<PAGE>


                                   EXHIBIT 13

                       1999 Annual Report to Shareholders


<PAGE>

CORPORATE  PROFILE  Klamath  First  Bancorp,  Inc.  (Nasdaq:  KFBI) is a unitary
savings and loan holding company,  headquartered in Klamath Falls,  Oregon.  The
Company's subsidiary,  Klamath First Federal Savings and Loan Association, has a
65 year history, dating back to 1934. The Company provides a diversified line of
loan and deposit  services to individuals,  families and small business  owners.
The  Company  recognizes  there is great  value in serving  both large and small
communities of Oregon, and will continue to serve these communities  through its
traditional  "hands on"  personal  banking  style  using  conventional  delivery
channels.  The  Company  will  also  give  customers  a  choice  whether  to use
alternative  delivery  channels such as ATMs,  telephone  banking,  and Internet
banking. At year-end,  Klamath First Bancorp, Inc. was operating from 35 offices
in 22 counties throughout Oregon.

1999 HIGHLIGHTS

Total assets, loans, deposits and earnings per share reach new Company highs.

          Total assets reached high of $1,041.6 million.
          Total net loans increased by 10.72% or $71.6 million.
          Total deposits grew to $720.4 million.
          Earnings per share reached new high of $1.21, a 15.24% increase over
          prior year.

Completed 20% Modified Dutch Auction Tender Offer (stock buy back) in
January 1999.

Paid quarterly dividends totaling $.46 per share, 38.98% pay out ratio.

Added 2 new ATM locations.

Klamath First Financial Services began operations in July 1999, offering
investment services and retirement planning for customers throughout Oregon.

Went  online with our  informational  web site,  www.klamathfirstfederal.com  in
September  1999. We are planning a fully  transactional  and bill paying site in
2000.


                                TABLE OF CONTENTS
 Selected Consolidated Financial Data................................2-3
 Directors and Officers................................................4
 Letter to our Shareholders............................................5
 Executive Officers....................................................8
 Financials.........................................................9-40
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth certain  information  concerning the consolidated
financial  position and  consolidated  results of  operations  of Klamath  First
Bancorp,  Inc. (the "Company") at the dates and for the periods indicated.  This
information  does not purport to be complete  and should be read in  conjunction
with,  and is  qualified  in its  entirety  by  reference  to, the  Consolidated
Financial  Statements  and Notes  thereto  appearing  elsewhere  in this  Annual
Report.

<TABLE>
<CAPTION>


                                                                At September 30,
                                                ----------   ----------   ----------   ----------   ----------
                                                    1999         1998         1997         1996         1995
                                                ----------   ----------   ----------   ----------   ----------
FINANCIAL CONDITION DATA                                                (In thousands)

<S>                                             <C>          <C>          <C>          <C>          <C>
Assets ......................................   $1,041,641   $1,031,302   $  980,078   $  671,969   $  647,840
Cash and cash equivalents ...................       24,523       66,985       32,043       16,180      175,994
Loans receivable, net .......................      739,793      668,146      551,825      473,556      403,544
Investment securities held to maturity ......          560        2,889       22,937        9,827       42,209
Investment securities available for sale ....      158,648      203,224      261,846       75,987       12,606
Mortgage-backed & related securities
held to maturity ............................        2,601        3,662        5,447        6,783         --
Mortgage-backed & related securities
available for sale ..........................       72,695       43,336       64,869       74,109         --
Stock in FHLB of Seattle, at cost ...........       10,957       10,173        7,150        4,774        4,426
Advances from FHLB of Seattle ...............      197,000      167,000      129,000       90,000       20,000
Deposit liabilities .........................      720,401      689,541      673,978      399,673      384,380
Shareholders' equity ........................      109,585      145,081      144,462      153,411      164,685
</TABLE>
<TABLE>
<CAPTION>

                                                                     Year Ended September 30,
                                                ----------   ----------   ----------   ----------   ----------
                                                      1999         1998         1997         1996         1995
                                                ----------   ----------   ----------   ----------   ----------
SELECTED OPERATING DATA                                                  (In thousands)
<S>                                             <C>          <C>          <C>          <C>          <C>
Total interest income .......................   $   71,691   $   69,733   $   54,167   $   45,649   $   35,107
Total interest expense ......................       38,382       37,848       29,856       23,286       20,441
                                                ----------   ----------   ----------   ----------   ----------
Net interest income .........................       33,309       31,885       24,311       22,363       14,666
Provision for loan losses ...................          932          674          370          120          120
                                                ----------   ----------   ----------   ----------   ----------
Net interest income after
provision for loan losses ...................       32,377       31,211       23,941       22,243       14,546
Non-interest income .........................        3,629        3,202          810          522          381
BIF/SAIF Assessment .........................         --           --           --          2,473         --
Non-interest expense ........................       21,186       19,523       11,764        9,769        6,004
                                                ----------   ----------   ----------   ----------   ----------
Earnings before income taxes                        14,820       14,890       12,987       10,523        8,923
Provision for income taxes                           5,665        5,339        4,429        4,413        3,349
                                                ----------   ----------   ----------   ----------   ----------
Net Earnings ................................   $    9,155   $    9,551   $    8,558   $    6,110   $    5,574
                                                ==========   ==========   ==========   ==========   ==========
Basic earnings per share ....................   $     1.21   $     1.05   $     0.91   $     0.56          N/A
                                                ==========   ==========   ==========   ==========   ==========
</TABLE>


<PAGE>


<TABLE>
<CAPTION>
                                                                 At or for the Year Ended September 30,
                                                  -------------------------------------------------------------
                                                     1999          1998         1997         1996         1995
                                                  ---------      --------  ----------     --------     --------
KEY OPERATING RATIOS

Performance Ratios

Return on average assets
<S>                                                <C>          <C>          <C>          <C>           <C>
(net earnings divided by average assets) ....         0.88%        0.96%        1.14%        0.99%        1.19%

Return on average equity
(net earnings divided by average equity) ....         7.55%        6.52%        5.85%        3.69%       10.44%

Interest rate spread
(difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities                          2.73%        2.57%        2.28%        2.22%        2.73%

Net interest margin (net interest income as a
percentage of average interest-earning assets)        3.37%        3.36%        3.32%        3.65%        3.24%

Average interest-earning assets to average
interest-bearing liabilities ................       116.47%      119.84%      125.58%      137.78%      111.29%

Net interest income after provision for loan losses
to total non-interest expenses ..............       152.82%      159.87%      203.51%      181.69%      242.27%

Non-interest expense to average total assets          2.05%        1.96%        1.57%        1.99%        1.29%

Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income)        57.36%       55.64%       46.83%       53.49%       39.90%

Dividend payout ratio (dividends declared per share
divided by net earnings per share) ..........        38.98%       34.50%       34.09%       44.64%        --

Book value per share ........................      $ 15.52      $ 16.30      $ 15.64      $ 14.98          N/A

Asset Quality Ratios

Allowance for loan losses to total loans ....         0.32%        0.28%        0.22%        0.19%        0.19%

Non-performing assets to total assets .......         0.46%        0.05%        0.03%        0.04%        0.12%

Non-performing loans to total loans, before
net items ...................................         0.43%        0.07%        0.04%        0.04%        0.18%

Capital Ratios

Equity to assets ratio ......................        10.52%       14.07%       14.74%       22.83%       25.42%

Tangible capital ratio ......................         8.91%        8.26%       11.06%       19.22%       18.57%

Core capital ratio ..........................         8.91%        8.26%       11.06%       19.22%       18.57%

Risk-based capital ratio ....................        17.41%       16.13%       23.12%       42.41%       36.87%


Other Data

Number of

Real estate loans outstanding ...............        9,297        9,155        8,393        7,704        7,110

Deposit accounts ............................       85,112       82,585       82,032       38,651       38,260

Full service offices ........................           34           34           32            7            7

</TABLE>
<PAGE>





KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND
KLAMATH FIRST BANCORP, INC. BOARD OF DIRECTORS

Bernard Z. Agrons        Retired; Weyerhaeuser Company Vice President for the
                         Eastern Oregon Region until 1981; Former State
                         Representative in the Oregon State Legislature from
                         1983 to 1991

Timothy A. Bailey        Senior Vice President - Klamath Operations for Regence
                         Blue Cross/Blue Shield, a health insurance company

James D. Bocchi          Retired; President of Klamath First Federal Savings and
                         Loan Association from 1984 until June 1994

Gerald V. Brown          President and Chief Executive Officer of Klamath First
                         Federal Savings and Loan Association since June 1994

William C. Dalton        Retired; former owner of W. C. Dalton and Company,
                         farming

J. Gillis Hannigan       Retired; Executive Vice President of Modoc Lumber in
                         Klamath Falls, Oregon, until January 1995

Rodney N.  Murray        Director and Chairman of the Board, owner and  operator
                         of Rodney  Murray  Ranch, former  owner and manager and
                         President of Klamath Falls Creamery, Inc., located in
                         Klamath Falls, Oregon

Dianne E. Spires, CPA    Partner since 1986 with Rusth,  Spires & Menefee,  LLP,
                         a public accounting firm located in Klamath Falls and
                         Lakeview, Oregon

OFFICERS OF KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION

Gerald V. Brown*              President and Chief Executive Officer
Robert A. Tucker*             Senior Vice President - Chief Lending Officer
Marshall J. Alexander*        Senior Vice President - Chief Financial Officer
Frank X. Hernandez*           Senior Vice President - Chief Operating Officer
Robert L. Salley              Vice President
Gerald A. Page                Vice President
Carol Starkweather            Assistant Vice President
Craig M. Moore                Auditor/Corporate Counsel
Nora L. Boman                 Treasurer
and all branch managers

*   Indicates an officer of Klamath First Bancorp, Inc.


<PAGE>



Dear Shareholder,

     When we started  this fiscal year 1999,  we  initiated a major  shareholder
enhancement  called a "Modified  Dutch Auction Tender Offer".  We planned to buy
back 20% of our  outstanding  shares to improve  earnings per share  ("EPS") and
return on equity  ("ROE").  This was just as  successful  as we had planned.  We
ended the year with EPS of $1.21 as compared to $1.05 for fiscal  1998, a 15.24%
increase.  Our ROE was  7.55% as  compared  to 6.52% the year  before,  a 15.80%
increase.  It is interesting to note, however,  that these enhancements were not
only because of the tender offer.  We had an excellent  earnings  year.  Our net
earnings  were very good even  though we took $39  million  out of our  earnings
stream to purchase the 1,984,090 shares.  The $39 million,  if invested at lower
yielding overnight funds rates averaging 5.06% for the last quarter,  would have
represented  $1.5 million greater interest income for the year. Our net earnings
for the year were $9.2 million as compared to $9.6 million the previous year. We
will continue to consider all  shareholder  and earnings  enhancements  that are
accretive to both EPS and ROE.

     This year the Company formed Klamath First Financial Services, Inc. The new
subsidiary  is offering  general  securities  trading as well as  financial  and
retirement  planning to  customers  of the Company and the public at large.  The
primary area served at present is Klamath County,  but we have plans in place to
expand with representatives in Jackson and Deschutes Counties.

     We are striving to achieve an 8% to 10% asset growth this year.  We plan to
accomplish  this  through  new  branches  in growth  areas such as  Jackson  and
Deschutes counties. We will also continue to look for acquisition  opportunities
that fit into our corporate structure.  We'll continue our primary business as a
thrift, with emphasis on one to four family lending,  however, we plan to expand
our lending in multi-family  residential  lending and commercial real estate. We
also plan to emphasize our consumer and commercial  lending by hiring commercial
loan officers for our high growth areas.

     We currently offer a telephone banking voice response system which receives
over    20,000     calls    per    month.     We    opened    our    web    site
(www.klamathfirstfederal.com) which at present is an informational site. We plan
on expanding this during the coming fiscal year to a full  transactional site to
include bill paying.  Although new  technologies  are, and will be, available to
our  customers  who  choose  to use  them,  we  will  continue  to  provide  our
traditional "hands on" service at the teller windows.

     Our  deposits  increased  4.5% last year when the thrift  industry  overall
showed a 2.4% loss from June of 1998 to June of 1999  according to the Office of
Thrift Supervision.  We believe this gain is because of our friendly,  courteous
personnel and their dedication to excellent  customer service.  We will continue
to offer the products and services our customers want.  KFBI's mission statement
is clear:  "The  mission of KFBI is to be the  preferred  provider of  financial
products  and  services.  This  will be  accomplished  within an  atmosphere  of
commitment to our  shareholders,  employees,  customers and the  communities  we
serve."

     With our large loan  volume,  $224.2  million in new loans,  we entered the
secondary  market and started  selling  loans to the Federal  National  Mortgage
Association  ("Fannie  Mae"). We sold our first loan to them in May of 1999, the
eighth  month of our fiscal year.  We started this program  primarily to improve
fee income through the retained  servicing rights and servicing fees. We plan to
retain servicing on all loans sold for fee income and to retain customer service
and relationships. From  May  through  September  this  new  activity  generated

<PAGE>

$72,000 in non-interest  income.  Total fees and service charges grew from $2.41
million in 1998 to $2.94 million in 1999, a 21.79% increase. We plan to continue
this program while  retaining  non-conforming  and higher  yielding loans in our
portfolio.

     The big issue for all  financial  institutions  this year has been the Year
2000 issue (Y2K) with the computer  turn-over  to that date.  We have tested all
our  critical  systems with the computer  date  advanced to 2000.  Every type of
transaction  has been run and they all went  through  the system  well.  We also
developed a contingency  plan in the event any of our branches have problems and
transactions must be run off-line.  Each of our 34 branches were tested and they
all performed  successfully.  This is an issue that all  financial  institutions
have taken very seriously.

     We are  looking  forward  to  another  good  year  and we  thank  you,  our
shareholders,  employees and customers, for your support and assistance with our
goals.




/s/ Gerald V. Brown                          /s/ Rodney N. Murray
Gerald V. Brown                              Rodney N. Murray
President and Chief Executive Officer        Chairman of the Board




<PAGE>

OUR BUSINESS

LENDING

Klamath  First  Federal  continues  to strive to be a market  leader in the real
estate lending market  throughout  Oregon.  Our tradition of excellence  started
more than 65 years ago when we were originally  formed to meet the housing needs
of our customers.  We continue that tradition today and have financed single and
multi-family  homes  throughout  the state.  Real estate  loans  remain the core
earning  asset of the  Company.  This  includes  owner  and  non-owner  occupied
residences,   second  home  loans,   construction   loans,  and  our  all-in-one
construction  loan (both the  construction  and term  financing in one package).
Multi-family  homes have also been in our product line for many years.  Today we
have expanded  these  products  throughout  the state.  Our real estate  lending
includes apartment  buildings,  manufactured home parks,  commercial real estate
projects,  such as motels,  medical  buildings,  warehouses,  resorts and office
complexes. When it comes to real estate lending, we do it all.

When we  purchased  the 25 branches  of Wells  Fargo a few years back,  both the
customers  and  the  Company  went  through  some  changes.  In  several  of the
communities,  we were the  only  financial  institution  in town and many of the
offices had not offered real estate loans,  but they were familiar with offering
consumer  and  small  business  loans.  Klamath  First  Federal  has a  profound
commitment  to serving  the  financial  needs of our  communities.  As a result,
training for both customers and staff about real estate lending was necessary in
addition to increasing  staffing  levels to originate  consumer,  commercial and
small business loans. Our product line in consumer loans now includes all of the
expected  products  from  automobiles  to  recreational  vehicles,  secured  and
unsecured.  Our track record has been very good in both  originations and credit
quality throughout our branch network.

Additionally,  our branch network provides the opportunity to attract more small
business and commercial loans. Our plans for the next year and the future are to
further  capitalize on our consumer and small business lending with the addition
of  seasoned  lending  officers  in  several  key branch  locations  in our more
populated market areas. Our "hands-on" approach to customer service continues to
attract  customers  who  still  want  their  bankers  to  be  a  part  of  their
communities.

Real estate  lending will continue to be the Company's  primary focus because we
are very  successful and efficient in this product line.  However,  we will also
continue to expand and emphasize our diversified  lending  products in consumer,
commercial and small business lending.

DEPOSITS

Klamath First Federal offers our deposit customers an array of competitive terms
and rates to help meet  their  savings  needs.  These  include  the  traditional
savings  certificates  ("CDs"),  IRAs including SEPP, Keogh, Roth and Education,
statement  savings and money market  accounts with tiered rates based on account
balances.  Throughout  the year we have offered  specials on CDs that have rates
superior  to the  competition  and often have odd  maturities  that help  offset
automatic rollovers of our current customers and tend to attract a higher degree
of new money.

The last few  years we have  been  very  successful  in  marketing  our  various
checking account products to both our personal and business customers.   We have

<PAGE>

a variety of checking account products from free checking to interest  checking.
We intend to continue  emphasizing checking accounts in our marketing efforts as
a source of lower  cost funds as well as an anchor  account  from which to cross
sell other  banking  products  and  loans.  This year we will  introduce  a club
account that offers customers various travel discounts,  shopping  discounts and
other  add-on  options  that  provide  customers a variety of consumer  friendly
products as well  as a  source for  additional  fee  income  for  Klamath  First
Federal.  We  are  very  encouraged  by  the  potential  of  this  account  as a
value-added service for our growing customer base.

Our  customers  continue to benefit from  technological  advances  which provide
economical and convenient choices for them to conduct their banking.  We offer a
combined ATM, Check Guarantee and Debit Card to qualified customers. This allows
them access to their checking or savings  balances 24 hours a day either through
ATMs or merchants with  point-of-sale  terminals.  We offer combined  statements
that itemize on one convenient  monthly statement  multiple account  information
including checking, savings, time deposits, and mortgage, consumer or commercial
loans if the customer  desires.  Our automated  24-hour telephone banking system
allows  customers  to get instant  up-to-date  account  information  and perform
routine transfer and payment transactions real-time over the telephone.

Our various  business  accounts  continue to grow and have new added options for
customer  convenience.  This past year we added an option  allowing our business
customers to dial up their accounts and see their account  activity  directly by
use of a modem and personal  computer.  Customers  with a high volume of account
activity find this service to be a great advantage over alternative choices.

Last,  Klamath First Federal has moved into the Internet with our  informational
web site www.klamathfirstfederal.com. The site will be updated with new features
as they  are  developed,  including  a bill  paying  feature  as well as a fully
transactional  site allowing such  transactions  as account  inquiries,  balance
transfers and making loan payments.  The site currently has hot links to Nasdaq,
Klamath First Financial Services( see below) and Klamath First Bancorp, Inc. The
Bancorp's  link will feature  Company  highlights,  and recent news and earnings
releases.  Our entry into the Internet will allow our customers to have one more
choice in how they do their banking with us and access their accounts.

INVESTMENT ALTERNATIVES

Consolidation  of the financial  marketplace  continues to rapidly blur the line
between banks,  stockbrokers,  and insurance companies.  The trend is clear, and
customers  now expect to be able to have one-stop  shopping for their  financial
needs and retirement planning. With this is mind, Klamath First Federal formed a
new subsidiary,  Klamath First Financial  Services  ("KFFS"),  whose  activities
include  securities  brokerage,  insurance  and related  services to retail bank
customers.  The  subsidiary,  through  a  third  party-broker  dealer,  Fintegra
Financial  Solutions  ("Fintegra"),  will  offer  common and  preferred  stocks,
corporate and municipal bonds,  mutual funds, unit investment  trusts,  variable
and fixed annuities, and long term care insurance.  Customers are able to access
their account histories on the Internet,  use optional on-line trading, and have
access to  market  research  using  the  technological  advances  that  Fintegra
provides.


<PAGE>

Wes Handley, Vice President and Program Manager of KFFS operates out of the main
office in Klamath Falls. He has been covering all of our branches throughout the
state on an appointment basis. This next year we plan to add additional licensed
investment  professionals to cover our state-wide branch network.  Additionally,
new  accounts  personnel  are  obtaining  insurance  licenses  to offer  annuity
products to  appropriate  customers.  This  subsidiary has the potential to help
increase  our  non-interest  income,   but   more   importantly,   adds  another
relationship and valued service for our growing customer base.

