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, 1996

                                      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  10,  1996,  there were issued and  outstanding  11,612,470
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  10, 1996 of $15.00,
was $167,255,070.

                      DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of Registrant's  Annual Report to  Shareholders  for the Fiscal
Year Ended September 30, 1996 ("Annual Report") (Parts I and II).

     2. Portions of Registrant's  Definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders (Part III).

     3.  Registrant's  Current Report on Form 8-K dated May 21, 1996, as amended
on May 31, 1996 (Part II, Item 9).


<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, 1996,  the Company had total assets of $672.0  million,
total deposits of $399.7 million and shareholders' equity of $153.4 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.

      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,  1996,   permanent
residential  one- to four-family  real estate loans totalled $447.0 million,  or
91.50%  of  the  total  loans.  The  Association  has  historically   emphasized
fixed-rate  lending  but  has  determined  to  place  greater  emphasis  on  the
origination   of  adjustable   rate  loans  on  permanent  one-  to  four-family
residences.  In an attempt to increase  this type of business,  in November 1994
the  Association  began to use below market "teaser" rates which are competitive
with other  institutions  originating  mortgages  in the  Association's  primary
market area. At September 30, 1996, 89.32% and 10.68% of the Association's total
loan portfolio  consisted of long-term,  fixed-rate  and adjustable  rate loans,
after loans in process and non-performing loans, respectively.

Market Area

      The  Association's  market area covers the counties of Klamath,  Deschutes
and Jackson in Southern  and Central  Oregon.  This area has a diverse  economic
base, with each of the three counties influenced by distinct economic factors.

      The  economy of Klamath  County,  where the  Association's  main office is
located,  has been historically reliant on the timber and wood products industry
and  agriculture.  However,  Klamath  County's  economy  has  been  increasingly
influenced in recent years by employment  growth in light industry,  the federal
government  (including the Kingsley Field Air National Guard  Installation)  and
health  services.  Major  employers in Klamath County include Merle West Medical
Center and JELD-WEN (wood products).

      The  economy of  Deschutes  County,  which is located in the center of the
state,  has  been  affected  by  rapid  expansion  in  tourism,  recreation  and
retirement  activities,  especially  in and  around  the  Three  Sisters  Alpine
Wilderness  Area and the Mt.  Bachelor  ski  area.  Much of this  activity,  and
related service sector and  retail/wholesale  trade  employment,  is centered in
Bend which  lies 140 miles  north of the  Association's  main  office.  Redmond,
Oregon,  20 miles to the north of Bend and the  location of the new loan center,
has grown rapidly because of affordable  housing for many people employed in the
Bend area.  Deschutes  County's  major  employers  include Bend Mill Works (wood
products), St. Charles Medical Center and Bend-Lapine Schools.

      The economy of Jackson  County has been  influenced  by a steady influx of
new  residents,  primarily  retirees,  many of whom have  migrated  from  nearby
California. Related to this increase, employment in services, including

                                      1

<PAGE>



lodging,  recreation and health care, has expanded. The cities of Medford, which
is 75 miles northwest of the Association's  main office, and Ashland which is 62
miles  southwest  of the main  office,  are  located  in Jackson  County.  Major
employers in Jackson County include Bear Creek Corporation (fruit production and
sales), Rogue Valley Medical Center and Jackson County School District.

<TABLE>

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.

<CAPTION>
                                                                      Year Ended
                                                         At          September 30,
                                                    September 30,  -----------------
                                                       1996        1996   1995  1994
                                                   ------------    ----   ----  ----

Weighted average yield:
<S>                                                <C>            <C>    <C>    <C>  
   Loans receivable...........................     7.73%          8.00%  7.89%  8.12%
   Mortgage backed and related securities.....     6.34           5.75     --     --
   Investment securities......................     6.31           6.27   7.43   7.09
   Federal funds sold.........................     5.38           5.47   5.55   3.42
   Time deposits..............................     5.24           5.37   5.30   5.39
   FHLB stock.................................     8.00           7.64   6.86   8.89

Combined weighted average yield on
 interest-bearing assets......................     7.34           7.45   7.75   7.86
                                                   ----           ----   ----   ----

Weighted average rate paid on:
   Tax and insurance reserves.................     3.30           3.30   3.97   4.10
   Passbook accounts..........................     3.29           2.87   2.78   2.67
   Negotiable order of withdrawal ("NOW") accounts 2.54           2.47   2.44   2.58
   Money market deposit accounts..............     3.96           3.88   3.95   3.33
   Certificate accounts.......................     5.95           5.94   5.79   5.30
   FHLB advances..............................     5.62           5.60   6.21     --

Combined weighted average rate on
 interest-bearing liabilities.................     5.30           5.23   5.02   4.46
                                                   ----           ----   ----   ----

Net interest spread...........................     2.04%          2.22%  2.73%  3.40%
                                                   ====           ====   ====   ====
</TABLE>


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 12 of the 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 10 of the Annual Report,  which section is incorporated herein
by reference.


                                      2

<PAGE>



Rate/Volume Analysis

      Reference is made to the section entitled  "Rate/Volume  Analysis" on page
13 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 95% 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.  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.

