000 ..............      --        776      4,894       --        5,670      1.49
  December 31, 2000 ...............      --      1,211      5,601       --        6,812      1.79
  March 31, 2001 ..................      --      1,584      6,432       --        8,016      2.10
  June 30, 2001 ...................      --      3,807        316       --        4,123      1.08
  Thereafter ......................      --      3,808      7,890       --       11,698      3.07
                                     ------   --------   --------     ----     --------    ------
    Total .........................  $1,894   $269,590   $109,731     $  8     $381,223    100.00%
                                     ======   ========   ========     ====     ========    ======
    Percent of total ..............      --         --         --       --           --        --
</TABLE>

                                       25

<PAGE>

     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, 1998.

<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 .....   $75,312   $70,987   $ 94,511   $88,426   $329,236
Certificates of deposit of $100,000 or more ....     9,652     7,523     10,462    10,652     38,289
Public funds(1) ................................     9,690     2,008      1,993         7     13,698
                                                   -------   -------   --------   -------   --------
Total certificates of deposit ..................   $94,654   $80,518   $106,966   $99,085   $381,223
                                                   =======   =======   ========   =======   ========
</TABLE>
----------
(1)  Deposits from governmental and other public entities.


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

     Borrowings.  Western  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 11 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,
                                                  ------------------------------
                                                    1998       1997       1996
                                                  --------   --------   --------
                                                          (In Thousands)
Maximum Balance:
  FHLB Advances ................................  $248,133   $190,338   $145,388
  Collateralized Mortgage Obligations ..........       775      1,117      1,584
  Other Borrowings and Repurchase Agreements ...    26,099      8,101         --

Average Balance:
  FHLB Advances ................................   244,339    145,446    134,211
  Collateralized Mortgage Obligations ..........       625        967      1,380
  Other Borrowings and Repurchase Agreements ...    12,022      2,731         --

                                       26

<PAGE>

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

                                                            June 30,
                                                 ------------------------------
                                                   1998       1997       1996
                                                 --------   --------   --------
                                                     (Dollars in Thousands)
FHLB Advances .................................  $248,133   $190,338   $124,663
Collateralized Mortgage Obligations ...........       511        797      1,175
Other Borrowings and Repurchase Agreements ....     6,542      8,101         --
                                                 --------   --------   --------
    Total Borrowings ..........................  $255,186   $199,236   $125,838
                                                 ========   ========   ========
Weighted Average Interest Rate of FHLB Advances      5.83%      6.14%      6.26%
                                                 ========   ========   ========
Weighted Average Interest Rate of
  Collateralized Mortgage Obligations .........     11.48%     11.37%     11.27%
                                                 ========   ========   ========
Weighted Average Interest Rate of Other
  Borrowings and Repurchase Agreements ........      5.05%      5.30%        --%
                                                 ========   ========   ========

Interest Rate Caps and Interest Rate Swaps

     As explained under Interest Rate Risk Management in Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 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, 1998 the amount of the  unamortized
premiums paid related to the interest rate cap transactions was $135,000.

Subsidiary Activities

     General.  The  Company  has no  direct  subsidiaries  other  than the Bank.
Western  Security  has  four  wholly  owned  service  corporation  subsidiaries:
WesterFed Insurance Services,  Inc.  ("WesterFed  Insurance"),  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, 1998,  Western  Security's  investment in
the  four  wholly  owned  service   corporations   totaled  $2.8   million,   or
approximately 0.27% 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:

     Westerfed  Insurance  Services,   Inc.  Westerfed   Insurance,   which  was
incorporated in 1981, is an insurance  agency  currently  engaged in the sale of
tax deferred annuities and depositor group health insurance  programs,  although
it may offer a wider range of insurance services in the future.  This subsidiary
was acquired by Western  Security in  connection  with its  acquisition  of Home
Federal in 1983.  Western  Security's  investment  in  WesterFed  Insurance  was
$156,000 at June 30, 1998.

                                       27

<PAGE>

     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 $404,000 at June 30, 1998.

     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  Billings Office and a real estate rental business.  At June
30, 1998, Western Security's  investment in Western Security  Investment totaled
$572,000.

