SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                  For the Fiscal Year Ended September 30, 1999

                                       OR

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

                         Commission File Number: 0-26556

                           KLAMATH FIRST BANCORP, INC.
             (Exact name of registrant as specified in its charter)

                     Oregon                                           93-1180440
(State or other jurisdiction of incorporation                   (I.R.S. Employer
or organization)                                                    I.D. Number)

540 Main Street, Klamath Falls, Oregon                                     97601
 (Address of principal executive offices)                             (Zip Code)

Registrant's telephone number, including area code:               (541) 882-3444

Securities registered pursuant to Section 12(b) of the Act:                 None

Securities registered pursuant
to Section 12(g) of the Act:              Common Stock, par value $.01 per share
                                                                (Title of Class)

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

Indicate by check mark whether  disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's  knowledge,  in definitive  proxy or other  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendments to this Form 10-K. YES X NO

As of December 3, 1999,  there were issued and outstanding  7,908,377  shares of
the  Registrant's   common  stock.  The  Registrant's  voting  stock  is  traded
over-the-counter  and is listed on the Nasdaq  National  Market under the symbol
"KFBI." The aggregate  market value of the voting stock held by nonaffiliates of
the  Registrant,  based on the closing  sales price of the  Registrant's  common
stock as quoted on the Nasdaq National Market on December 3, 1999 of $11.75, was
$75,645,948.

                       DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of Registrant's  Annual Report to  Shareholders  for the Fiscal
Year Ended September 30, 1999 ("Annual Report") (Parts I and II).

     2. Portions of Registrant's  Definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders (Part III).

<PAGE>

                                     PART I
Item 1.  Business

General

     Klamath  First  Bancorp,  Inc.  ("Company"),  an  Oregon  corporation,  was
organized on June 16, 1995 for the purpose of becoming  the holding  company for
Klamath  First Federal  Savings and Loan  Association  ("Association")  upon the
Association's  conversion  from a federal  mutual to a federal stock savings and
loan  association  ("Conversion").  The  Conversion  was completed on October 4,
1995. At September 30, 1999, the Company had total assets of $1.0 billion, total
deposits  of $720.4  million and  shareholders'  equity of $109.6  million.  All
references to the Company herein include the Association where applicable.

     The  Association was organized in 1934. 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 also is a member
of the Federal Home Loan Bank ("FHLB") System through the FHLB of Seattle.

     In July 1997,  the  Association  acquired 25 former First  Interstate  Bank
branches  from Wells  Fargo Bank,  N.A.  The new  branches  are located in rural
communities throughout Oregon,  expanding and complementing the existing network
of branches. The acquisition was accounted for as a purchase and resulted in the
addition of approximately  $241.3 million in deposits on the acquisition date of
July 18, 1997.

     The  Association  is a  traditional,  community-oriented  savings  and loan
association  that focuses 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  extent  on  commercial
property  and  multi-family   dwellings.   At  September  30,  1999,   permanent
residential  one- to four-family  real estate loans totaled $647.1  million,  or
83.56% of total loans.  While the Association has historically  emphasized fixed
rate mortgage  lending,  it has been diversifying its loan portfolio by focusing
on  increasing  the number of  originations  of  commercial  real estate  loans,
multi-family  residential loans,  residential construction loans, small business
loans and non-mortgage consumer loans. A significant portion of these newer loan
products  carry  adjustable  rates,  higher  yields,  or shorter  terms than the
traditional  fixed rate mortgages.  This lending strategy is designed to enhance
earnings,  reduce  interest  rate risk,  and  provide a more  complete  range of
financial  services  to  customers  and  the  local  communities  served  by the
Association.  At September  30, 1999,  the  Association's  total loan  portfolio
consisted of 90.59% fixed rate and 9.41% adjustable rate loans,  after deducting
loans in process and non-performing loans.

Announcement of Stock Repurchase

     On December 1, 1999 the Company announced its intention to repurchase 5% of
its outstanding  common stock.  The repurchase will be accomplished  through the
open market over a twelve month period.

Modified Dutch Auction Tender

     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 Offer." Under this program,
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 the  purchase of 1,984,090  shares at $19.50 per
share. This represented approximately 85.9% of the shares tendered at $19.50 per
share or  less,  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 with
a corresponding  impact on the  performance  ratios for the year ended September
30, 1999.

                                        1
<PAGE>

Market Area

     As a result of the branch  acquisition  in 1997, the  Association's  market
area  expanded  to include 33  locations  in 22 of  Oregon's  36  counties.  Two
additional branch locations were added in 1998. The Association's primary market
area,  which  encompasses  the  State  of  Oregon  and  some  adjacent  areas of
California and Washington,  can be characterized  as a predominantly  rural area
containing  a number of  communities  that are  experiencing  moderate  to rapid
population  growth.  The  favorable   population  growth  in  the  market  area,
particularly  in  Southern  Oregon,  has been  supported  in  large  part by the
favorable  climate,  and by  favorable  real estate  values.  The economy of the
market  area is  still  based  primarily  on  agriculture  and  lumber  and wood
products, but is experiencing  diversification into light manufacturing,  health
care and other services, and other sectors. Tourism is a significant industry in
many regions of the market area including Central Oregon and the Southern Oregon
coast.

Yields Earned and Rates Paid

     The following table sets forth,  for the periods and at the date indicated,
the weighted  average  yields earned on  interest-earning  assets,  the weighted
average interest rates paid on  interest-bearing  liabilities,  and the interest
rate spread between the weighted average yields earned and rates paid.
<TABLE>
<CAPTION>

                                                                        Year Ended
                                                        At             September 30,
                                                   September 30,  ------------------------
                                                        1999      1999      1998      1997
                                                   -------------  ----      ----      ----
Weighted average yield:
<S>                                                     <C>       <C>       <C>       <C>
   Loans receivable .....................               7.47%     7.80%     8.06%     7.92%
   Mortgage backed and related securities               5.89      5.50      6.03      6.34
   Investment securities ................               6.23      5.88      6.05      6.10
   Federal funds sold ...................               5.22      4.93      5.45      5.31
   Interest-earning deposits ............               5.28      4.75      5.35      5.32
   FHLB stock ...........................               7.25      7.50      7.73      7.70

Combined weighted average yield on
 interest-bearing assets ................               7.15      7.25      7.34      7.40
                                                       -----     -----     -----     -----
Weighted average rate paid on:
   Tax and insurance reserve ............               1.73      2.07      2.47      2.97
   Passbook and statement savings .......               1.76      2.15      2.70      3.15
   Interest-bearing checking ............               1.14      1.23      1.48      2.20
   Money market .........................               4.04      3.87      3.86      3.85
   Certificates of deposit ..............               5.28      5.38      5.69      5.76
   FHLB advances/Short term borrowings ..               5.34      5.26      5.63      5.68

Combined weighted average rate on
 interest-bearing liabilities ...........               4.64      4.52      4.77      5.12
                                                       -----     -----     -----     -----
Net interest spread .....................               2.51%     2.73%     2.57%     2.28%
                                                       =====     =====     =====     =====
</TABLE>
                                       2
<PAGE>

Average Balances, Net Interest Income and Yields Earned and Rates Paid

     Reference is made to the section entitled "Average  Balances,  Net Interest
Income and Yields Earned and Rates Paid" on page 16 of the 1999 Annual Report to
Shareholders  ("Annual  Report"),   which  section  is  incorporated  herein  by
reference.


Interest Sensitivity Gap Analysis

     Reference  is  made  to the  section  entitled  "Interest  Sensitivity  Gap
Analysis" on page 12 of the Annual Report,  which section is incorporated herein
by reference.

Rate/Volume Analysis

     Reference is made to the section entitled "Rate/Volume Analysis" on page 17
of the Annual Report, which section is incorporated herein by reference.


Lending Activities

     General.  As a  federally  chartered  savings  and  loan  association,  the
Association has authority to originate and purchase loans secured by real estate
located  throughout the United States.  Notwithstanding  this nationwide lending
authority,  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.  With the  expanded  market area  provided by the
branch  acquisition in 1997, the Association's  mortgage lending has diversified
throughout the state of Oregon. It is management's intention,  subject to market
conditions, that the Association will remain a traditional financial institution
originating long-term mortgage loans for the purchase, construction or refinance
of one- to four-family  residential  real estate.  However,  to enhance interest
income and reduce  interest  rate risk,  the  Association  is placing  increased
emphasis on the origination or purchase of adjustable rate loans secured by one-
to four-family residential, multi-family residential and commercial real estate,
the  majority of which are  located  outside  Klamath,  Jackson,  and  Deschutes
counties.  During the year ended September 30, 1999, the Association initiated a
program to sell loans to the  Federal  National  Mortgage  Association  ("Fannie
Mae").

     Permanent residential one- to four-family mortgage loans amounted to $647.1
million,  or 83.56%, of the Association's total loan portfolio before net items,
at  September  30,  1999.  The  Association  originates  other loans  secured by
multi-family  residential  and  commercial  real estate,  construction  and land
loans.  Those loans  amounted to $110.8  million,  or 14.31%,  of the total loan
portfolio,  before net items,  at September 30, 1999.  Approximately  2.13%,  or
$16.5 million, of the Association's  total loan portfolio,  before net items, as
of September 30, 1999, consisted of non-real estate loans.

     Permissible  loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation  was $15.2 million at September 30, 1999. At September 30, 1999,  the
Association had 25 borrowing  relationships with outstanding  balances in excess
of $1.0 million,  the largest of which amounted to $5.4 million and consisted of
28 loans,  27 of which  were  secured by  commercial  real  estate  construction
projects  and single  family real estate and one which is an  unsecured  line of
credit.

     The  Association  has  placed a  growing  emphasis  on the  origination  of
adjustable rate loans in order to increase the interest rate  sensitivity of its
loan portfolio.  The Association has been successful in expanding the production
of adjustable  rate  consumer  loans and has  purchased  adjustable  rate multi-
family  residential and  non-residential  real estate loans.  Also, in September
1999,  the  Association  purchased  $10.0  million  of  adjustable  rate one- to
four-family  loans  on  properties  located  in  the  Pacific  Northwest  from a
Northwest bank. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  -- Market Risk and  Asset/Liability  Management"  and
"INTEREST SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 1999,
$70.3  million,  or 9.41% of loans in the  Association's  total loan  portfolio,
after loans in process and  non-performing  loans,  consisted of adjustable rate
loans.


                                        3
<PAGE>

     Loan Portfolio Analysis.  The following table sets forth the composition of
the loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>


                                                                          At September 30,
                               -----------------------------------------------------------------------------------------------------
                                      1999                1998                 1997                 1996                 1995
                               -----------------   ------------------   ------------------   ------------------   ------------------
                                Amount   Percent    Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent
                               --------  -------   --------   -------   --------   -------   --------   -------   --------   -------
                                                                               (Dollars in thousands)


Real estate loans:
  Permanent residential
<S>                            <C>        <C>      <C>         <C>      <C>         <C>      <C>         <C>      <C>         <C>
    one- to four-family ....   $647,130    83.56%  $577,471     81.95%  $498,595     86.47%  $447,004     91.50%  $381,683    91.68%
  Multi-family residential .     18,412     2.38     19,230      2.73     16,881      2.93      6,555      1.34      7,433     1.79
  Construction .............     53,219     6.87     64,289      9.12     30,487      5.29     14,276      2.92      9,807     2.36
  Commercial ...............     37,079     4.79     29,457      4.18     22,639      3.93     15,645      3.20     13,984     3.36
  Land .....................      2,064     0.27      2,185      0.31      1,586      0.27      1,152      0.24      1,072     0.25
                                -------   ------    -------    ------    -------    ------    -------    ------    -------   ------
Total real estate loans ....    757,904    97.87    692,632     98.29    570,188     98.89    484,632     99.20    413,979    99.44
                                -------   ------    -------    ------    -------    ------    -------    ------    -------   ------
Non-real estate loans:
  Savings accounts .........      1,800     0.23      1,991      0.28      1,711      0.30      1,640      0.34      1,966     0.47
  Home improvement and
     home equity loans .....      6,726     0.87      5,750      0.82      3,486      0.60      1,977      0.40       --         --
  Other ....................      8,011     1.03      4,330      0.61      1,190      0.21        302      0.06        367     0.09
                                -------   ------    -------    ------    -------    ------    -------    ------    -------   ------
Total non-real estate loans      16,537     2.13     12,071      1.71      6,387      1.11      3,919      0.80      2,333     0.56
                                -------   ------    -------    ------    -------    ------    -------    ------    -------   ------
 Total loans ...............    774,441   100.00%   704,703    100.00%   576,575    100.00%   488,551    100.00%   416,312   100.00%
                                          ======               ======               ======               ======              ======
Less:
Undisbursed portion of loans     24,176              26,987               17,096                8,622                7,203
Deferred loan fees .........      7,988               7,620                6,358                5,445                4,757
Allowance for loan losses ..      2,484               1,950                1,296                  928                  808
                               --------            --------             --------             --------             --------
Net loans ..................   $739,793            $668,146             $551,825             $473,556             $403,544
                               ========            ========             ========             ========             ========
</TABLE>

                                        4
<PAGE>

     The following table sets forth the amount of fixed-rate and adjustable rate
loans, net of loans in process and non-performing  loans,  included in the total
loan portfolio at the dates indicated.
<TABLE>
<CAPTION>


                                 At September 30,
                  ------------------------------------------
                          1999                  1998
                  -------------------   --------------------
                    Amount    Percent     Amount     Percent
                  --------   --------   --------     -------
                                (Dollars in thousands)

<S>               <C>         <C>       <C>           <C>
Fixed rate ....   $676,644     90.59%   $607,112       89.67%
Adjustable-rate     70,309      9.41      69,958       10.33
                  --------    ------    --------      ------
     Total ....   $746,953    100.00%   $677,070      100.00%
                  ========    ======    ========      ======
</TABLE>


     Permanent  Residential  One- to  Four-Family  Mortgage  Loans.  The primary
lending activity of the Association is the origination of permanent  residential
one- to  four-family  mortgage  loans.  Management  believes that this policy of
focusing on  single-family  residential  mortgage  loans has been  successful in
contributing  to interest  income while  keeping  delinquencies  and losses to a
minimum.  At September 30, 1999, $647.1 million, or 83.56%, of the Association's
total loan portfolio,  before net items, consisted of permanent residential one-
to  four-family  mortgage  loans.  As of such date,  the average  balance of the
Association's  permanent  residential  one- to  four-family  mortgage  loans was
$73,558.