THE FUTURE

The  Company   looks  forward  to  the  rapidly   changing   future  with  great
anticipation.  Our asset  size,  market  capitalization,  and current and future
branch locations allow us to capitalize on market synergies,  economies of scale
and  product  diversification.  We  plan  to add an  experienced  marketing  and
training  professional  to our  management  staff  this  coming  year.  This new
position  will  develop  marketing  campaigns  to inform  present and  potential
customers of our quality service and varied financial  product lines, as well as
train and motivate branch staff to better market our products.  We will continue
to look for  opportunities  to expand the franchise and our market reach through
acquisitions,  strategic  alliances,  branching,  and technology.  Klamath First
Bancorp,  Inc. and the  financial  industry  have many  challenges  ahead of it.
Management  will continue to meet these  challenges and provide  quality service
and  financial  products  through a variety of  delivery  channels.  This should
translate into a stronger  financial  institution  creating good returns for our
shareholders.
<PAGE>
CORPORATE EXECUTIVE OFFICERS

Corporate Executive Officer Profiles

Gerald V. Brown has been with Klamath  First  Federal  since 1957. He began as a
teller,  and, in his 42 years with Klamath  First  Federal,  has  progressed  up
through  the ranks to his  current  position as  President  and Chief  Executive
Officer.  Mr.  Brown has  served on the Board of  Directors  for  Klamath  First
Federal Savings & Loan Association since 1994.

Robert A. Tucker has been with Klamath First Federal Savings & Loan  Association
since 1973. He is currently  Senior Vice  President  and Chief  Lending  Officer
responsible for all lending  functions of the Association.  In his 26 years with
the  Association,  Mr.  Tucker has served in various  positions  including  Loan
Officer,  Branch  Manager,  and  Chief  Operating  Officer  responsible  for the
operations of the Association.

Frank X.  Hernandez  joined  Klamath  First  Federal  in 1991 as Human  Resource
Manager after an 11 year career with Oregon's  largest  commercial bank where he
was a District  Operations  Officer and Branch Manager.  He currently  serves as
Senior Vice President and Chief  Operating  Officer  responsible  for all of the
Association's  non-loan operations  including deposit  acquisition,  information
systems and investor relations.

Marshall J.  Alexander has been with Klamath First Federal  Savings & Loan since
1986. He began as the Association's Controller,  was promoted to Chief Financial
Officer in August 1994 and was named Senior Vice  President and Chief  Financial
Officer in November  1998.  Mr.  Alexander  brought  over ten years of financial
management  experience in both regional banks and small community banks prior to
joining the Association.  He is responsible for evaluating strategic shareholder
value  enhancements,  supervising  the accounting  department,  and managing the
investments of the Company.




<PAGE>

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

Special Note Regarding  Forward-Looking  Statements
     Management's  Discussion and Analysis of Financial Condition and Results of
Operations   and  other   portions  of  this  Annual  Report   contain   certain
"forward-looking  statements"  concerning the future operations of Klamath First
Bancorp,  Inc.  Management  desires  to  take  advantage  of the  "safe  harbor"
provisions  of the  Private  Securities  Litigation  Reform  Act of 1995  and is
including this statement for the express  purpose of availing the Company of the
protections of such safe harbor with respect to all "forward-looking statements"
used  in  our  Annual  Report.     We  have  used  "forward-looking  statements"
to describe  future plans and  strategies,  including  our  expectations  of the
Company's future financial results.  Management's  ability to predict results or
the effect of future plans or strategies is inherently uncertain.  Factors which
could affect actual results include  interest rate trends,  the general economic
climate in the  Company's  market  area and the  country as a whole  which could
affect  the  collectibility  of loan  balances,  the  ability to  increase  non-
interest income through  expansion of new lines of business,  the ability of the
Company  to  control  costs  and  expenses,   the  ability  of  the  Company  to
successfully address year 2000 ("Y2K") issues, competitive products and pricing,
loan  delinquency  rates,  and  changes in federal and state  regulation.  These
factors should be considered in evaluating the "forward-looking statements," and
undue reliance should not be placed on such statements.

General
     Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation,  is the
unitary  savings and loan holding  company for Klamath First Federal Savings and
Loan Association (the "Association").

     The  Association  is a  traditional,  community-oriented,  savings and loan
association that focuses on hands-on  customer service within its primary market
area.  Accordingly,  the Association is primarily engaged in attracting deposits
from the general public through its offices and using those and other  available
sources of funds to originate  permanent  residential  one- to four-family  real
estate  loans  within  its market  area and,  to a lesser  but  growing  extent,
commercial real estate and multi-family residential loans and loans to consumers
and small businesses.

     The Company's  profitability  depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-earning
assets,  principally  loans and investment  securities,  and interest expense on
interest-bearing  deposits  and  borrowings.  Because the  Company is  primarily
dependent on net interest  income for its  earnings,  the focus of the Company's
planning  is to devise and  employ  strategies  that  provide  stable,  positive
spreads  between  the  yield  on  interest-  earning  assets  and  the  cost  of
interest-bearing  liabilities  in order to  maximize  the  dollar  amount of net
interest income.  The Company's net earnings are dependent,  to a lesser extent,
on the level of its non-  interest  income,  such as service  charges  and other
fees,  and  the  controlling  of its  non-interest  expense,  such  as  employee
compensation and benefits,  occupancy and equipment  expense,  deposit insurance
premiums and miscellaneous  other expenses,  as well as federal and state income
taxes.

     The  Association is regulated by the Office of Thrift  Supervision  ("OTS")
and  its  deposits  are  insured  up to  applicable  limits  under  the  Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC").

     The  Association  is a member of the  Federal  Home Loan Bank  system.  The
Association conducts its business through 34  office  facilities  and  one  loan

<PAGE>

production  office,  with the main office located in Klamath Falls,  Oregon. The
Association  considers  its  primary  market  area to be the  state  of  Oregon,
particularly the 22 counties in which the offices are located.

Federal  Legislation
     In Federal  legislation  enacted in 1996,  the reserve method of accounting
for thrift bad debt reserves (including the percentage of taxable income method)
was repealed for tax years  beginning  after  December 31, 1995.  The  resulting
change in accounting  method  triggers bad debt reserve  recapture for post-1987
reserves over a six-year period, thereby generating an additional tax liability.
At September 30, 1999, the  Association's  post-1987  reserves  amounted to $3.8
million. Pre-1988 reserves would only be subject to recapture if the institution
fails to  qualify  as a  thrift.  A  special  provision  suspends  recapture  of
post-1987  reserves for up to two years if, during those years,  the institution
satisfies   a  "residential  loan  requirement."  Notwithstanding  this  special
provision,  however,  recapture  was required to begin during the tax year ended
September 30, 1999.

Market Risk and Asset/Liability Management

     The Company's  financial  performance is affected by the success of the fee
generating products it offers to its customers,  the credit quality of its loans
and securities,  and the extent to which its earnings are affected by changes in
interest  rates.  Credit risk is the risk that  borrowers  will become unable to
repay their debts.  The Company  utilizes no  derivatives to mitigate its credit
risk,  relying instead on strict  underwriting  standards,  loan review,  and an
adequate allowance for loan losses.

     Interest  rate  risk is the  risk of loss in  principal  value  and risk of
earning  less  net  interest  income  due to  changes  in  interest  rates.  Put
simplistically,  savings  institutions  solicit deposits and lend the funds they
receive to borrowers.  The difference  between the rate paid on deposits and the
rate  received  on loans is the  interest  rate  spread.  If the  rates  paid on
deposits  change,  or reprice,  with the same timing and  magnitude as the rates
change on the loans,  there is perfect  matching  of interest  rate  changes and
thus, no change in interest rate spread and no interest rate risk. In actuality,
interest rates on deposits and other liabilities do not reprice at the same time
and/or  with  the  same  magnitude  as those on  loans,  investments  and  other
interest-earning  assets.  For example,  the  Association  primarily  originates
fixed-rate  residential  loans for its portfolio.  Because  fixed-rate loans, by
definition,  do not reprice until payoff and because the majority of residential
loans have terms of 15 to 30 years (with actual  expected  lives of seven to ten
years),  the interest rate  characteristics of the loan portfolio do not exactly
match the  Company's  liabilities,  which  consist of deposits  with  maturities
ranging up to ten years and borrowings  which mature or reprice in five years or
less. When interest rates change, this mismatch creates changes in interest rate
spread that influence net interest income and result in interest rate risk.

     Changes  in  interest  rates  also  impact the fair value of the assets and
liabilities  on the  Company's  balance  sheet,  expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market  value of assets  minus the market  value of  liabilities
plus or minus the estimated market value of off-balance-sheet  instruments.  For
example,  the market  value of  investment  securities  and loans is impacted by
changes  in  interest  rates.  Fixed-rate  loans  and  investments  held  in the
Company's  portfolio  increase  in  market  value  if  interest  rates  decline.
Conversely,  the market  value of  fixed-rate  portfolio  assets  decrease in an
increasing  interest rate environment.  It is generally assumed that assets with
adjustable rates are less subject to market value changes due to  interest  rate
fluctuations based on the premise that their rates will adjust with the market.
<PAGE>

     In December 1998, the OTS issued Thrift Bulletin 13a ("TB 13a")  containing
guidance on the  management of interest rate risk and providing a description of
how the "Sensitivity to Market Risk" rating would be determined.  Sensitivity to
Market Risk  represents  the "S" component of the CAMELS rating which is used by
regulators  in  their  evaluation  of  financial   institutions.   The  OTS  has
established  detailed  minimum  guidelines  for two areas of interest  rate risk
management.   These  guidelines  establish  minimum  expectations  for  (1)  the
establishment  and  maintenance  of  board-approved   risk  limits  and  (2)  an
institution's  ability  to  measure  their  interest  rate risk  exposure.  Each
thrift's board of directors is responsible for establishing  risk limits for the
institution. The interest rate risk limits are expected to include limits on the
change in NPV as well as limits on earnings sensitivity.

     NPV  limits  include  minimums  for the NPV ratio  which is  calculated  by
dividing the NPV by the present  value of the  institution's  assets for a given
rate  scenario.  The board should specify the minimum NPV ratio it is willing to
allow under  interest rate shifts of 100, 200, and 300 basis points up and down.
Both the NPV  limits and the actual  NPV  forecast  calculations  play a role in
determining a thrift's  Sensitivity  to Market Risk.  The prudence of the limits
and the compliance with board-prescribed limits are factors in the determination
of whether or not the institution's risk management is sufficient.  In addition,
the NPV ratio permitted by the institution's policies under an adverse 200 basis
point rate shift scenario is combined with the  institution's  current  interest
rate sensitivity to determine the  institution's  "Level of Interest Rate Risk."
The  level  of  interest  rate  risk is then  utilized  in  conjunction  with an
assessment  of the "Quality of Risk  Management  Practices" to determine the "S"
component of the CAMELS rating.

     The  Company's  exposure  to  interest  rate risk is reviewed on at least a
quarterly  basis by the Board of Directors  and the Asset  Liability  Management
Committee ("ALCO"), which includes senior management  representatives.  The ALCO
monitors and  considers  methods of managing  interest  rate risk by  monitoring
changes in NPV, the NPV ratio,  and net interest  income under various  interest
rate  scenarios.  The ALCO  attempts  to manage the  various  components  of the
Company's  balance sheet to minimize the impact of sudden and sustained  changes
in interest rates on NPV and the NPV ratio. If potential  changes to NPV and the
NPV ratio  resulting from  hypothetical  interest rate swings are not within the
limits  established by the Board, the Board may direct  management to adjust its
asset  and  liability  mix to bring  interest  rate risk  within  Board-approved
limits.

     NPV is calculated  based on the net present  value of estimated  cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent   broker  quotations  and  other  public  sources.   Computation  of
forecasted  effects of hypothetical  interest rate changes are based on numerous
assumptions,   including   relative  levels  of  market  interest  rates,   loan
prepayments,  and deposit decay,  and should not be relied upon as indicative of
actual future results.  Further, the computations do not contemplate any actions
the ALCO could undertake in response to changes in interest rates.

     The Association  continues to originate  primarily  fixed-rate  residential
loans. Some of these loans are sold to Fannie Mae with servicing  retained while
others are held in its  portfolio.  In order to reduce the  exposure to interest
rate fluctuations, the Company has developed strategies to manage its liquidity,
shorten  the  effective   maturities  and  increase  the  repricing  of  certain
interest-earning assets,  and  increase  the  effective  maturities  of  certain

<PAGE>

interest-bearing  liabilities.  During the year ended  September  30, 1999,  the
Company took several  actions to reduce interest rate risk.  First,  the Company
purchased a $10 million block of adjustable-rate single family mortgages,  which
generally  reprice in one year.  The Company also  purchased  participations  in
adjustable-rate  multi-family  and  commercial  real estate loans.  Second,  the
Company has focused its  non-residential  lending on adjustable or floating rate
and/or  short-term  loans.   Third,  the  Company  has  focused  its  investment
activities  on short-  and  medium-term  securities,  including  adjustable-rate
mortgage-backed  securities and collateralized  mortgage  obligations  ("CMOs").
Fourth,  the Company has attempted to maintain and increase its regular  savings
and  transaction  deposit  accounts,  which  are  considered  to  be  relatively
resistant  to changes in interest  rates.  New  deposit  product  offerings  and
promotion of checking accounts provided  significant  progress in attaining this
goal. Fifth, the Company has utilized long-term borrowings and deposit marketing
programs to  lengthen  the term to  repricing  of its  liabilities.  During 1999
adjustable-rate  borrowings  from FHLB of Seattle were  converted to longer term
fixed-rate  borrowings.  The Company will continue to explore  opportunities  in
these areas.

     The  Company's  Board of Directors  had  established  risk limits under the
previous OTS guidance. These limits have been revised and approved to bring them
into  compliance  with TB 13a.  NPV values  for the  Association  are  regularly
calculated  internally  and  by  the OTS  based on  regulatory  guidelines.  The
following table presents the  Association's  projected change in NPV and the NPV
ratio for the  various  rate shock  levels as of  September  30,  1999 using the
internally  generated  calculations.  The assets and  liabilities  at the parent
company  level are not  considered  in the  analysis.  The  exclusion of holding
company  assets  and  liabilities  does not  have a  significant  effect  on the
analysis of NPV sensitivity.  All market rate sensitive instruments presented in
these tables are  classified  as either held to maturity or available  for sale.
The Association has no trading securities.
<TABLE>
<CAPTION>

               PROJECTED CHANGES IN NET PORTFOLIO VALUE
               as of September 30, 1999

       Change in                                                NPV      Sensitivity
       Interest Rates                                         Ratio        Measure
                                                                       (Basis points)

<S>                                                           <C>          <C>
200 basis point increase ........................              6.53%       (327)
100 basis point increase ........................              8.21%       (159)
Base Rate Scenario ..............................              9.80%       --
100 basis point decline .........................             11.14%        134
200 basis point decline .........................             11.18%        138

</TABLE>



<PAGE>

     The preceding table indicates that at September 30, 1999, in the event of a
sudden  and  sustained   increase  in  prevailing  market  interest  rates,  the
Association's NPV and NPV ratio would be expected to decrease.  At September 30,
1999,  the  Association's  estimated  changes in these  measures were within the
targets established by the Board of Directors.

     Certain  shortcomings  are inherent in the method of analysis  presented in
the  computation  of NPV.  Actual  values  may  differ  from  those  projections
presented should market conditions vary from assumptions used in the calculation
of NPV.  Certain  assets,  such as  adjustable-rate  loans,  have features which
restrict  changes in interest  rates on a short-term  basis and over the life of
the  assets.  In  addition,  the  proportion  of  adjustable-rate  loans  in the
Association's  portfolio  could  decrease in future  periods if market  interest
rates remain at or decrease  below  current  levels due to  refinance  activity.
Further,  in the  event of a change  in  interest  rates,  prepayment  and early
withdrawal levels would likely deviate  significantly  from those assumed in the
NPV.  Finally,  the ability of many  borrowers  to repay  their  adjustable-rate
mortgage loans may decrease in the event of interest rate increases.

     A   conventional   measure  of  interest  rate   sensitivity   for  savings
institutions is the calculation of interest rate "gap." This measure of interest
rate   sensitivity   is  a  measure  of  the  difference   between   amounts  of
interest-earning assets and interest-bearing liabilities which either reprice or
mature  within a given period of time.  The  difference,  or the  interest  rate
repricing  "gap," provides an indication of the extent to which an institution's
interest  rate spread will be  affected by changes in interest  rates.  A gap is
considered positive when the amount of interest-rate sensitive assets exceed the
amount of interest- rate sensitive liabilities,  and is considered negative when
the  amount  of  interest-rate  sensitive  liabilities  exceeds  the  amount  of
interest-rate  sensitive assets.  Generally,  during a period of rising interest
rates,  a negative gap within shorter  maturities  would result in a decrease in
net interest  income.  Conversely,  during a period of falling interest rates, a
negative  gap within  shorter  maturities  would  result in an  increase  in net
interest income.

     At September 30, 1999,  the  Association's  one-year  cumulative  gap was a
negative 31.49% of total assets compared to a negative 32.19% of total assets at
September 30, 1998.


<PAGE>

The following table sets forth certain  historical  information  relating to the
Company's  interest-earning  assets and  interest-bearing  liabilities  that are
estimated to mature or are scheduled to reprice within one year.
<TABLE>
<CAPTION>

                                                   At September 30,
                                      -----------------------------------------
                                        1999            1998            1997
                                      ---------       --------       ----------
                                                      (In thousands)
Earning assets maturing
<S>                                  <C>             <C>             <C>
or repricing within one year ....    $ 188,286       $ 220,952       $ 199,320

Interest-bearing liabilities
maturing or repricing
within one year .................      516,161         552,929         524,942

Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets ....       (31.49%)        (32.19%)        (33.22%)

Percent of assets to liabilities
maturing or repricing
within one year .................        36.48%          39.96%          37.97%
</TABLE>


<PAGE>

INTEREST SENSITIVITY GAP ANALYSIS

The   following   table   presents   the   difference   between  the   Company's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at September 30, 1999. This table does not  necessarily  indicate the
impact of general  interest rate movements on the Company's net interest  income
because  the  repricing  of  certain  assets  and   liabilities  is  subject  to
competitive and other limitations.  As a result,  certain assets and liabilities
indicated as maturing or otherwise  repricing within a stated period may in fact
mature or reprice at different times and at different volumes.
<TABLE>
<CAPTION>


ASSETS                       3 Months  > 3 Months   > 6 Months   > 1 to 3   > 3 to 5   > 5 to 10  > 10 to 20       > 20
                              or Less  to 6 Months   to 1 Year     Years      Years      Years        Years        Years       TOTAL
                            ---------  -----------  ----------  ---------  ---------   ---------  ----------    ---------   --------
Permanent 1-4 Mortgages
<S>                        <C>         <C>         <C>         <C>         <C>       <C>          <C>           <C>          <C>
  Adjustable-rate .......   $ 11,519    $  3,638    $  9,261    $  3,962    $ 5,108        $--          $--          $--    $ 33,488
  Fixed-rate ............      2,927       2,705       4,372       1,355      2,553     25,381       96,983      498,360     634,636

Other Mortgage Loans
  Adjustable-rate .......      2,494       3,176       8,606       6,321      7,411       --           --           --        28,008
  Fixed-rate ............        195         224         845       5,657      7,131      9,522        6,514        4,198      34,286

Mortgage Backed and Related
Securities                    48,780         946      10,696       1,879      4,969      2,469        4,018        1,919      75,676

Non-Real Estate Loans
  Adjustable-rate .......      6,896         469       1,262         186       --         --           --           --         8,813
  Fixed-rate ............        653         303         547       1,106      3,197        838        1,078         --         7,722

Investment Securities ...     39,186        --        28,586      74,025     10,471      2,235       20,289        1,237     176,029
                            --------    --------    --------    --------    -------    -------     --------     --------    --------
     Total Rate Sensitive
          Assets            $112,650    $ 11,461    $ 64,175    $ 94,491    $40,840    $40,445     $128,882     $505,714    $998,658
                            ========    ========    ========    ========    =======    =======     ========     ========    ========
LIABILITIES

Deposits-Fixed Maturity     $ 97,557    $ 80,259    $ 88,208   $ 67,166    $ 37,459    $20,703     $    594     $    140    $392,086
Deposits-Interest Bearing      5,741       5,250       9,200     24,034      11,771      9,409        1,844           54      67,303
Deposits-Money Market         47,440      31,865      35,945     29,870       2,442      1,132          208         --       148,902
Deposits-Passbook and
     Statement Savings         5,100       4,664       8,173     21,351      10,457      8,359        1,638           48      59,790
Other Interest-Bearing
     Liabilities              71,759      25,000        --      100,000      10,000       --           --           --       206,759
                            --------    --------    --------   --------    --------    -------     --------     --------    --------
     Total Rate Sensitive
          Liabilities       $227,597    $147,038    $141,526   $242,421    $ 72,129    $39,603     $  4,284     $    242    $874,840
                            ========    ========    ========   ========    ========    =======     ========     ========    ========
Interest Rate
     Sensitivity Gap       ($114,947)  ($135,577)  ($77,351)  ($147,930)  ($31,289)   $    842     $124,598     $505,472    $123,818

Cumulative Interest Rate
     Sensitivity Gap       ($114,947)  ($250,524)  ($327,875) ($475,805)  ($507,094) ($506,252)   ($381,654)    $123,818

Sensitivity Gap to
     Total Assets             -11.04%     -13.02%      -7.43%    -14.20%      -3.00%      0.08%       11.96%      48.53%

Cumulative Interest Rate
     Sensitivity Gap
     to Total Assets          -11.04%     -24.06%     -31.49%    -45.69%     -48.69%    -48.61%      -36.65%      11.88%
</TABLE>

<PAGE>


Liquidity  and  Capital Resources
     The Company  generates cash through  operating  activities,  primarily as a
result of net  income.  The  adjustments  to  reconcile  net  income to net cash
provided by operations during the periods presented  consisted  primarily of the
provision  for  loan  losses,   depreciation   and   amortization,   stock-based
compensation expense,  amortization of deferred loan origination fees, increases
or decreases  in various  escrow  accounts  and  increases or decreases in other
assets and  liabilities.  During the fiscal year ended September 30, 1997, there
was a major  one-time  adjustment to cash  resulting from the Wells Fargo branch
acquisition which contributed  approximately $220.9 million in cash. The primary
investing  activity of the  Association  is  lending,  which is funded with cash
provided  from  operations  and financing  activities,  as well as proceeds from
amortization  and  prepayments on existing loans and mortgage backed and related
securities.   For  additional  information  about  cash  flows  from  operating,
financing,  and investing  activities,  see the Consolidated  Statements of Cash
Flows included in the Consolidated Financial Statements.