     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 $1.5 million at June
30,  1998.  Western  Security's  investment  in Monte  Mac as of June 30,  1998,
included   approximately  $1.0  million  in  FHLMC  certificates  in  excess  of
collateralized  mortgage  obligations.   The  payments  received  on  the  FHLMC
certificates  are used to pay down the CMOs.  If the CMOs are paid as originally
projected, the remaining investment in Monte Mac is expected to be minimal.

Regulation

     General.  The Bank is a federally chartered Bank, the deposits of which are
federally  insured and backed by the full faith and credit of the United  States
Government.  Accordingly,  the Bank is subject to broad federal  regulation  and
oversight  extending to all of its operations.  The Bank is a member of the FHLB
of  Seattle  and is  subject  to  certain  limited  regulation  by the  Board of
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  December  1997 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,  1998,  was
approximately  $200,000.   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.

                                       28

<PAGE>

     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, 1998,
the Bank's lending limit under this restriction was approximately $13.0 million.
The Bank is in compliance with the loans-to-one-borrower limitation.

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

     Insurance of Accounts and  Regulation by the FDIC. The deposits of the Bank
are presently insured by the SAIF.  Deposits are insured up to applicable limits
by the FDIC and such  insurance  is backed by the full  faith and  credit of the
United  States  Government.  As  insurer,  the FDIC  imposes  deposit  insurance
premiums and is authorized to conduct  examinations of and to require  reporting
by FDIC-insured institutions.  It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order 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 3 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.

                                       29

<PAGE>

     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, 1998, the Bank had unamortized  purchased mortgage
servicing  rights of $1.0  million  and  goodwill  and core  deposit  intangible
relating to the purchase of Security Bancorp of $20.3 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, 1998, the Bank was required to deduct  $561,000 of its
investment in Service Corp. of Montana,  Inc. and $572,000 of its  investment in
Western Security Investment under these rules.

     At June 30, 1998, the Bank had tangible capital of $82.1 million,  or 8.27%
of adjusted total assets, which is approximately $67.2 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, 1998, the Bank
had no such intangible assets.

     At June 30, 1998,  the Bank had core  capital  equal to $82.1  million,  or
8.27% of  adjusted  total  assets,  which is $42.4  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, 1998,  the Bank had no capital  instruments  that  qualify as  supplementary
capital and had $4.9 million of general loss reserves, which was less than 1.25%
of  risk-weighted  assets,  and were included in the $87.0 million of risk-based
capital at June 30, 1998.

     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, 1998.

     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.

                                       30

<PAGE>

     On June 30, 1998,  the Bank had total  risk-based  capital of $87.0 million
(including  $82.1  million  in core  capital  and  $4.9  million  in  qualifying
supplementary  capital) and  risk-weighted  assets of $629.9 million  (including
$70,000 in converted  off-balance sheet assets);  or total risk-based capital of
13.8% of risk-weighted  assets.  This amount was $36.6 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.

     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.

                                       31

<PAGE>

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

     The OTS has  proposed  regulations  that would  revise the current  capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  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.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

     Liquidity.  All savings  associations,  including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings  payable  in one  year or  less.  For a  discussion  of what the Bank
includes  in  liquid  assets,  see  "Management's  Discussion  and  Analysis  of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources."  This  liquid  asset  ratio  requirement  may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 4%.
The Bank's regulatory ratio was 18.8% at June 30, 1998.

     Accounting.  An OTS policy statement applicable to all savings associations
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
association  must be in  compliance  with  approved  and  documented  investment
policies and  strategies,  and must be accounted  for in  accordance  with GAAP.
Under the policy  statement,  management must support its  classification of and
accounting for loans and securities (i.e., whether held for investment,  sale or
trading) with  appropriate  documentation.  The Bank is in compliance with these
amended rules. OTS accounting regulations, which may be made more stringent than
GAAP, require that transactions be reported in a manner that best reflects their
underlying  economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.

     Qualified Thrift Lender Test. All savings associations, including the Bank,
are required to meet a qualified  thrift  lender  ("QTL") test to avoid  certain
restrictions on their  operations.  This test requires a savings  association to
have at  least  65% of its  portfolio  assets  (as  defined  by  regulation)  in
qualified  thrift  investments  on a  monthly  average  for nine out of every 12
months on a rolling  basis.  As an  alternative,  the  savings  association  may
maintain 60% of its assets in those assets  specified in Section  7701(a)(19) of
the Internal Revenue Code.  Under either test, such assets primarily  consist of
residential  housing related loans and  investments.  At June 30, 1998, the Bank
met the test and has always met the test since its effectiveness.