     The Association  presently  originates  both fixed-rate  mortgage loans and
adjustable  rate mortgages  ("ARMs")  secured by one- to four-family  properties
with terms of 15 to 30 years. Historically,  most of the loans originated by the
Association   have  been  fixed  rate  loans  secured  by  one-  to  four-family
properties.  At September 30, 1999, $634.6 million, or 84.96% of the total loans
after  loans in  process  and  non-performing  loans  were  fixed  rate  one- to
four-family loans and $33.5 million,  or 4.48%, were ARM loans.  Borrower demand
for ARM loans  versus  fixed-rate  mortgage  loans is a function of the level of
interest rates,  the  expectations of changes in the level of interest rates and
the difference between the initial interest rates and fees charged for each type
of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can
be  originated  at any time is  largely  determined  by the demand for each in a
competitive environment.

     The  Association  qualifies the ARM loan borrower  based on the  borrower's
ability  to repay the loan  using  the  fully  indexed  rate.  As a result,  the
Association  believes that the potential for  delinquencies  and defaults on ARM
loans when rates adjust upwards is lessened.

     The  loan  fees  charged,  interest  rates  and  other  provisions  of  the
Association's  ARM loans are  determined by the  Association on the basis of its
own pricing criteria and competitive market  conditions.  At September 30, 1999,
the Association  charged origination fees ranging from 1.00% to 1.75% on its ARM
loans.

     In an attempt to increase  adjustable rate mortgages in the loan portfolio,
the  Association  uses below market  "teaser" rates which are  competitive  with
other  institutions  originating  mortgages in the Association's  primary market
area.  Initially,  ARM loans are priced at the competitive teaser rate and after
one year reprice at 2.875% over the One-Year  Constant  Maturity  Treasury  Bill
Index,  with a maximum  increase  or decrease of 2.00% in any one year and 6.00%
over the life of the loan.  In  October  1999 the  Association  also  introduced
variable  rate loan  products  that bear fixed rates for the first three or five
years and then reprice  annually  thereafter.  As a supplement to origination of
ARM loans, the Association  purchases ARMs from other institutions when suitable
loans can be found which meet its underwriting criteria.

     The retention of ARM loans in the Association's loan portfolio helps reduce
the  Association's  exposure to changes in interest rates.  There are,  however,
unquantifiable  credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising  interest  rates,  the risk of default on ARM loans may  increase as a
result of repricing with increased costs to the borrower.  Furthermore,  the ARM
loans originated by the Association generally provide, as a marketing incentive,
for  initial  rates  of  interest  below  the  rates  which would apply were the
                                       5
<PAGE>

adjustment  index used for  pricing  initially  (discounting).  These  loans are
subject to increased  risks of default or delinquency  because of this.  Another
consideration  is that although ARM loans allow the  Association to increase the
sensitivity  of its asset base to changes in the interest  rates,  the extent of
this interest  sensitivity is limited by the periodic and lifetime interest rate
adjustment  limits.  Because of these  considerations,  the  Association  has no
assurance that yields on ARM loans will be sufficient to offset increases in the
Association's cost of funds.

     The loan-to-value ratio, maturity and other provisions of the loans made by
the  Association  generally  have  reflected  the policy of making less than the
maximum loan permissible under applicable regulations,  in accordance with sound
lending practices,  market conditions and underwriting  standards established by
the Association.  The  Association's  lending policies on permanent  residential
one- to four-family  mortgage loans  generally  limit the maximum  loan-to-value
ratio to 90% of the  lesser  of the  appraised  value or  purchase  price of the
property and generally all permanent  residential  one- to four-family  mortgage
loans  in  excess  of  an  80%  loan-to-value  ratio  require  private  mortgage
insurance.  Programs  for 95% and 97%  loan-to-value  are  available  for  owner
occupied purchase transactions.

     The Association also has a limited amount of  non-owner-occupied  permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten  using  generally  the same  criteria as  owner-occupied  permanent
residential  one-  to  four-family  mortgage  loans,  except  that  the  maximum
loan-to-value  ratio is generally  75% of the lesser of the  appraised  value or
purchase  price of the  property  and such loans are  generally  provided  at an
interest rate higher than owner-occupied loans.

     The  Association   offers   fixed-rate,   permanent   residential  one-  to
four-family  mortgage  loans  with  terms of 15 to 30 years.  Substantially  all
permanent one- to four-family loans have original  contractual terms to maturity
of 30 years.  Such loans are  amortized on a monthly  basis with  principal  and
interest  due each month and  customarily  include  "due-on-sale"  clauses.  The
Association   enforces   due-on-sale  clauses  to  the  extent  permitted  under
applicable laws.  Substantially all of the Association's mortgage loan portfolio
consists of conventional loans.

     Historically,  the  Association has not originated  significant  amounts of
mortgage loans on second  residences.  However,  with the branch offices in Bend
and the loan  center  in  Redmond,  which is near  popular  ski  areas and other
outdoor  activities,  and the branches along the Southern Oregon coast, which is
also an increasingly  popular resort and vacation area, the Association believes
that there is an  opportunity to engage in such lending within the parameters of
its current  underwriting  policies.  At September 30, 1999,  $4.2  million,  or
0.54%, of the Association's loan portfolio consisted of loans on second homes.

     Commercial  and  Multi-Family   Real  Estate  Loans.  The  Association  has
historically  engaged in a limited amount of  multi-family  and commercial  real
estate lending.  The Association  purchases  participations  in loans secured by
multi-family  and  commercial  real estate in order to  increase  the balance of
adjustable rate loans in the portfolio.  See "-- Loan  Originations,  Purchases,
and Sales." At September 30, 1999, $18.4 million, or 2.38%, of the Association's
total loan portfolio,  before net items,  consisted of loans secured by existing
multi-family  residential  real  estate  and $37.1  million,  or  4.79%,  of the
Association's total loan portfolio, before net items, consisted of loans secured
by  existing   commercial  real  estate.   The   Association's   commercial  and
multi-family  real  estate  loans  include  primarily  loans  secured  by office
buildings,  small  shopping  centers,  churches,   mini-storage  warehouses  and
apartment buildings.  All of the Association's  commercial and multi-family real
estate  loans are secured by  properties  located in the  Association's  primary
market area. The average outstanding balance of commercial and multi-family real
estate loans was $246,625 at September 30, 1999, the largest of which was a $2.5
million land  development loan secured by land and  improvements.  This loan has
performed  in  accordance  with its terms  since  origination.  Originations  of
commercial  real estate and  multi-family  residential  real estate  amounted to
5.74%,  3.20%,  and 4.87% of the  Association's  total loan  originations in the
fiscal  years ended  September  30,  1999,  1998,  and 1997,  respectively.  The
                                       6
<PAGE>

Association  also  purchased  $2.4  million  in  multi-family  residential  loan
participations and $937,000 in commercial real estate  participations during the
year ended September 30, 1999.

     The  Association's  commercial and multi-family  loans generally have terms
which  range  up to 25  years  and  loan-to-value  ratios  of  up  to  75%.  The
Association  currently  originates  fixed and  adjustable  rate  commercial  and
multi-family  real  estate  loans.   Commercial  real  estate  and  multi-family
adjustable rate loans are priced to be competitive with other commercial lenders
in the  Association's  market  area.  A variety of terms are  available  to meet
specific  commercial  and  multi-family   residential  financing  needs.  As  of
September  30,  1999,  $28.0  million,  or 3.75%,  after  loans in  process  and
non-performing  loans,  of  other  mortgage  loans,   including  commercial  and
multi-family residential real estate loans, had adjustable rates of interest.

     Multi-family  residential  and commercial  real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family  lending.  Such  lending  typically  involves  large  loan  balances
concentrated in a single borrower or groups of related  borrowers.  In addition,
the  payment  experience  on loans  secured by  income-producing  properties  is
typically  dependent  on the  successful  operation  of the related  real estate
project and thus may be subject to a greater extent to adverse conditions in the
real  estate  market or in the  economy  generally.  The  Association  generally
attempts to mitigate  the risks  associated  with  multi-family  residential and
commercial  real estate  lending  by, among other things,  lending on collateral
located in its market area and following strict  underwriting  standards.  Loans
considered  for purchase are  subjected  to the same  underwriting  standards as
those originated in- house.

     Construction  Loans. The Association makes  construction loans primarily to
individuals  for  the  construction  of  their  single-family  residences.   The
Association  also makes loans to builders for the  construction of single-family
residences  which  are not  presold  at the  time of  origination  ("speculative
loans").  Permanent  construction loans generally begin to amortize as permanent
residential  one- to  four-family  mortgage loans within one year of origination
unless extended.  Speculative loans are scheduled to pay off in 12 to 18 months.
At September 30, 1999,  construction  loans amounted to $53.2 million (including
$22.5 million of speculative  loans), or 6.87%, of the Association's  total loan
portfolio  before net  items.  Construction  loans  have  rates and terms  which
generally  match the  non-construction  loans then  offered by the  Association,
except that during the  construction  phase,  the borrower pays only interest on
the loan. The Association's  construction loan agreements generally provide that
loan  proceeds are  disbursed in  increments  as  construction  progresses.  The
Association  periodically  reviews the progress of the  underlying  construction
project  through  physical  inspections.  Construction  loans  are  underwritten
pursuant to the same general  guidelines used for originating  permanent one- to
four-family   loans.   Construction   lending  is   generally   limited  to  the
Association's primary market area.

     Construction  financing is generally  considered to involve a higher degree
of risk of loss than financing on improved,  owner-occupied  real estate because
of the  uncertainties  of  construction,  including  the  possibility  of  costs
exceeding the initial estimates and, in the case of speculative  loans, the need
to  obtain a  purchaser.  The  Association  has  sought  to  minimize  the risks
associated with permanent construction lending by limiting construction loans to
qualified  owner-occupied  borrowers  with  construction  performed by qualified
state licensed  builders  located  primarily in the  Association's  market area.
During  1997,  the  Association  began  originating  construction  loans  in the
Portland,  Oregon  metropolitan area through mortgage  brokers.  These loans are
underwritten using the same standards as loans from the branch locations.

     The  Association's  underwriting  criteria  are  designed to  evaluate  and
minimize the risks of each construction  loan.  Interim  construction  loans are
qualified at permanent  rates in order to ensure the  capability of the borrower
to repay the loan.

     Loan proceeds are disbursed only as construction progresses and inspections
warrant.  These loans are  underwritten  to the same  standards  and to the same
terms and requirements as one- to four-family  purchase  mortgage loans,  except
the loans provide for  disbursement of funds during a construction  period of up
to one year.  During this  period,  the  borrower  is  required to make  monthly
payments of accrued  interest on the  outstanding  loan  balance.  Disbursements
during  the  construction  period  are  limited  to no more than the  percent of
completion. Up to 95% loan-to-value  upon  completion  of  construction  may  be

                                        7
<PAGE>

disbursed if private mortgage insurance above 80% loan-to-value is in place.

     Land Loans.  The Association  makes loans to individuals for the purpose of
acquiring  land to build a permanent  residence.  These loans  generally have 20
year amortization periods, with a balloon payment due in five years, and maximum
loan-to-value  ratios of 80%. As of September 30, 1999, $2.1 million,  or 0.27%,
of the Association's total loan portfolio consisted of land loans.

     Non-Real  Estate Loans.  Non-real estate lending has  traditionally  been a
small  part  of  the  Association's  business.   During  1997,  the  Association
introduced  several new business  and consumer  loan  products,  including  home
equity lines of credit,  automobile and recreational vehicle loans, and personal
and business lines of credit, among others. Non-real estate loans generally have
shorter  terms to  maturity or  repricing  and higher  interest  rates than real
estate  loans.  As of  September  30,  1999,  $16.5  million,  or 2.13%,  of the
Association's  total loan portfolio  consisted of non-real  estate loans.  As of
that  date,  $1.8  million,  or .23%,  of total  loans  were  secured by savings
accounts.  At September 30, 1999,  $1.5 million,  or 0.20%,  of non-real  estate
loans consisted of Title I home improvement loans insured by the Federal Housing
Administration and most are secured by liens on the real property.

     Loan  Maturity  and  Repricing.  The  following  table sets  forth  certain
information  at September  30, 1999  regarding the dollar amount of total loans,
after loans in process and non-performing  loans,  maturing in the Association's
portfolio,  based on the contractual terms to maturity or repricing date. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less.

<TABLE>
<CAPTION>

                                 Within     After One Year
                               One Year    Through 5 Years     After 5 Years             Total
                               ---------   ---------------     -------------        ----------
                                                      (In thousands)

Permanent residential
   one- to four-family:
<S>                            <C>               <C>               <C>               <C>
  Adjustable rate ....         $  24,418         $   9,070         $    --           $  33,488
  Fixed rate .........            10,004             3,908           620,724           634,636
Other mortgage loans:
  Adjustable rate ....            14,276            13,732              --              28,008
  Fixed rate .........             1,264            12,788            20,234            34,286
Non-real estate loans:
   Adjustable rate ...             8,627               186              --               8,813
   Fixed rate ........             1,503             4,303             1,916             7,722
                               ---------         ---------         ---------         ---------
    Total loans ......         $  60,092         $  43,987         $ 642,874         $ 746,953
                               =========         =========         =========         =========
</TABLE>


     Scheduled  contractual  amortization  of loans does not  reflect the actual
term  of the  Association's  loan  portfolio.  The  average  life  of  loans  is
substantially  less than their  contractual  terms  because of  prepayments  and
due-on-sale  clauses,  which  gives  the  Association  the  right to  declare  a
conventional loan immediately due and payable in the event,  among other things,
that the borrower  sells the real property  subject to the mortgage and the loan
is not repaid.