      Permanent  residential  one- to  four-family  mortgage  loans  amounted to
$447.0 million,  or 91.50%, of the Association's total loan portfolio before net
items, at September 30, 1996. The Association  originates other loans secured by
multi-family  residential  and  commercial  real estate,  construction  and land
loans.  Those  loans  amounted  to $37.6  million,  or 7.70%,  of the total loan
portfolio, before net items, at September 30, 1996. Approximately 0.80%, or $3.9
million,  of the  Association's  total loan  portfolio,  before net items, as of
September 30, 1996 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 $18.0 million at September 30, 1996. At September 30, 1996,  the
Association  had seven  borrowing  relationships  with  outstanding  balances in
excess of $1.0  million,  the  largest of which  amounted  to $1.4  million  and
consisted of three loans, all of which were secured by multi-family  residential
or commercial real estate.  All of those loans have performed in accordance with
their terms since origination.

      The  Association  has  placed a growing  emphasis  on the  origination  of
adjustable  rate  mortgage  ("ARM") loans in order to increase the interest rate
sensitivity of its loan portfolio.  See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset Liability  Management and
Interest  Rate  Risk" and  "INTEREST  SENSITIVITY  GAP  ANALYSIS"  in the Annual
Report.  At  September  30,  1996,  $51.3  million,  or  10.68%  of loans in the
Association's  total loan portfolio,  after loans in process and  non-performing
loans, consisted of ARM loans.


                                      3

<PAGE>

<TABLE>

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

<CAPTION>

                                                                         At September 30,
                               ----------------------------------------------------------------------------------------------
                                    1996                  1995                 1994                 1993                1992
                               ----------------     ----------------     ----------------     ----------------    ----------------
                               Amount   Percent     Amount   Percent     Amount   Percent      Amount  Percent    Amount   Percent
                               --------  ------     -------  -------     -------  -------     -------  -------    -------  ------- 
                                                                         (Dollars in Thousands)
<S>                            <C>      <C>          <C>      <C>        <C>      <C>        <C>      <C>         <C>      <C>    
Real estate loans:
  Permanent residential
    1-4 family .............   $447,004  91.50%      $381,683  91.68%    $337,212  90.06%    $291,317  90.54%     $272,421   91.61%
  Multi-family residential .      6,555   1.34          7,433   1.79        8,209   2.19        7,797   2.42         6,009    2.02
  Construction .............     14,276   2.92          9,807   2.36       12,625   3.37        8,298   2.58         5,055    1.70
  Commercial ...............     15,645   3.20         13,984   3.36       13,425   3.58       11,227   3.49        10,420    3.50
  Land .....................      1,152   0.24          1,072   0.25        1,180   0.32        1,270   0.39         1,376    0.46
                               --------  -----       --------  -----     --------  -----     --------  -----      --------   -----
Total real estate loans ....    484,632  99.20        413,979  99.44      372,651  99.52      319,909  99.42       295,281   99.29
                               --------  -----       --------  -----     --------  -----     --------  -----      --------   -----


Non-real estate loans:
  Savings accounts .........      1,640   0.34          1,966   0.47        1,316   0.35        1,250   0.39        1,414     0.48
  Home improvement loans ...      1,977   0.40             --     --           --     --           --     --           --       --
  Education ................       --       --             --     --           --     --           --     --           99     0.03
  Other ....................        302   0.06            367   0.09          472   0.13          615   0.19          594     0.20
                               --------  -----       --------  -----     --------  -----     --------  -----      --------   -----
Total non-real estate loans       3,919   0.80          2,333   0.56        1,788   0.48        1,865   0.58        2,107     0.71
                               --------  -----       --------  -----     --------  -----     --------  -----      --------   -----
 Total loans ...............    488,551 100.00%       416,312 100.00%     374,439 100.00%     321,774 100.00%     297,388   100.00%
                                        ======                ======              ======              ======                ======

Less:
Undisbursed portion of loans      8,622                 7,203               9,310               7,148               5,240
Deferred loan fees .........      5,445                 4,757               4,252               3,330               2,354
Allowance for loan losses ..        928                   808                 755                 628                 572
                              ---------              --------            --------            --------            --------
Net loans ..................   $473,556              $403,544            $360,122            $310,668            $289,222
                              =========              ========            ========            ========            ========

</TABLE>


                                      4

<PAGE>


<TABLE>

      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.

<CAPTION>

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

<S>                    <C>       <C>      <C>       <C>   
Fixed rate..           $428,528   89.32%   353,457   86.55%
Adjustable-rate          51,250   10.68     54,918   13.45
                       --------  ------  ---------  ------
     Total..           $479,778  100.00%  $408,375  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, 1996, $447.0 million, or 91.50%, 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
$60,447.

     The Association presently originates both fixed-rate mortgage loans and ARM
loans 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, 1996,
$410.1  million,  or  86.61% of the  total  loans  after  loans in  process  and
non-performing  loans  were  fixed  rate  one- to  four-family  loans  and $42.3
million,  or  8.92%,  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, 1996,
the Association charged 1.75% origination fees on its ARM loans.

     The Association has placed greater emphasis on the origination of ARM loans
for permanent  one- to  four-family  residences.  In an attempt to increase this
type of business,  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.

     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,

                                       5
<PAGE>
for  initial  rates of  interest  below the rates  which  would  apply  were the
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. A 95% loan-to- value program is 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 generally 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  opening  of a branch
office in Bend and the loan center in Redmond,  near popular ski areas and other
outdoor  activities,  the  Association  believes that there is an opportunity to
engage  in such  lending  within  the  parameters  of its  current  underwriting
policies.