     The  Association  is  required  under  applicable  federal  regulations  to
maintain  specified  levels of "liquid"  investments in qualifying types of U.S.
government, federal agency and other investments having maturities of five years
or less.  Current OTS regulations  require that a savings  association  maintain
liquid  assets  of not less  than  4.00% of its  average  daily  balance  of net
withdrawable  deposit  accounts and  borrowings  payable in one year or less. At
September 30, 1999,  the  Association's  regulatory  liquidity,  as measured for
regulatory purposes, was 22.38%. The Company has borrowing agreements with banks
that can be used if funds are  needed.  (See Notes 9 and 10 to the  Consolidated
Financial Statements.)

     OTS capital  regulations  require the  Association  to have:  (i)  tangible
capital equal to 1.5% of adjusted total assets,  (ii) core capital equal to 3.0%
of adjusted total assets,  and (iii) total  risk-based  capital equal to 8.0% of
risk-weighted  assets.  At September 30, 1999, the Association was in compliance
with  all  regulatory  capital  requirements  effective  as of such  date,  with
tangible,  core and risk-based  capital of 8.9%,  8.9% and 17.4%,  respectively.
(See Note 18 to Consolidated Financial Statements.)

Year 2000 Readiness

     The Company has taken all  possible  steps to ensure  computer  systems and
infrastructure are ready for the Year 2000. The following  information  explains
the process that the Company used to achieve Year 2000 readiness.

Background.  As with other  organizations,  some of the data processing programs
used by the Company  were  originally  designed to recognize  calendar  years by
their last two digits.  Calculations  performed using these truncated fields may
not work  properly with dates beyond 1999.  Correct  processing of date oriented
information is critical to the operation of all financial  institutions  because
computer  systems track deposit  account and loan balances,  record  transaction
activity in accounts,  and calculate  interest amounts,  among other activities.
Failure  of these  processes  could  severely  hinder the  ability  to  continue
operations and provide customer  service.  Because of the critical nature of the
issue, the Company  established a committee early in 1997 to address "Year 2000"
issues. The committee, consisting of executive management,  technical staff, and
a full-time project manager, chose to use the OTS Year 2000 checklist as a guide

<PAGE>

for Year 2000 preparation. The committee also used a Year 2000 Testing Guide and
Contingency Guide provided by Alex Information  Systems,  Inc. to complement the
OTS checklist.

Process. The Federal Financial Institutions Examination Council ("FFIEC") issued
guidelines  for Year 2000 project  management by financial  institutions,  which
were followed by the Company.  These  guidelines  identified  the following five
steps for Year 2000 conversion programs:

     Awareness  Phase - Define the Year 2000  problem and  establish a Year 2000
     program team and overall  strategy.  This step was completed by the Company
     as of September 30, 1997.

     Assessment Phase - Assess the size and complexity of the problem and detail
     the  magnitude of effort  necessary to address Year 2000 issues,  including
     hardware, software, networks, automated teller machines, etc. This step was
     approximately 100% complete by June 30, 1999 and assessment will be ongoing
     until the Year 2000.

     Renovation Phase - This phase includes  hardware and software  upgrades and
     system  replacements.  This step was 100% complete for in-house  systems at
     December 31, 1998. This phase also encompasses ongoing discussions with and
     monitoring of outside servicers and third-party software providers.

     Validation/Testing  Phase - This process  includes  testing of hardware and
     software  components.  Testing is completed by performing  extensive  tests
     with the computer dates changed to January 1, 2, and 3, 2000.  Such testing
     continued  through  September 30, 1999,  with the most  critical  functions
     tested  first.  This  allows time to correct  any  discovered  deficiencies
     before the end of 1999.  In-house  systems and third party service  bureaus
     are 100% tested as of September 30, 1999.  The Company is either testing or
     reviewing test documents of additional  third party vendors that are deemed
     critical to the operations of the Company. Overall, the validation phase is
     considered 100% complete as of September 30, 1999.

     Implementation  Phase - Systems  successfully  tested will be designated as
     Year  2000  compliant.  For any  system  failing  validation  testing,  the
     business impact must be assessed and a contingency plan  implemented.  This
     phase was completed as of June 30, 1999.

All personal computers ("PCs") and related software  throughout the Company have
been  inventoried  and tested for Year 2000  capability.  The  Company  used two
testing  methods,  BIOS  and  off  line,  for  PC  certification  of  Year  2000
compatibility.  PCs were required to pass both tests to be considered  ready for
Year 2000.  As of September  30, 1998,  all of the  Company's PCs were Year 2000
compatible. The Company's Wide Area Network and various Local Area Networks were
also upgraded, tested, and determined to be Year 2000 prepared.

Data  processing  for the Company is provided by Fiserv,  the  nation's  largest
third party service bureau  serving  financial  institutions.  Fiserv has stated
that all their  processing  was Year 2000 ready of as June 30, 1998. The Company
successfully  performed test procedures for critical service bureau processes in
December 1998 and in April 1999.

Software  purchased  from a Fiserv  affiliate is used for  applications  such as
accounts  payable,  fixed  assets  and  investment  portfolio  accounting.   The

<PAGE>

investment  portfolio  accounting  software  was  Year  2000  compatible  as  of
September  30,  1998.  During the  quarter  ended  March 31,  1999,  the Company
converted  the accounts  payable and fixed asset  applications  to the Year 2000
ready software provided by the Fiserv affiliate.

Other third party vendors identified by the Company were monitored for Year 2000
readiness.  Validation  with  critical  vendors was 100% complete as of June 30,
1999.

Critical  data  processing  applications,  in addition to those  provided by the
service  bureau,  have  been  identified.  These  include  applications  such as
electronic  processing  through the  Federal  Reserve  Bank and ATM  processing.
Testing with the Federal Reserve Bank has been successfully  completed.  All ATM
machines have been upgraded and are now ready for Year 2000.

Contingency plans were developed by the committee. The contingency plans address
actions to be taken to continue operations in the event of system failure due to
areas that cannot be tested in  advance,  such as power and  telephone  service,
which are vital to business continuation. Contingency planning was 100% complete
as of June 30,  1999.  The Company  continues  to make last minute  plans and to
prepare its staff for the  rollover  period of  December  20, 1999 to January 7,
2000.

For many  financial  institutions,  the Year 2000 readiness of borrowers to whom
the institution has commercial  operating loans is a concern.  Lack of Year 2000
preparedness could cause disruptions of borrowers' businesses significant enough
to compromise their ability to repay  indebtedness.  The Company's loans of this
type  represent  less than one half of one percent of the total loan  portfolio,
and are not considered to represent a significant risk of loss.

To assist in understanding  Year 2000 issues and to inform them of the Company's
preparation  activities,  brochures  regarding Year 2000  preparedness have been
distributed to all customers. Another mailing was made during the quarter ending
September 30, 1999. In addition,  the Company has  published  advertisements  in
local  newspapers  and has placed "Year 2000"  bulletin  boards in all branches,
which contain current information on Year 2000 readiness for the Company and the
financial services industry.

Conclusion.  The  Company  believes  that  the  Year  2000  issue  will not pose
significant  operational  problems and is not  anticipated to be material to its
financial  position or results of  operations in any given year. As of September
30, 1999, the Company estimated that total Year 2000  implementation  costs will
be  approximately  $200,000 and are expected to be expensed  over a period of 18
months,  affecting  fiscal years 1998, 1999, and 2000. This estimate is based on
information  available at September  30, 1999,  and may be revised as additional
information and actual costs become available.  During the years ended September
30, 1999 and 1998,  $82,000 and $89,000 of Year 2000  expenses were incurred and
expensed, respectively.

Changes in Financial Condition

     At September 30, 1999, the consolidated assets of the Company totaled $1.04
billion,  an increase of $10.3 million, or 1.0%, from $1.03 billion at September
30, 1998.  The increase in total assets was  primarily a result of $71.6 million
growth in loans which offset the Company's  repurchase of 20% of the outstanding
common  stock in January  1999,  which  reduced  cash and  investments  by $39.0
million.


<PAGE>

     Total cash and cash  equivalents  decreased $42.5 million,  or 63.4%,  from
$67.0 million at September 30, 1998 to $24.5 million at September 30, 1999.  The
decrease is primarily  the result of using cash to fund the stock  repurchase in
January 1999.

     Net loans  receivable  increased  by $71.6  million,  or  10.7%,  to $739.8
million at September 30, 1999, compared to $668.1 million at September 30, 1998.
The increase was  primarily  the result of continued  new loan demand  exceeding
loan repayments,  augmented by the Company's  purchase of $5.1 million in higher
yielding loans on multi-family  residential and commercial  properties in Oregon
and $10.0 million in  adjustable-rate  one- to four- family mortgages during the
year ended September 30, 1999.

     Investment  securities  decreased  $46.9  million,  or 22.8%,  from  $206.1
million at  September  30, 1998 to $159.2  million at September  30, 1999.  This
decrease was the result of scheduled  maturities,  primarily maturities of short
term commercial  paper. The proceeds from these maturities were used to fund the
stock  repurchase.  During the year ended  September 30, 1999,  $16.4 million of
principal  payments  were  received  on mortgage  backed and related  securities
("MBS") and $9.5  million of MBS were sold,  thus  reducing  the balance of MBS.
This reduction was more than offset by the purchase of $18.8 million in CMOs and
$36.7 million in other mortgage-backed  securities,  resulting in a net increase
in total MBS from  $47.0  million  at  September  30,  1998 to $75.3  million at
September 30, 1999.

     Real estate owned increased from zero at September 30, 1998 to $1.5 million
at September 30, 1999.  This balance  primarily  relates to the foreclosure of a
motel with an estimated fair value of $1.4 million that was a participation loan
originated by another lender.

     Deposit liabilities  increased $30.9 million,  or 4.5%, from $689.5 million
at  September  30,  1998 to $720.4  million  at  September  30,1999.  Management
attributes the increase to the  maintaining  of competitive  rates in its market
areas as well as the use of an automated on-line personal  computer-based system
to market  deposits  nationally.  The increase in deposits has been  experienced
throughout the network of 34 full service branches.

     Advances  from  the  FHLB of  Seattle  increased  from  $167.0  million  at
September  30, 1998 to $197.0  million at September  30, 1999.  The increase was
used to fund loan growth.  During the quarter  ended June 30, 1999,  the Company
converted  adjustable-rate  FHLB  borrowings to  fixed-rate  three- to five-year
maturity borrowings as a strategic move to manage interest rate risk. Short term
borrowings  at  September  30,  1998  consisted  of  $12.1  million  in  reverse
repurchase  agreements.  These agreements matured during the quarter ended March
31, 1999, and they were not renewed.

     Total shareholders'  equity  decreased $35.5 million, or 24.5%, from $145.1
million at  September  30, 1998 to $109.6  million at September  30,  1999.  The
decrease is primarily  attributable  to $39.0 million paid out for the 20% stock
repurchase  completed  in  January  1999.  Equity was also  decreased  by a $4.6
million decrease in unrealized gains on securities available for sale during the
year ended  September 30, 1999.  These  decreases were partially  offset by $9.2
million in earnings for the year.

Asset Quality

Non-Performing Assets
     At  September  30,  1999,  the ratio of  non-performing  assets  (including
nonaccrual  loans,  accruing loans greater than 90 days delinquent,  real estate
owned,  and other  repossessed  assets) to total  assets was .46% as compared to
 .05% at September 30, 1999. The Association intends to maintain asset quality by
continuing its focus on one-to-four  family  lending.  With the  introduction of
other lending  options such as commercial  and  multi-family  real estate loans,
equity lines of credit, other consumer loan products,  and commercial loans, the
Association has evaluated the trade off associated with planned loan growth  and

<PAGE>

the greater credit risk associated with such forms of lending.

Classified Assets
     The Association has established a  Classification  of Assets Committee that
meets at least  quarterly  to approve  and develop  action  plans to resolve the
problems  associated with the assets.  They also review  recommendations for new
classifications  and make any  changes  in present  classifications,  as well as
making recommendations for the adequacy of reserves.

     In accordance with  regulatory  requirements,  the Association  reviews and
classifies  on a regular  basis,  and as  appropriate,  its  assets as  "special
mention,"  "substandard,"  "doubtful,"  and  "loss."  All  nonaccrual  loans and
non-performing assets are included in classified assets.
<TABLE>
<CAPTION>

The following  table sets forth at the dates indicated the amounts of classified
assets:

                             At September 30,
                  ---------------------------------
                      1999        1998        1997
                  ---------   ---------   ---------
                            (In thousands)

<S>               <C>         <C>         <C>
Loss ..........   $    --     $       3   $    --
Doubtful ......        --          --          --
Substandard ...       4,810         521         304
Special Mention         456       2,452         843
                  _________   _________   _________
                  $   5,266   $   2,976   $   1,147
                  =========   =========   =========
</TABLE>

Allowance for Loan Losses
     The Association has established a systematic  methodology for determination
of provisions for loan losses.  The  methodology is set forth in a formal policy
and takes into consideration the need for a general valuation  allowance as well
as specific  allowances  that are tied to individual  loans.  Provision for loan
losses is recorded  based on the  Association's  evaluation of specific loans in
its portfolio,  historical loan loss experience, the volume and type of lending,
geographic  distribution  of  lending,  general  economic  conditions,  and  the
existing level of the Association's allowance for loan losses.
<TABLE>
<CAPTION>

The following  table sets forth at the dates  indicated the loan loss  allowance
and charge-offs:


                                              At September 30,
                                  -----------------------------------------
                                    1999             1998             1997
                                  -------          --------          ------
                                              (In thousands)

<S>                               <C>                <C>             <C>
General loan loss allowance       $2,484             $1,947          $1,296
Specific loss allowance               --                  3              --
Charge-offs                          398                 20               2

</TABLE>


<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1999
AND 1998

General

     In  September  1998,  the  Company's  Board  of  Directors  authorized  the
repurchase  of 20% of the  Company's  outstanding  common  stock via a "Modified
Dutch Auction  Tender Offer" (the  "Offer").  The  transaction  was completed in
January 1999. The Offer contributed to the 15.24% increase in earnings per share
from $1.05 for the year  ended  September  30,  1998 to $1.21 for the year ended
September 30, 1999.  Similarly,  the Company's return on average equity improved
by 15.80% from 6.52% for the year ended September 30, 1998 to 7.55% for the year
ended September 30, 1999.

Interest Income

     The $39.1 million increase in average  interest earning assets  contributed
to an increase in interest income of $2.0 million or 2.8% from $69.7 million for
the year ended  September 30, 1998 to $71.7 million for the year ended September
30, 1999.  An increase in average  loans  receivable  provided a net increase in
interest income that more than offset the decrease in interest income  resulting
from  completion  of the Offer in January 1999 which reduced  earning  assets by
$39.0 million.  The general interest rate environment during the year was one of
low but gradually  increasing  rates.  During the year ended September 30, 1998,
interest rates were stable  throughout  most of the year,  declining only in the
last quarter,  from July through  September.  As a result,  interest  rates were
lower overall during fiscal 1999 than in 1998.  This is reflected in the average
yield on  interest-earning  assets which  decreased  slightly from 7.34% for the
year ended September 30, 1998 to 7.25% for the year ended September 30, 1999.

     An increase in loans  receivable  contributed to a $6.8 million increase in
interest  income on loans.  The  increase in loans  receivable  was  primarily a
result of the purchase of participation  loans and loan  originations  exceeding
loan refinancing, which resulted in net loan growth of $71.6 million for 1999.

     The increase in interest income on loans was partially  offset by decreases
in  interest  income on  investment  securities,  mortgage  backed  and  related
securities and interest-earning  deposits.  Cash and investment  securities were
liquidated  to provide funds for  completion  of the Offer in January 1999.  For
example the average balance of investments decreased by $49.3 million, or 21.1%,
for the year ended September 30, 1999 compared with the same period in 1998.

Interest Expense

     Interest expense increased $533,255 due to increases in interest expense on
FHLB borrowings.  Interest expense on deposits  remained stable at $29.0 million
for the year ended  September  30, 1999  compared to $28.9  million for the year
ended September 30, 1998.

     Average  deposits  increased by $35.9 million for the year ended  September
30, 1999 compared to the year ended September 30, 1998, but the average interest
paid on  interest-bearing  deposits decreased 24 basis points from 4.58% for the
year ended  September  30, 1998 to 4.34% for the year ended  September 30, 1999.
This decrease was a result of the lower interest rate scenario  during the year.
Interest  expense on FHLB  borrowings  increased  $1.2  million due to increased
average borrowings of $32.7 million.

     As noted previously,  the general interest rate environment during the year
was one of low rates  which  gradually  increased  during  the  year.   In  this

<PAGE>

environment,  the Company  improved its interest  rate spread from 2.57% for the
year ended  September  30, 1998 to 2.73% for the year ended  September 30, 1999.
While yields on assets  decreased by 9 basis  points,  cost of  interest-bearing
liabilities decreased by 25 basis points,  resulting in a greater spread for the
current year. Net interest  margin (net interest  income as a percent of average
interest-earning  assets)  remained  constant  comparing  the fiscal  year ended
September  30,  1999 to 1998.  The  increase  in  non-interest-bearing  checking
deposits through  checking  account  campaigns had a positive impact by reducing
overall cost of funds.