     The dollar amount of all loans, net of loans in process and  non-performing
loans,  due one year after  September 30, 1999,  which have fixed interest rates
and have adjustable rates, was $663.9 million and $23.0 million, respectively.
                                       8
<PAGE>

     Loan  Commitments.   The  Association  issues  commitments  for  fixed  and
adjustable rate loans  conditioned  upon the occurrence of certain events.  Such
commitments are made on specified terms and conditions and are honored for up to
45 days from  commitment.  The Association had outstanding  loan  commitments of
approximately  $11.8 million at September 30, 1999 consisting of $4.4 million of
variable  rate loans and $7.4 million of fixed rate loans.  See Note 19 of Notes
to the Consolidated Financial Statements.

     Loan  Solicitation and Processing.  The Association  originates real estate
and other loans at each of its  offices.  Loan  originations  are  obtained by a
variety of sources, including mortgage brokers,  developers,  builders, existing
customers,  newspapers,  radio,  periodical  advertising and walk-in  customers,
although  referrals  from  local  realtors  has been the  primary  source.  Loan
applications are taken by lending personnel,  and the loan processing department
obtains credit reports, appraisals and other documentation involved with a loan.
All of the  Association's  lending is subject to its  written  nondiscriminatory
underwriting  standards,   loan  origination  procedures  and  lending  policies
prescribed by the  Association's  Board of Directors.  Property  valuations  are
required on all real estate loans and are prepared by employees  experienced  in
the  field  of  real  estate  or  by  independent  appraisers  approved  by  the
Association's  Board of  Directors.  Additionally,  all  appraisals  on loans in
excess of $250,000 must meet applicable regulatory standards.

     The  Association's   loan  approval  process  is  intended  to  assess  the
borrower's ability to repay the loan, the viability of the loan, the adequacy of
the value of the  property  that will secure the loan,  the location of the real
estate,  and, in the case of commercial and multi-family  real estate loans, the
cash  flow of the  project  and the  quality  of  management  involved  with the
project.  The  Association  generally  requires title insurance on all loans and
also that borrowers provide evidence of fire and extended casualty  insurance in
amounts and through  insurers  that are  acceptable to the  Association.  A loan
application file is first reviewed by a loan officer of the Association and then
is  submitted  to  the  loan  committee  for  underwriting  and  approval.   The
Association  can make  loan  commitments,  subject  to  property  valuation  and
possible  other  conditions  of  approval,  in three to five days if income  and
credit data of the borrower are readily available.

     Loan  Originations,  Purchases and Sales.  The  Association  has originated
substantially all of the loans in its portfolio. During the year ended September
30, 1999, the Association  originated $224.2 million in total loans, compared to
$232.5  million in the same  period of 1998.  The  continued  high level of loan
originations  was attributable to relatively low interest rates and promotion of
lending  throughout the branch network and through mortgage brokers.  During the
year ended September 30, 1999, the Association  began a program to sell loans to
Fannie Mae.  Through this  program,  $5.6 million in fixed rate loans were sold,
all of which were one- to four-family  mortgages.  Servicing was retained on all
loans sold.

     Between 1989 and 1992, the Association purchased permanent residential one-
to four-family  jumbo mortgage loans (i.e.,  loans with principal  balances over
$203,150) on detached residences from various localities  throughout the Western
United States, primarily Oregon, Washington, California and Arizona. At one time
the  aggregate  balance  of such  loans  was  approximately  $64.6  million.  At
September 30, 1999,  the balance had declined to $1.3 million.  During 1999, the
Association purchased $10.4 million in permanent residential one- to four-family
mortgage  loans.  These loans were  underwritten  on the same basis as permanent
residential one- to four-family real estate loans originated by the Association.

     The  Association  also purchases  multi-family  and commercial  real estate
mortgage  loans secured by properties  within the  Association's  primary market
area.  At September  30,  1999,  the balance of such  purchased  loans was $17.9
million.  These  loans were  underwritten  on the same  basis as  similar  loans
originated by the Association.

                                       9
<PAGE>

     The following table shows total loans originated,  purchased and sold, loan
reductions  and the net increase in the  Association's  loans during the periods
indicated.
<TABLE>
<CAPTION>

                                                Year Ended September 30,
                                         -----------------------------------
                                             1999         1998         1997
                                         ---------    ---------    ---------
                                                     (In thousands)

<S>                                      <C>          <C>          <C>
Total net loans at beginning of period   $ 668,146    $ 551,825    $ 473,556
                                         ---------    ---------    ---------
Loans originated:
 Real estate loans originated (1) ....     209,723      219,790      116,502
 Real estate loans purchased .........      15,500        7,792       15,648
 Non-real estate loans originated ....      14,471       12,684        3,571
                                         ---------    ---------    ---------
   Total loans originated ............     239,694      240,266      135,721
                                         ---------    ---------    ---------
Loan reductions:
 Principal paydowns ..................    (159,161)    (122,029)     (56,157)
 Loans sold ..........................      (5,584)        --           --
 Other reductions (2) ................      (3,302)      (1,916)      (1,295)
                                         ---------    ---------    ---------
    Total loan reductions ............    (168,047)    (123,945)     (57,452)
                                         ---------    ---------    ---------
Total net loans at end of period .....   $ 739,793    $ 668,146    $ 551,825
                                         =========    =========    =========
<FN>
(1)  Includes  decreases/increases  from  loans-in-process.
(2)  Includes  net  reductions  due to  deferred  loans fees,  discounts  net of
     amortization, provision for loan loss and transfers to real estate owned.
</FN>
</TABLE>

     Loan  Origination  and Other Fees. In addition to interest earned on loans,
the  Association  receives  loan  origination  fees or "points" for  originating
loans.  Loan points are a percentage of the principal  amount of the real estate
loan and are charged to the borrower in connection  with the  origination of the
loan.  The  amount  of  points  charged  by the  Association  varies,  though it
generally amounts to 1.00% to 1.75% on permanent loans and 2.00% on construction
loans.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, the Association's loan origination fees and
certain related direct loan origination costs are offset,  and the resulting net
amount is deferred  and  amortized  as income over the  contractual  life of the
related loans as an adjustment to the yield of such loans,  or until the loan is
paid in full. At September  30, 1999,  the  Association  had $8.0 million of net
loan fees which had been  deferred and are being  recognized  as income over the
contractual maturities of the related loans.

                                       10
<PAGE>

Asset Quality

     Delinquent  Loans.  The following table sets forth  information  concerning
delinquent  loans at September 30, 1999, in dollar amount and as a percentage of
the  Association's  total loan portfolio.  The amounts  presented  represent the
total  outstanding  principal  balances  of the related  loans,  rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>

                              Permanent residential                               Multi-family
                                   1-4 family               Construction        Real Estate Loans            Total
                              ---------------------    ---------------------   -------------------     ---------------------
                               Amount    Percentage    Amount     Percentage   Amount   Percentage     Amount    Percentage
                              -------    ----------    ------     ----------   ------   ----------     -------    ----------
                                                                 (Dollars in thousands)

Loans delinquent
<S>                              <C>         <C>       <C>            <C>        <C>        <C>        <C>           <C>
 for 90 days and more.......     $915        0.12%     $1,474         0.19%      $926       0.12%      $3,315        0.43%
</TABLE>

     Delinquency Procedures. When a borrower fails to make a required payment on
a loan,  the  Association  attempts to cure the  delinquency  by contacting  the
borrower.  In the case of loans past due,  appropriate  late notices are sent on
the fifth and  fifteenth  days  after the due date.  If the  delinquency  is not
cured,  the borrower is contacted by telephone after the fifteenth day after the
payment is due.

     For real estate loans, in the event a loan is past due for 45 days or more,
the Association will attempt to arrange an in-person interview with the borrower
to  determine  the  nature of the  delinquency;  based  upon the  results of the
interview  and its review of the loan status,  the  Association  may negotiate a
repayment program with the borrower.  If a loan remains past due at 60 days, the
Association performs an in-depth review of the loan status, the condition of the
property and the circumstances of the borrower.  If appropriate,  an alternative
payment  plan is  established.  At 90 days past due,  a letter  prepared  by the
Association is sent to the borrower  describing the steps to be taken to collect
the loan, including acceptance of a voluntary  deed-in-lieu of foreclosure,  and
of the initiation of foreclosure proceedings.  A decision as to whether and when
to  initiate  foreclosure  proceedings  is made by senior  management,  with the
assistance of legal counsel,  at the direction of the Board of Directors,  based
on such factors as the amount of the  outstanding  loan in relation to the value
of  the  property  securing  the  original  indebtedness,   the  extent  of  the
delinquency  and the borrower's  ability and  willingness to cooperate in curing
the delinquency.

     For consumer loans, at 60 days past due a letter demanding  payment is sent
to the borrower.  If the delinquency is not cured prior to becoming 90 days past
due,  repossession  procedures are implemented for  collateralized  loans. At 90
days past due, consumer loans are generally charged off.

     Non-Performing  Assets. The Association's  non-performing assets consist of
non-accrual loans,  accruing loans greater than 90 days delinquent,  real estate
owned and other  repossessed  assets.  All loans are reviewed on a regular basis
and are placed on a non-accrual  status when, in the opinion of management,  the
collection  of additional  interest is deemed  insufficient  to warrant  further
accrual.  Generally, the Association places all loans more than 90 days past due
on  non-accrual  status.  Uncollectible  interest on loans is  charged-off or an
allowance  for  losses  is  established  by a charge  to  earnings  equal to all
interest previously accrued and 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  acquired by  foreclosure  is  classified  as real estate owned
until such time as it is sold. See Note 1 of Notes to the Consolidated Financial
Statements.  When such property is acquired,  it is recorded at the lower of the
balance of the loan on the  property at the date of  acquisition  (not to exceed
the  net  realizable  value)  or the  estimated  fair  value.  Costs,  excluding
interest, relating to holding the property are expensed as incurred.  Valuations
are  periodically  performed  by  management  and an  allowance  for  losses  is
established  by a charge to  operations  if the  carrying  value of the property
exceeds its estimated net realizable  value.  From time to time, the Association

                                       11
<PAGE>

also acquires personal property, generally mobile homes, which are classified as
other  repossessed  assets and are carried on the books at their  estimated fair
market value and disposed of as soon as commercially reasonable.

     As of September 30, 1999,  the  Association's  total  non-performing  loans
amounted to $3.3 million,  or 0.43% of total loans,  before net items,  compared
with $524,000, or 0.07% of total loans, before net items, at September 30, 1998.
The increase relates  primarily to two loans placed on nonaccrual  status during
1999, a $1.5 million land development loan and a $925,711 commercial real estate
loan secured by an apartment  complex.  The  appraised  value of the  underlying
collateral  exceeds the loan  balances  and  foreclosure  proceedings  have been
commenced related to these properties.

     Real estate owned  increased  from the prior year  primarily as a result of
the foreclosure of a commercial real estate property.  This property was written
down to its estimated fair value of $1.4 million upon foreclosure.

     The  following   table  sets  forth  the  amounts  and  categories  of  the
Association's  non-performing assets at the dates indicated. The Association had
no material troubled debt restructurings as defined by SFAS No. 15 at any of the
dates indicated.
<TABLE>
<CAPTION>

                                                              At September 30,
                                             -----------------------------------------------
                                             1999        1998       1997      1996      1995
                                             -----     ------    -------   -------    ------
                                                           (Dollars in thousands)
Non-accruing loans
<S>                                         <C>       <C>        <C>       <C>       <C>
    One- to four-family real estate .....   $  915    $   513    $   245    $  191    $  734
    Commercial real estate ..............    2,400         --         --        --        --
    Consumer ............................       --         11          9        --        --
Accruing loans greater than 90
  days delinquent .......................       --         --         --        --        --
                                            ------     ------    -------    ------    ------
    Total non-performing loans ..........    3,315        524        254       191       734
                                            ------     ------    -------    ------    ------
Real estate owned .......................    1,495         --         --        69        24
Other repossessed assets ................       --         --         --        --        --
                                            ------     ------    -------    ------    ------
    Total repossessed assets ............    1,495         --         --        69        24
                                            ------    -------    -------    ------    ------
    Total non-performing assets .........   $4,810    $   524    $   254    $  260    $  758
                                            ======    =======    =======    ======    ======
Total non-performing assets as a
  percentage of total assets ............     0.46%     0.05%      0.03%     0.04%     0.12%
                                            ======    ======    =======    ======    ======
Total non-performing loans as a
  percentage of total loans,
  before net items ......................     0.62%     0.07%      0.04%     0.04%     0.18%
                                            ======    ======    =======    ======    ======
Allowance for loan losses as a
  percentage of total non-performing
  assets ................................    51.64%   372.14%    510.38%   356.92%   106.80%
                                            ======    ======    =======    ======    ======
Allowance for loan losses as a percentage
  of total non-performing loans .........    74.93%   372.14%    510.38%   485.86%   110.08%
                                            ======    ======    =======    ======    ======
</TABLE>


     For the year ended  September  30,  1999,  the amount of gross  income that
would have been  recorded  in the period  then  ended if  non-accrual  loans and
troubled debt restructurings had been current according to their original terms,

                                       12
<PAGE>

and the amount of interest  income on such loans that was included in net income
for each of such periods,  were, in both cases,  less than 1% of total  interest
income.