      Commercial  and  Multi-Family  Real  Estate  Loans.  The  Association  has
historically  engaged in a limited amount of  multi-family  and commercial  real
estate  lending.  At  September  30,  1996,  $6.6  million,  or  1.34%,  of  the
Association's total loan portfolio, before net items, consisted of loans secured
by existing multi-family residential real estate and $15.6 million, or 3.20%, 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 $155,247 at September 30, 1996, the largest of which was a $1.2
million loan secured by a commercial office property.  The loan has performed in
accordance  with its terms since  origination.  Originations  of commercial real
estate and  multi-family  residential  real estate amounted to 2.58%,  1.35% and
4.51% of the  Association's  total loan  originations  in the fiscal  year ended
September 30, 1996, 1995 and 1994, respectively.

      The Association's commercial and multi-family loans 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,  1996,  $9.0
million,  or  1.87%,  after  loans  in  process  and  non-performing  loans,  of
commercial and  multi-family  residential real estate loans had adjustable rates
of interest.
                                      6
<PAGE>
      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  commercial  and
residential  real estate  lending by, among other things,  lending on collateral
located  in its  market  area and  generally  to  individuals  who reside in its
market.

      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"). The Association generally limits loans to builders to not more than two
residences  under  construction at a given time. With the exception of a limited
number of 18-month  speculative  loans,  construction  loans  generally begin to
amortize as permanent  residential one-to four-family  mortgage loans within one
year of origination unless extended.  At September 30, 1996,  construction loans
amounted to $14.3 million  (including  $1.0 million of  speculative  loans),  or
2.92%, 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.   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 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.

      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 purchased 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
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 terms
not exceeding 15 years and maximum  loan-to-value ratios of 75%. As of September
30, 1996,  $1.2 million,  or 0.24%,  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.  Non-real estate loans generally have
shorter  terms to  maturity or  repricing  and higher  interest  rates than real
estate  loans.  As of  September  30,  1996,  $3.9  million,  or  .80%,  of  the
Association's  total loan portfolio  consisted of non-real  estate loans.  As of
that  date,  $1.6  million,  or .34%,  of such  loans  were  secured  by savings
accounts.

                                      7

<PAGE>



At September 30, 1996, $2.0 million, or 0.40%,  million 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.
<TABLE>

      Loan  Maturity  and  Repricing.  The  following  table sets forth  certain
information  at September  30, 1996  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.  Demand  loans,  loans
having no stated schedule of repayments and no stated  maturity,  and overdrafts
are reported as due in one year or less.
<CAPTION>
                                     After One Year
                     Within One Year  Through 5 Years  After 5 Years  Total
                     ---------------  ---------------  -------------  -----
                                     (In thousands)
<S>                       <C>             <C>          <C>         <C>  
Permanent residential
   1-4 family:
  Adjustable rate.....    $41,149         $1,109       $     --    $ 42,258
  Fixed rate..........        884          1,098        408,150     410,132
Other mortgage loans:
  Adjustable rate.....      8,843            249             --       8,992
  Fixed rate..........         96          2,088         12,293      14,477
Non-real estate loans.      1,159            836          1,924       3,919
                          -------         ------      ---------   ---------
    Total loans.......    $52,031         $5,380       $422,367    $479,778
                          =======         ======       ========    ========

</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, 1996,  which have fixed interest rates
and have  floating or  adjustable  rates,  was $426.4  million and $1.4 million,
respectively.

      Loan  Commitments.  The  Association  issues  commitments  for  fixed- and
adjustable-rate one- to four-family  residential mortgage loans conditioned upon
the occurrence of certain events.  Such  commitments are made on specified terms
and  conditions  and  are  honored  for  up  to 60  days  from  commitment.  The
Association had outstanding loan  commitments of approximately  $10.8 million at
September  30, 1996  consisting  of  $146,000  of variable  rate loans and $10.7
million of fixed rate loans. See Note 16 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  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.


                                      8

<PAGE>



      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  generally  originates loans for its own portfolio which has enabled
it  to  develop  an  expedited  loan  application  and  approval  process  which
management  believes  provides it with a  competitive  advantage  in its primary
market area.  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 and generally  holds them until
maturity.  During the year ended September 30, 1996, the Association  originated
$135.6  million in total loans,  compared to $84.7 million in the same period of
1995. The increase in loan  originations was attributable to strong new purchase
loan originations.

      The  Association  generally  does not  engage in the sale or  purchase  of
loans.  Between 1989 and 1992,  however,  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, 1996, the balance was $5.8 million.  These loans
were underwritten on the same basis as permanent residential one- to four-family
real estate loans originated by the Association.


                                      9

<PAGE>

<TABLE>
      The following table shows total loans originated,  loan reductions and the
net increase in the Association's loans during the periods indicated.
<CAPTION>
                                                 Year Ended September 30,
                                                -------------------------
                                                1996        1995       1994
                                                ----        ----       ----     
                                                      (In thousands)

<S>                                              <C>        <C>        <C>     
Total net loans at beginning of period....       $403,544   $360,122   $310,668
Loans originated:
 Real estate loans originated (1).........        133,814     83,344    128,814
 Non-real estate loans originated.........          1,753      1,370      1,211
                                                 --------   --------   --------
   Total loans originated.................        135,567     84,714    130,025
                                                 --------   --------   --------

Loan reductions:
 Principal paydowns.......................        (64,530)   (40,408)   (79,226)
 Other reductions (2).....................         (1,025)      (884)    (1,345)
                                                 --------   --------   --------
    Total loan reductions.................        (65,555)   (41,292)   (80,571)
                                                 --------   ---------  --------

Total net loans at end of period..........       $473,556    $403,544  $360,122
                                                 ========    ========  ========
<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 1.75% 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, 1996, the Association
had $5.4  million  of net  loan  fees  which  had been  deferred  and are  being
recognized as income over the contractual maturities of the related loans.