<PAGE>
<TABLE>
<CAPTION>

AVERAGE BALANCES, NET INTEREST INCOME and YIELDS EARNED and RATES PAID

The following table presents,  for the periods indicated,  information regarding
average balances of assets and liabilities,  as well as the total dollar amounts
of interest income from average  interest-earning assets and interest expense on
average  interest-bearing  liabilities,  resultant yields, interest rate spread,
net interest margin and the ratio of average  interest-earning assets to average
interest-bearing  liabilities.  Dividends  received  are  included  as  interest
income.  The table does not  reflect  any effect of income  taxes.  All  average
balances  are based on month-end  balances.  Nonaccrual  loans are  reflected as
carrying a zero yield.

                                                                    Year Ended September 30,
                              ------------------------------------------------------------------------------------------------------
                                             1999                            1998                              1997
                              -------------------------------  --------------------------------  -----------------------------------
                               Average                 Yield/   Average                  Yield/   Average                    Yield/
                               Balance      Interest    Rate    Balance     Interest      Rate    Balance     Interest        Rate
                              ---------   ----------   ------  ---------  ----------     ------  --------     --------       -------
INTEREST-EARNING ASSETS                                                   (In thousands)

<S>                         <C>           <C>         <C>    <C>          <C>           <C>      <C>          <C>           <C>
Loans receivable ........   $  721,658    $   56,290    7.80%  $614,457   $   49,508      8.06%  $515,555     $ 40,851        7.92%
Mortgage backed and
     related securities         38,284         2,104    5.50%    61,000        3,680      6.03%    74,349        4,716        6.34%
Investment securities ...      184,428        10,847    5.88%   233,715       14,149      6.05%   112,319        6,847        6.10%
Federal funds sold ......       18,555           914    4.93%    16,820          917      5.45%    17,533          931        5.31%
Interest earning deposits       15,801           751    4.75%    16,108          862      5.35%     6,132          327        5.32%
FHLB stock ..............       10,471           785    7.50%     7,983          617      7.73%     6,431          495        7.70%
                            ----------    ----------           --------   ----------            ---------     --------
Total interest-earning assets  989,197        71,691    7.25%   950,083       69,733      7.34%   732,319       54,167        7.40%
Non-interest-earning assets     45,314    ----------             48,202   ----------               16,527     --------
                            ----------                       ----------                          --------
Total Assets ............   $1,034,511                       $  998,285                          $748,846
                            ==========                       ==========                          ========
INTEREST-BEARING LIABILITIES

Tax and insurance reserve   $    5,326    $      110    2.07%$    5,895   $      145      2.47%$    4,614   $      137        2.97%
Passbook and statement
     savings                    61,674         1,326    2.15%    62,333        1,683      2.70%    40,281        1,271        3.15%
Interest-bearing checking       71,107           873    1.23%    73,806        1,089      1.48%    35,892          791        2.20%
Money market ............      131,534         5,096    3.87%   110,650        4,275      3.86%    62,171        2,391        3.85%
Certificates of deposit .      402,809        21,679    5.38%   384,400       21,885      5.69%   312,511       18,012        5.76%
FHLB advances/Short term
     borrowings                176,851         9,298    5.26%   155,712        8,771      5.63%   127,659        7,254        5.68%
                            ----------    ----------          ---------    ---------             --------     --------
Total interest-bearing
     liabilities               849,301        38,382    4.52%   792,796       37,848      4.77%   583,128       29,856        5.12%
Non-interest-bearing
     liabilities                63,975                           59,037                            19,417
                            ----------    ----------         ----------   -----------           ---------      -------
Total liabilities .......      913,276                          851,833                           602,545
Shareholders' equity ....      121,235                          146,452                           146,301
                            ----------                       ----------                          --------
Total Liabilities and
     Shareholders' Equity   $1,034,511                       $  998,285                          $748,846
                            ==========                       ==========                          ========
Net interest income .....                 $   33,309                      $   31,885                           $24,311
                                          ==========                      ==========                           =======
Interest rate spread ....                               2.73%                             2.57%                               2.28%
                                                      =======                             =====                               =====
Net interest margin .....                               3.37%                             3.36%                               3.32%
                                                      =======                             =====                              ======
Average interest-earning assets to
average interest-bearing liabilities                  116.47%                           125.58%                             137.78%
                                                      =======                           =======                             =======
</TABLE>

<PAGE>

RATE VOLUME ANALYSIS

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

                                                                         For the Year Ended September 30,
                                         -------------------------------------------------------------------------------------------
                                            1998 VS 1999 Increase (Decrease) Due to         1997 VS 1998 Increase (Decrease) Due to
                                         ---------------------------------------------      ----------------------------------------
                                                                          Net Increase                                  Net Increase
                                           Rate       Volume    Rate/Vol    (Decrease)      Rate      Volume  Rate/Vol    (Decrease)
                                         --------   --------    --------  ------------   -------    --------  --------  ------------
INTEREST EARNING ASSETS                                                          (In thousands)

<S>                                     <C>         <C>         <C>         <C>         <C>         <C>         <C>       <C>
Loans ...............................   ($ 1,580)   $  8,637    ($   275)   $  6,782    $    688    $  7,837    $  132    $  8,657
Mortgage backed and related
     securities .....................       (328)     (1,370)        122      (1,576)       (231)       (848)       43      (1,036)
Investment securities ...............       (403)     (2,984)         85      (3,302)        (47)      7,400       (51)      7,302
Federal funds sold ..................        (88)         95         (10)         (3)         25         (37)       (2)        (14)
Interest bearing deposits ...........        (96)        (16)          1        (111)          1         533         1         535
FHLB stock ..........................        (19)        192          (5)        168           2         120        --         122
                                        --------    --------    --------    --------    --------    --------    ------    --------
Total Interest-Earning Assets           ($ 2,514)   $  4,554    ($    82)   $  1,958    $    438    $ 15,005    $  123    $ 15,566
                                        ========    ========    ========    ========    ========    ========    ======    ========

INTEREST-BEARING LIABILITIES

Tax and insurance reserves ..........   ($    23)   ($    14)   $      2    ($    35)   ($    24)   $     38    ($   6)   $      8
Passbook and statement savings ......       (343)        (18)          4        (357)       (183)        696      (101)        412
Interest-bearing checking ...........       (183)        (40)          7        (216)       (261)        836      (277)        298
Money market ........................         12         807           2         821          11       1,864         9       1,884
Certificates of deposit .............     (1,197)      1,048         (57)       (206)       (220)      4,143       (50)      3,873
FHLB advances/Short term borrowings..       (584)      1,191         (80)        527         (63)      1,593       (13)      1,517
                                        --------    --------    --------    --------    --------    --------    -------    --------
Total Interest-Bearing Liabilities      ($ 2,318)   $  2,974    ($   122)   $    534    ($   740)   $  9,170    ($ 438)   $  7,992
                                        ========    ========    ========    ========    ========    ========    =======    ========
Increase in Net Interest Income......                                         $1,424                                      $  7,574
                                                                            ========                                       ========
</TABLE>










<PAGE>

Provision for Loan Losses

     The  provision  for loan losses was  $932,000,  recoveries  were zero,  and
charge offs were $398,052 during the year ended September 30, 1999 compared to a
provision of $674,000, with no recoveries, and charge offs of $20,774 during the
year ended September 30, 1998. Charge offs for the year ended September 30, 1999
primarily  relate to the  write-down  of a $1.6 million  commercial  real estate
loan.  The  underlying  property was acquired  through  foreclosure in September
1999.

     As the Company has grown over the last twelve  months,  the  composition of
the loan  portfolio has changed,  with  relatively  high levels of  construction
loans and increases in commercial  and consumer  loans,  which are considered to
have more  associated risk than the Company's  traditional  portfolio of one- to
four-family   residential  mortgages.   Because  of  the  Company's  history  of
relatively low loan loss experience, it has historically maintained an allowance
for loan losses at a lower  percentage  of total  loans as  compared  with other
institutions  with higher risk loan portfolios and higher loss  experience.  The
increased  provision for loan losses reflects such changes in the composition of
the loan portfolio, although the Company's recent experience has not indicated a
deterioration in loan quality. The balance of non-performing loans has increased
during the current fiscal year,  primarily as a result of the addition of a $1.5
million land development loan. The Company is not anticipating any material loss
on this loan at this time. At September 30, 1998,  the allowance for loan losses
was equal to 372.1% of non-performing assets compared to 51.64% at September 30,
1999.  The decrease in the coverage  ratio at year end 1999 was the result of an
increase   in   non-performing   assets  as  a  result  of  the   aforementioned
nonperforming land development loan and foreclosure of a $1.6 million commercial
real estate property.  The foreclosed real estate has been recorded at estimated
fair value of $1.4 million.  The Company views these as isolated problem assets,
not a market or underwriting trend.

Non-Interest Income

     Non-interest income increased  $427,264,  or 13.3%, to $3.6 million for the
year ended September 30, 1999 from $3.2 million for the year ended September 30,
1998. The increase was primarily attributable to increases in fee income related
to the increase in deposit accounts subject to service charges.

Non-Interest Expense

     Non-interest expense increased $1.7 million, or 8.5%, from a total of $19.5
million  for the prior year to $21.2  million for the year ended  September  30,
1999.  Compensation,  employee benefits, and related expense increased $479,677,
or 5.0%,  from $9.6  million  for the year  ended  September  30,  1998 to $10.1
million  for the same  period of 1999.  Occupancy  expense  increased  from $2.1
million for the year ended September 30, 1998 to $2.2 million for the year ended
September  30,  1999.  These  modest  increases  are due to the  addition of two
branches and  expenditures on equipment  related to preparing for the Year 2000.
Sale of mortgage backed and related securities and real estate owned resulted in
a loss of $137,140  during the year ended September 30, 1999 compared to zero in
the previous year. Other expense  increased $1.0 million,  from $4.9 million for
the year ended  September  30, 1998 to $5.9  million for the current  year.  The
increase  primarily resulted from recognition of $515,000 of losses in the third
quarter of this year related to the Wells Fargo branch  integration.  Management
believes  this  loss is an  isolated  item and does  not  anticipate  additional
charges. The ratio of non-interest expense to average total assets was 2.05% and
1.96% for the years ended September 30, 1999 and 1998, respectively.


<PAGE>

Income Taxes

     The  provision  for  income  taxes  was $5.7  million  for the  year  ended
September 30, 1999,  representing  an effective tax rate of 38.2%  compared with
$5.3 million for the year ended September 30, 1998 representing an effective tax
rate of 35.9%.  The lower  effective  rate for 1998 reflects the impact of a one
year  reduction  in  the  state  tax  rate  for  Oregon.  (See  Note  11 to  the
Consolidated Financial Statements.)

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998
AND 1997

General

     The  acquisition  of 25 branches  from Wells Fargo Bank,  N.A.  late in the
fiscal  year  ended  September  30,  1997 (the  "Acquisition")  had  significant
positive impact on the operations of the Company.  The overnight  expansion from
eight  branches  to 33 and the  resultant  increase  in  deposits  and number of
employees  is  reflected  in  increases  in  non-interest  income and  expenses.
Additionally,  two branches  were opened  during  fiscal year 1998,  including a
branch that the Company  constructed in Bend and a branch the Company  purchased
from Key Bank in  Jacksonville.  The Company ended fiscal year 1998 with 34 full
service branches in operation and one loan production office.

     With the  Acquisition  during the year ended  September  30, 1997 and other
activities  throughout 1998, net earnings increased $1.0 million, or 11.6%, from
$8.6 million for the year ended September 30, 1997, to $9.6 million for the year
ended  September 30, 1998. Net interest  income  increased $7.6 million or 31.2%
from $24.3  million for the year ended  September  30, 1997 to $31.9 million for
the year ended September 30, 1998.  This increase was primarily  attributable to
an  increase in total  average  interest-earning  assets from $732.3  million at
September 30, 1997 to $950.1  million at September 30, 1998. The increase in net
interest income was augmented by a significant  increase in non-interest  income
from $810,608 for the year ended September 30, 1997 to $3.2 million for the year
ended  September  30, 1998.  This  increase  was  primarily  attributable  to an
increase in service fee income due to the  addition of the 25 acquired  branches
which contributed 42,000 additional deposit accounts.

Interest Income

     The $217.8 million increase in average interest earning assets  contributed
to an increase in interest income of $15.6 million, or 28.7%, from $54.1 million
for the year  ended  September  30,  1997 to $69.7  million  for the year  ended
September  30,  1998.  A   significant   portion  of  the  increase  in  average
interest-earning  assets was the result of  converting  the cash obtained in the
Acquisition into investment securities. This in turn increased the proportion of
investment  securities to total earning  assets and decreased the  proportion of
loans.   In  most  cases,   loans  will  generate  higher  average  yields  than
investments. As a result, although total interest income increased for the year,
the average yield on interest earning assets  decreased  slightly from 7.40% for
the year ended  September  30,  1997 to 7.34% for the year ended  September  30,
1998.

     Of  the  $15.6  million  increase  in  interest  income,  $8.7  million  is
attributable to additional  loan income due to an increase in loans  receivable.
The  increase in loans  receivable  was  primarily  a result of the  purchase of
participation  loans and loan  originations  exceeding loan  refinancing,  which
resulted in greater net loan growth for 1998.

<PAGE>

     The remaining  increase in interest  income of $6.9 million was a result of
investing the proceeds of the  Acquisition  in fixed-rate  U.S.  Government  and
agency   securities  with  maturities  of  less  than  five  years,   fixed  and
adjustable-rate corporate securities and overnight funds. The average balance of
investments  and  mortgage-backed  and related  securities  increased  by $108.0
million,  or 57.9%,  for the year ended  September  30, 1998  compared  with the
comparable period in 1997.

Interest Expense

     Interest  expense  increased  $8.0  million  due to  increases  in interest
expense on deposits and borrowings.  Interest expense on deposits increased $6.5
million,  or 28.8%,  from $22.4 million for the year ended September 30, 1997 to
$28.9 million for the year ended September 30, 1998.

     Average  deposits  increased by $180.3 million for the year ended September
30, 1998 compared to the year ended September 30, 1997, but the average interest
paid on  interest-bearing  deposits decreased 40 basis points from 4.98% for the
year ended  September  30, 1997 to 4.58% for the year ended  September 30, 1998.
This  decrease  was a result  of the  lower  cost of  deposits  obtained  in the
Acquisition and overall lower rates in 1998 over 1997. These lower cost deposits
were outstanding for the entire year ended September 30, 1998 but only two and a
half months during the prior year,  thus having a greater  impact on fiscal year
1998.  Interest  expense  on  FHLB  borrowings  increased  $1.7  million  due to
increased average borrowings of $30.3 million.

     The general interest rate environment  during the year was one of low rates
and a flat yield curve.  Analysts  reported  that the largest 50 public  banking
companies  experienced a  20-basis-point  compression in net interest margin for
the year ended  September  30, 1998. In spite of this  environment,  the Company
improved its net interest  margin from 3.32% for the fiscal year ended September
30, 1997 to 3.36% for the year ended  September 30, 1998.  This  improvement was
related  to  the  Company's  success  in  converting  proceeds  from  investment
securities into loans which yield a higher return than investment  securities as
well as improving the mix of loans  originated  to include more higher  yielding
loans than in the past.  Interest rate spread also improved,  from 2.28% for the
year ended  September 30, 1997 to 2.57% for the current year.  This  improvement
was primarily the result of the lower cost  transaction  accounts  obtained with
the Acquisition. The addition of non- interest-bearing checking deposits through
the  Acquisition  had the further  positive  impact of reducing  overall cost of
funds.

Provision for Loan Losses

     The  provision  for loan losses was  $674,000,  recoveries  were zero,  and
charge offs were $20,774 during the year ended  September 30, 1998 compared to a
provision of $370,000 with no  recoveries  and charge offs of  $1,369 during the
year ended  September 30, 1997. The increase in the provision is a reflection of
the Company's approach of increasing the provision as loan volumes increase.  At
September  30,  1998,  the  allowance  for loan  losses  was  equal to 372.1% of
non-performing  assets compared to 510.2% at September 30, 1997. The decrease in
the  coverage  ratio  at  year  end  1998  was  the  result  of an  increase  in
non-performing  assets as a result of foreclosure  proceedings initiated against
five  one- to  four-family  properties.  The  loan  balances  related  to  these
properties  totaled  $289,737 at September  30, 1998  compared to fair values of
$565,830.

Non-Interest Income

     Non-interest  income increased $2.4 million, or 295.1%, to $3.2 million for
the year ended September 30, 1998 from $811,000 for the year ended September 30,
1997. The  increase  was  attributable to increases in fees and service  charges
<PAGE>

and other  income,  principally  as a result of the  increase  in the  number of
deposit accounts subject to service charges obtained in the Acquisition.

Non-Interest Expense

     Non-interest  expense increased $7.7 million,  or 65.9%, for the year ended
September  30, 1998,  from a total of $11.8  million for the prior year to $19.5
million for the year ended September 30, 1998. The increase in branches with the
Acquisition  as  well  as the  addition  of two new  branches  impacted  several
categories of non-interest  expense. An increase in number of employees from 100
to 244 produced the $2.5 million increase in compensation and employee benefits.
Occupancy  expense  increased  $1.2  million,  or 127.4%,  as expected  with the
increase from seven branches to 34. Other items  correlated to increased  volume
and number of  locations  also  increased  as  expected.  For  example,  postage
increased by $400,759,  or 221.3%;  telephone increased by $171,570,  or 147.7%;
check processing  increased by $506,181,  or 281.0%;  and ATM expense  increased
$218,004, or 145.1%.

     The  recording  of  core  deposit  intangible  related  to the  Acquisition
resulted in $1.7 million in  amortization  expense for the year ended  September
30,  1998  compared to $302,991  for the prior year.  The ratio of  non-interest
expense  to  average  total  assets  was 1.96%  and  1.57%  for the years  ended
September 30, 1998 and 1997, respectively.

Income Taxes

     The  provision  for  income  taxes  was $5.3  million  for the  year  ended
September 30, 1998,  representing  an effective tax rate of 35.9%  compared with
$4.4 million for the year ended September 30, 1997 representing an effective tax
rate of 34.1%.  The  effective  rate for 1998  reflects the impact of a one year
reduction in the state tax rate for Oregon.  The effective tax rate for 1997 was
lower than 1998  because  the  Company  was able to  recognize  the tax  benefit
related to the capital loss on sale of the U.S. Federal  securities  mutual bond
fund, thereby reducing tax expense for the year. At September 30, 1996, when the
capital loss was recognized for book purposes, a valuation allowance was created
to offset the  deferred  tax asset  because the Company was not assured of being
able to realize a capital  gain and the  related  tax  benefit.  During the year
ended September 30, 1997, the Company,  through the sale of certain investments,
realized a capital gain for tax purposes  that  assures  realization  of the tax
benefit and thus reduced the  valuation  allowance to zero.  (See Note 11 to the
Consolidated Financial Statements.)
<PAGE>

COMMON STOCK INFORMATION

     Since October 4, 1995,  Klamath First Bancorp's  common stock has traded on
the National  Association of Security  Dealers  Automated  Quotation  ("Nasdaq")
National  Market under the symbol "KFBI".  As of September 30, 1999,  there were
approximately  1,511  shareholders  of record.  This total does not  reflect the
number of persons or entities who hold stock in nominee or "street" name through
various brokerage firms.


The high and low common stock prices by quarter were as follows:
<TABLE>
<CAPTION>

                                           Year Ended September 30,
                                ________________________________________________
                                        1999                          1998
                                __________________            __________________
                                 High         Low              High         Low
                                ______      ______            ______      ______
<S>                             <C>         <C>               <C>         <C>
First quarter                   $19.38      $16.00            $24.25      $20.50
Second quarter                   19.00       15.00             23.06       19.50
Third quarter                    17.00       14.63             23.00       18.63
Fourth quarter                   15.06       12.63             20.00       14.00
</TABLE>

The cash dividends declared by quarter were as follows:
<TABLE>
<CAPTION>

                                 Year Ended September 30,
                                 ________________________
                                    1999         1998
                                 _________      _________

<S>                                <C>          <C>
First quarter                      $0.095       $0.080
Second quarter                      0.120        0.085
Third quarter                       0.120        0.090
Fourth quarter                      0.125        0.090
</TABLE>

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


<PAGE>




Independent Auditors' Report



Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon


     We have audited the  accompanying  consolidated  balance  sheets of Klamath
First Bancorp,  Inc. and Subsidiary (the "Company") as of September 30, 1999 and
1998, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three  years in the period  ended  September  30,
1999. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
Subsidiary as of September 30, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period  ended  September
30, 1999, in conformity with generally accepted accounting principles.