     Classified Assets.  Federal  regulations  require that each insured savings
association  classify its assets on a regular basis. In addition,  in connection
with examinations of insured  institutions,  federal examiners have authority to
identify  problem  assets and, if  appropriate,  classify  them.  There are four
categories used to classify problem assets:  "special  mention,"  "substandard,"
"doubtful,"  and "loss."  Special  mention assets are not considered  classified
assets,  but are assets of  questionable  quality  that have  potential  or past
weaknesses that deserve management's close attention and monitoring. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility  that  the  insured  institution  will  sustain  some  loss  if  the
deficiencies  are  not  corrected.   Doubtful  assets  have  the  weaknesses  of
substandard assets with the additional  characteristic  that the weaknesses make
collection  or  liquidation  in full on the basis of currently  existing  facts,
conditions and values questionable,  and there is a high possibility of loss. An
asset classified loss is considered  uncollectible and of such little value that
continuance as an asset of the  institution is not  warranted.  Special  mention
assets and assets  classified as substandard or doubtful require the institution
to establish general  allowances for loan losses. If an asset or portion thereof
is classified  loss,  the insured  institution  must either  establish  specific
allowances  for loan  losses in the  amount of 100% of the  portion of the asset
classified loss or charge-off such amount.  General loss allowances  established
to cover possible losses related to special mention assets and assets classified
substandard  or  doubtful  may  be  included  in  determining  an  institution's
regulatory capital,  while specific valuation  allowances for loan losses do not
qualify as regulatory  capital.  Federal  examiners may disagree with an insured
institution's classifications and the amounts reserved.

As of September 30, 1999,  total  classified  assets  amounted to 0.46% of total
assets.   At  September  30,  1999  and  1998,  the  aggregate  amounts  of  the
Association's  classified  and  special  mention  assets,  exclusive  of amounts
classified loss and which have been fully reserved, were as follows:
<TABLE>
<CAPTION>

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

<S>                        <C>      <C>
Loss ...................   $   --   $   --
Doubtful ...............       --       --
Substandard assets .....    4,810      521
Special mention ........      456    2,452


General loss allowances     2,484    1,947
Specific loss allowances       --        3
Charge offs ............      398       20
</TABLE>

     Assets classified  substandard at September 30, 1999 include a $1.5 million
land development  loan, a $925,711 loan on a 40-unit  apartment  complex,  and a
$1.4 million commercial real estate property obtained through foreclosure.  None
of these assets were classified at September 30, 1998.  These problem assets are
not  concentrated  in any one market area and the Company  does not believe they
are  indicative  of an adverse  market trend in the  Northwest.  The increase in
charge offs for the year ended  September  30,  1999  relates  primarily  to the
write-down of the commercial real estate property to fair value. The loan on the
commercial real estate was originally a participation with another lender.

     Allowance for Loan Losses. The allowance for loan losses is maintained at a
level  considered  adequate by management to provide for anticipated loan losses
based  on  management's   assessment  of  various  factors  affecting  the  loan
portfolio, including a review of all loans for which full collectibility may not
be reasonably  assured,  an overall  evaluation of the quality of the underlying
collateral,  economic  conditions,  historical  loan  loss  experience and other

                                       13
<PAGE>

factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.  While management believes it uses the best information  available to
determine the  allowance for loan losses,  unforeseen  market  conditions  could
result in adjustments to the allowance for loan losses and net earnings could be
significantly   affected,   if  circumstances   differ  substantially  from  the
assumptions used in making the final  determination.  At September 30, 1999, the
Association had an allowance for loan losses of $2.5 million, which was equal to
51.64% of non-performing assets and 0.32% of total loans.

     Provisions  for loan  losses  are  charged to  earnings  to bring the total
allowance  for  loan  losses  to  a  level  deemed  appropriate  by  management.
Management  considers  historical loan loss  experience,  the volume and type of
lending  conducted  by  the  Association,  industry  standards,  the  amount  of
non-performing assets, general economic conditions  (particularly as they relate
to  the   Association's   market  area),   and  other  factors  related  to  the
collectibility of the Association's loan portfolio in their determination of the
adequacy of the  allowance and the  provision.  The  provisions  for loan losses
charged  against  income for the years ended  September 30, 1999,  1998 and 1997
were $932,000,  $674,000, and $370,000,  respectively.  Management believes that
the amount  maintained  in the  allowance  will be adequate  to absorb  possible
losses in the portfolio.

     The  following  table  sets  forth for the  periods  indicated  information
regarding  changes  in  the  Association's   allowance  for  loan  losses.   All
information is before net items.

<TABLE>
<CAPTION>

                                                                  Year Ended September 30,
                                            ----------------------------------------------------------------
                                                1999          1998          1997          1996         1995
                                            ---------     ---------     ---------     ---------    ---------
                                                                   (Dollars in thousands)

<S>                                         <C>           <C>           <C>           <C>          <C>
Total loans outstanding .................   $ 774,441     $ 704,703     $ 576,575     $ 488,551    $ 416,312
                                            =========     =========     =========     =========    =========
Average loans outstanding ...............   $ 721,658     $ 614,457     $ 515,555     $ 440,510    $ 381,689
                                            =========     =========     =========     =========    =========
Allowance at beginning of period ........   $   1,950     $   1,296     $     928     $     808    $     755

Charge-offs .............................        (398)          (20)           (2)         --            (67)

Recoveries ..............................          --            --            --            --           --

Provision for loan losses ...............         932           674           370           120          120
                                            ---------     ---------     ---------     ---------    ---------
Allowance at end of period ..............   $   2,484     $   1,950     $   1,296     $     928    $     808
                                            =========     =========     =========     =========    =========
Allowance for loan losses as a percentage
 of total loans outstanding .............        0.32%         0.28%         0.22%         0.19%        0.19%
                                                 ====          ====          ====          ====         ====
Ratio of net charge-offs to average loans
 outstanding during the period ..........        0.06%           --%           --%           --%        0.02%
                                                 ====          ====          ====          ====         ====
</TABLE>

                                       14
<PAGE>

     The  following  table sets forth the  breakdown of the  allowance  for loan
losses by loan category and summarizes the percentage of total loans, before net
items,  in each  category  to  total  loans,  before  net  items,  at the  dates
indicated.
<TABLE>
<CAPTION>

                                                                      At September 30,
                       -------------------------------------------------------------------------------------------------------------
                                       1999                                 1998                                 1997
                       ------------------------------------  ----------------------------------- -----------------------------------
                                    Percent of                           Percent of                           Percent of
                          Amount  Allowance in   Percent of    Amount  Allowance in   Percent of    Amount  Allowance in  Percent of
                              of   Category to  Total Loans        of   Category to  Total Loans        of   Category to Total Loans
                       Allowance   Total Loans  by Category  Allowance  Total Loans  by Category Allowance   Total Loans by Category
                       ---------  ------------  -----------  --------- ------------  ----------- ---------  ------------ -----------
                                                                (Dollars in thousands)

Permanent
  residential
<S>                       <C>             <C>       <C>        <C>            <C>         <C>      <C>          <C>         <C>
  1-4 family ...........  $1,103          0.14%      83.56%    $1,141         0.16%        81.95%  $  887       0.15%        86.51%
Multi-family
  residential ..........     267          0.03        2.38        124         0.02          2.73      121       0.02          2.93
Construction ...........     221          0.03        6.87        116         0.02          9.12       --         --          5.31
Commercial .............     730          0.09        4.79        444         0.07          4.18      250       0.04          3.93
Land ...................      28            --        0.27         29           --          0.31       12         --          0.27
Non-real estate ........     135          0.02        2.13         96         0.01          1.71       26       0.01          1.05
                          ------         ------     ------     ------         -----       ------   ------       ----        ------
   Total ...............  $2,484          0.31%     100.00%    $1,950         0.28%       100.00%  $1,296       0.22%       100.00%
                          ======         =====      ======     ======         ====        ======   ======       ====        ======
</TABLE>
<TABLE>
<CAPTION>
                                                     At September 30,
                       -------------------------------------------------------------------------
                                       1996                                 1995
                       ------------------------------------  -----------------------------------
                                    Percent of                           Percent of
                          Amount  Allowance in   Percent of    Amount  Allowance in   Percent of
                              of   Category to  Total Loans        of   Category to  Total Loans
                       Allowance   Total Loans  by Category  Allowance  Total Loans  by Category
                       ---------  ------------  -----------  --------- ------------  -----------
                                                                (Dollars in thousands)
Permanent
  residential
<S>                         <C>          <C>        <C>          <C>          <C>        <C>
  1-4 family............    $925         0.19%       91.50%      $807         0.19%       91.68%
Multi-family
  residential...........      --           --         1.34         --           --         1.79
Construction............      --           --         2.92         --           --         2.36
Commercial..............      --           --         3.20         --           --         3.36
Land....................      --           --         0.24         --           --         0.25
Non-real estate.........       3           --         0.80          1           --         0.56
                           ------       -----      -------       ----         ----       ------
   Total................    $928         0.19%      100.00%      $808         0.19%      100.00%
                           ======       =====      =======       ====         ====       ======
</TABLE>

                                       15
<PAGE>

     Although the Association believes that it has established its allowance for
loan  losses  in  accordance  with  generally  accepted  accounting   principles
("GAAP"),  there  can  be  no  assurance  that  regulators,   in  reviewing  the
Association's loan portfolio,  will not request the Association to significantly
increase its allowance for loan losses,  thereby reducing the  Association's net
worth and earnings.  In addition,  because future events affecting borrowers and
collateral  cannot be predicted with  certainty,  there can be no assurance that
the existing allowance for loan losses is adequate or that substantial increases
will not be necessary should the quality of any loans deteriorate as a result of
the  factors  discussed  above.  Any  material  increase  in the  allowance  may
adversely affect the Association's financial condition and results of operation.

Investment Activities

     Federally  chartered  savings  institutions have the authority to invest in
securities of various federal agencies,  certain insured certificates of deposit
of banks and savings  institutions,  certain  bankers'  acceptances,  repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.  OTS regulations  restrict investments in corporate
debt  securities  of any  one  issuer  in  excess  of  15% of the  Association's
unimpaired capital and unimpaired  surplus,  as defined by federal  regulations,
which totaled  $101.0  million at September 30, 1999,  plus an additional 10% if
the  investments  are  fully  secured  by  readily  marketable  collateral.  See
"REGULATION  --  Federal  Regulation  of  Savings  Associations  -- Loans to One
Borrower"  for a discussion  of  additional  restrictions  on the  Association's
investment activities.

     The investment securities portfolio is managed in accordance with a written
investment  policy  adopted by the Board of Directors  and  administered  by the
Investment  Committee,  which  consists of the President and four Board members.
Generally,  the investment policy is to invest funds among various categories of
investments  and maturities  based upon the need for  liquidity,  to achieve the
proper balance  between its desire to minimize risk and maximize  yield,  and to
fulfill the  asset/liability  management  policy.  The  President  and the Chief
Financial  Officer may  independently  invest up to 1.0% of total  assets of the
Company  within  the  parameters  set  forth  in the  Investment  Policy,  to be
subsequently  reviewed  with the  Investment  Committee at their next  scheduled
meeting.  Transactions  or investments  in any one security  determined by type,
maturity  and  coupon  in  excess of $10.0  million  or 1.0% of  assets  are not
permitted.

     Investment securities held to maturity are carried at cost and adjusted for
amortization  of premiums and accretion of discounts.  As of September 30, 1999,
the investment  securities  portfolio held to maturity  consisted of $559,512 in
tax-exempt securities issued by states and municipalities. Securities to be held
for  indefinite  periods of time and not  intended  to be held to  maturity  are
classified as available for sale and carried at fair value. Securities available
for  sale  include  securities  that  management  intends  to use as part of its
asset/liability  management  strategy that may be sold in response to changes in
interest  rates or  significant  prepayment  risks or both.  As of September 30,
1999, the portfolio of securities  available for sale consisted of $73.9 million
in securities issued by the U.S. Treasury and other federal government agencies,
$23.9 million in tax exempt securities issued by states and municipalities,  and
$102.6 million in investment grade corporate investments.

     During the years  ended  September  30,  1999,  1998 and 1997,  neither the
Company nor the Association  held any  off-balance  sheet  derivative  financial
instruments in their  investment  portfolios to which the provisions of SFAS No.
119,  "Disclosure  about  Derivative  Financial  Instruments  and Fair  Value of
Financial Instruments," would apply.