     Any savings  association  that fails to meet the QTL test must convert to a
national bank charter,  unless it 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."

                                       32

<PAGE>

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

     The federal banking agencies,  including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's  compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years,  the Bank may be required to devote  additional  funds for investment
and lending in its local community.  The Bank was examined for CRA compliance in
October 1997 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.

     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."

                                       33

<PAGE>

     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, 1998,  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 FEDERAL HOME LOAN BANK OF SEATTLE,  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,  1998,  the Bank had $13.6  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 7.17% and were 7.74% and 8.00% for calendar
years 1996 and 1997 respectively.

     Under  federal  law the FEDERAL  HOME LOAN BANK OF SEATTLE 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.

                                       34

<PAGE>

     For the  fiscal  year ended June 30,  1998,  dividends  paid by the FHLB of
Seattle to the Bank totaled $975,000, which constitutes a $264,000 increase over
the amount of dividends  received in fiscal year 1997. 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, 1998 the Bank's bad debt reserve for tax purposes  was  approximately  $13.8
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.

                                       35

<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 1998.

     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.

                                       36

<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, 1997
   County                             Deposit Share(1)             City
-------------                         ----------------    ----------------------
Missoula ...........................       15.0%          Missoula
Yellowstone ........................       11.7           Billings and Laurel
Lewis & Clark ......................        6.7           Helena and East Helena
Cascade ............................        4.6           Great Falls
Gallatin ...........................        4.1           Bozeman
Ravalli ............................        6.0           Hamilton
Pondera ............................        8.5           Conrad
Fergus .............................       17.4           Lewistown
Custer .............................        6.0           Miles City
Big Horn ...........................       11.5           Hardin
Deer Lodge .........................       22.4           Anaconda
Flathead ...........................        0.7           Kalispell
Hill ...............................        9.9           Havre
Phillips ...........................        4.7           Malta
Richland ...........................        6.1           Sidney
Sheridan ...........................       16.2           Plentywood
Silverbow ..........................        8.6           Butte
Valley .............................        6.2           Glasgow
----------
(1)  Based on data supplied by Ferguson & Company Branch Source as of June 1997,
     Western  Security  held  approximately  a 6.6% market  share of deposits in
     Montana. Based on this market share, Western Security ranked 4th out of 196
     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,  1998
regarding  the  executive  officers of the Company and the Bank who are not also
directors.

<TABLE>
<CAPTION>
         Name         Age                                 Position(s) Held
-------------------   ---   ---------------------------------------------------------------------------
<S>                    <C>  <C> 
Douglas G. Bardwell    56   Executive Vice President and Secretary of the Company and
                              Executive Vice President and Chief Operating Officer of the Bank
James A. Salisbury     47   Treasurer and Chief Financial Officer of the Company and the Bank
Jack E. Lovell         61   Senior Vice President and Credit Administrator of the Bank
Dale W. Brevik         46   Senior Vice President and Marketing Director/Investor Relations of the Bank
Charles E. Eiseman     48   Senior Vice President/Retail Lending Manager of the Bank
</TABLE>

                                       37

<PAGE>

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

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

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

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

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

     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.

Employees

     At June 30, 1998, the Company had a total of 336 full-time employees and 72
part-time  employees.  None  of  the  Bank  employees  are  represented  by  any
collective bargaining group.

                                       38

<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, 1998. At
June 30, 1998, the Bank's premises and equipment had an aggregate net book value
of approximately $22.7 million.