\s\ Deloitte & Touche LLP
Portland, Oregon
October 29, 1999


<PAGE>
<TABLE>
<CAPTION>
                   KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                                                                       September 30,
                                                                           -----------------------------------
                                                                                  1999               1998
ASSETS                                                                     ----------------    ---------------

<S>                                                                         <C>                <C>
Cash and due from banks .................................................   $    21,123,217    $    25,644,460
Interest bearing deposits with banks ....................................         1,231,516         11,496,026
Federal funds sold and securities purchased under agreements to resell ..         2,167,856         29,844,783
                                                                            ---------------    ---------------
   Total cash and cash equivalents ......................................        24,522,589         66,985,269

Investment securities available for sale, at fair value
  (amortized cost: $161,112,272 and $199,251,123) .......................       158,648,057        203,224,184
Investment securities held to maturity, at amortized cost (fair
  value: $577,455 and $2,928,324) .......................................           559,512          2,888,759
Mortgage backed and related securities available for sale, at fair
  value (amortized cost: $73,075,553 and $42,741,863) ...................        72,695,555         43,335,857
Mortgage backed and related securities held to maturity, at amortized
  cost (fair value: $2,596,408 and $3,696,444) ..........................         2,600,920          3,661,683
Loans receivable, net ...................................................       739,793,403        668,146,380
Real estate owned and repossessed assets ................................         1,494,890               --
Premises and equipment, net .............................................        11,581,923         12,347,467
Stock in Federal Home Loan Bank of Seattle, at cost .....................        10,957,300         10,172,900
Accrued interest receivable .............................................         7,153,818          7,471,717
Core deposit intangible .................................................         9,778,341         11,431,018
Other assets ............................................................         1,855,032          1,637,164
                                                                            ---------------    ---------------
   Total assets .........................................................   $ 1,041,641,340    $ 1,031,302,398
                                                                            ===============    ===============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Deposit liabilities ...................................................   $   720,401,112    $   689,541,345
  Accrued interest on deposit liabilities ...............................         1,184,471          1,291,784
  Advances from borrowers for taxes and insurance .......................         9,758,627          9,420,791
  Advances from Federal Home Loan Bank of Seattle .......................       197,000,000        167,000,000
  Short term borrowings .................................................              --           12,112,500
  Accrued interest on borrowings ........................................            34,484            213,957
  Pension liabilities ...................................................           833,644            779,392
  Deferred federal and state income taxes ...............................           579,727          3,655,944
  Other liabilities .....................................................         2,263,812          2,205,730
                                                                            ---------------    ---------------
    Total liabilities ...................................................       932,055,877        886,221,443
                                                                            ---------------    ---------------
Commitments and contingencies

SHAREHOLDERS' EQUITY

  Preferred stock, $.01 par value, 500,000 shares authorized; none issued              --                 --
  Common stock, $.01 par value, 35,000,000 shares authorized,
   September 30, 1999 - 7,908,377 issued, 7,062,092 outstanding
   September 30, 1998 - 9,916,766 issued, 8,898,972 outstanding .........            79,084             99,168
  Additional paid-in capital ............................................        43,794,535         82,486,183
  Retained earnings-substantially restricted ............................        76,866,452         71,051,445
  Unearned shares issued to ESOP ........................................        (5,871,900)        (6,850,550)
  Unearned shares issued to MRDP ........................................        (3,519,296)        (4,536,865)
  Net unrealized gain (loss) on securities available for sale, net of tax        (1,763,412)         2,831,574
                                                                            ---------------    ---------------
    Total shareholders' equity ..........................................       109,585,463        145,080,955
                                                                            ---------------    ---------------
    Total liabilities and shareholders' equity ..........................   $ 1,041,641,340    $ 1,031,302,398
                                                                            ===============    ===============
</TABLE>

      See notes to consolidated financial statements.

<PAGE>
                   KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>


                                                                    Year Ended September 30,
                                                              ---------------------------------------
                                                                  1999          1998          1997
                                                              -----------   -----------  ------------
INTEREST INCOME
<S>                                                           <C>           <C>           <C>
  Loans receivable ........................................   $56,289,718   $49,508,126   $40,850,478
  Mortgage backed and related securities ..................     2,103,881     3,679,740     4,716,184
  Investment securities ...................................    11,631,439    14,766,471     7,342,604
  Federal funds sold and securities purchased under
     agreements to resell .................................       914,584       916,847       930,980
  Interest bearing deposits ...............................       751,218       862,086       326,521
                                                              -----------   -----------   -----------
    Total interest income .................................    71,690,840    69,733,270    54,166,767
                                                              -----------   -----------   -----------
INTEREST EXPENSE
  Deposit liabilities .....................................    28,974,568    28,931,749    22,464,345
  Advances from FHLB of Seattle ...........................     9,121,190     7,921,570     6,270,615
  Other ...................................................       285,848       995,032     1,120,858
                                                              -----------   -----------   -----------
    Total interest expense ................................    38,381,606    37,848,351    29,855,818
                                                              -----------   -----------   -----------
    Net interest income ...................................    33,309,234    31,884,919    24,310,949

Provision for loan losses .................................       932,000       674,000       370,000
                                                              -----------   -----------   -----------

    Net interest income after provision for
      loan losses .........................................    32,377,234    31,210,919    23,940,949
                                                              -----------   -----------   -----------

NON-INTEREST INCOME
  Fees and service charges ................................     2,935,700     2,410,239       668,779
  Gain on sale of investments .............................       329,435       440,750         2,144
  Gain on sale of real estate owned .......................        29,266          --          27,946
  Other income ............................................       335,217       351,365       111,739
                                                              -----------   -----------   -----------
    Total non-interest income .............................     3,629,618     3,202,354       810,608
                                                              -----------   -----------   -----------
NON-INTEREST EXPENSE
  Compensation, employee benefits and related expense .....    10,096,000     9,616,323     7,143,516
  Occupancy expense .......................................     2,221,900     2,091,830       919,880
  Data processing expense .................................       915,434       963,475       480,889
  Insurance premium expense ...............................       295,950       289,592       376,029
  Loss on sale of investments .............................       112,255          --          14,531
  Loss on sale of real estate owned .......................        24,885          --            --
  Amortization of core deposit intangible .................     1,652,677     1,652,677       302,991
  Other expense ...........................................     5,867,155     4,908,907     2,526,519
                                                              -----------   -----------   -----------
    Total non-interest expense ............................    21,186,256    19,522,804    11,764,355
                                                              -----------   -----------   -----------
Earnings before income taxes ..............................    14,820,596    14,890,469    12,987,202

Provision for income taxes ................................     5,665,403     5,339,432     4,429,452
                                                              -----------   -----------   -----------

Net earnings ..............................................   $ 9,155,193   $ 9,551,037   $ 8,557,750
                                                              ===========   ===========   ===========

Earnings per common share - basic .........................        $ 1.21        $ 1.05        $ 0.90
Earnings per common share - fully diluted .................        $ 1.18        $ 1.00        $ 0.88
Weighted average common shares outstanding - basic ........     7,564,415     9,115,404     9,487,848
Weighted average common shares outstanding -  with dilution     7,748,527     9,521,249     9,762,459
</TABLE>

     See notes to consolidated financial statements.

<PAGE>

                   KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                 Unearned    Unearned     Accumulated
                           Common     Common      Additional                        shares      shares           other        Total
                            stock      stock         paid-in       Retained         issued      issued  comprehensive  shareholders'
                           shares     amount         capital       earnings        to ESOP     to MRDP  income (loss)        equity
                      -----------   ---------   ------------     -----------  ------------ ------------  ------------ -------------
Balance at
<S>                    <C>          <C>         <C>             <C>           <C>          <C>           <C>          <C>
     October 1, 1996   10,242,360   $116,124    $110,762,678    $59,082,479   ($8,807,850) ($6,694,470)  ($1,047,987) $153,410,974

Cash dividends .....         --         --            --         (2,895,234)        --           --            --       (2,895,234)

Stock repurchased
     and retired....   (1,182,936)   (11,829)   (18,866,299)           --           --           --            --      (18,878,128)

ESOP contribution ..       97,865       --         705,260             --        978,650         --            --        1,683,910

MRDP contribution ..       78,293       --            --               --           --      1,071,130          --        1,071,130
                       ----------    -------    ----------      -----------   ----------    ---------    ----------   ------------
                        9,235,582    104,295    92,601,639       56,187,245   (7,829,200)  (5,623,340)   (1,047,987)   134,392,652
Comprehensive income
 Net earnings ......                                              8,557,750                                              8,557,750
 Other comprehensive
     income:
  Unrealized gain on
  securities, net of
  tax and reclassifi-
  cation adjustment (1)                                                                                  1,512,041       1,512,041
                                                                                                                      ------------
   Total comprehensive
     income                                                                                                             10,069,791
                       ----------    -------    ----------      -----------   ----------   ----------    ----------   ------------
Balance at
  September 30, 1997   9,235,582    104,295    92,601,639       64,744,995    (7,829,200)  (5,623,340)     464,054     144,462,443

Cash dividends .....         --         --            --         (3,244,587)         --           --           --       (3,244,587)

Stock repurchased
  and retired.......    (544,085)    (5,440)   (11,556,044)           --            --           --           --       (11,561,484)

ESOP contribution ..       97,865       --       1,029,866             --         978,650         --           --        2,008,516

MRDP contribution ..       78,293       --            --               --            --      1,086,475         --        1,086,475

Exercise of stock
  options                  31,317        313       410,722             --            --           --           --          411,035
                       ----------    -------    ----------      -----------    ----------   ----------    ----------   -----------
                        8,898,972     99,168    82,486,183       61,500,408    (6,850,550)  (4,536,865)     464,054    133,162,398

Comprehensive income
 Net earnings ......                                              9,551,037                                              9,551,037
 Other comprehensive
  income:
  Unrealized gain on
  securities, net of
  tax and reclassifi-
  cation adjustment (2)                                                                                   2,367,520      2,367,520
                                                                                                                      ------------
    Total comprehensive
     income                                                                                                             11,918,557
                       ----------    -------    ----------      -----------    ----------   ----------   ----------   ------------
Balance at
  September 30, 1998    8,898,972     99,168    82,486,183       71,051,445    (6,850,550)  (4,536,865)   2,831,574    145,080,955
</TABLE>

<PAGE>
                  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                   (Continued)
<TABLE>
<CAPTION>
                                                                                 Unearned    Unearned     Accumulated
                           Common     Common      Additional                        shares      shares           other        Total
                            stock      stock         paid-in       Retained         issued      issued  comprehensive  shareholders'
                           shares     amount         capital       earnings        to ESOP     to MRDP  income (loss)        equity
                      -----------   ---------   ------------     -----------  ------------ ------------  ------------ -------------

<S>                    <C>           <C>        <C>             <C>           <C>          <C>          <C>           <C>
Cash dividends .....         --         --            --         (3,340,186)         --           --           --       (3,340,186)

Stock repurchased
  and retired ......   (2,008,389)   (20,084)   (39,314,056)           --            --           --           --      (39,334,140)

ESOP contribution ..       97,865       --         602,287             --         978,650         --           --        1,580,937

MRDP contribution ..       73,644       --          20,121             --            --      1,017,569         --        1,037,690
                       ----------    -------    ----------      -----------    ----------   ----------   ----------    -----------
                        7,062,092     79,084    43,794,535       67,711,259    (5,871,900)  (3,519,296)   2,831,574    105,025,256

Comprehensive income
 Net earnings ......                                              9,155,193                                              9,155,193
 Other comprehensive income:
  Unrealized loss on
  securities, net of
  tax and reclassifi-
  cation adjustment (3)                                                                                  (4,594,986)    (4,594,986)
                                                                                                                      ------------
    Total comprehensive
     income                                                                                                              4,560,207
                       ----------    -------    ----------      -----------    ----------   ----------   ----------   ------------
Balance at
    September 30, 1999  7,062,092    $79,084    $43,794,535     $76,866,452   ($5,871,900) ($3,519,296) ($1,763,412)  $109,585,463
                       ==========    =======    ==========      ===========    ==========   ==========   ==========   ============
<FN>
(1)  Net  unrealized  holding gain on securities of $1,476,538  (net of $461,062
     tax expense) less  reclassification  adjustment for losses  included in net
     earnings  of  $35,503  (net of $21,760  tax  benefit).
(2)  Net unrealized  holding gain on securities of $2,429,643 (net of $1,451,061
     tax expense) less  reclassification  adjustment  for gains  included in net
     earnings of $62,123 (net of $38,075 tax expense).
(3)  Net unrealized  holding loss on securities of $4,332,997 (net of $2,816,282
     tax benefit) less  reclassification  adjustment  for gains  included in net
     earnings of $261,989 (net of $160,574 tax expense).
</FN>
</TABLE>

See notes to consolidated financial statements.

<PAGE>
                   KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                       Year Ended September 30,
                                                              ---------------------------------------
                                                                  1999          1998          1997
                                                              -----------   -----------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                           <C>           <C>           <C>
    Net earnings ..........................................   $ 9,155,193   $ 9,551,037   $ 8,557,750

ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    Depreciation and amortization .........................     2,896,271     2,815,615       772,204
    Provision for deferred taxes ..........................      (259,935)      293,310       714,915
    Provision for loan losses .............................       932,000       674,000       370,000
    Compensation expense related to ESOP benefit ..........     1,580,937     2,008,516     1,683,910
    Compensation expense related to MRDP Trust ............     1,037,690     1,086,475     1,071,130
    Net amortization of premiums (discounts)  paid on
      investment and mortgage backed and related securities       134,979        21,994       102,626
    Increase in deferred loan fees, net of amortization ...       405,237     1,258,655       912,445
    Accretion of discounts on purchased loans .............       (37,456)        3,763          (325)
    Net (gain) loss on sale of real estate owned and
      premises and equipment ..............................        (4,381)        3,196        (3,514)
    Net (gain) loss on sale of investment and mortgage
      backed and related securities .......................      (217,179)     (440,750)       12,387
    FHLB stock dividend ...................................      (784,400)     (617,000)     (495,000)
    Increase in core deposit intangible ...................          --            --     (13,386,686)
CHANGES IN ASSETS AND LIABILITIES
    Accrued interest receivable ...........................       317,899       154,447    (2,583,032)
    Other assets ..........................................      (377,868)     (218,359)   (1,625,538)
    Accrued interest on deposit liabilities ...............      (107,313)       76,039       503,337
    Accrued interest on borrowings ........................      (179,473)     (298,759)      189,553
    Pension liabilities ...................................        54,252        52,252        59,052
    Other liabilities .....................................       264,936       131,341    (1,134,717)
                                                              -----------   -----------   -----------
Net cash provided by (used in) operating activities .......    14,811,389    16,555,772    (4,279,503)
                                                              -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from maturity of investment securities
      held to maturity ....................................    82,455,000    20,150,000    48,680,000
    Proceeds from maturity of investment securities
      available for sale ..................................    48,572,000   104,180,000    19,009,324
    Principal repayments received on mortgage
       backed and related securities held to maturity .....     1,044,871     1,755,918     1,313,309
    Principal repayments received on mortgage
       backed and related securities available for sale ...    15,311,695    24,664,174    18,923,262
    Principal repayments received on loans ................   159,160,842   122,009,359    56,879,728
    Loan originations .....................................   (224,193,434) (232,474,655) (120,072,487)
    Loans purchased .......................................   (15,500,495)   (7,792,061)  (15,648,275)
    Loans sold ............................................     5,584,065          --            --
    Purchase of investment securities held
      to maturity .........................................   (79,711,523)         --     (61,722,409)
    Purchase of investment securities available
      for sale ............................................   (22,147,855)  (60,366,913)  (219,697,100)
    Purchase of mortgage backed and related
      securities available for sale .......................   (55,536,014)  (13,202,490)  (14,850,705)
    Purchase of FHLB stock ................................          --      (2,405,500)   (4,307,500)
    Proceeds from sale of FHLB stock ......................          --            --       2,425,900
    Proceeds from sale of investment securities
      available for sale ..................................    11,834,420    19,388,451    16,066,044
    Proceeds from sale of mortgage backed and related
      securities available for sale .......................     9,454,776     9,656,938     5,743,267
    Proceeds from sale of real estate owned and
      premises and equipment ..............................       514,710          --          86,159
    Purchases of premises and equipment ...................      (321,050)   (1,682,477)   (7,176,075)
                                                              -----------   -----------   -----------
Net cash used in investing activities .....................   (63,477,992)  (16,119,256)  (274,347,558)
                                                              -----------   -----------   -----------
</TABLE>

<PAGE>
                   KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Continued)
<TABLE>
<CAPTION>

                                                                       Year Ended September 30,
                                                              ----------------------------------------
                                                                  1999          1998           1997
                                                              -----------   -----------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES

    Increase in deposit liabilities,
<S>                                                          <C>           <C>            <C>
     net of withdrawals ...................................   $30,859,767   $15,563,444   $274,304,721
    Proceeds from FHLB advances ...........................   160,000,000   179,000,000    184,000,000
    Repayments of FHLB advances ...........................  (130,000,000) (141,000,000)  (145,000,000)
    Proceeds from short term borrowings ...................     8,595,000    88,343,199     84,750,150
    Repayments of short term borrowings ...................   (20,707,500)  (93,308,199)   (82,577,050)
    Stock repurchase and  retirement ......................   (39,334,140)  (11,561,483)   (18,878,128)
    Proceeds from exercise of stock options ...............          --         411,035           --
    Advances from borrowers for taxes and insurance .......       337,836       505,305      1,084,359
    Dividends paid ........................................    (3,547,040)   (3,447,744)    (3,193,428)
                                                              -----------   -----------    -----------
Net cash provided by financing activities .................     6,203,923    34,505,557    294,490,624
                                                              -----------   -----------    -----------
Net (decrease) increase in cash and cash
  equivalents .............................................   (42,462,680)   34,942,073     15,863,563

Cash and cash equivalents at beginning
  of year .................................................    66,985,269    32,043,196     16,179,633
                                                              -----------   -----------    -----------
Cash and cash equivalents at end of year ..................   $24,522,589   $66,985,269    $32,043,196
                                                              ===========   ===========    ===========
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME TAXES PAID
    Interest paid .........................................   $38,668,392   $38,071,070    $29,162,927
    Income taxes paid .....................................     5,866,000     5,808,299      3,373,457

SUPPLEMENTAL SCHEDULE OF NONCASH
  INVESTING ACTIVITIES

    Net unrealized gain (loss) on securities
      available for sale ..................................   ($4,594,986)  $ 2,367,520    $ 1,512,041
    Dividends declared and accrued in other
      liabilities .........................................       988,547       892,509        834,363
</TABLE>






    See notes to consolidated financial statements

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

     The consolidated financial statements include the accounts of Klamath First
Bancorp,  Inc. (the  "Company") and its  wholly-owned  subsidiary  Klamath First
Federal  Savings  and  Loan  Association  (the  "Association"),   including  the
Association's  subsidiary,  Klamath First Financial  Services.  All intercompany
accounts and transactions have been eliminated in consolidation.

Nature of Operations

     The  Company  provides  banking  and  limited  non-banking  services to its
customers who are located  throughout the state of Oregon,  principally in rural
communities.  These  services  primarily  include  attracting  deposits from the
general public and using such funds,  together with other borrowings,  to invest
in  various  real  estate  loans,  consumer  and  commercial  loans,  investment
securities and mortgage backed and related securities.

Use of Estimates in the Presentation of the Financial Statements

     The  preparation  of financial  statements  in  conformity  with  generally
accepted accounting  principles  requires management to make assumptions.  These
assumptions  result in  estimates  that affect the  reported  amounts of certain
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the financial statements and the reported amounts of related revenue
and expense during the reporting period.  Actual results could differ from those
estimates.