                                       16
<PAGE>
     The  following  tables  set  forth  certain  information  relating  to  the
investment  securities  portfolio held to maturity and securities  available for
sale at the dates indicated.
<TABLE>
<CAPTION>
                                                                        At September 30,
                                          ---------------------------------------------------------------------------
                                                     1999                     1998                      1997
                                          -----------------------   -----------------------   -----------------------
                                          Amortized          Fair   Amortized          Fair   Amortized          Fair
                                               Cost         Value        Cost         Value        Cost         Value
                                          ---------   -----------   ---------   -----------   ---------   -----------
                                                                          (In thousands)
Held to maturity:
<S>                                        <C>        <C>            <C>        <C>            <C>        <C>
  State and municipal obligations ......   $    560   $       577    $    889   $       926    $  1,042   $     1,069
  Corporate obligations ................       --            --         2,000         2,002      21,895        21,900

Available for sale:
  U.S. Government obligations ..........     74,227        73,960     102,620       105,454     185,861       185,601
  State and municipal obligations ......     24,848        23,881      17,406        18,103       8,861         9,087
  Corporate obligations ................     62,037        60,807      79,225        79,667      67,147        67,158
                                           --------   -----------    --------   -----------    --------   -----------
    Total ..............................   $161,672   $   159,225    $202,140   $   206,152    $284,806   $   284,815
                                           ========   ===========    ========   ===========    ========   ===========
</TABLE>
<TABLE>
<CAPTION>
                                                               At September 30,
                                   ----------------------------------------------------------------------
                                           1999                     1998                    1997
                                   ---------------------   ----------------------   ---------------------
                                   Amortized  Percent of    Amortized  Percent of   Amortized  Percent of
                                        Cost   Portfolio         Cost   Portfolio        Cost   Portfolio
                                   ---------  -----------  ----------  ----------   ---------  ----------
                                                           (Dollars in thousands)
Held to maturity:
<S>                                 <C>           <C>        <C>           <C>      <C>           <C>
  State and municipal obligations   $    560        0.35%    $    889        0.44%  $  1,042        0.36%
  Corporate obligations .........         --          --        2,000        0.99     21,895        7.69

Available for sale:
  U.S. Government obligations ...     74,227       45.91      102,620       50.77    185,861       65.26
  State and municipal obligations     24,848       15.37       17,406        8.61      8,861        3.11
  Corporate obligations .........     62,037       38.37       79,225       39.19     67,147       23.58
                                    --------      ------     --------      ------   --------      ------
    Total .......................   $161,672      100.00%    $202,140      100.00%  $284,806      100.00%
                                    ========      ======     ========      ======   ========      ======
</TABLE>
                                       17
<PAGE>

     The following  table sets forth the maturities and weighted  average yields
of the debt securities in the investment portfolio at September 30, 1999.
<TABLE>
<CAPTION>
                                  One Year          After One Through      After Five Through         After Ten
                                  or Less              Five Years              Ten Years                Years           Totals
                          ---------------------  --------------------   ---------------------  --------------------   --------
                            Amount        Yield    Amount       Yield     Amount        Yield    Amount       Yield
                          --------       ------  --------      ------   --------       ------  --------      ------
                                                                   (Dollars in thousands)
Held to maturity:
  State and municipal
<S>                       <C>             <C>    <C>             <C>    <C>             <C>    <C>             <C>    <C>
     obligations ......   $    171        6.82%  $    389        5.60%  $     --          --   $     --          --   $    560

Available  for sale:
  U.S.  Government
     obligations ......     15,014        5.69%    59,213        6.01%        --          --         --          --     74,227
State and  municipal
     obligations ......        572        6.49%       802        6.25%       198        6.12%    23,276        7.57%    24,848
Corporate obligations .     21,053        6.14%    21,159        6.12%        --          --     19,825        5.94%    62,037
                          --------                -------                -------               --------               --------
Total..................   $ 36,810                $81,563                  $ 198               $ 43,101               $161,672
                          ========                =======                =======               ========               ========
</TABLE>

     At September 30, 1999 the  Association  did not hold any securities  from a
single issuer, other than the U.S. Government, whose aggregate book value was in
excess of 10% of the Company's stockholders' equity, or $11.0 million.


                                       18
<PAGE>

Mortgage-Backed and Related Securities

     At  September  30, 1999,  the  Company's  net  mortgage-backed  and related
securities totaled $75.3 million at fair value ($75.7 million at amortized cost)
and had a weighted average yield of 5.88%. At September 30, 1999,  82.37% of the
mortgage-backed and related securities were adjustable rate securities.

     Mortgage-backed and related securities ("MBS") can be divided into two main
groups.  The  first  group,  called  mortgage   participation   certificates  or
pass-through  certificates,  typically represents a participation  interest in a
pool of  single-family  or  multi-family  mortgages.  The principal and interest
payments on these  mortgages are passed from the mortgage  originators,  through
intermediaries  (generally  U.S.  Government  agencies and government  sponsored
enterprises)  that pool and resell the  participation  interests  in the form of
securities,  to investors such as the Company. Such U.S. Government agencies and
government sponsored  enterprises,  which guarantee the payment of principal and
interest  to  investors,  primarily  include  the  Federal  Home  Loan  Mortgage
Corporation  ("FHLMC"),  Fannie Mae  (formerly  the  Federal  National  Mortgage
Association), the Government National Mortgage Association ("GNMA") and the U.S.
Small Business Administration ("SBA").

     The second group,  called  collateralized  mortgage  obligations  ("CMOs"),
consists of securities  created from and secured by the  securities in the first
group  described  above.  CMOs are an example of a security called a derivative,
because they are derived from mortgage pass-through securities.  Underwriters of
CMOs create these  securities  by dividing up the interest  and  principal  cash
flows from the pools of mortgages  and selling  these  different  slices of cash
flows as a new and different  class of individual  securities or "tranches." The
Company invested in $18.1 million of CMOs during 1999, comprised of two classes,
planned  amortization  class tranches ("PACs") and Floaters.  The least volatile
CMOs are PACs. With PAC tranches, the yields, average lives, and lockout periods
when no  payments  are  received  are  designed  to  closely  follow  the actual
performance of the underlying MBS. PACs are available in a variety of short term
maturities,  usually two, three,  five, or seven years. CMO floaters are similar
to  adjustable  rate  mortgages;  they carry an interest  rate that changes in a
fixed  relationship  to an interest rate index,  typically the London  Interbank
Offer Rate  ("LIBOR").  Floaters  usually have caps that  determine  the highest
interest that can be paid by the securities.  Except for caps on floaters,  PACs
and floaters may help to manage  interest rate risk by reducing asset  duration.
They also may help manage  price  volatility  since  they  typically  have short
maturities or coupons that reset monthly or quarterly to reflect  changes in the
index rate.

     MBS typically are issued with stated principal amounts,  and the securities
are backed by pools of mortgages  that have loans with interest  rates that fall
within a specific range and have varying  maturities.  MBS generally  yield less
than the loans  that  underlie  such  securities  because of the cost of payment
guarantees  and credit  enhancements.  In addition,  MBS are usually more liquid
than  individual  mortgage  loans  and  may be  used  to  collateralize  certain
liabilities  and  obligations  of the Company.  These types of  securities  also
permit the Association to optimize its regulatory  capital because they have low
risk weighting.

     Expected maturities of MBS will differ from contractual  maturities because
borrowers may have the right to call or prepay  obligations with or without call
or  prepayment  penalties.  Prepayments  that are faster  than  anticipated  may
shorten the life of the security  and may result in a loss of any premiums  paid
and thereby  reduce the net yield on such  securities.  Although  prepayments of
underlying  mortgages  depend on many factors,  including the type of mortgages,
the  coupon  rate,  the  age of  mortgages,  the  geographical  location  of the
underlying  real estate  collateralizing  the  mortgages  and general  levels of
market  interest  rates,  the  difference  between  the  interest  rates  on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most  significant  determinant  of the rate of  prepayments.  During  periods of
declining  mortgage  interest  rates,  if the  coupon  rate  of  the  underlying
mortgages  exceeds the  prevailing  market  interest  rates offered for mortgage
loans,  refinancing  generally  increases and  accelerates the prepayment of the
underlying  mortgages and the related security.  Under such  circumstances,  the
Company  may be subject to  reinvestment  risk  because,  to the extent that the
Company's MBS amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a comparable
rate.

                                       19
<PAGE>

     The  following  tables  set  forth  certain  information  relating  to  the
mortgage-backed  and related securities portfolio held to maturity and available
for sale at the dates indicated.
<TABLE>
<CAPTION>

                                                                        At September 30,
                                          ---------------------------------------------------------------------------
                                                     1999                     1998                      1997
                                          -----------------------   -----------------------   -----------------------
                                          Amortized          Fair   Amortized          Fair   Amortized          Fair
                                               Cost         Value        Cost         Value        Cost         Value
                                          ---------   -----------   ---------   -----------   ---------   -----------
                                                                           (In thousands)
Held to maturity:
<S>                                        <C>        <C>            <C>        <C>            <C>        <C>
  GNMA .................................   $  2,601   $     2,596    $  3,662   $     3,696    $  5,447   $     5,518

Available for sale:

  Fannie Mae ...........................     24,319        24,410      12,866        12,985      12,775        12,897
  FHLMC ................................     18,375        18,371      14,722        15,158      25,881        26,574
  GNMA .................................     11,783        11,768       3,619         3,662       9,709         9,808
  SBA ..................................         --            --      11,535        11,531      15,732        15,590
  CMOs .................................     18,598        18,146        --            --          --            --
                                           --------   -----------    --------   -----------    --------   -----------
    Total ..............................   $ 75,676   $    75,291    $ 46,404   $    47,032    $ 69,544   $    70,387
                                           ========   ===========    ========   ===========    ========   ===========
</TABLE>
<TABLE>
<CAPTION>
                                                         At September 30,
                      ------------------------------------------------------------------------------------
                                  1999                        1998                        1997
                      ----------------------------  --------------------------  --------------------------
                        Amortized      Percent of   Amortized      Percent of   Amortized       Percent of
                             Cost       Portfolio        Cost       Portfolio        Cost        Portfolio
                      -----------      -----------  ---------      -----------  ---------       ----------
                                                      (Dollars in thousands)
Held to maturity:
<S>                   <C>                  <C>      <C>                <C>       <C>               <C>
  GNMA ............   $    2,601             3.44%  $  3,662             7.89%   $ 5,447             7.83%

Available for sale:

  Fannie Mae ......       24,319            32.13     12,866            27.73     12,775            18.37
  FHLMC ...........       18,375            24.28     14,722            31.72     25,881            37.22
  GNMA ............       11,783            15.57      3,619             7.80      9,709            13.96
  SBA .............           --               --     11,535            24.86     15,732            22.62
  CMOs ............       18,598            24.58         --               --         --               --
                      ----------           ------   --------           ------    -------           ------
    Total .........   $   75,676           100.00%  $ 46,404           100.00%   $69,544           100.00%
                      ==========           ======   ========           ======    =======           ======
</TABLE>


Interest-Earning Deposits

     The  Company  also had  interest-earning  deposits  in the FHLB of  Seattle
amounting  to $1.3  million and $12.1  million at  September  30, 1999 and 1998,
respectively.

Deposit Activities and Other Sources of Funds

     General.  Deposits are the primary  source of the  Association's  funds for
lending and other investment purposes. In addition to deposits,  the Association
derives funds from loan principal  repayments.  Loan repayments are a relatively
stable  source of funds,  while deposit  inflows and outflows are  significantly
influenced by general

                                       20
<PAGE>

interest  rates  and  money  market  conditions.  Borrowings  may be  used  on a
short-term  basis to compensate for reductions in the availability of funds from
other sources. They may also be used on a longer term basis for general business
purposes.

     Deposits.  The Association's deposits are attracted principally from within
the Association's  primary market area through the offering of a broad selection
of  deposit  instruments,  including  checking  accounts,  negotiable  order  of
withdrawal  ("NOW")  accounts,  money  market  deposit  accounts,  passbook  and
statement  savings accounts,  and certificates of deposit.  Included among these
deposit  products are individual  retirement  account  ("IRA")  certificates  of
approximately  $87.4 million at September 30, 1999.  Deposit account terms vary,
with the principal  differences  being the minimum  balance  required,  the time
period the funds must remain on deposit and the interest rate.

     In 1996, the Association began accepting  deposits from outside its primary
market area through both private  placements and brokered  deposits if the terms
of the deposits  fit the  Association's  specific  needs and are at a rate lower
than the rates on similar maturity  borrowings  through the FHLB of Seattle.  At
September 30, 1999,  these  deposits  totaled $35.2  million,  or 4.89% of total
deposits.

     Interest rates paid, maturity terms,  service fees and withdrawal penalties
are established by the Association on a periodic basis.  Determination  of rates
and terms are predicated on funds acquisition and liquidity requirements,  rates
paid by competitors, growth goals and federal regulations.

     In July 1997,  the  Association  acquired 25 Wells  Fargo Bank  branches in
Oregon,  adding $241.3 million in deposit accounts.  In addition to the increase
from the  acquisition,  the  Association  experienced a net increase in deposits
(before  interest  credited) of $14.1  million for the year ended  September 30,
1997 as customers  deposited  funds and new customers  were added.  The acquired
deposit base included a significant  proportion of non-interest bearing checking
accounts,   thereby   reducing  the  cost  of  deposits.   Concurrent  with  the
acquisition, the Association's deposit product offerings were expanded, allowing
customers to choose the accounts best suited to their needs, whether their focus
is low cost or additional  services.  For the year ended September 30, 1999, the
Association experienced a net increase in deposits (before interest credited) of
$6.3 million as customers  deposited  funds and new  customers  were added.  The
Association has conducted a special  checking  account  campaign in an effort to
attract and retain deposits. To augment this deposit growth, the Association has
relied on increased borrowings from the FHLB of Seattle. See "-- Borrowings."

     At September 30, 1999, certificate accounts maturing during the year ending
September 30, 2000 totaled $266.0 million. Based on historical  experience,  the
Association  expects  that  a  significant  amount  will  be  renewed  with  the
Association at maturity.  In the event a significant amount of such accounts are
not renewed at maturity,  the Association  would not expect a resultant  adverse
impact on  operations  and  liquidity  because  of the  Association's  borrowing
capacity. See "-- Borrowings."

     In the unlikely event the  Association is  liquidated,  depositors  will be
entitled to full payment of their  deposit  accounts  prior to any payment being
made  to  the  Company,  which  is the  sole  shareholder  of  the  Association.
Substantially all of the Association's  depositors are residents of the State of
Oregon.


                                       21
<PAGE>

     The  following  table  indicates  the amount of  certificate  accounts with
balances of $100,000 or greater by time remaining until maturity as of September
30, 1999.

<TABLE>
<CAPTION>

                                                                   Certificate
                             Maturity Period                          Accounts
                     ------------------------------------          -----------
                                                                 (In thousands)

                     <S>                                               <C>
                     Three months or less................              $17,824
                     Over three through six months.......               18,692
                     Over six through twelve months......               22,841
                     Over twelve months..................               25,289
                                                                       -------
                         Total...........................              $84,646
                                                                       =======
</TABLE>

     The following table sets forth the deposit balances in the various types of
deposit accounts offered by the Association at the dates indicated.