<TABLE>

Asset Quality

      Delinquent  Loans. The following table sets forth  information  concerning
delinquent  loans at September 30, 1996, 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.

<CAPTION>
                                   Permanent
                                   residential         Non-real
                                   1-4 family          Estate Loans           Total
                              -------------------  -------------------   -------------------                         
                              Amount  Percentage   Amount  Percentage   Amount  Percentage
                              ------  ----------   ------  ----------   ------  ----------  
                                                (Dollars in Thousands)
<S>                             <C>        <C>         <C>        <C>     <C>        <C>  
 Loans delinquent
for 90 days and more.....      $189       0.04%       $2         --%     $191       0.04%
</TABLE>
                                      10
<PAGE>



      Delinquency  Procedures.  When a borrower fails to make a required payment
on a real estate  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 on the fifteenth day after
the payment is due.

      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's  legal counsel
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.

      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  or accounted for as "in  substance"
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.  Valuations are periodically  performed by management and
an allowance for losses is established by a charge to operations if the carrying
value of property exceeds its estimated net realizable value. From time to time,
the Association 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, 1996, the  Association's  total  non-performing  loans
amounted to  $191,000,  or 0.04% of total loans,  before net items,  compared to
$734,000,  or 0.18% of total loans, before net items, at September 30, 1995. The
decrease  in  non-accruing  loans  at  September  30,  1996  was the  result  of
properties foreclosed and sold during the year.


                                      11

<PAGE>

<TABLE>


      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.
<CAPTION>

                                                   At September 30,
                                                   ----------------     
                                       1996     1995     1994     1993     1992
                                       ----     ----     ----     ----     ----     
                                               (Dollars in thousands)
<S>                                  <C>      <C>     <C>      <C>       <C>    
Non-accruing loans (1).......          $191    $734     $183     $198    $1,350
Accruing loans greater than 90
  days delinquent............            --      --       --       --        --
                                     ------   ------   ------   ------   ------
    Total non-performing loans          191     734      183       198    1,350

Real estate owned............            69      24       59       84       354
Other repossessed assets.....            --      --       --       16        --
                                     ------   ------   ------   ------   ------
    Total repossessed assets.            69     24        59      100       354
                                     ------   ------   ------   ------   ------
    Total non-performing assets        $260    $758     $242     $298    $1,704
                                     ======   ======   ======   ======   ======

Total non-performing assets as a
  percentage of total assets.          0.04%   0.12%    0.05%    0.07%     0.46%
                                       ====    ====     ====     ====      ====

Total non-performing loans as a
  percentage of total loans,
  before net items...........          0.04%   0.18%    0.05%    0.06%     0.45%
                                       ====    ====     ====     ====      ====

Allowance for loan losses as a
  percentage of total non-performing
  assets.....................        356.92%  106.80% 311.98%  210.74%    33.57%
                                     ======   ======  ======   ======     =====
Allowance for loan losses as a percentage
  of total non-performing loans      485.86%  110.08% 412.57%  317.19%    42.37%
                                     ======   ======  ======   ======     =====
<FN>
    
(1)   Consists of permanent residential one- to four-family mortgage loans.
</FN>
</TABLE>


      For the year ended  September  30,  1996,  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,
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  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

                                      12

<PAGE>



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.

      Exclusive of assets  classified  loss and which have been fully  reserved,
the Association's  classified assets at September 30, 1996 consisted of $281,000
of loans  classified as substandard and $645,000  designated as special mention.
As of September 30, 1996,  total  classified  assets  amounted to 0.14% of total
assets.
<TABLE>
      At September 30, 1996 and 1995, the aggregate amounts of the Association's
classified assets were as follows:
<CAPTION>
                                 At September 30,
                                 ---------------- 
                                 1996        1995
                                 ----        ----  
                                  (In thousands)

<S>                             <C>        <C>     
Loss..........................   $ --      $   --
Doubtful......................     --          --
Substandard assets............    281       1,095
Special mention...............    645          --


General loss allowances.......    928         808
Specific loss allowances......     --          --
Charge offs...................     --          67
</TABLE>
      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
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, 1996, the
Association  had an allowance  for loan losses of  $928,000,  which was equal to
356.9% of non-performing assets and 0.19% 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  based on
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,  which  exist at the time the  determination  of the
adequacy  of  the  provision  is  made,  related  to the  collectibility  of the
Association's  loan  portfolio.  The provisions for loan losses charged  against
income for the years ended  September  30,  1996,  1995 and 1994 were  $120,000,
$120,000  and  $150,000,  respectively.  Management  believes  that  the  amount
maintained in the allowances  will be adequate to absorb  possible losses in the
portfolio.
                                      13

<PAGE>


<TABLE>

      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.