Cash Equivalents

     The Company  considers cash and due from banks,  interest  bearing deposits
held at domestic banks, federal funds sold, and security resale agreements to be
cash and cash  equivalents for purposes of the  Consolidated  Statements of Cash
Flows.

Investment Securities

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115,   Accounting  for  Certain  Investments  in  Debt  and  Equity  Securities,
investment  securities held to maturity are stated at amortized cost only if the
Company  has the  positive  intent  and the  ability to hold the  securities  to
maturity.  Securities  available for sale,  including  mutual funds, and trading
securities are stated at fair value.  Unrealized gains and losses from available
for sale  securities  are excluded  from earnings and reported (net of tax) as a
net amount in a separate  component  of  shareholders'  equity  until  realized.
Realized  gains and losses on the sale of  securities,  recognized on a specific
identification  basis, and valuation  adjustments of trading account  securities
are included in non-interest  income or expense.  Net unrealized gains or losses
on securities  resulting from an other than temporary  decline in the fair value
are recognized in earnings when incurred.

Stock Investments

     The Company holds stock in the Federal Home Loan Bank of Seattle  ("FHLB of
Seattle"). This investment is carried at the lower of cost or fair value.
<PAGE>

Loans

     Loans held for investment are stated at the principal  amount  outstanding,
net of deferred loan fees and unearned income. Loan origination fees, commitment
fees and certain direct loan origination costs are capitalized and recognized as
a yield  adjustment  over the lives of the loans using  the level-yield  method.
Unearned  discounts are accreted to income over the average lives of the related
loans using the level yield method, adjusted for estimated prepayments.

     Interest income is recorded as earned. Management ceases to accrue interest
income on any loan that  becomes 90 days or more  delinquent  and  reverses  all
interest accrued up to that time. Thereafter, interest income is accrued only if
and when, in management's opinion, projected cash proceeds are deemed sufficient
to repay both principal and interest.  All loans for which interest is not being
accrued are referred to as loans on nonaccrual status.

Allowance for Loan Losses

     The allowance for loan losses is  established  to absorb known and inherent
losses in the loan  portfolio.  Allowances  for losses on specific  problem real
estate loans and real estate owned are charged to earnings when it is determined
that the value of these loans and properties,  in the judgment of management, is
impaired.  In addition to specific reserves,  the Company also maintains general
provisions  for loan losses based on evaluating  known and inherent risks in the
loan  portfolio,  including  management's  continuing  analysis  of the  factors
underlying the quality of the loan  portfolio.  These factors include changes in
the size and  composition of the loan  portfolio,  actual loan loss  experience,
current and anticipated  economic  conditions,  detailed  analysis of individual
loans for which full collectibility may not be assured, and determination of the
existence and realizable  value of the  collateral  and guarantees  securing the
loans.  The reserve is an estimate  based upon factors and trends  identified by
management at the time financial statements are prepared.  The ultimate recovery
of loans is susceptible  to future market factors beyond the Company's  control,
which may  result in losses or  recoveries  differing  significantly  from those
provided  in  the  consolidated  financial  statements.  In  addition,   various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically review the Company's valuation  allowances on loans and real estate
owned.

     Delinquent  interest on loans past due 90 days or more is charged off or an
allowance  established  by a charge to income equal to all  interest  previously
accrued.  Interest is  subsequently  recognized only to the extent cash payments
are  received  until  delinquent  interest is paid in full and, in  management's
judgment,  the  borrower's  ability  to make  periodic  interest  and  principal
payments  is back to  normal,  in which  case the loan is  returned  to  accrual
status.

Real Estate Owned

     Property  acquired  through  foreclosure  or deed in lieu of foreclosure is
carried at the lower of estimated fair value,  less estimated  costs to sell, or
the balance of the loan on the  property at date of  acquisition,  not to exceed
net realizable value. Costs excluding  interest,  relating to the improvement of
property are  capitalized,  whereas  those  relating to holding the property are
charged to expense.

Premises and Equipment

     Premises and  equipment are stated at cost less  accumulated  depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful  lives of the various  classes of assets from their  respective  dates of
acquisition.  Estimated  useful lives range up to 30 years for buildings,  up to
the lease term for  leasehold  improvements,  three years for  automobiles,  and
three to 15 years for furniture and equipment.

<PAGE>

Mortgage Servicing

     Fees  earned for  servicing  loans are  reported as income when the related
mortgage  loan  payments  are  collected.  Loan  servicing  costs are charged to
expense as incurred.

     Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment  of Liabilities.
SFAS No. 125  requires  the Company to allocate  the total cost of all  mortgage
loans sold,  whether  originated or purchased,  to the mortgage servicing rights
and the loans (without  mortgage  servicing rights) based on their relative fair
values if it is practicable to estimate those fair values.

Core Deposit Intangible

     On July 18, 1997 the Company  assumed $241.3 million of deposits from Wells
Fargo Bank,  N.A. for a core deposit  premium of $16.4  million.  In conjunction
with the  assumption  of these  deposits  the  Company  also  acquired 25 branch
facilities (24 owned and one leased) located  throughout  Oregon.  In accordance
with generally accepted  accounting  principles for purchase  transactions,  the
assets acquired and liabilities assumed were recorded at fair value and the core
deposit  premium was  allocated to premises and  equipment in the amount of $3.0
million  and to core  deposit  intangible  in the amount of $13.4  million.  The
recorded core deposit intangible is being amortized to non-interest expense on a
straight-line basis over 8.1 years.

Income Taxes

     The Company  accounts for income taxes in accordance with the provisions of
SFAS No. 109,  Accounting for Income Taxes,  which requires the use of the asset
and liability method of accounting for income taxes. Under this method, deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and liabilities  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.

Pension Cost

     It is the Company's  policy to fund  retirement  costs as they are accrued.
All such costs are computed on the basis of accepted actuarial methods.

Employee Stock Ownership Plan

     The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is
accounted  for in  accordance  with the American  Institute of Certified  Public
Accountants  ("AICPA")  Statement of Position  93-6,  Employer's  Accounting for
Employee Stock  Ownership  Plans.  Accordingly,  the shares held by the ESOP are
reported as unearned  shares issued to the employee stock  ownership plan in the
balance  sheets.  The plan  authorizes  release  of the  shares  over a ten-year
period,  of  which  six  years  are  remaining.  As  shares  are  released  from
collateral,  compensation  expense is recorded  equal to the then current market
price of the shares,  and the shares become  outstanding  for earnings per share
calculations.

Management Recognition and Development Plan

     The  Company  sponsors  a  Management   Recognition  and  Development  Plan
("MRDP").  The MRDP is accounted for in accordance with SFAS No. 123, Accounting
for  Stock-Based  Compensation.  The  plan  authorizes the grant of common stock
<PAGE>

shares to certain officers and directors,  which vest over a five-year period in
equal installments. The Company recognizes compensation expense in the amount of
the fair value of the  common  stock in  accordance  with the  vesting  schedule
during  the years in which the  shares  are  payable.  When the MRDP  awards are
allocated,  the common stock shares become common stock equivalents for earnings
per share calculations.

Stock Based Compensation

     The Company  accounts for stock option  grants  using the  intrinsic  value
method as  prescribed  in Accounting  Principles  Board ("APB")  Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under the
intrinsic value based method, compensation cost for stock options is measured as
the excess,  if any, of the quoted  market price of the stock at grant date over
the amount an employee must pay to acquire the stock.  Stock options  granted by
the Company  have no  intrinsic  value at the grant date and,  under APB No. 25,
there is no compensation expense to be recorded.

     SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require,  companies to record  compensation  cost for  stock-based  employee
compensation plans at fair value. The fair value approach measures  compensation
costs based on factors such as the term of the option, the market price at grant
date, and the option  exercise price,  with expense  recognized over the vesting
period.  See Note 15 for the pro forma  effect on net  earnings and earnings per
share as if the fair value method had been used.

Recently Issued Accounting Pronouncements

     In June 1998,  SFAS No. 133,  Accounting  for  Derivative  Instruments  and
Hedging  Activities,  was issued.  SFAS No. 133  establishes  the accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized firm  commitment,  (b) a hedge of the exposure to variable
cash flows of a forecasted  transaction,  or (c) a hedge of the foreign currency
exposure  of a net  investment  in a foreign  operation,  an  unrecognized  firm
commitment,  an available-for-sale  security, or a  foreign-currency-denominated
forecasted transaction. The effective date of this Statement was deferred by the
issuance of SFAS No. 137,  Accounting  for  Derivative  Instruments  and Hedging
Activities - Deferral of the  Effective  Date of FASB  Statement  No. 133.  This
Statement is now effective for fiscal years beginning after June 15, 2000.

The Company has  determined  that it currently has no  instruments  or contracts
that meet the scope of SFAS No. 133. Accordingly, the adoption of this Statement
in 2001 is not expected to have a material impact on the financial statements of
the Company.

(2) Cash and Due from Banks

The Company is required to maintain an average  reserve balance with the Federal
Reserve Bank, or maintain such reserve  balance in the form of cash.  The amount
of this required reserve balance was approximately $3.0 million at September 30,
1999 and 1998, and was met by holding cash and  maintaining  an average  balance
with the Federal Reserve Bank in excess of this amount.

<PAGE>

(3) Investments and Mortgage-Backed Securities

     Amortized cost and approximate fair value of securities  available for sale
and held to maturity are summarized by type and maturity as follows:
<TABLE>
<CAPTION>

                                                          September 30, 1999
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------
Investment securities available for sale

  U.S. Government obligations
<S>                                        <C>            <C>            <C>            <C>
    Maturing within one year ...........   $ 15,014,112   $     18,266   $     40,190   $ 14,992,188
    Maturing after one year through
     five years ........................     59,212,960         88,398        333,544     58,967,814


  State and municipal obligations
    Maturing within one year ...........        572,115          4,223             --        576,338
    Maturing after one year through
     five years ........................        801,572          2,701         17,217        787,056
    Maturing after five years through
     ten years .........................        198,414           --          10,190        188,224
    Maturing after ten years ...........     23,275,612         15,017        961,272     22,329,357

  Corporate obligations
    Maturing within one year ...........     21,053,101         36,346        171,277     20,918,170
    Maturing after one year through
     five years ........................     21,159,327           --          289,867     20,869,460
    Maturing after ten years ...........     19,825,059           --          805,609     19,019,450
                                           ------------   ------------   ------------   ------------
                                           $161,112,272   $    164,951   $  2,629,166   $158,648,057
                                           ============   ============   ============   ============

<CAPTION>
                                                           September 30, 1998
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------

Investment securities available for sale

  U.S. Government obligations
<S>                                        <C>            <C>            <C>            <C>
    Maturing within one year ...........   $ 11,555,117   $     95,853            $--   $ 11,650,970
    Maturing after one year through
     five years ........................     91,064,477      2,738,617             --     93,803,094


  State and municipal obligations
    Maturing after one year through
     five years ........................        890,782         21,258             --        912,040
    Maturing after ten years ...........     16,515,526        675,702            567     17,190,661

  Corporate obligations
    Maturing within one year ...........     14,518,739         34,576             --     14,553,315
    Maturing after one year through
     five years ........................     44,883,935        772,455         12,836     45,643,554
    Maturing after ten years ...........     19,822,547             --        351,997     19,470,550
                                           ------------   ------------   ------------   ------------
                                           $199,251,123   $  4,338,461   $    365,400   $203,224,184
                                           ============   ============   ============   ============

<CAPTION>
                                                       September 30, 1999
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------

Investment securities held to maturity

  State and municipal obligations
<S>                                        <C>            <C>                     <C>   <C>
    Maturing within one year ...........   $    170,376   $        438            $--   $    170,814
    Maturing after one year through
     five years ........................        389,136         17,505             --        406,641
                                           ------------   ------------   ------------   ------------
                                           $    559,512   $     17,943            $--   $    577,455
                                           ============   ============   ============   ============
</TABLE>

<PAGE>
<TABLE>

<CAPTION>

                                                                September 30, 1998
                                            --------------------------------------------------------
                                             Amortized           Gross Unrealized               Fair
                                                  cost           Gains       Losses            value
                                            ----------      ----------    ----------   -------------
Investment securities held to maturity

  State and municipal obligations
<S>                                        <C>            <C>                     <C>   <C>
    Maturing within one year ...........   $    210,837   $      1,397            $--   $    212,234
    Maturing after one year through
     five years ........................        677,922         36,168             --        714,090

  Corporate obligations
    Maturing within one year ...........      2,000,000          2,000             --      2,002,000
                                           ------------   ------------   ------------   ------------
                                           $  2,888,759   $     39,565            $--   $  2,928,324
                                           ============   ============   ============   ============
</TABLE>


MORTGAGE BACKED AND RELATED SECURITIES
<TABLE>
<CAPTION>

                                                         September 30, 1999
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------

Mortgage backed and related securities available for sale

  FNMA maturing after five years
<S>                                        <C>            <C>            <C>            <C>
     through ten years .................   $  2,469,286            $--   $     25,043   $  2,444,243

  CMO's maturing after one year
    through five years .................      4,969,296             --         55,346      4,913,950

  FNMA maturing after ten years ........     21,849,523        116,867            228     21,966,162

  FHLMC maturing after ten years .......     18,375,619         26,201         31,314     18,370,506

  GNMA maturing after ten years ........     11,783,245          3,738         18,918     11,768,065

  CMO's  maturing after ten years ......     13,628,584           --          395,955     13,232,629
                                           ------------   ------------   ------------   ------------
                                           $ 73,075,553   $    146,806   $    526,804   $ 72,695,555
                                           ============   ============   ============   ============

<CAPTION>
                                                         September 30, 1998
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------

Mortgage backed and related securities available for sale

  FNMA maturing after five years
<S>                                        <C>            <C>            <C>            <C>
     through ten years .................   $  4,045,247   $     40,251            $--   $  4,085,498

  FNMA maturing after ten years ........      8,820,853         89,676         11,334      8,899,195

  FHLMC maturing after ten years .......     14,722,039        438,394          1,941     15,158,492

  GNMA maturing after ten years ........      3,619,071         43,083           --        3,662,154

  SBA maturing after ten years .........     11,534,653          1,780          5,915     11,530,518
                                           ------------   ------------   ------------   ------------
                                           $ 42,741,863   $    613,184   $     19,190   $ 43,335,857
                                           ============   ============   ============   ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                         September 30, 1999
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------

Mortgage backed and related securities held to maturity

<S>                                        <C>            <C>            <C>            <C>
  GNMA maturing after ten years ........   $  2,600,920   $      3,289   $      7,801   $  2,596,408
                                           ============   ============   ============   ============
<CAPTION>

                                                         September 30, 1998
                                            --------------------------------------------------------
                                             Amortized          Gross Unrealized           Fair
                                                cost          Gains         Losses         value
                                            -----------   ------------   ------------   ------------

Mortgage backed and related securities held to maturity

<S>                                        <C>            <C>                     <C>   <C>
  GNMA maturing after ten years ........   $  3,661,683   $     34,761            $--   $  3,696,444
                                           ============   ============   ============   ============
</TABLE>

     Expected  maturities of mortgage backed and related  securities will differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay obligations with or without call or prepayment penalties.

     At September 30, 1999 and 1998,  the Company  pledged  securities  totaling
$35.6 million and $31.2 million, respectively, to secure certain public deposits
and for other purposes as required or permitted by law.

     The Company has also pledged securities of zero and $12.0 million to secure
short term borrowings of reverse repurchase agreements at September 30, 1999 and
1998, respectively. (See Note 10.)

(4)  Loans Receivable
<TABLE>
<CAPTION>
                                                  September 30,
                                           ---------------------------
                                               1999           1998
                                           ------------   ------------
Real estate loans
<S>                                        <C>            <C>
  Permanent residential 1-4 family .....   $647,130,329   $577,321,223
  Multi-family residential .............     18,411,762     19,229,984
  Construction .........................     53,219,452     64,288,949
  Commercial ...........................     37,078,809     29,457,284
  Land .................................      2,064,037      2,184,595
                                           ------------   ------------
     Total real estate loans ...........    757,904,389    692,482,035
                                           ------------   ------------
Non-real estate loans
  Savings account ......................      1,800,234      1,990,776
  Home improvement and home equity .....      6,725,721      5,749,969
  Other ................................      8,010,808      4,480,064
                                           ------------   ------------
     Total non-real estate loans .......     16,536,763     12,220,809
                                           ------------   ------------
     Total loans .......................    774,441,152    704,702,844

Less
  Undisbursed portion of loans .........     24,176,425     26,986,869
  Deferred loan fees ...................      7,987,699      7,619,918
  Allowance for loan losses ............      2,483,625      1,949,677
                                           ------------   ------------
                                           $739,793,403   $668,146,380
                                           ============   ============
</TABLE>
<PAGE>

     The weighted  average interest rate on loans at September 30, 1999 and 1998
was 7.47% and 7.71%, respectively.

     Included in loans receivable are $379,662 of loans held for sale. All these
loans are one- to four-family mortgage loans.  In the  aggregate  there  was  no
lower of cost or market adjustment required; fair value approximates cost.

     Loans to employees,  officers, and directors totaled $10.9 million and $8.8
million at September 30, 1999 and 1998, respectively.


<PAGE>


Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>

                                             Year Ended September 30,
                                 ------------------------------------------
                                     1999           1998           1997
                                 -----------    ------------   ------------
<S>                              <C>            <C>            <C>
Balance, beginning of year ...   $ 1,949,677    $ 1,296,451    $   927,820
Charge offs ..................      (398,052)       (20,774)        (1,369)
Additions ....................       932,000        674,000        370,000
                                 -----------    -----------    -----------

Balance, end of year .........   $ 2,483,625    $ 1,949,677    $ 1,296,451
                                 ===========    ===========    ===========
</TABLE>

(5) Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                             September 30,
                                                    ----------------------------
                                                         1999            1998
                                                    ------------    ------------
<S>                                                 <C>             <C>
Land .............................................  $  2,476,807    $  2,479,807
Office buildings and construction in progress.....    10,470,855      10,403,971
Furniture, fixtures and equipment ................     4,464,622       4,211,886
Automobiles ......................................        38,856          38,856
Less accumulated depreciation ....................    (5,869,217)     (4,787,053)
                                                    ------------    ------------
                                                    $ 11,581,923    $ 12,347,467
                                                    ============    ============
</TABLE>

     Depreciation  expense was $1.1 million,  $1.0 million, and $469,208 for the
years ended September 30, 1999, 1998, and 1997, respectively.

(6)   Accrued Interest Receivable

     The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
                                                   September 30,
                                           ---------------------------
                                                1999           1998
                                           ------------   ------------
<S>                                        <C>            <C>
Loans receivable .......................   $  4,335,013   $  4,114,533
Mortgage backed and related securities .        478,635        424,458
Investment securities ..................      2,340,170      2,932,726
                                           ------------   ------------
                                           $  7,153,818   $  7,471,717
                                           ============   ============
</TABLE>


<PAGE>

(7)     Mortgage Servicing Rights

     Mortgage  loans  serviced for others are not  included in the  accompanying
consolidated  balance  sheets.  The unpaid  principal  balance of mortgage loans
serviced  for others was $6.1  million and  $724,559 at  September  30, 1999 and
1998,  respectively.  During  the year  ended  September  30,  1999 the  Company
initiated a program to sell loans to the Federal National  Mortgage  Association
("Fannie Mae") which resulted in the significant  increase in loans serviced for
others.

     Capitalized  mortgage  servicing  rights were $52,432 and zero at September
30, 1999 and 1998, respectively.