<TABLE>
<CAPTION>

                                                                        At September 30,
                             ------------------------------------------------------------------------------------------
                                           1999                              1998                         1997
                             -------------------------------   --------------------------------   ---------------------
                                          Percent                           Percent                            Percent
                                               of  Increase                      of   Increase                      of
                               Amount       Total (Decrease)     Amount       Total  (Decrease)     Amount       Total
                             --------     ------- ----------   --------     -------- ----------   --------     --------
                                                                   (Dollars in thousands)

<S>                          <C>           <C>     <C>         <C>           <C>      <C>         <C>           <C>
Certificates of deposit ..   $392,086       54.43% ($ 3,265)   $395,351       57.33%  $ 19,748    $375,603       55.73%
                             --------       -----  --------    --------       -----   --------    --------       -----
Transaction accounts:

Non-interest checking ....     52,319        7.26     4,772      47,547        6.90     (5,031)     52,578        7.80
Interest-bearing checking      67,303        9.34    (3,258)     70,561       10.23     (4,483)     75,044       11.14
Passbook and
    statement savings ....     59,790        8.30    (1,624)     61,414        8.91     (1,765)     63,179        9.37
Money market deposits ....    148,903       20.67    34,235     114,668       16.63      7,094     107,574       15.96
                             --------      ------  --------     -------      ------   --------    --------      ------
Total transaction accounts    328,315       45.57    34,125     294,190       42.67     (4,185)    298,375       44.27
                             --------      ------  --------    --------      ------   --------    --------      ------
Total deposits ...........   $720,401      100.00% $ 30,860    $689,541      100.00%  $ 15,563    $673,978      100.00%
                             ========      ======  ========    ========      ======   ========    ========      ======
</TABLE>

     The following  table sets forth the deposit  activities of the  Association
for the periods indicated.
<TABLE>
<CAPTION>

                                                Year Ended September 30,
                                         -----------------------------------
                                             1999         1998         1997
                                         ---------    ---------    ---------
                                                    (In thousands)

<S>                                      <C>          <C>          <C>
Beginning balance ....................   $ 689,541    $ 673,978    $ 399,673
                                         ---------    ---------    ---------
Increase due to acquired deposits ....        --           --        241,272
Net inflow (outflow) of deposits before
 interest credited ...................       6,251       (8,753)      14,077
Interest credited ....................      24,609       24,316       18,956
                                         ---------    ---------    ---------
Net increase in deposits .............      30,860       15,563      274,305
                                         ---------    ---------    ---------
Ending balance .......................   $ 720,401    $ 689,541    $ 673,978
                                         =========    =========    =========
</TABLE>


     Borrowings.  Deposit  liabilities  are the primary  source of funds for the
Association's  lending and investment  activities  and for its general  business
purposes. The  Association may  rely  upon  advances  from  the FHLB of Seattle,

                                       22
<PAGE>

reverse repurchase agreements and a bank line of credit to supplement its supply
of  lendable  funds and to meet  deposit  withdrawal  requirements.  The FHLB of
Seattle serves as the Association's primary borrowing source after deposits.

     The FHLB of Seattle  functions as a central  reserve bank providing  credit
for  savings  and  loan   associations   and  certain  other  member   financial
institutions.  As a member,  the Association is required to own capital stock in
the FHLB of Seattle and is  authorized  to apply for advances on the security of
certain of its mortgage loans and other assets (principally securities which are
obligations  of,  or  guaranteed  by,  the  U.S.  Government)  provided  certain
creditworthiness  standards have been met. Advances are made pursuant to several
different  credit  programs.  Each credit  program has its own interest rate and
range of  maturities.  Depending  on the program,  limitations  on the amount of
advances are based on the financial  condition of the member institution and the
adequacy of  collateral  pledged to secure the credit.  As a member of the FHLB,
the  Association  maintains a credit line that is a percentage of its regulatory
assets,  subject to collateral  requirements.  At September 30, 1999, the credit
line was 30% of total assets of the Association.  Advances are collateralized in
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB,  by certain  mortgages  or deeds of trust and  securities  of the U.S.
Government and agencies thereof.

     During the year ended September 30, 1998 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 these
repurchase  agreements  were  delivered  to the  broker-dealer  who arranged the
transaction.  Securities delivered to the broker-dealer may be loaned out in the
ordinary  course of  operations.  All of the reverse  repurchase  agreements  at
September 30, 1998 matured  during the quarter ended March 31, 1999 and were not
renewed.

     The following table sets forth certain information  regarding borrowings by
the Company and Association at the end of and during the periods indicated:
<TABLE>
<CAPTION>


                                                            At September 30,
                                                     -------------------------
                                                         1999            1998
                                                     ----------    -----------
Weighted average rate paid on:
<S>                                                      <C>             <C>
  FHLB advances ..................................       5.34%           5.26%
  Reverse repurchase agreements ..................         --            5.65
</TABLE>
<TABLE>
<CAPTION>
                                                              Year Ended
                                                             September 30,
                                                     -------------------------
                                                         1999            1998
                                                     ----------    -----------
                                                        (Dollars in thousands)
Maximum amount outstanding at any month
  end:
<S>                                                  <C>           <C>
  FHLB advances ..................................   $  197,000    $   167,000
  Reverse repurchase agreements ..................        8,095         17,078

Approximate average balance:
  FHLB advances ..................................      173,740        141,016
  Reverse repurchase agreements ..................        3,105         14,669

Approximate weighted average rate paid on:
  FHLB advances ..................................         5.25%          5.62%
  Reverse repurchase agreements ..................         5.72           5.80
</TABLE>

     The  Association  also has an  uncommitted  line of credit of $15.0 million
with a commercial bank. At September 30, 1999, the Association had no borrowings
outstanding under this credit facility.


                                       23
<PAGE>

                          REGULATION OF THE ASSOCIATION

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

Federal Regulation of Savings Associations

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

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

     The Association, as a member of the FHLB of Seattle, is required to acquire
and hold  shares of capital  stock in the FHLB of Seattle in an amount  equal to
the  greater  of (i)  1.0% of the  aggregate  outstanding  principal  amount  of
residential  mortgage loans, home purchase contracts and similar  obligations at
the beginning of each year, or (ii) 1/20 of its advances  (borrowings)  from the
FHLB of Seattle.  The Association is in compliance with this requirement with an
investment in FHLB of Seattle stock of $11.0 million at September 30, 1999.

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

     Federal Deposit Insurance  Corporation.  The FDIC is an independent federal
agency  that  insures  the  deposits,  up to  prescribed  statutory  limits,  of
depository  institutions.  The FDIC currently  maintains two separate  insurance
funds:  the  Bank  Insurance  Fund  ("BIF")  and the  SAIF.  As  insurer  of the
Association's  deposits,  the FDIC has examination,  supervisory and enforcement
authority over the Association.

     The  majority  of the  Association's  accounts  are  insured  by the  SAIF,
however,  the $241.3 million of deposits  acquired in July 1997 from Wells Fargo
Bank, N.A., a BIF-insured institution, will continue to be BIF-insured  deposits

                                       24
<PAGE>

and will be assessed premiums based on BIF rates, which have been lower than the
SAIF rates since 1995.  These deposits are known as Oakar  deposits,  indicating
that they are deposits held by a  SAIF-insured  institution,  but insured by the
BIF.  The  FDIC  insures  deposits  at the  Association  to the  maximum  extent
permitted by law. The Association  currently pays deposit insurance  premiums to
the FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member  institutions.   Under  applicable  regulations,   institutions  are
assigned to one of three capital groups that are based solely on the level of an
institution's  capital  -- "well  capitalized,"  "adequately  capitalized,"  and
"undercapitalized"  -- which are defined in the same  manner as the  regulations
establishing the prompt  corrective  action system,  as discussed  below.  These
three groups are then divided into three  subgroups which reflect varying levels
of supervisory  concern,  from those which are considered to be healthy to those
which are considered to be of  substantial  supervisory  concern.  The matrix so
created results in nine assessment  risk  classifications,  with rates currently
ranging from .23% for well capitalized, financially sound institutions with only
a few minor  weaknesses to .31% for  undercapitalized  institutions  that pose a
substantial  risk of loss to the SAIF  unless  effective  corrective  action  is
taken.   The  FDIC  is  authorized  to  raise  assessment  rates  under  certain
circumstances.  The  Association's  assessments  expensed  for  the  year  ended
September 30, 1999 totaled $295,950.

     Until the  second  half of 1995,  the same  matrix  applied  to  BIF-member
institutions.  As a result of the BIF  having  reached  its  designated  reserve
ratio,  effective  January  1,  1996,  the FDIC  substantially  reduced  deposit
insurance premiums for  well-capitalized,  well-managed  financial  institutions
that are  members  of the BIF.  Under the new  assessment  schedule,  rates were
reduced  to a range  of 0 to 27  basis  points,  with  approximately  92% of BIF
members paying the statutory minimum annual assessment rate of $2,000.  Pursuant
to the Deposit  Insurance  Fund Act ("DIF Act"),  which was enacted on September
30, 1996,  the FDIC imposed a special  one-time  assessment  on each  depository
institution  with  SAIF-assessable  deposits  so that the SAIF may  achieve  its
designated reserve ratio. The Association's  assessment amounted to $2.5 million
and was assessed during the quarter ended September 30, 1996.  Beginning January
1, 1997,  the  assessment  schedule for SAIF members became the same as that for
BIF members.  In addition,  beginning January 1, 1997, SAIF members were charged
an  assessment of 0.064% of  SAIF-assessable  deposits for the purpose of paying
interest on the obligations issued by the Financing  Corporation ("FICO") in the
1980s to help fund the thrift  industry  cleanup.  After  December 31, 1999, the
insurance  assessment  will be the same for all  insured  deposits.  This should
result in a significant  reduction in future deposit insurance  premiums for the
Association.

     The FDIC may  terminate  the deposit  insurance  of any insured  depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance  temporarily during the hearing process for the permanent  termination
of  insurance,  if the  institution  has no tangible  capital.  If  insurance of
accounts  is  terminated,  the  accounts  at  the  institution  at the  time  of
termination,  less  subsequent  withdrawals,  shall continue to be insured for a
period of six months to two years,  as  determined  by the FDIC.  Management  is
aware of no  existing  circumstances  that could  result in  termination  of the
deposit insurance of the Association.

     Liquidity Requirements.  Under OTS regulations, each savings institution is
required to maintain an average daily  balance of liquid  assets (cash,  certain
time deposits and savings  accounts,  bankers'  acceptances,  and specified U.S.
Government,  state or federal agency  obligations and certain other investments)
equal to a quarterly average of not less than a specified percentage  (currently
4.0%)  of  its  net  withdrawable  accounts  plus  short-term  borrowings.   The
Association's liquidity ratio was 22.38% at September 30, 1999.

     Prompt  Corrective  Action.  Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it  regulates.  The federal  banking  agencies  have  promulgated  substantially
similar regulations to implement this system of prompt corrective action.  Under
the regulations,  an institution shall be deemed to be (i) "well capitalized" if
it  has a  total  risk-based  capital  ratio  of  10.0%  or  more,  has a Tier I
risk-based  capital ratio of 6.0% or more,  has a leverage ratio of 5.0% or more
and is not subject to  specified  requirements  to meet and  maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a
total  risk-based  capital  ratio of 8.0% or more, a Tier I  risk-based  capital
ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0%  under  certain

                                       25
<PAGE>

circumstances)  and does not meet the  definition of "well  capitalized;"  (iii)
"undercapitalized"  if it has a total risk-based capital ratio that is less than
8.0%,  a Tier I  risk-based  capital  ratio that is less than 4.0% or a leverage
ratio  that  is  less  than  4.0%  (3.0%  under  certain  circumstances);   (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically  undercapitalized" if
it has a ratio of tangible  equity to total assets that is equal to or less than
2.0%.

     A federal  banking  agency  may,  after  notice  and an  opportunity  for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may  require  an  adequately  capitalized  institution  or  an  undercapitalized
institution to comply with  supervisory  actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination,  and has not corrected, a less than satisfactory
rating for asset quality,  management,  earnings or liquidity. (The OTS may not,
however, reclassify a significantly  undercapitalized  institution as critically
undercapitalized.)

     An institution  generally must file a written capital restoration plan that
meets specified requirements,  as well as a performance guaranty by each company
that controls the  institution,  with the  appropriate  federal  banking  agency
within 45 days of the date that the institution  receives notice or is deemed to
have  notice  that it is  undercapitalized,  significantly  undercapitalized  or
critically  undercapitalized.  Immediately  upon becoming  undercapitalized,  an
institution   shall  become  subject  to  various  mandatory  and  discretionary
restrictions on its operations.

     At  September  30,  1999,  the   Association   was   categorized  as  "well
capitalized" under the prompt corrective action regulations of the OTS.

     Standards for Safety and Soundness. The federal banking regulatory agencies
have   prescribed,   by  regulation,   standards  for  all  insured   depository
institutions  relating  to:  (i)  internal  controls,  information  systems  and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest  rate risk  exposure;  (v) asset  growth;  (vi)  asset  quality;  (vii)
earnings;  and  (viii)  compensation,  fees  and  benefits  ("Guidelines").  The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital  becomes  impaired.  If the OTS determines  that the  Association
fails to meet any standard prescribed by the Guidelines, the OTS may require the
Association  to  submit  an  acceptable  plan to  achieve  compliance  with  the
standard,  as required by the FDIA. OTS regulations  establish deadlines for the
submission and review of such safety and soundness compliance plans.

     Qualified Thrift Lender Test. All savings associations are required to meet
a qualified  thrift lender ("QTL") test to avoid certain  restrictions  on their
operations.  A savings  institution  that  fails to become or remain a QTL shall
either become a national bank or be subject to the following restrictions on its
operations:  (i) the  association  may not make any new  investment or engage in
activities  that  would  not  be  permissible  for  national  banks;   (ii)  the
association  may not  establish  any new branch  office  where a  national  bank
located in the savings institution's home state would not be able to establish a
branch office;  (iii) the association shall be ineligible to obtain new advances
from any FHLB;  and (iv) the payment of  dividends by the  association  shall be
subject  to  the  rules   regarding  the  statutory  and   regulatory   dividend
restrictions applicable to national banks. Also, beginning three years after the
date  on  which  the  savings  institution  ceases  to  be a  QTL,  the  savings
institution would be prohibited from retaining any investment or engaging in any
activity not  permissible for a national bank and would be required to repay any
outstanding  advances to any FHLB.  In addition,  within one year of the date on
which a savings  association  controlled  by a company  ceases to be a QTL,  the
company must register as a bank holding  company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.