<CAPTION>

                                                     Year Ended September 30,
                                        -----------------------------------------------      
                                           1996      1995      1994      1993      1992
                                           ----      ----      ----      ----      ----
                                                      (Dollars in thousands)
<S>                                    <C>       <C>       <C>       <C>       <C>     
Total loans outstanding.........       $488,551  $416,312  $374,439  $321,774  $297,388
                                        =======   =======   =======   =======   =======
Average loans outstanding.......       $440,510  $381,689  $338,679  $298,481  $291,775
                                        =======   =======   =======   =======   =======
Allowance at beginning of period       $    808  $    755  $    628  $    572  $    532

Charge-offs.....................             --       (67)      (23)      (64)     (80)

Provision for loan losses.......            120       120       150       120       120
                                       --------  --------  --------  --------  --------

Allowance at end of period......       $    928  $    808  $    755  $    628  $    572
                                        =======   =======   =======   =======   =======
Allowance for loan losses as a percentage
 of total loans outstanding.....           0.19%     0.19%     0.20%     0.20%     0.19%
                                           ====      ====      ====      ====      ====

Ratio of net charge-offs to average loans
 outstanding during the period..            --%      0.02%     0.01%     0.02%     0.03%
                                           ===       ====      ====      ====      ====
</TABLE>

                                      14

<PAGE>

<TABLE>

      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.
<CAPTION>
  
     
                                                                    At September 30,
                       ------------------------------------------------------------------------------------------------------------
                                         1996                                 1995                                1994
                       -----------------------------------  ----------------------------------  -----------------------------------
                                   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)
<S>                         <C>        <C>         <C>          <C>         <C>         <C>           <C>        <C>        <C>   
  
Permanent residential
1-4 family ...........      $925       0.19%        91.50%      $807        0.19%        91.68%       $713       0.19%       90.06%
Multi-family residential      --         --          1.34         --          --          1.79          --         --         2.19
Construction ...........      --         --          2.92         --          --          2.36          --         --         3.37
Commercial .............      --         --          3.20         --          --          3.36          41       0.01         3.58
Land ...................      --         --          0.24         --          --          0.25          --         --         0.32
Non-real estate ........       3         --          0.80          1          --          0.56           1         --         0.48
                           -----      -----         -----      -----       -----        ------       -----      -----       ------
   Total ...............    $928       0.19%       100.00%      $808        0.19%       100.00%       $755       0.20%      100.00%
                           =====      =====        ======      =====       =====        ======       =====      =====       ======

<CAPTION>



                                                 At September 30,
                       -----------------------------------------------------------------------
                                         1993                                 1992            
                       -----------------------------------  ----------------------------------
                                   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)

<S>                         <C>        <C>         <C>          <C>        <C>          <C>   
 Permanent residential
  1-4 family ............   $599       0.19%        90.54%      $565       0.19%         91.61%
Multi-family residential      --         --          2.42         --         --           2.02
Construction ............     --         --          2.58         --         --           1.70
Commercial ..............     28       0.01          3.49         --         --           3.50
Land ....................     --         --          0.39         --         --           0.46
Non-real estate .........      1         --          0.58          7         --           0.71
                           -----      -----         -----      -----       -----        ------ 
   Total ................   $628       0.20%       100.00%      $572       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 totalled  $120.3 million at September 30, 1996,  plus an additional 10% if
the  investments  are  fully  secured  by  readily  marketable  collateral.  See
"REGULATION -- Investment Rules" 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% of total assets of
the Association  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 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,
1996, the investment  securities  portfolio held to maturity had $1.2 million in
tax-exempt  securities issued by states and  municipalities  and $8.6 million in
investment  grade  corporate  obligations.  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  prepayments  risks or both. As of September 30, 1996, the portfolio
of securities  available for sale  consisted of $12.1 million in a U.S.  Federal
securities  mutual  bond  fund,  which was sold  subsequent  to year end and was
recorded as a realized loss of $1.6 million,  $59.7 million in securities issued
by the U.S.  Treasury and other  federal  government  agencies,  $250,000 in tax
exempt  securities  issued by states  and  municipalities,  and $5.0  million in
investment grade corporate investments.

     On November 15, 1995, the Financial  Accounting  Standards  Board published
implementation  guidance on SFAS No. 115, "Accounting for Certain Investments in
Debt  and  Equity  Securities",  that  allows  a  corporation  to  reassess  the
appropriateness  of the  classification  of its debt securities  under a special
transition  provision.  Debt  securities  classified  as "held to maturity"  are
reported in financial  statements  at amortized  cost while those  classified as
"available for sale" are reported at fair value and unrealized  gains and losses
on such  securities  are  reported  as a net amount in a separate  component  of
shareholders'  equity. The net unrealized gain or loss on securities  classified
as available for sale  fluctuates  based on several  factors,  including  market
interest  rates,  prepayment  rates  and the  portfolio  amount.  Subsequent  to

                                       16
<PAGE>
September 30, 1995, the Association  reclassified and transferred  $27.2 million
of  its  debt   securities   from   the   held-to-maturity   portfolio   to  the
available-for-sale portfolio.

      During the years ended  September  30,  1996,  1995 and 1994,  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 would apply.
<TABLE>

      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.

<CAPTION>

                                                                         At September 30,
                                   --------------------------------------------------------------------------------------------  
                                                1996                           1995                            1994
                                   --------------------------      ---------------------------       --------------------------
                                    Amortized            Fair       Amortized             Fair        Amortized            Fair
                                       Cost             Value         Cost               Value           Cost(1)          Value
                                       ----             -----         ----               -----           ----             -----
                                                                         (In thousands)
<S>                                  <C>              <C>           <C>                <C>             <C>              <C>    
Held to maturity:
  U.S. Government obligations......    $  --            $  --       $28,961            $28,873         $29,091          $27,681
  State and municipal obligations..    1,227            1,249           512                552             513              536
  Corporate obligations............    8,600            8,611        12,736             12,753          14,960           14,833