The changes in the balance of mortgage servicing rights were as follows:
<TABLE>
<CAPTION>
                                                      Year Ended September 30,
                                                    ----------------------------
                                                         1999           1998
                                                    ------------    ------------
<S>                                                 <C>                      <C>
Balance, beginning of year ......................            $--             $--
Additions .......................................         53,789              --
Amortization of mortgage servicing rights .......         (1,357)             --
                                                    ------------    ------------
Balance, end of year ............................   $     52,432             $--
                                                    ============    ============
</TABLE>

(8)   Deposit Liabilities

The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>
                                                     September 30,
                                   -----------------------------------------------
                                             1999                       1998
                                   ----------------------- -----------------------
                                      Amount       Percent     Amount      Percent
                                  ------------   --------- ------------   --------

Checking accounts, non-interest
<S>                               <C>               <C>    <C>               <C>
 bearing ......................   $ 52,318,958        7.3% $ 47,547,651        6.9%
                                  ------------    -------  ------------    -------
Interest-bearing checking .....     67,303,245        9.3    70,561,435       10.2
                                  ------------    -------  ------------    -------
Passbook and statement savings      59,790,124        8.3    61,413,910        8.9
                                  ------------    -------  ------------    -------
Money market deposits .........    148,902,589       20.7   114,667,649       16.6
                                  ------------    -------  ------------    -------
Certificates of deposit
 Less than 4% .................      4,893,194        0.7     1,371,156        0.2
 4.00% to 5.99% ...............    340,945,349       47.3   329,246,772       47.8
 6.00% to 7.99% ...............     36,072,270        5.0    43,853,274        6.4
 8.00% to 9.99% ...............     10,175,383        1.4    20,879,498        3.0
                                  ------------    -------  ------------    -------
                                   392,086,196       54.4   395,350,700       57.4
                                  ------------    -------  ------------    -------
                                  $720,401,112      100.0% $689,541,345      100.0%
                                  ============    =======  ============    =======
</TABLE>


<PAGE>




Following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                              ---------------------------------------
                                                                  1999          1998          1997
                                                              -----------   -----------   -----------
<S>                                                           <C>           <C>           <C>
Interest-bearing checking .................................   $   873,211   $ 1,088,777   $   791,032
Passbook and statement savings ............................     1,326,259     1,683,101     1,270,468
Money market ..............................................     5,096,134     4,275,419     2,391,245
Certificates of deposit ...................................    21,767,895    21,990,525    18,075,128
                                                              -----------   -----------   -----------
                                                               29,063,499    29,037,822    22,527,873
Less early withdrawal
 penalties ................................................        88,931       106,073        63,528
                                                              -----------   -----------   -----------
  Net interest on deposits ................................   $28,974,568   $28,931,749   $22,464,345
                                                              ===========   ===========   ===========
</TABLE>

At September 30, 1999, deposit maturities are as follows:
<TABLE>
<CAPTION>

<S>                          <C>
Within 1 year                $594,338,934
1 year to 3 years              67,166,011
3 years to 5 years             37,459,409
Thereafter                     21,436,758
                             ------------
                             $720,401,112
                             ============
</TABLE>
<TABLE>
<CAPTION>

Weighted average interest rates at September 30 are as follows:

                                                   1999           1998
                                               ----------     ----------
<S>                                                <C>            <C>
Interest-bearing checking ..............           1.14%          1.33%
Passbook and statement savings .........           1.76%          2.44%
Money market ...........................           4.04%          3.92%
Certificates of deposit ................           5.28%          5.81%
Weighted average rate for all deposits .           4.27%          4.66%
</TABLE>

     Deposits in excess of $100,000 totaled $149.9 million and $151.0 million at
September  30, 1999 and 1998,  respectively.  Deposits in excess of $100,000 may
not be insured by the Federal Deposit Insurance Corporation ("FDIC").

(9)   Advances from FHLB

     As a member of the FHLB of Seattle, the Association maintains a credit line
that  is  a   percentage   of  its   total   regulatory   assets,   subject   to
collateralization  requirements.  At September 30, 1999, the credit line was 30%
of  total  assets  of  the  Association.  Advances  are  collateralized  in  the
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB of Seattle, by certain mortgages or deeds of trust,  and  securities of
<PAGE>

the U.S. Government and agencies thereof. At September 30, 1999 the minimum book
value of eligible collateral for these borrowings was $216.2 million.



Scheduled maturities of advances from the FHLB were as follows:

<TABLE>
<CAPTION>


                                   September 30, 1999                                September 30, 1998
                        ------------------------------------------     ----------------------------------------------
                                          Range of        Weighted                       Range of            Weighted
                                          interest         average                       interest             average
                            Amount           rates   interest rate          Amount          rates       interest rate
                        ------------   -----------  --------------      ------------   -----------      -------------
<S>                     <C>            <C>                   <C>       <C>             <C>                      <C>
Due within one year .   $       --              --              --      $ 30,000,000   5.54%-5.56%              5.55%

After one but within
five years ..........     40,000,000   5.39%-5.70%           5.43%        55,000,000   5.39%-5.74%              5.56%

After five but within
ten years ...........    157,000,000   4.77%-5.87%           5.32%        82,000,000   4.77%-5.24%              4.96%
                        ------------                                   -------------
                        $197,000,000                                   $ 167,000,000
                        ============                                   =============
</TABLE>


Financial  data  pertaining  to the  weighted  average  cost,  the level of FHLB
advances and the related interest expense are as follows:
<TABLE>
<CAPTION>
                                                                        Year ended September 30,
                                                             -----------------------------------------
                                                                  1999          1998          1997
                                                             -------------  ------------  ------------
<S>                                                           <C>           <C>           <C>
Weighted average interest rate at end of year .............          5.34%         5.26%         5.62%
Weighted daily average interest rate
during the year ...........................................          5.25%         5.62%         5.66%
Daily average FHLB advances ...............................   $173,739,726  $141,016,438  $110,736,986
Maximum FHLB advances at any month end ....................    197,000,000   167,000,000   151,000,000
Interest expense during the year ..........................      9,121,190     7,921,570     6,270,615
</TABLE>


<PAGE>

(10)  Short Term Borrowings

     Securities  sold under  agreements  to  repurchase  at  September  30, 1998
consisted  of  reverse  repurchase   agreements  of  $12.1  million.  All  these
agreements matured during the quarter ended March 31, 1999 and were not renewed.

     The Company sold,  under agreements to repurchase,  specific  securities of
the U.S.  government  and its  agencies  and  other  approved  investments  to a
broker-dealer.  The securities  underlying the agreement with the broker- dealer
were delivered to the dealer who arranged the transaction.  Securities delivered
to broker-dealers may be loaned out in the ordinary course of operations.

Financial data pertaining to the weighted  average cost, the level of securities
sold under  agreements to repurchase,  and the related  interest  expense are as
follows:
<TABLE>
<CAPTION>
                                                                     Year Ended September 30,
                                                              ----------------------------------------
                                                                  1999          1998          1997
                                                              ------------  ------------  ------------
<S>                                                           <C>           <C>           <C>
Weighted average interest rate at end of year .............          --            5.65%         5.75%
Weighted daily average interest rate
during the year ...........................................          5.72%         5.80%         5.82%
Daily average of securities sold
under agreements to repurchase ............................   $ 3,105,336   $14,669,203   $16,804,520
Maximum securities sold under
agreements to repurchase at any
month end .................................................     8,095,000    17,077,500    19,117,500
Interest expense during the year ..........................       177,568       850,122       978,023
</TABLE>

     The Company had an unused line of credit  totaling  $15.0 million with U.S.
National Bank of Oregon at September 30, 1999 and 1998.


<PAGE>

(11) Taxes on Income

The following is a summary of income tax expense:
<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                                              ---------------------------------------
                                                                  1999          1998          1997
                                                              -----------   -----------   -----------
Current Taxes
<S>                                                           <C>           <C>           <C>
Federal ...................................................   $ 4,842,232   $ 4,771,653   $ 3,076,977
State .....................................................     1,065,157       468,978       639,503
                                                              -----------   -----------   -----------
Current tax provision .....................................     5,907,389     5,240,631     3,716,480
                                                              -----------   -----------   -----------
Deferred Taxes
Federal ...................................................      (201,337)       82,204       648,092
State .....................................................       (40,649)       16,597        64,880
                                                              -----------   -----------   -----------
Deferred tax provision (benefit) ..........................      (241,986)       98,801       712,972
                                                              -----------   -----------   -----------
Provision for income taxes ................................   $ 5,665,403   $ 5,339,432   $ 4,429,452
                                                              ===========   ===========   ===========
</TABLE>

An analysis of income tax expense,  setting  forth the reasons for the variation
from the  "expected"  federal  corporate  income tax rate and the effective rate
provided, is as follows:
<TABLE>
<CAPTION>

                                                                         Year Ended September 30,
                                                                    ----------------------------------
                                                                     1999          1998          1997
                                                                    ------         -----         -----
Federal income taxes computed at
<S>                                                                  <C>           <C>          <C>
statutory rate ............................................          35.0%         35.0%         35.0%

Tax effect of:

State income taxes, net of Federal
income tax benefit ........................................           4.5           2.1           4.4
Nondeductible ESOP compensation
expense ...................................................           1.4           2.4           5.4
Deductible MRDP compensation
expense ...................................................          (0.1)         (1.5)         (2.2)
Interest income on municipal securities ...................          (2.2)           --          --
Elimination of valuation allowance ........................          --            (1.5)        (12.6)
Other .....................................................          (0.4)         (0.6)          4.1
                                                                   -------        ------        ------
Income tax expense included in the
consolidated statement of earnings ........................          38.2%         35.9%         34.1%
                                                                   ======         =====          ====
</TABLE>

     Deferred  income taxes at September 30, 1999 and 1998 reflect the impact of
"temporary  differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.

<PAGE>

The tax  effects  of  temporary  differences  which  give rise to a  significant
portion of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>

                                                               September 30,
                                                     ---------------------------
                                                          1999           1998
                                                     ------------   ------------
DEFERRED TAX ASSETS

<S>                                                  <C>            <C>
Allowance for losses on loans ....................   $    975,816   $    761,440
Pension liability ................................        327,539        306,462
Unearned ESOP shares .............................        371,290        422,071
Unrealized loss on securities available for sale .      1,080,801           --
Core deposit premium .............................        657,904        359,209
                                                     ------------   ------------
Total gross deferred tax assets ..................      3,413,350      1,849,182
                                                     ------------   ------------
DEFERRED TAX LIABILITIES

FHLB stock dividends .............................        894,222        585,949
Deferred loan fees ...............................      1,262,694        919,314
Tax bad debt reserve in excess of base-
year reserve .....................................      1,224,537      1,469,444
Unrealized gain on securities held for sale ......           --        1,735,484
Other ............................................        611,624        794,935
                                                     ------------   ------------
Total gross deferred tax liabilities .............      3,993,077      5,505,126
                                                     ------------   ------------
Net deferred tax liability .......................   $    579,727   $  3,655,944
                                                     ============   ============
</TABLE>

     At September 30, 1996 the Company created a valuation allowance of $648,837
to offset the deferred tax asset  associated  with the realized  capital loss on
the U.S. Federal  securities mutual bond fund because management was not assured
of being able to realize a capital gain and the related tax benefit.  During the
year ended September 30, 1997, the Company, through sale of certain investments,
realized a capital gain for tax purposes  that  assured  realization  of the tax
benefit and thus reduced the valuation  allowance to zero. There continues to be
no valuation allowance at September 30, 1999.

     The Company has qualified under  provisions of the Internal Revenue Code to
compute  federal  income  taxes after  deductions  of  additions to the bad debt
reserves.  At September 30, 1999, the Company had a taxable temporary difference
of  approximately  $10.5 million that arose before 1988 (base-year  amount).  In
accordance  with SFAS No. 109, a deferred tax liability has not been  recognized
for  the  temporary  difference.  Management  does  not  expect  this  temporary
difference to reverse in the foreseeable future.
<PAGE>

(12) Commitments and Contingencies

     In the  ordinary  course of business,  the Company has various  outstanding
commitments  and  contingencies  that  are  not  reflected  in the  accompanying
consolidated  financial statements.  In addition,  the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business.  In
the opinion of management,  after consultation with legal counsel,  the ultimate
disposition  of these matters is not expected to have a material  adverse effect
on the consolidated financial condition of the Company.

(13) Shareholders' Equity

     In September  1998,  the Board of Directors  authorized  the  repurchase of
approximately 20% of the Company's  outstanding common stock. The repurchase was
completed  through a "Modified Dutch Auction Tender." Under this procedure,  the
Company's  shareholders  were given the opportunity to sell part or all of their
shares to the  Company at a price of not less than $18.00 per share and not more
than $20.00 per share.  Results of the offer were  finalized on January 15, 1999
when the Company  announced  purchase of  1,984,090  shares at $19.50 per share.
This represents  approximately  85.9% of the shares tendered at $19.50 per share
or below, and 64.7% of all shares tendered. The cost of the shares purchased was
approximately  $39.3  million.  The effect of the  transaction is reflected in a
reduction in cash and investments and a reduction in equity.

     The table below summarizes  repurchases of the Company's common stock which
were approved by the Board of Directors and completed by management.
<TABLE>
<CAPTION>

                                                 Number        Average
Month Completed                               of Shares          Price
----------------------------------------      ---------       --------
<S>                                           <C>               <C>
September 1996 .........................        620,655         $14.33
January 1997 ...........................      1,161,247          15.91
May 1998 ...............................        521,477          21.22
January 1999 ...........................      1,984,040          19.50
</TABLE>

     In 1999,  1998 and 1997,  the vested  portion of awarded  MRDP  shares were
released.  Many of the  recipients  of this award had the Company  withhold  and
retire some of their shares to pay the associated  taxes.  This further  reduced
the  number  of  shares  outstanding  by  24,299,   22,608  and  21,689  shares,
respectively,   and  reduced   equity  by  $353,407,   $498,054  and   $377,000,
respectively.

     At the  time of  conversion,  the  Association  established  a  liquidation
account in an amount  equal to its retained  earnings as of June 30,  1995,  the
date of the latest statement of financial condition used in the final conversion
prospectus.  The  liquidation  account  will be  maintained  for the  benefit of
eligible withdrawable account holders who have maintained their deposit accounts
in the Association after conversion.  In the event of a complete  liquidation of
the  Association  (and  only in such an  event),  eligible  depositors  who have
continued to maintain  accounts will be entitled to receive a distribution  from
the  liquidation  account  before any  liquidation  may be made with  respect to
common  stock.  The  Association  may not declare or pay cash  dividends  if the
effect thereof would reduce its regulatory capital below the amount required for
the liquidation account.

     The Company's  Articles of Incorporation  authorize the issuance of 500,000
shares of preferred  stock,  having a par value of $.01 per share, in series and
to fix and state the powers,  designations,  preferences  and relative rights of
the shares of such series, and the qualifications,  limitations and restrictions
thereof.

<PAGE>

(14) Earnings Per Share

     Earnings  per share  ("EPS") is computed in  accordance  with SFAS No. 128,
Earnings  per Share,  which was adopted by the Company as of December  31, 1997.
EPS for all prior  periods have been  restated to reflect the  adoption.  Shares
held by the  Company's  ESOP  that are  committed  for  release  are  considered
contingently  issuable  shares and are included in the computation of basic EPS.
Diluted  EPS is computed  using the  treasury  stock  method,  giving  effect to
potential  additional  common  shares that were  outstanding  during the period.
Potential  dilutive  common shares include shares awarded but not released under
the  Company's  MRDP,  and stock  options  granted  under the Stock Option Plan.
Following is a summary of the effect of dilutive  securities on weighted average
number of shares (denominator) for the basic and diluted EPS calculations. There
are no resulting adjustments to net earnings.

<TABLE>
<CAPTION>
                                                                       Year Ended September 30,
                                                              ---------------------------------------
                                                                  1999          1998          1997
                                                              -----------   -----------   -----------
Weighted average common
<S>                                                             <C>           <C>           <C>
shares outstanding - basic ................................     7,564,415     9,115,404     9,487,848
                                                              -----------   -----------   -----------
Effect of Dilutive Securities on Number of Shares:
MRDP shares ...............................................        23,923        64,188        45,824
Stock options .............................................       160,189       341,657       228,787
                                                              -----------   -----------   -----------
Total Dilutive Securities .................................       184,112       405,845       274,611
                                                              -----------   -----------   -----------
Weighted average common shares
 outstanding - with dilution ..............................     7,748,527     9,521,249     9,762,459
                                                              ===========   ===========   ===========
</TABLE>

(15) Employee Benefit Plans

Employee Retirement Plan

     The  Company  is a member  of a  multiple-employer  trusteed  pension  plan
("Plan")  covering  all  employees  with at least one year of  service  and pays
direct  pensions to certain  retired  employees.  Benefits are based on years of
service with the Company and salary excluding bonuses, fees,  commissions,  etc.
Participants  are vested in their accrued  benefits after five years of service.
Pension expense of $40,828, $180,000, and $170,613 was incurred during the years
ended  September 30, 1999,  1998,  and 1997,  respectively.  Separate  actuarial
valuations,  including  computed  value of  vested  benefits,  are not made with
respect to each contributing  employer, nor are the plan assets so segregated by
the trustee.  The Plan had an over-funded  accumulated  benefit of approximately
$564.7 million at June 30, 1999.

Director Deferred Compensation Plan

     The Company  also has an  unfunded  supplemental  benefits  plan to provide
members  of the  Board  of  Directors  with  supplemental  retirement  benefits.
Supplemental  benefits  are based on monthly fees  approved by the  Compensation
Committee of the Board.  Pension costs  recognized for the years ended September
30, 1999, 1998, and 1997 were $71,052,  $71,052,  and $71,052, respectively.  At
September 30, 1999 and 1998, the projected benefit obligation was  $833,644  and
$779,392, respectively.
<PAGE>

Management Recognition and Development Plan

     In February 1996, the Board of Directors approved a MRDP for the benefit of
officers  and non-  employee  directors  which  authorizes  the grant of 489,325
common stock  shares.  The MRDP was approved by the  Company's  shareholders  on
April 9, 1996.  Those eligible to receive benefits under the MRDP are determined
by members of a committee  appointed  by the Board of  Directors of the Company.
MRDP awards  vest over a five-year  period in equal  installments  beginning  on
April 9, 1997 (the first  anniversary of the effective date of the MRDP) or upon
the  participant's  death or disability.  On April 9, 1996,  391,459 shares were
awarded to officers  and  directors.  On November  19, 1997 a new award of 6,116
shares was made to a director.  On January 4, 1999 a new award of 4,893 was made
to an officer.  During 1998, 17,616 shares awarded under the plan were forfeited
upon resignation of an officer.  The Company recognizes  compensation expense in
accordance  with the vesting  schedule  during the years in which the shares are
payable  based  on the  fair  value  of the  common  stock  on the  grant  date.
Compensation  expense for the years ended  September 30, 1999, 1998 and 1997 was
$1.0 million, $1.1 million and $1.1 million, respectively.

Stock Option Plan

     In  February  1996,  the Board of  Directors  adopted a Stock  Option  Plan
("Stock  Plan") for the benefit of certain  employees and  directors.  The Stock
Plan was approved by the Company's  shareholders  on April 9, 1996.  The maximum
number of common  shares  which may be issued  under the Stock Plan is 1,223,313
shares with a maximum  term of ten years for each option from the date of grant.
The initial awards were granted on April 9, 1996 at the fair value of the common
stock on that date ($13.125). All initial awards vest in equal installments over
a five year period from the grant date and expire  during  April 2006.  Unvested
options become immediately exercisable in the event of death or disability.

Option activity under the Stock Plan is as follows:
<TABLE>
<CAPTION>

                                                                  Weighted
                                              Number of            Average
                                                 Shares     Exercise Price
                                              ------------  --------------

<S>                                             <C>            <C>
Outstanding, October 1, 1996 ...........        971,308        $13.125
Granted ................................           --             --
Exercised ..............................           --             --
Canceled ...............................           --             --
                                             ----------
Outstanding, September 30, 1997 ........        971,308        $13.125
Granted ................................         23,243        $20.577
Exercised ..............................        (31,317)       $13.125
Canceled ...............................        (46,976)       $13.125
                                             ----------
Outstanding, September 30, 1998 ........        916,258        $13.314

Granted ................................           --             --
Exercised ..............................           --             --
Canceled ...............................           --             --
                                             ----------
Outstanding, September 30, 1999 ........        916,258        $13.314
                                             ==========        =======
</TABLE>


     At September  30, 1999,  275,738  shares were  available  for future grants
under the Stock Plan.