     Currently,  the QTL test requires that 65% of an  institution's  "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly  average  basis  in nine out of every 12  months.  Assets  that  qualify
without  limit for  inclusion as part of the 65%  requirement  are loans made to
purchase,  refinance,  construct, improve or repair domestic residential housing
and  manufactured  housing;   home  equity  loans;   mortgage-backed  securities

                                       26
<PAGE>

(where the mortgages are secured by domestic residential housing or manufactured
housing);  FHLB  stock;  and  direct or  indirect  obligations  of the FDIC.  In
addition,  the following  assets,  among others,  may be included in meeting the
test subject to an overall limit of 20% of the savings  institution's  portfolio
assets: 50% of residential  mortgage loans originated and sold within 90 days of
origination;  100% of consumer and  educational  loans  (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or Fannie Mae. Portfolio assets
consist  of total  assets  minus the sum of (i)  goodwill  and other  intangible
assets,  (ii) property used by the savings  institution to conduct its business,
and  (iii)  liquid  assets  up to 20%  of the  institution's  total  assets.  At
September 30, 1998, the qualified  thrift  investments of the  Association  were
approximately 88.90% of its portfolio assets.

     Capital  Requirements.  Under OTS  regulations a savings  association  must
satisfy three minimum capital requirements:  core capital,  tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements.

     OTS  capital  regulations  establish a 3% core  capital or  leverage  ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined  to  include  common  shareholders'  equity,   noncumulative   perpetual
preferred  stock and any  related  surplus,  and  minority  interests  in equity
accounts of consolidated  subsidiaries,  less (i) any intangible assets,  except
for certain  qualifying  intangible  assets;  (ii)  certain  mortgage  servicing
rights;  and (iii)  equity and debt  investments  in  subsidiaries  that are not
"includable  subsidiaries,"  which are defined as subsidiaries engaged solely in
activities  not  impermissible  for  a  national  bank,  engaged  in  activities
impermissible  for a national  bank but only as an agent for its  customers,  or
engaged solely in  mortgage-banking  activities.  In calculating  adjusted total
assets,  adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account  appropriately for the investments in
and assets of both includable and nonincludable subsidiaries.  Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital  plan that  details the steps they will take to reach  compliance.  In
addition,  the OTS's prompt corrective action regulation provides that a savings
institution  that  has a  leverage  ratio of less  than 4% (3% for  institutions
receiving  the  highest  CAMELS  examination   rating)  will  be  deemed  to  be
"undercapitalized"  and may be subject to certain restrictions.  See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."

     Savings  associations also must maintain  "tangible  capital" not less than
1.5% of the Association's adjusted total assets.  "Tangible capital" is defined,
generally,  as core capital minus any  "intangible  assets" other than purchased
mortgage servicing rights.

     Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted  assets.  Total risk-based capital consists of the sum
of core and supplementary  capital,  provided that supplementary  capital cannot
exceed core capital, as previously defined.  Supplementary  capital includes (i)
permanent  capital  instruments  such as cumulative  perpetual  preferred stock,
perpetual  subordinated debt and mandatory  convertible  subordinated debt, (ii)
maturing  capital  instruments  such  as  subordinated  debt,  intermediate-term
preferred  stock and  mandatory  convertible  subordinated  debt,  subject to an
amortization   schedule,  and  (iii)  general  valuation  loan  and  lease  loss
allowances up to 1.25% of risk-weighted assets.

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

                                       27
<PAGE>

schedule.  These credit equivalent  amounts are then assigned to risk categories
in the same manner as balance sheet assets and included in risk-weighted assets.

     The following table presents the Association's  capital levels at September
30, 1999.
<TABLE>
<CAPTION>

                                                                                                 To Be
                                                                                  Categorized as "Well
                                                                                    Capitalized" Under
                                                                For Capital          Prompt Corrective
                                         Actual              Adequacy Purposes        Action Provision
                             --------------------------   ----------------------- ---------------------
                                 Amount          Ratio     Amount          Ratio   Amount        Ratio
                             ----------          ------   -------          ------ -------        ------
                                                               (In thousands)

<S>                          <C>                  <C>     <C>                <C>  <C>             <C>
Total Capital ............   $   95,495           17.4%   $42,889            8.0% $53,611         10.0%
 (To Risk Weighted Assets)
Tier I Capital ...........       93,012           17.0         --             --   32,166          6.0
 (To Risk Weighted Assets)
Tier I Capital ...........       93,012            8.9     30,833            3.0   51,388          5.0
 (To Total Assets)
Tangible Capital .........       93,012            8.9     15,416            1.5       --           --
 (To Tangible Assets)
</TABLE>

     Limitations  on  Capital  Distributions.  OTS  regulations  impose  uniform
limitations  on the  ability of all  savings  associations  to engage in various
distributions  of capital  such as  dividends,  stock  repurchases  and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS 30
days' advance notice of any proposed capital distributions,  and the OTS has the
authority  under its supervisory  powers to prohibit the capital  distributions.
The regulation utilizes a three-tiered  approach which permits various levels of
distributions based primarily upon a savings association's capital level.

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

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

     Loans to One Borrower.  Under the HOLA, savings  institutions are generally
subject to the national  bank limit on loans to one  borrower.  Generally,  this
limit  is 15% of the  Association's  unimpaired  capital  and  surplus,  plus an
additional  10% of  unimpaired  capital and surplus,  if such loan is secured by
readily-marketable  collateral,  which is defined to include  certain  financial
instruments  and  bullion.  The OTS by  regulation  has amended the loans to one
borrower  rule to permit  savings  associations  meeting  certain  requirements,
including  capital  requirements,  to extend loans to one borrower in additional
amounts under circumstances  limited essentially to loans to develop or complete
residential  housing units.  At September 30, 1999, the  Association's  limit on

                                       28
<PAGE>

loans  to  one  borrower  was  $15.2   million.   At  September  30,  1999,  the
Association's  largest  aggregate  amount  of  loans  to one  borrower  was $5.4
million.

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

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

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

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

     The  Association's  authority  to  extend  credit  to  executive  officers,
directors and 10% shareholders,  as well as entities controlled by such persons,
is currently  governed by Sections  22(g) and 22(h) of the Federal  Reserve Act,
and Regulation O thereunder.  Among other things, these regulations require that
such  loans  be made on terms  and  conditions  substantially  the same as those
offered to unaffiliated  individuals  (unless the loan or extension of credit is
made under a benefit program generally available to all other employees and does
not give preference to any insider over any other employee) and not involve more
than the normal  risk of  repayment.  Regulation  O also places  individual  and
aggregate limits on the amount of loans the Association may make to such persons
based, in part, on the  Association's  capital  position,  and requires  certain
board  approval  procedures to be followed.  The OTS  regulations,  with certain
minor variances, apply Regulation O to savings institutions.
                                       29
<PAGE>

                            REGULATION OF THE COMPANY

General

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

Company Acquisitions

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

Holding Company Activities

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

Potential Impact of Current Legislation on Future Results of Operations

     On  November  12,  1999,  the  Gramm-Leach-Bliley  Act (the "GLB  Act") was
enacted into law. The GLB Act makes sweeping  changes in the financial  services
in which various types of financial  institutions may engage. The Glass-Steagull
Act,  which  generally  prevented  banks from  affiliating  with  securities and
insurance firms,  was repealed.  A new "financial  holding  company," which owns
only  well  capitalized  and  well  managed  depository  institutions,  will  be
permitted to engage in a variety of financial  activities,  including  insurance
and securities underwriting and agency activities.

     The GLB Act permits unitary savings and loan holding companies in existence
on May 4, 1999,  including the Company,  to continue to engage in all activities
that they were  permitted to engage in prior to the  enactment of the Act.  Such
activities  are  essentially  unlimited,  provided  that the  thrift  subsidiary
remains a qualified  thrift lender.  Any thrift holding company formed after may
4, 1999,  will be subject to the same  restrictions as a multiple thrift holding
company.  In addition,  a unitary thrift holding  company in existence on May 4,
1999,  may be sold only to a financial  holding  company  engaged in  activities
permissible for multiple savings and loan holding companies.


                                       30
<PAGE>

     The GLB Act is not expected to have a material  effect on the activities in
which the Company and the  Association  currently  engage,  except to the extent
that competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.

Affiliate Restrictions

     The affiliate restrictions contained in Sections 23A and 23B of the Federal
Reserve Act apply to all federally  insured  savings  associations  and any such
"affiliate." A savings and loan holding company,  its subsidiaries and any other
company under common control are considered affiliates of the subsidiary savings
association  under  the HOLA.  Generally,  Sections  23A and 23B:  (i) limit the
extent  to which the  insured  association  or its  subsidiaries  may  engage in
certain covered transactions with an affiliate to an amount equal to 10% of such
institution's  capital and surplus,  and contain an aggregate  limit on all such
transactions  with all  affiliates to an amount equal to 20% of such capital and
surplus,  and (ii) require that all such transactions be on terms  substantially
the same, or at least as favorable to the  institution or  subsidiary,  as those
provided to a non-affiliate.  The term "covered transaction" includes the making
of loans, purchase of assets, issuance of a guarantee and other similar types of
transactions.  Also, a savings association may not make any loan to an affiliate
unless the affiliate is engaged only in activities  permissible for bank holding
companies.  Only the Federal Reserve may grant  exemptions from the restrictions
of  Sections  23A  and  23B.  The  OTS,  however,   may  impose  more  stringent
restrictions on savings associations for reasons of safety and soundness.

Qualified Thrift Lender Test

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


                                    TAXATION

Federal Taxation

     General.  The Company and the  Association  report their income on a fiscal
year basis using the  accrual  method of  accounting  and are subject to federal
income taxation in the same manner as other corporations,  with some exceptions.
The  following  discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Company and the Association.

     Bad  Debt  Reserve.   Historically,   savings   institutions  such  as  the
Association  which met certain  definitional  tests  primarily  related to their
assets and the nature of their business  ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual  additions  thereto,  which
may have been deducted in arriving at their taxable  income.  The  Association's
deductions with respect to "qualifying real property loans," which are generally
loans  secured by certain  interest in real  property,  were  computed  using an
amount based on the Association's  actual taxable income,  computed with certain
modifications  and reduced by the amount of any permitted  additions to the non-
qualifying reserve. Each year the Association selected the most favorable way to
calculate the deduction attributable to an addition to the tax bad debt reserve.

     The  provisions  repealing the current thrift bad debt rules were passed by
Congress as part of "The Small  Business  Job  Protection  Act of 1996." The new
rules eliminated the 8% of taxable income method for deducting  additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions  recapture all or a portion
of their  bad debt  reserves  added  since  the base  year  (last  taxable  year
beginning  before January 1, 1988).  The Association  has previously  recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on net income or federal income  tax  expense.  For  taxable

                                       31
<PAGE>

years  beginning after December 31, 1995, the  Association's  bad debt deduction
will be determined on the basis of net charge-offs  during the taxable year. The
new rules allow an  institution  to suspend bad debt reserve  recapture  for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years  preceding 1996 adjusted for inflation.  For this purpose,
only home purchase or home  improvement  loans are included and the  institution
can elect to have the tax years with the  highest  and lowest  lending  activity
removed from the average calculation. If an institution is permitted to postpone
the reserve  recapture,  it must begin its six year  recapture no later than the
1998 tax year  (fiscal  year ending  September  30, 1999 for the  Company).  The
unrecaptured  base year reserves will not be subject to recapture as long as the
institution  continues  to carry on the business of banking.  In  addition,  the
balance of the pre-1988  bad debt reserves  continue to be subject to provisions
of present law referred to below that  require  recapture in the case of certain
excess distributions to shareholders.

     Distributions.  To the  extent  that  the  Association  makes  "nondividend
distributions" to the Company,  such  distributions will be considered to result
in  distributions  from the balance of its bad debt  reserves as of December 31,
1987 (or a lesser amount if the  Association's  loan portfolio  decreased  since
December  31, 1987) and then from the  supplemental  reserve for losses on loans
("Excess  Distributions"),  and an amount based on the Excess Distributions will
be included  in the  Association's  taxable  income.  Nondividend  distributions
include  distributions  in excess of the  Association's  current and accumulated
earnings and profits,  distributions in redemption of stock and distributions in
partial  or  complete   liquidation.   However,   dividends   paid  out  of  the
Association's  current or  accumulated  earnings and profits,  as calculated for
federal income tax purposes,  will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable income
created from an Excess  Distribution  is an amount that, when reduced by the tax
attributable  to the  income,  is equal to the amount of the  distribution.  The
Association does not intend to pay dividends that would result in a recapture of
any portion of its tax bad debt reserve.

     Corporate  Alternative  Minimum Tax. The Internal  Revenue Code of 1986, as
amended ("Code") imposes a  tax on alternative  minimum  taxable income ("AMTI")
at a rate of 20%.  The excess of the tax bad debt  reserve  deduction  using the
percentage  of taxable  income  method over the  deduction  that would have been
allowable  under the  experience  method is  treated  as a  preference  item for
purposes of computing the AMTI.  In addition,  only 90% of AMTI can be offset by
net operating  loss  carryovers.  AMTI is increased by an amount equal to 75% of
the amount by which the Association's adjusted current earnings exceeds its AMTI
(determined  without  regard to this  preference  and prior to reduction for net
operating  losses).  For taxable years  beginning  after  December 31, 1986, and
before  January 1,  1996,  an  environmental  tax of 0.12% of the excess of AMTI
(with  certain  modification)  over $2.0  million is  imposed  on  corporations,
including the Association,  whether or not an Alternative Minimum Tax ("AMT") is
paid.

     Dividends-Received  Deduction. The Company may exclude from its income 100%
of dividends  received from the  Association as a member of the same  affiliated
group of corporations.  The corporate  dividends-received deduction is generally
70% in the case of dividends received from unaffiliated  corporations with which
the Company and the Association will not file a consolidated tax return,  except
that if the  Company  or the  Association  owns  more than 20% of the stock of a
corporation  distributing a dividend,  then 80% of any dividends received may be
deducted.