Available for sale:
  U.S. Federal securities
   mutual bond fund................   12,080           12,080        12,606             12,606          12,224           12,224
  U.S. Government obligations......   59,717           58,624            --                 --              --               --
  State and municipal obligations .      250              251            --                 --              --               --
  Corporate obligations............    5,024            5,032            --                 --              --               --
                                    --------         --------      --------           --------        --------         -------- 
    Total..........................  $86,898          $85,847       $54,815            $54,784         $56,788          $55,274
                                    ========         ========       =======           ========        ========          =======

<FN>

(1)   SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted on
      October 1, 1993.  See the Notes to the Consolidated Financial Statements.
</FN>
</TABLE>

                                      17

<PAGE>


<TABLE>
<CAPTION>


                                                                            At September 30,
                                   --------------------------------------------------------------------------------------    
                                              1996                           1995                            1994
                                   -------------------------      -------------------------     -------------------------
                                    Amortized     Percent of       Amortized     Percent of      Amortized     Percent of
                                      Cost         Portfolio         Cost         Portfolio      Cost(1)(2)     Portfolio
                                      ----         ---------         ----         ---------      ----------     ---------   
                                                                         (Dollars in Thousands)
<S>                                 <C>              <C>           <C>              <C>             <C>            <C>   
Held to maturity:
  U.S. Government obligations...... $    --            0.00%       $28,961           52.84%         $29,091         51.23%
  State and municipal obligations..   1,227            1.41            512             .93              513          0.90
  Corporate obligations............   8,600            9.90         12,736           23.23           14,960         26.34

Available for sale:
  U.S. Federal securities
   mutual bond fund................  12,080           13.90         12,606           23.00           12,224         21.53
  U.S. Government obligations......  59,717           68.72             --              --               --            --
  State and municipal obligations..     250            0.29             --              --               --            --
  Corporate obligations............   5,024            5.78             --              --               --            --
                                   --------        --------       --------        --------         --------      --------
   Total........................... $86,898          100.00%       $54,815          100.00%         $56,788        100.00%
                                   ========        ========       ========        ========         ========      ========

<FN>

(1)   The fair value of the investment portfolio amounted to $85.8 million, $54.8 million and $55.3 million at
      September 30, 1996, 1995 and 1994, respectively.
(2)   SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was adopted on
      October 1, 1993.  See Note 1 of Notes to the Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE>

     The following  table sets forth the maturities and weighted  average yields of the debt securities in
 the investment portfolio at September 30, 1996.
<CAPTION>

                             Less Than            One to              Five to           Over Ten
                              One Year          Five Years          Ten Years              Years
                         -------------       -------------      -------------      -------------
                         Amount  Yield       Amount  Yield      Amount  Yield      Amount  Yield      Totals
                         ------  -----       ------  -----      ------  -----      ------  -----      ------
                                                      (Dollars in thousands)
<S>                     <C>       <C>       <C>       <C>      <C>       <C>        <C>     <C>     <C>  
Held to maturity:
  State and municipal
    obligations.......  $   181   5.90%     $   536   6.55%    $   510   6.57%         --     --    $ 1,227
  Corporate obligations   6,600   6.37%       2,000   5.86%         --     --          --     --      8,600

Available for sale:
  U.S. Federal securities
   mutual bond fund....  12,080   6.10%          --     --          --     --          --     --     12,080
  U.S. Government
   obligations.........      --     --       43,720   6.14%     15,997   6.94%         --     --     59,717
  State and municipal
   obligations.........      --     --          250   7.12%         --     --          --     --        250
  Corporate obligations      --     --        5,024   6.27%         --     --          --     --      5,024
                        -------             -------            -------            -------            ------ 
Total ................. $18,861             $51,530            $16,507                 $0           $86,898
                        =======             =======            =======            =======           =======

</TABLE>

                                            18

<PAGE>



Mortgage Backed and Related Securities

     At September 30, 1996, the Company's and  Association's net mortgage backed
and related  securities  totaled $80.8  million at fair value ($81.0  million at
amortized  cost) and had a weighted  average  yield of 6.34%.  At September  30,
1996, all of the mortgage backed securities were adjustable-rate securities. The
Company and  Association  purchased its mortgage  backed and related  securities
during  1996  with  proceeds  from the  Company's  initial  stock  offering  and
borrowings from the FHLB of Seattle.

      Mortgage backed and related  securities  (which also are known as mortgage
participation  certificates or pass-through  certificates) typically represent 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 Association.  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 ("FNMA") (formerly
the Federal National  Mortgage  Association),  the Government  National Mortgage
Association  ("GNMA")  and  the  U.S.  Small  Business  Administration  ("SBA").
Mortgage  backed  and  related  securities  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. Mortgage backed and related securities generally yield less than the
loans that underlie such  securities  because of the cost of payment  guarantees
and credit enhancements. In addition, mortgage-backed and related securities are
usually  more  liquid  than  individual  mortgage  loans  and  may  be  used  to
collateralize  certain  liabilities  and obligations of the  Association.  These
types of  securities  also permit the  Association  to optimize  its  regulatory
capital because they have low risk weighting.

      Expected  maturities of mortgage backed and related securities will differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay  obligations  with or without call or prepayment  penalties.  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 Association may be subject to reinvestment risk because,  to
the extent that the Association's  mortgage backed securities amortize or prepay
faster  than  anticipated,  the  Association  may not be able  to  reinvest  the
proceeds of such repayments and prepayments at a comparable rate.