Additional information regarding options outstanding as of September 30, 1999 is
as follows:
<TABLE>
<CAPTION>

                                                Weighted Avg.
                     Options       Options          Remaining
Exercise Price   Outstanding   Exercisable   Contractual Life
--------------   -----------   -----------   ----------------
<S>  <C>           <C>           <C>               <C>
     $13.125       893,015       535,809           6.5
     $20.577        23,243         4,649           8.1
                 -----------   -----------
                   916,258       540,458
                 ===========   ===========
</TABLE>
<PAGE>

Additional Stock Plan Information

     As  discussed  in  Note  1,  the  Company  continues  to  account  for  its
stock-based  awards  using the  intrinsic  value method in  accordance  with APB
Opinion  No.  25,  Accounting  for Stock  Issued to  Employees  and its  related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.

     SFAS  No.  123,  Accounting  for  Stock-Based  Compensation,  requires  the
disclosure  of pro forma  net  income  and  earnings  per share had the  Company
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
fair  value of freely  tradable,  fully  transferable  options  without  vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective  assumptions,  including future stock price
volatility  and expected time to exercise,  which greatly  affect the calculated
values.


The Company's  calculations  were made using the  Black-Scholes  option  pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
                                             November 1997     April 1996
                                                   Grant          Grant
                                             -------------    -----------
<S>                                               <C>            <C>
Risk free interest rates ...............           5.79%          6.33%
Expected dividend ......................           1.75%          1.75%
Expected lives, in years ...............            7.5            7.5
Expected volatility ....................          23.24%         19.63%
</TABLE>

     The weighted average grant-date fair value of options granted during fiscal
years  1998  and  1996  were  $6.65  and  $4.12,  respectively.   The  Company's
calculations are based on a multiple option  valuation  approach and forfeitures
<PAGE>

are  recognized  as they  occur.  Had  compensation  cost for these  awards been
determined under SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>

                                                         Year ended September 30,
                                                -----------------------------------------
                                                   1999            1998           1997
                                                ----------      ----------     ----------
Net earnings:
<S>                                             <C>             <C>            <C>
             As reported                        $9,155,193      $9,551,037     $8,557,750
             Pro forma                           8,642,299       9,040,753      8,063,929
Earnings per common share - basic
             As reported                             $1.21           $1.05          $0.90
             Pro forma                               $1.14           $0.99          $0.85
Earnings per common share - fully diluted
             As reported                             $1.18           $1.00          $0.88
             Pro forma                               $1.12           $0.95          $0.83
</TABLE>


(16) Employee Stock Ownership Plan

     As part of the stock conversion consummated on October 4, 1995, the Company
established  an ESOP  for  all  employees  that  are age 21 or  older  and  have
completed two years of service with the Company.  The ESOP  borrowed  $9,786,500
from the  Company and used the funds to  purchase  978,650  shares of the common
stock of the Company issued in the conversion  which would be distributed over a
ten year  period.  The  loan  will be  repaid  principally  from  the  Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an  outstanding  balance of $5.9 million and $6.9 million at September  30, 1999
and 1998,  respectively,  and an interest rate of 8.75%.  The loan obligation of
the  ESOP is  considered  unearned  compensation  and,  as such,  recorded  as a
reduction of the Company's  shareholders'  equity.  Both the loan obligation and
the unearned  compensation  are reduced by the amount of loan repayments made by
the ESOP. Shares purchased with the loan proceeds are held in a suspense account
for allocation  among  participants as the loan is repaid.  Contributions to the
ESOP  and  shares  released  from  the  suspense  account  are  allocated  among
participants on the basis of  compensation  in the year of allocation.  Benefits
are fully vested at all times under the ESOP.  Forfeitures  are  reallocated  to
remaining plan participants and may reduce the Company's contributions. Benefits
may be payable on retirement,  death,  disability,  or separation  from service.
Since the Company's annual  contributions  are  discretionary,  benefits payable
under the ESOP cannot be  estimated.  Compensation  expense is recognized to the
extent  of the fair  value of  shares  committed  to be  released.  The  Company
recorded  compensation expense under the ESOP of $1.6 million, $2.0 million, and
$1.7  million  for  the  years  ended   September  30,  1999,   1998  and  1997,
respectively, and 97,865 shares were allocated among the participants in each of
those years.

<PAGE>

(17) Fair Value of Financial Instruments

     Financial  instruments  have been  construed  to  generally  mean cash or a
contract  that  implies  an  obligation  to deliver  cash or  another  financial
instrument to another entity.
<TABLE>
<CAPTION>


                                              September 30, 1999            September 30, 1998
                                       ---------------------------   ---------------------------
                                           Carrying           Fair       Carrying           Fair
                                             amount          value         amount          value
Financial Assets                       ------------   ------------   ------------   ------------

<S>                                    <C>            <C>            <C>            <C>
Cash and due from banks ............   $ 21,123,217   $ 21,123,217   $ 25,644,460   $ 25,644,460
Interest earning deposits with banks      1,231,516      1,231,516     11,496,026     11,496,026
Federal funds sold and
securities purchased under
agreements to resell ...............      2,167,856      2,167,856     29,844,783     29,844,783
Investment securities
available for sale .................    158,648,057    158,648,057    203,224,184    203,224,184
Investment securities held
to maturity ........................        559,512        577,455      2,888,759      2,928,324
Mortgage backed and related
securities available for sale ......     72,695,555     72,695,555     43,335,857     43,335,857
Mortgage backed and related
securities held to maturity ........      2,600,920      2,596,408      3,661,683      3,696,444
Loans receivable, net ..............    739,793,403    714,285,234    668,146,380    721,213,589
FHLB stock .........................     10,957,300     10,957,300     10,172,900     10,172,900

Financial Liabilities

Deposit liabilities ................    720,401,112    722,373,174    689,541,345    693,936,011
FHLB advances ......................    197,000,000    192,637,192    167,000,000    166,432,152
Short term borrowings ..............           --             --       12,112,500     12,112,500
</TABLE>


(18) Regulatory Capital Requirements

     The  Company is not subject to any  regulatory  capital  requirements.  The
Association,  however,  is subject to various  regulatory  capital  requirements
administered  by the  Office  of Thrift  Supervision  ("OTS").  Failure  to meet
minimum  capital  requirements  can  initiate  certain  mandatory  and  possibly
additional discretionary action by regulators that, if undertaken,  could have a
direct material effect on the Association's financial statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Association must meet specific capital guidelines that involve  quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory  accounting  practices.  The  Association's
capital amounts and classification are also subject to qualitative  judgments by
the regulators about components, risk weightings, and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I  capital  to  risk-weighted  assets,  of  Tier I  capital to total assets, and
<PAGE>

tangible  capital to tangible assets (set forth in the table below).  Management
believes that the Association  meets all capital adequacy  requirements to which
it is subject as of September 30, 1999.

     As of  September  30,  1999,  the  most  recent  notification  from the OTS
categorized the Association as "well capitalized" under the regulatory framework
for prompt  corrective  action.  To be  categorized as  "well-capitalized,"  the
Association  must maintain  minimum  total  risk-based,  Tier I risk-based,  and
tangible  capital  ratios as set forth in the table.  There are no conditions or
events  since that  notification  that  management  believes  have  changed  the
institution's category.

     At periodic  intervals,  the OTS and FDIC routinely examine the Association
as part of their legally prescribed  oversight of the thrift industry.  Based on
these examinations,  the regulators can direct that the Association's  financial
statements be adjusted in accordance with their findings.  A future  examination
by the OTS or the FDIC could include a review of certain  transactions  or other
amounts reported in the Association's 1999 financial statements.  In view of the
uncertain  regulatory  environment in which the  Association  now operates,  the
extent,  if any, to which a forthcoming  regulatory  examination  may ultimately
result in  adjustments  to the 1999  financial  statements  cannot be  presently
determined.

<PAGE>

<TABLE>
<CAPTION>

                                                                             Categorized as "Well
                                                                               Capitalized" Under
                                                               For Capital      Prompt Corrective
                                      Actual             Adequacy Purposes       Action Provision
                              ---------------------   --------------------   ---------------------
                                   Amount     Ratio        Amount    Ratio        Amount     Ratio
                              -----------     -----   -----------    -----   -----------     -----
As of September 30, 1999
<S>                           <C>             <C>     <C>             <C>    <C>             <C>
 Total Capital: ...........   $95,495,327     17.4%   $42,888,616     8.0%   $53,610,770     10.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........    93,011,702     17.0%          N/A      N/A     32,166,462      6.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........    93,011,702      8.9%    30,832,614     3.0%    51,387,690      5.0%
  (To Total Assets)
 Tangible Capital: ........    93,011,702      8.9%    15,416,307     1.5%          N/A       N/A
  (To Tangible Assets)

As of September 30, 1998
 Total Capital: ...........   $83,179,044     16.1%   $41,257,520     8.0%   $51,571,900     10.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........    81,232,367     15.8%           N/A     N/A     30,943,140      6.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........    81,232,367      8.3%    29,487,686     3.0%    49,146,143      5.0%
  (To Total Assets)
 Tangible Capital: ........    81,232,367      8.3%    14,743,843     1.5%          N/A       N/A
  (To Tangible Assets)
</TABLE>

The following table is a reconciliation of the Association's capital, calculated
according to generally accepted accounting principles,  to  regulatory  tangible
and risk-based capital:
<TABLE>
<CAPTION>

                                         September 30, 1999   September 30, 1998
                                         ------------------   ------------------
<S>                                           <C>                   <C>
Association's equity                          $101,042,299          $95,448,624
Unrealized securities (gains) losses             1,747,744           (2,785,239)
Core deposit intangible                         (9,778,341)         (11,431,018)
                                               -----------          -----------
Tangible capital                                93,011,702           81,232,367
General valuation allowances                     2,483,625            1,946,677
                                               -----------          -----------
Total capital                                 $ 95,495,327          $83,179,044
                                                ==========           ==========
</TABLE>

<PAGE>


(19) Financial  Instruments with Off-Balance  Sheet Risk and  Concentrations  of
     Credit Risk

     The Company is party to financial  instruments with off-balance  sheet risk
in the normal course of business to meet the financing  needs of its  customers.
These financial  instruments generally include commitments to originate mortgage
and consumer loans. Those instruments  involve, to varying degrees,  elements of
credit and interest rate risk in excess of the amount  recognized in the balance
sheet.  The  Company's   maximum  exposure  to  credit  loss  in  the  event  of
nonperformance by the borrower is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making commitments as
it does for  on-balance  sheet  instruments.  Commitments  to extend  credit are
conditional  45 day  agreements  to lend to a customer  subject to the Company's
usual terms and conditions.

     At September 30, 1999, loan  commitments  amounted to  approximately  $11.8
million  comprised of $4.4 million in variable  rate loans ranging from 5.50% to
10.50% and $7.4  million in fixed rate loans  ranging  from 6.75% to 10.50%.  At
September 30, 1998 commitments amounted to approximately $31.2 million comprised
of  $305,000  in  variable  rate  loans  ranging  from 8.99% to 14.50% and $30.9
million in fixed rate loans ranging from 6.13% to 10.75%.

     At September 30, 1999,  the Company also had $2.0 million in commitments to
sell loans to FNMA.

     The  Company  originates  residential  real  estate  loans and, to a lesser
extent,  commercial  and  multi-family  real  estate,  commercial  business  and
consumer loans.  Over 79% of the mortgage loans in the  Association's  portfolio
are secured by properties located in Klamath, Jackson, and Deschutes counties in
Southern and Central  Oregon.  An economic  downturn in these areas would likely
have a negative impact on the Company's  results of operations  depending on the
severity of the downturn.

(20) Parent Company Financial Information

     Condensed financial  information as of September 30, 1999 and 1998, and for
the years then ended, for Klamath First Bancorp, Inc. is presented and should be
read in conjunction  with the  consolidated  financial  statements and the notes
thereto:
<TABLE>
<CAPTION>


BALANCE SHEETS
                                                               September 30,
                                                     ------------------------------
                                                             1999            1998
                                                     -------------    -------------
<S>                                                  <C>              <C>
Cash and cash equivalents ........................   $   5,844,155    $  41,737,415
Investment and mortgage-backed securities ........       2,762,506       20,003,078
Investment in wholly-owned subsidiary ............     101,042,299       95,448,624
Other assets .....................................       1,034,776        1,099,598
                                                     -------------    -------------
Total assets .....................................   $ 110,683,736    $ 158,288,715
                                                     =============    =============
Liabilities

Short-term borrowings ............................   $        --      $  12,112,500
Other liabilities ................................       1,098,273        1,095,260
                                                     -------------    -------------
Total liabilities ................................       1,098,273       13,207,760
                                                     -------------    -------------
Shareholders' equity

Common stock .....................................          79,084           99,168
Additional paid-in capital .......................      43,794,535       82,486,183
Retained earnings ................................      75,103,040       73,883,019
Unearned ESOP shares at cost .....................      (5,871,900)      (6,850,550)
Unearned MRDP shares at cost .....................      (3,519,296)      (4,536,865)
                                                     -------------    -------------
Total shareholders' equity .......................     109,585,463      145,080,955
                                                     -------------    -------------
Total liabilities and shareholders' equity .......   $ 110,683,736    $ 158,288,715
                                                     =============    =============
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

STATEMENTS OF EARNINGS
                                                          Year Ended September 30,
                                                     ------------------------------
                                                            1999             1998
                                                     -------------    -------------
<S>                                                  <C>              <C>
Equity in undistributed income of subsidiary .....   $   9,221,480    $   9,259,035
Total interest income ............................       1,675,756        2,995,169
Total interest expense ...........................         177,568          850,122
Non-interest income ..............................              77             --
Non-interest expense .............................       1,631,674        1,674,321
                                                     -------------    -------------
Earnings before income taxes .....................       9,088,071        9,729,761
Provision (benefit) for income taxes .............         (67,122)         178,724
                                                     -------------    -------------
Net earnings .....................................   $   9,155,193    $   9,551,037
                                                     =============    =============
</TABLE>
<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS
                                                         Year Ended September 30,
                                                     ------------------------------
                                                            1999             1998
                                                     -------------    -------------
<S>                                                  <C>              <C>
Net cash flows from operating activities .........   $     963,814    $  34,654,657
                                                     -------------    -------------
Cash flows from investing activities
Investment in subsidiary .........................        (302,892)        (261,300)
Maturity of investment and mortgage-
backed securities ................................      76,275,337       20,227,224
(Purchase) sale of investment and mortgage-
backed securities ................................     (58,814,489)      (5,035,162)
                                                     -------------    -------------
Net cash flows provided by investing activities ..      17,157,956       14,930,762
                                                     -------------    -------------
Cash flows from financing activities
Cost of ESOP shares released .....................         978,650          978,650
Proceeds from short-term borrowings ..............       8,095,000       72,503,199
Repayments of short-term borrowings ..............     (20,207,500)     (77,468,199)
Stock repurchase and retirement ..................     (39,334,140)     (11,561,483)
Proceeds from exercise of stock options ..........            --            411,035
Dividends paid ...................................      (3,547,040)      (3,447,740)
                                                     -------------    -------------
Net cash flows used in financing activities ......     (54,015,030)     (18,584,538)
                                                     -------------    -------------
Net increase/(decrease) in cash and cash
equivalents ......................................     (35,893,260)      31,000,881
Cash and cash equivalents beginning of year ......      41,737,415       10,736,534
                                                     -------------    -------------
Cash and cash equivalents end of year ............   $   5,844,155    $  41,737,415
                                                     =============    =============
</TABLE>
<PAGE>

Consolidated Supplemental Data
Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>

                                                             Year Ended September 30, 1999
                                                     ---------------------------------------------
                                                      December       March       June    September
                                                     ---------   ---------   ---------   ---------
                                                           (In thousands except per share data)

<S>                                                  <C>         <C>         <C>         <C>
Total interest income ............................   $  18,278   $  17,686   $  17,802   $  17,925
Total interest expense ...........................       9,788       9,461       9,441       9,692
                                                     ---------   ---------   ---------   ---------
Net interest income ..............................       8,490       8,225       8,361       8,233
Provision for loan losses ........................         123         303         243         263
                                                     ---------   ---------   ---------   ---------
Net interest income after provision ..............       8,367       7,922       8,118       7,970
Non-interest income ..............................         899         946         827         957
Non-interest expense .............................       5,075       5,064       5,763       5,284
                                                     ---------   ---------   ---------   ---------
Earnings before income taxes .....................       4,191       3,804       3,182       3,643
Provision for income taxes .......................       1,737       1,509       1,292       1,127
                                                     ---------   ---------   ---------   ---------
Net earnings .....................................   $   2,454   $   2,295   $   1,890   $   2,516
                                                     =========   =========   =========   =========
Net earnings per share - basic ...................   $    0.28   $    0.32   $    0.27   $    0.36
                                                     =========   =========   =========   =========
Net earnings per share - fully diluted ...........   $    0.27   $    0.31   $    0.26   $    0.35
                                                     =========   =========   =========   =========

<CAPTION>

                                                           Year Ended September 30, 1998
                                                     ---------------------------------------------
                                                      December       March       June    September
                                                     ---------   ---------   ---------   ---------
                                                           (In thousands except per share data)

<S>                                                  <C>         <C>         <C>         <C>
Total interest income ............................   $  16,945   $  17,180   $  17,710   $  17,898
Total interest expense ...........................       9,186       9,123       9,710       9,829
                                                     ---------   ---------   ---------   ---------
Net interest income ..............................       7,759       8,057       8,000       8,069
Provision for loan losses ........................          75          91         198         310
                                                     ---------   ---------   ---------   ---------
Net interest income after provision ..............       7,684       7,966       7,802       7,759
Non-interest income ..............................         697         577         823       1,106
Non-interest expense .............................       4,829       4,888       4,832       4,974
                                                     ---------   ---------   ---------   ---------
Earnings before income taxes .....................       3,552       3,655       3,793       3,891
Provision for income taxes .......................       1,406       1,447       1,302       1,184
                                                     ---------   ---------   ---------   ---------
Net earnings .....................................   $   2,146   $   2,208   $   2,491   $   2,707
                                                     =========   =========   =========   =========
Net earnings per share - basic ...................   $    0.23   $    0.24   $    0.28   $    0.31
                                                     =========   =========   =========   =========
Net earnings per share - fully diluted ...........   $    0.22   $    0.23   $    0.26   $    0.30
                                                     =========   =========   =========   =========
</TABLE>

<PAGE>

Klamath First Bancorp, Inc.
Corporate Information

Corporate                               Special Counsel
Headquarters                            Breyer & Associates PC
540 Main Street                         1100 New York Ave. N.W.
Klamath Falls, OR 97601                 Suite 700 East
541-882-3444                            Washington, DC 20005
www.klamathfirstfederal.com             (202)737-7900

Independent                             Transfer Agent
Auditors                                Registrar & Transfer Co.
Deloitte & Touche LLP                   10 Commerce Drive
3900 U.S. Bancorp Tower                 Cranford, NJ 07016-3572
111 SW Fifth Avenue                     (800) 866-1340
Portland, OR 97204-3698
503-222-1341

Corporate Counsel
Craig M. Moore
540 Main Street
Klamath Falls, OR 97601
541-882-3444

Common Stock
Traded over-the-counter/Nasdaq National Market
Nasdaq Symbol: KFBI

Form 10-K  Information
A copy of the Form 10-K, as filed with the Securities  and Exchange  Commission,
will be  furnished  without  charge to  shareholders  as of the record  date for
voting at the annual meeting of  shareholders  upon written request to:
Marshall Alexander,
Senior  Vice  President  - Chief  Financial  Officer
Klamath  First Bancorp, Inc.
540 Main Street
Klamath Falls, OR 97601

Annual Meeting
The annual meeting of shareholders will be held Wednesday, January 26, 2000
beginning at 2:00 p.m., Pacific Time at:
   The Shilo Inn
   2500 Almond Street
   Klamath Falls, OR 97601.

Shareholders of record as of the close of business on November 29, 1999 shall be
those entitled to notice of and to vote at the meeting.

<PAGE>