     Other Federal Tax Matters. There have not been any Internal Revenue Service
audits of the Company's or the  Association's  federal income tax returns during
the past five years.

Oregon Taxation

     The Company and the Association are subject to an Oregon  corporate  excise
tax at a statutory  rate of 6.6% (4.0% for the fiscal year ended  September  30,
1998) of income.  Neither the Company's nor the  Association's  state income tax
returns have been audited during the past five years.


                                       32
<PAGE>

Competition

     The  Association  originates  most of its loans to and accepts  most of its
deposits  from  residents  of its market  area.  The  Association  is the oldest
financial  institution  headquartered in Klamath Falls. The Association believes
that it is a major competitor in the markets in which it operates.  Nonetheless,
the Association faces competition in attracting  deposits and making real estate
loans from various financial institutions, including banks, savings associations
and  mortgage  brokers.  In  addition,  the  Association  has  faced  additional
significant  competition  for  investors'  funds from  short-term  money  market
securities  and  other  corporate  and  government  securities.   The  financial
institution  industry in the Association's market area is characterized by a mix
of local independent  financial  institutions and offices of larger out-of-state
financial institutions, including several multi-national bank holding companies.
The ability of the Association to attract and retain savings deposits depends on
its ability to generally  provide a rate of return and liquidity risk comparable
to that offered by competing investment opportunities.  The Association competes
for loans  principally  through the interest  rates and loan fees it charges and
the efficiency and quality of services it provides  borrowers.  Competition  may
increase as restrictions on the interstate operations of financial  institutions
continue to be reduced.

Personnel

     As of  September  30,  1999,  the  Association  had  249  full-time  and 70
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining unit. The Association believes its relationship with its employees is
good.

     Executive  Officers.  The following  table sets forth  certain  information
regarding the executive officers of the Company.
<TABLE>
<CAPTION>

Name                      Age(1)                       Position

<S>                      <C>   <C>
Gerald V. Brown          63    President and Chief Executive Officer

Robert A. Tucker         51    Senior Vice President and Chief Lending
                               Officer/Secretary

Frank X. Hernandez       44    Senior Vice President and Chief Operating Officer

Marshall J. Alexander    49    Senior Vice President and Chief Financial Officer

<FN>
______________
(1)  At September 30, 1999.
</FN>
</TABLE>

     Gerald V. Brown has been  employed by the  Association  since 1957.  He was
appointed  a  director  and the  President  of the  Association  in June 1994 to
succeed the retiring President, James Bocchi. From 1982 until his appointment as
President, Mr. Brown served as Senior Vice President and Secretary,  supervising
all loan activities of the Association.

     Robert A. Tucker has been  employed by the  Association  since 1973. He has
served  as  Senior  Vice  President  since  November  1989.  He  served as Chief
Operating  Officer from March 1997 to June 1998 and has served as Chief  Lending
Officer and Secretary since July 1998.

     Frank X.  Hernandez  has been  employed by the  Association  since 1991. He
served as Human Resources  Officer until July 1998 when he was appointed  Senior
Vice President and Chief Operating Officer.

     Marshall J. Alexander has been employed by the  Association  since 1986. He
has served as Vice President and Chief  Financial  Officer since August 1994 and
was named a Senior Vice President in November 1998.

                                       33
<PAGE>

Item 2.        Properties

     The following  table sets forth the location of the  Association's  offices
and  other  facilities  used  in  operations  as  well  as  certain   additional
information relating to these offices and facilities as of September 30, 1999.
<TABLE>
<CAPTION>

                                        Year                       Square
Description/Address                    Opened      Leased/Owned   Footage

Main Office

<S>                                      <C>           <C>         <C>
540 Main Street ...................      1939          Owned       25,660
Klamath Falls, Oregon

Branch Offices

2943 South Sixth Street ...........      1972          Owned        3,820
Klamath Falls, Oregon

2323 Dahlia Street ................      1979          Owned        1,876
Klamath Falls, Oregon

512 Walker Avenue .................      1977          Owned        4,216
Ashland, Oregon

1420 East McAndrews Road ..........      1990          Owned        4,006
Medford, Oregon

61515 S. Highway 97 ...............      1993          Owned        5,415
Bend, Oregon

2300 Madison Street ...............      1995          Owned        5,000
Klamath Falls, Oregon

721 Chetco Avenue .................      1997          Owned        5,409
Brookings, Oregon

293 North Broadway ................      1997          Owned        5,087
Burns, Oregon

111 West Main Street ..............      1997          Owned        1,958
Carlton, Oregon

103 South Main Street .............      1997          Owned        2,235
Condon, Oregon

259 North Adams ...................      1997          Owned        5,803
Coquille, Oregon

106 Southwest 1st Street ..........      1997          Owned        4,700
Enterprise, Oregon



                                       34

<PAGE>

<CAPTION>

                                        Year                        Square
Description/Address                    Opened     Leased/Owned     Footage

555 1st Street ....................      1997          Owned        1,844
Fossil, Oregon

708 Garibaldi Avenue ..............      1997          Owned        1,400
Garibaldi, Oregon

29804 Ellensburg Avenue ...........      1997          Owned        3,136
Gold Beach, Oregon

111 North Main Street .............      1997          Owned        4,586
Heppner, Oregon

810 South Highway 395 .............      1997         Leased        6,000
Hermiston, Oregon

200 West Main Street ..............      1997          Owned        4,552
John Day, Oregon

1 South E Street ..................      1997          Owned        5,714
Lakeview, Oregon

206 East Front Street .............      1997          Owned        2,920
Merrill, Oregon

165 North 5th Street ..............      1997          Owned        2,370
Monroe, Oregon

217 Main Street ...................      1997          Owned        6,067
Nyssa, Oregon

48257 East 1st Street .............      1997          Owned        3,290
Oakridge, Oregon

227 West Main Street ..............      1997          Owned        2,182
Pilot Rock, Oregon

716 Northeast Highway 101 .........      1997          Owned        2,337
Port Orford, Oregon

178 Northwest Front Street ........      1997          Owned        2,353
Prairie City, Oregon

315 North Main Street .............      1997          Owned        3,638
Riddle, Oregon

38770 North Main Street ...........      1997          Owned        2,997
Scio, Oregon



                                       35
<PAGE>
<CAPTION>

                                        Year                        Square
Description/Address                    Opened      Leased/Owned    Footage

508 Main Street ...................      1997          Owned        2,282
Moro, Oregon

144 South Main Street .............      1997          Owned        2,146
Union, Oregon


165 North Maple Street ............      1997          Owned        2,192
Yamhill, Oregon

475 NE Windy Knolls Drive .........      1998          Owned        3,120
Bend, Oregon

185 East California ...............      1998          Owned        2,116
Jacksonville, Oregon

Loan Center

585 SW 6th, Suite #2 ..............      1996         Leased          900
Redmond, Oregon

Loan Processing Center

600 Main Street ...................      1998         Leased        2,800
Klamath Falls, Oregon
</TABLE>

     The net book value of the  Association's  investment in office,  properties
and equipment  totaled $11.6 million at September 30, 1999.  See Note 5 of Notes
to the Consolidated Financial Statements in the Annual Report.

Item 3.   Legal Proceedings

     Periodically,  there have been various  claims and lawsuits  involving  the
Association,   mainly  as  a  defendant,   such  as  claims  to  enforce  liens,
condemnation  proceedings on properties in which the Association  holds security
interests,  claims involving the making and servicing of real property loans and
other issues incident to the  Association's  business.  The Association is not a
party to any pending legal  proceedings  that it believes  would have a material
adverse effect on the financial condition or operations of the Association.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended September 30, 1999.


                                       36
<PAGE>

                                     PART II

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

     The  information  contained  under  the  section  captioned  "Common  Stock
Information"  on  page  20 of  the  Annual  Report  is  incorporated  herein  by
reference.

Item 6.   Selected Financial Data

     The   information   contained   under  the  section   captioned   "Selected
Consolidated  Financial  Data"  on  pages  2  and  3 of  the  Annual  Report  is
incorporated herein by reference.

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

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on page
9 of  the  Annual  Report  is  incorporated  herein  by  reference.  Disclosures
regarding  Year 2000 Readiness are included in the  above-referenced  section of
the Annual Report.

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset/Liability  Management"  beginning  on  page  9 of  the  Annual  Report  is
incorporated herein by reference.

Item 8.   Financial Statements and Supplementary Data

          (a)  Financial Statements
               Independent Auditors' Report*
               Consolidated Balance Sheets as of September 30, 1999 and 1998*
               Consolidated Statements of Earnings for the Years Ended
                    September 30, 1999, 1998 and 1997*
               Consolidated Statements of Shareholders' Equity for the Years
                    Ended September 30, 1999, 1998 and 1997*
               Consolidated Statements of Cash Flows for the Years Ended
                    September 30, 1999, 1998 and 1997*
               Notes to the Consolidated Financial Statements*

          * Included  in the  Annual  Report  attached  as Exhibit 13 hereto and
          incorporated  herein by reference.  All schedules have been omitted as
          the required  information  is either  inapplicable  or included in the
          Consolidated  Financial  Statements or related Notes  contained in the
          Annual Report.

          (b)  Supplementary Data

     The  information  entitled  "Consolidated   Supplemental  Data  -  Selected
Quarterly Financial Data" on page 39 of the Annual Report is incorporated herein
by reference.

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

     There  have  been  no  changes  in or  disagreements  with  Accountants  on
accounting and financial disclosure during the year ended September 30, 1999.



                                       37
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     The  information  contained  under  the  section  captioned  "Proposal  I -
Election of Directors"  contained in the Company's Proxy Statement,  and "Part I
-- Business -- Personnel -- Executive  Officers" of this report, is incorporated
herein by  reference.  Reference  is made to the cover  page of this  report for
information regarding compliance with Section 16(a) of the Exchange Act.

Item 11.  Executive Compensation

     The  information   contained  under  the  sections   captioned   "Executive
Compensation",  "Directors'  Compensation"  and "Benefits"  under  "Proposal I -
Election  of  Directors"  in the  Proxy  Statement  is  incorporated  herein  by
reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     (a) Security Ownership of Certain Beneficial Owners

          Information  required by this item is incorporated herein by reference
          to the section  captioned  "Security  Ownership of Certain  Beneficial
          Owners and Management" of the Proxy Statement.

     (b) Security Ownership of Management

          The  information  required  by this  item is  incorporated  herein  by
          reference  to  the  sections  captioned  "Proposal  I  -  Election  of
          Directors" and "Security  Ownership of Certain  Beneficial  owners and
          Management" of the Proxy Statement.

     (c) Changes in Control

          The Company is not aware of any arrangements,  including any pledge by
          any person of securities of the Company, the operation of which may at
          a subsequent date result in a change in control of the Company.

     The information  required by this item is incorporated  herein by reference
to the sections  captioned  "Proposal I - Election of  Directors"  and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement.

Item 13.  Certain Relationships and Related Transactions

     The  information  set  forth  under the  section  captioned  "Proposal  I -
Election of Directors - Certain  Transactions with the Association" in the Proxy
Statement is incorporated herein by reference.


                                       38
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                                     PART IV

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

     (a) Exhibits

          3(a) Articles of Incorporation of the Registrant*
          3(b) Bylaws of the Registrant*
         10(a) Employment Agreement with Gerald V. Brown***
         10(b) Employment Agreement with Marshall J. Alexander***
         10(c) Employment Agreement with Robert A. Tucker***
         10(d) Employment Agreement with Frank X. Hernandez****
         10(e) 1996 Stock Option Plan**
         10(f) 1996 Management Recognition and Development Plan**
         13    Annual Report to Shareholders
         22    Subsidiaries of the Registrant
         23    Consent of Deloitte & Touche LLP with respect to financial
               statements of the Registrant
         27    Financial Data Schedule
___________________
*        Incorporated by reference to the Registrant's Registration Statement on
               Form S-1, filed on June 19, 1995.
**       Incorporated by reference to the Registrant's Definitive Proxy
               Statement for the 1996 Annual Meeting of Shareholders.
***      Incorporated by reference to the Registrant's Annual Report on Form
               10-K for the year ended September 30, 1995.
****     Incorporated by reference to the Registrant's Annual Report on Form
               10-K for the year ended September 30, 1998.


     (b) Reports on Form 8-K

         None.


                                       39
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                                   SIGNATURES

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

                           KLAMATH FIRST BANCORP, INC.


Date:  December 29, 1999                             By:     /s/ Gerald V. Brown
                                                             Gerald V. Brown
                                           President and Chief Executive Officer

     Pursuant  to the  Securities  Exchange  Act of 1934,  this  report has been
signed below by the  following  persons on behalf of the  registrant  and in the
capacities and on the dates indicated.

SIGNATURES                        TITLE                              DATE

/s/ Gerald V. Brown           President, Chief                 December 29, 1999
Gerald V. Brown               Executive Officer and
                              Director (Principal
                              Executive Officer)

/s/ Marshall J. Alexander     Senior Vice President and        December 29, 1999
Marshall J. Alexander         Chief Financial Officer
                              (Principal Financial
                               and Accounting Officer)

/s/ Rodney N. Murray          Chairman of the Board            December 29, 1999
Rodney N. Murray              of Directors


/s/ Bernard Z. Agrons         Director                         December 29, 1999
Bernard Z. Agrons

/s/ Timothy A. Bailey         Director                         December 29, 1999
Timothy A. Bailey


/s/ James D. Bocchi           Director                         December 29, 1999
James D. Bocchi

/s/ William C. Dalton         Director                         December 29, 1999
William C. Dalton

/s/ J. Gillis Hannigan        Director                         December 29, 1999
J. Gillis Hannigan

/s/ Dianne E. Spires          Director                         December 29, 1999
Dianne E. Spires



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