<TABLE>
<CAPTION>
                                     Year     Owned or   Lease Expiration      Net Book
Location                           Acquired    Leased          Date              Value
--------------------------------   --------   --------   ----------------   --------------
                                                                            (In Thousands)
<S>                                  <C>       <C>              <C>            <C>
Main Office
  110 East Broadway ............     1957      Owned            N/A            $   218
  Missoula, Montana
Full Service Branches
  100 East Broadway ............     1957      Owned            N/A(1)             418
  Missoula, Montana
  2230 Brooks ..................     1966      Owned            N/A                362
  Missoula, Montana
  1610 S. Third West ...........     1977      Leased       July 1, 1999            --
  Missoula, Montana
  2601 Garfield ................     1979      Owned            N/A              1,149
  Missoula, Montana
  321 Fuller ...................     1983      Owned            N/A                143
  Helena, Montana
  101 Lane Avenue ..............     1983      Owned            N/A                 66
  East Helena, Montana
  601 N. Montana ...............     1983      Leased     December 31, 1999          7
  Helena, Montana
  3171 N. Montana ..............     1996      Owned            N/A                650
  Helena, Montana
  501 N. First Street ..........     1980      Owned            N/A              1,645
  Hamilton, Montana
  2425 10th Avenue South .......     1988      Owned            N/A                151
  Great Falls, Montana
  25 Fifth Street North ........     1988      Owned            N/A                886
  Great Falls, Montana
  900 Third Street, NW .........     1988      Owned            N/A                438
  Great Falls, Montana
  702 South Main ...............     1988      Owned            N/A                186
  Conrad, Montana
  2929 Third Avenue North ......     1991      Owned            N/A              1,624
  Billings, Montana
  1101 Main Street .............     1991      Owned            N/A                 62
  Miles City, Montana
  524 North Cheyenne Avenue ....     1991      Owned            N/A                 93
  Hardin, Montana
  219 North 26th Street ........     1967      Owned            N/A                793
  Billings, Montana
  2675 King Avenue West ........     1995(3)   Owned            N/A              2,007
  Billings, Montana
  1941 West Main ...............     1983      Owned            N/A                337
</TABLE>

                                       39

<PAGE>

<TABLE>
<CAPTION>
                                     Year     Owned or   Lease Expiration      Net Book
Location                           Acquired    Leased          Date              Value
--------------------------------   --------   --------   ----------------   --------------
                                                                            (In Thousands)
<S>                                  <C>       <C>              <C>            <C>
  Bozeman, Montana
  2401 Grand Avenue ............     1975      Owned            N/A              2,139
  Billings, Montana
  1546 Main Street .............     1975      Owned            N/A                498
  Billings, Montana
  2845 Old Hardin Road .........     1997      Owned            N/A                972
  Billings, Montana
  19 Montana Avenue ............     1987      Owned            N/A                487
  Laurel, Montana
  405 Main Street ..............     1979      Owned            N/A                377
  Kalispell, Montana
  320 West Broadway ............     1980(4)   Leased      January 1, 2008          49
  Missoula, Montana
  2350 South Reserve ...........     1995      Leased     December 30, 1999        123
  Missoula, Montana
  221 Second Street NW .........     1989      Owned            N/A                376
  Sidney, Montana
  324 Third Avenue .............     1989      Owned            N/A              1,346
  Havre, Montana
  135 South Second Street East .     1994      Owned            N/A                127
  Malta, Montana
  125 Fourth Street South ......     1989      Leased         Monthly(2)            --
  Glasgow, Montana
  102 North Main ...............     1989      Owned            N/A                340
  Plentywood, Montana
  1880 Harrison Avenue .........     1994      Owned            N/A              1,140
  Butte, Montana
  401 West Main ................     1994      Owned            N/A                699
  Lewistown, Montana
  307 East Park Street .........     1994      Leased       March 1, 1999           13
  Anaconda, Montana
  2901 West Main ...............     1995      Leased       April 15, 2031         853
  Bozeman, Montana
Loan Administration
  1100 South Avenue ............     1993      Owned            N/A              1,097
  Missoula, Montana
  1105 West Sussex .............                                                   330
  Missoula, Montana
Construction in Progress .......                                                    --
Land for future branch expansion                                                   546
                                                                               ------- 
    Total                                                                      $22,747
                                                                               =======
</TABLE>
----------
(1)  Includes lease for drive-up window which expires in May 2001.
(2)  Lease is on a month-to-month basis.
(3)  Branch opened 12/97
(4)  Property sold 12/97 - leased for 10 years.


                                       40

<PAGE>

     The Company  replaced the branch at 300 South 24th Street,  Billings,  with
the Billings  King Avenue  branch.  Properties  located at 424 West Main Street,
Lewistown and at 320 West Broadway,  Missoula,  were sold. A lease was signed to
use a portion of the property at 320 West Broadway in Missoula for 10 years.