      Subsequent  to  September  30, 1995,  the  Association  reclassified  $1.7
million of  mortgage  backed and  related  securities  from held to  maturity to
available  for  sale  at  fair  values,  with an  unrealized  loss of  $100,421,
consistent with the implementation guidance discussed under above "-- Investment
Activities.

                                      19

<PAGE>
<TABLE>



      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.
<CAPTION>

                                                     At September 30,
                                 ------------------------------------------------------   
                                       1996                1995                1994
                                 ---------------     ---------------    ---------------
                                 Amortized Fair      Amortized Fair     Amortized Fair
                                   Cost    Value       Cost    Value      Cost    Value
                                   ----    -----       ----    -----      ----    -----      
                                                             (In thousands)
<S>                             <C>      <C>            <C>      <C>       <C>      <C>
Held to maturity:
  GNMA......................... $ 6,783  $ 6,736        $--      $--       $--      $--

Available for sale:

  FNMA.........................  15,905   15,959         --       --        --       --
  FHLMC........................  39,205   39,179         --       --        --       --
  SBA..........................  19,139   18,971         --       --        --       --
                                 ------ --------      -----    -----     -----    -----

    Total...................... $81,032  $80,845        $--      $--       $--      $--
                                =======  =======        ===      ===       ===      ===
<CAPTION>

                                                            At September 30,
                                -------------------------------------------------------------------------   
                                         1996                     1995                     1994
                                ----------------------   ----------------------    ----------------------
                                Amortized   Percent of   Amortized   Percent of    Carrying    Percent of
                                 Cost      Portfolio     Cost       Portfolio       Value(1)  Portfolio
                                 ------    ----------    ------     ----------    ----------- ----------
                                                       (Dollars in Thousands)
<S>                             <C>           <C>          <C>           <C>             <C>       <C>  
Held to maturity:
  GNMA......................... $ 6,783         8.37%      $--           0.00%           $--       0.00%

Available for sale:

  FNMA.........................  15,905        19.63        --             --             --         --
  FHLMC........................  39,205        48.38        --             --             --         --
  SBA..........................  19,139        23.62        --             --             --         --
                                 ------       ------    ------         ------         ------     ------

    Total...................... $81,032       100.00%      $--           0.00%           $--       0.00%
                                 ======       ======    ======         ======         ======     ======

<FN>
(1)   The fair value of the mortgage-backed and related securities portfolio amounted to $80.8 million at
      September 30, 1996.
</FN>
</TABLE>

Interest-Earning Deposits

      The  Company  also had  interest-earning  deposits  in the FHLB of Seattle
amounting  to $3.1 million and $134.0  million at  September  30, 1996 and 1995,
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 interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for

                                      20

<PAGE>



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 NOW accounts,  money market deposit accounts,
passbook accounts,  and term certificate accounts.  Included among these deposit
products are individual retirement account ("IRA") certificates of approximately
$73.0  million at  September  30, 1996.  Deposit  account  terms vary,  with the
principal  differences being the minimum balance required,  the time periods the
funds must remain on deposit and the interest rate.

      Beginning 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, 1996, these deposits  totalled $9.3 million,  or 2.33% 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.

      For the year ended September 30, 1996, the  Association  experienced a net
decrease in deposits  (before  interest  credited) of $2.4 million as depositors
withdrew funds to seek higher yielding alternative  investments.  To offset this
deposit  outflow,  the Association  has relied on increased  borrowings from the
FHLB of Seattle.  See  "--Borrowings."  The Association has also offered special
certificate  accounts with odd-month terms (i.e., 13, 17, 23 and 25 month terms)
in an effort to attract and retain deposits.  The increased use of FHLB advances
and the  certificate  account  specials have  contributed  to the  Association's
interest rate spread decreasing from 2.73% for the year ended September 30, 1995
to 2.22% for the year ended  September  30, 1996. In addition,  the  Association
introduced a Basic  Checking  Account and a Small Business  Checking  Account to
compete for student  checking and small  business  accounts.  Both accounts have
check  truncation  and do not pay  interest  which  results in low costs for the
customer.

      At  September  30, 1996,  certificate  accounts  maturing  during the year
ending  September  30,  1997  totalled  $102.4  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.
<TABLE>
      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, 1996.
<CAPTION>
                                               Certificate
            Maturity Period                     Accounts
            ---------------                     ----------
                                              (In thousands)
            <S>                                    <C>     
            Three  months or less                  $ 6,278 
            Over three  through six months           7,538
            Over six  through  twelve  months       19,318
            Over twelve months                      20,058
                                                    ------
               Total                               $53,192
                                                    ======
</TABLE>
                                     21
<PAGE>
<TABLE>
      The following  table sets forth the deposit  balances in the various types
of savings accounts offered by the Association at the dates indicated.