     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, 1998, totaled $6.1 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 Security Holders

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation of proxies or otherwise, during the quarter ended June 30, 1998.


                                     PART II

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

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

Item 6.  Selected Financial Data

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

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

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

Item 8.  Financial Statements and Supplementary Data

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

                                       41

<PAGE>

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.


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Information  concerning  Directors of the Registrant is incorporated herein
by reference from the  Corporation's  definitive  Proxy Statement for the Annual
Meeting of  Stockholders  scheduled to be held on October 27,  1998,  except for
information  contained  under  the  heading  "Compensation  Committee  Report on
Executive  Compensation" and "Stockholder  Return Performance  Presentation",  a
copy of which  will be filed  not  later  than 120 days  after  the close of the
fiscal year. See "Business - Executive Officers of the Company" in Part I of the
Form 10-K for information regarding executive officers.

Item 11. Executive Compensation

     Information  concerning  executive  compensation is incorporated  herein by
reference  from the  Corporation's  definitive  Proxy  Statement  for the Annual
Meeting of  Stockholders  scheduled to be held on October 27,  1998,  except for
information  contained  under  the  heading  "Compensation  Committee  Report on
Executive  Compensation" and "Stockholder  Return Performance  Presentation",  a
copy of which  will be filed  not  later  than 120 days  after  the close of the
fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information  concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Corporation's definitive
Proxy Statement for the Annual Meeting of  Stockholders  scheduled to be held on
October  27,  1998,   except  for   information   contained  under  the  heading
"Compensation  Committee  Report on  Executive  Compensation"  and  "Stockholder
Return Performance  Presentation",  a copy of which will be filed not later than
120 days after the close of the fiscal year.

Item 13. Certain Relationships and Related Transactions

     Information   concerning   certain   relationships   and   transactions  is
incorporated  herein  by  reference  from  the  Corporation's  definitive  Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
27,  1998,  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.

                                       42

<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, 1998, is  incorporated by reference in
this Form 10-K Annual Report as Exhibit 13.

                                                                        Pages in
                                                                         Annual
Annual Report Section                                                    Report
---------------------                                                   --------
Consolidated Financial Information ....................................    26

Independent Auditors' Report ..........................................    27

Consolidated Balance Sheets--June 30, 1997 and 1998 ...................    28

Consolidated Statements of Income--Each of the Years in the
  Three-Year Period Ended June 30, 1998 ...............................    29

Consolidated Statements of Stockholders' Equity--Each of the Years
  in the Three-Year Period Ended June 30, 1998 ........................    30

Consolidated Statements of Cash Flows--Each of the Years in the
  Three-Year Period Ended June 30, 1998 ...............................    31

Notes to Consolidated Financial Statements ............................    32

Supplementary Financial Data ..........................................    59

                                       43

<PAGE>

(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.

(a)(3)  Exhibits:

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

**   Filed  on  September  27,  1995,  as  the  exhibits  listed  above  to  the
     Registrant's  Annual  Report on Form 10-K for the year ended June 30,  1995
     pursuant to the Securities Exchange Act of 1934 (File No. 0-22772).  All of
     such previously filed documents are hereby incorporated herein by reference
     in accordance with Item 601 of Regulation S-K.

***  Filed  on  November  19,  1996,  as  the  exhibits   listed  above  to  the
     Registrant's Form S-4 registration statements  (Registration No. 533-16428)
     pursuant  to the  Securities  Act of  1933  all of  such  previously  filed
     documents are hereby incorporated herein by reference.

(b)  Reports on Form 8-K:

     No reports on Form 8-K have been filed during the three-month  period ended
June 30, 1998.

                                       44

<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:                                   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                  By: /s/ Dr. Marvin Reynolds
    ----------------------------------      --------------------------------
    Lyle R. Grimes, Chairman of             Dr. Marvin Reynolds, Director
    the Board, President, Chief
    Executive Officer and Director
    (Principal Executive and Operating
    Officer)

Date:                                   Date:



By: /s/ Dr. Otto G. Klein, Jr.          By: /s/ John E. Roemer
    ----------------------------------      --------------------------------
    Dr. Otto G. Klein, Jr., Director        John E. Roemer, Vice Chairman

Date:                                   Date:



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

Date:                                   Date:



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

Date:                                   Date:



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

Date:

                                       45