<CAPTION>
                                                                        At September 30,
                              -------------------------------------------------------------------------------   
                                            1996                           1995                         1994
                              -----------------------------    ------------------------------    -------------
                                           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>   
Certificate accounts...        $289,188    72.36%   $12,093    $277,095    2.09%     $21,109  $255,986   65.68%
                               --------    -----    -------    --------    ----      -------  --------   -----
Transaction accounts:

Non-interest checking..             161     0.04        161          --      --           --        --      --
NOW accounts...........          24,282     6.08      2,245      22,037    5.73         (814)   22,851    5.86
Passbook accounts......          33,711     8.43     (3,526)     37,237    9.69       (7,277)   44,514   11.42
Money market deposit
 accounts..............          52,331    13.09      4,320      48,011   12.49      (18,389)   66,400   17.04
                               --------   ------    -------    --------  ------       ------  --------  ------
Total transaction accounts      110,485    27.64      3,200     107,285   27.91      (26,480)  133,765   34.32
                               --------   ------    -------    --------  ------       ------  --------  ------
Total deposits.........        $399,673   100.00%   $15,293    $384,380  100.00%     ($5,371) $389,751  100.00%
                               ========   ======    =======    ========  ======       ======  ========  ======  
</TABLE>
<TABLE>
      The following  table sets forth the savings  activities of the Association
for the periods indicated.
<CAPTION>
                                         Year Ended September 30,
                                      ---------------------------- 
                                          1996      1995      1994
                                          ----      ----      ---- 
                                              (In thousands)

<S>                                   <C>       <C>       <C>     
Beginning balance...........          $384,380  $389,751  $349,952
                                       --------  -------   -------
Net increase (decrease) before
 interest credited..........            (2,364)  (21,109)   25,248
Interest credited...........            17,657    15,738    14,551
                                       --------  -------   -------
Net increase (decrease) in deposits     15,293    (5,371)   39,799
                                       --------  -------   -------
Ending balance..............          $399,673  $384,380  $389,751
                                       =======   =======   =======
</TABLE>
      Borrowings.  Savings  deposits  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,
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

                                       22
<PAGE>
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,
1996, 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, 1996 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, 1996 were due within 30 days and were  subsequently  renewed with
additional  principal  outstanding of  approximately  $53,000 and at an interest
rate of 5.65%.
<TABLE>
     The following  table sets forth certain  information  regarding  short-term
borrowings by the Company and  Association  at the end of and during the periods
indicated:
<CAPTION>
                                      At September 30,
                                    ------------------    
                                    1996          1995
                                    ----          ----
<S>                                 <C>           <C>  
 
Weighted average rate paid on:
 FHLB advances.................    5.50%         5.94%
  Reverse repurchase agreements.    5.65            --
<CAPTION>
                                         Year Ended
                                         September 30,
                                     ------------------
                                     1996          1995
                                     ----          ----                        
                                   (Dollars in thousands)
<S>                                 <C>         <C>  
 Maximum amount outstanding at any month
  end:
  FHLB advances..................   $90,000     $22,000
  Reverse repurchase agreements..    14,904          --

Approximate average balance:
  FHLB advances..................    47,986      15,305
  Reverse repurchase agreements..     3,531          --

Approximate weighted average rate paid on:
  FHLB advances.................       5.60%       6.21%
  Reverse repurchase agreements.       5.55          --
</TABLE>
      The  Association  also has an uncommitted  line of credit of $15.0 million
with a commercial bank. At September 30, 1996, the Association had no borrowings
outstanding under this credit facility.

                         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

                                       23
<PAGE>
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  Holding  Company,  the  Association  and their
operations.  The Holding Company,  as a savings and loan holding  company,  will
also be 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 $4.8 million at September 30, 1996.

      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 established originally to insure the deposits, up to prescribed statutory
limits,  of federally  insured banks and to preserve the safety and soundness of
the  banking  industry.  In 1989 the FDIC also  became  the  insurer,  up to the
prescribed  limits,  of the deposit  accounts held at federally  insured savings
associations  and established two separate  insurance  funds: the Bank Insurance
Fund  ("BIF") and the SAIF.  As insurer of deposits,  the FDIC has  examination,
supervisory and enforcement authority over all savings associations.

     The  Association's  accounts  are  insured  by the SAIF.  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

                                       24
<PAGE>
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  in  certain
circumstances.  The  Association's  assessments  expensed  for  the  year  ended
September 30, 1996, totalled $907,825.

      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 ("DIF"),  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  will be the  same as that for BIF
members. In addition, beginning January 1, 1997, SAIF members will be 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.  BIF-assessable deposits will be
charged  an  assessment  to help pay  interest  on the  FICO  bonds at a rate of
approximately  0.013%  until the earlier of  December  31, 1999 or the date upon
which  the last  savings  association  ceases  to exist,  after  which  time the
assessment will be the same for all insured deposits.

      The DIF Act  provides  for the  merger  of the BIF and the  SAIF  into the
Deposit  Insurance  Fund on January 1, 1999,  but only if no insured  depository
institution  is a savings  association on that date.  The DIF  contemplates  the
development  of  a  common  charter  for  all  federally  chartered   depository
institutions  and the  abolition of separate  charters  for  national  banks and
federal savings  associations.  It is not known what form the common charter may
take and what effect,  if any,  the adoption of a new charter  would have on the
operation of 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 monthly  average of not less than a specified  percentage  (currently
5.0%)  of  its  net  withdrawable  accounts  plus  short-term  borrowings.   OTS
regulations  also require each savings  institution to maintain an average daily
balance of short-term liquid assets at a specified  percentage  (currently 1.0%)
of the total of its net withdrawable  savings accounts and borrowings payable in
one  year or  less.  Monetary  penalties  may be  imposed  for  failure  to meet
liquidity requirements. The Association's short- and long-term monthly liquidity
ratios were 2.70% and 10.47%, respectively, at September 30, 1996.


                                      25

<PAGE>



      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
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,  1996,  the   Association   was  categorized  as  "well
capitalized" under the prompt corrective action regulations of the OTS.

      Standards for Safety and Soundness.  The FDIA requires the federal banking
regulatory  agencies to  prescribe,  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; and (vi) compensation,  fees
and benefits.  The federal banking agencies adopted  regulations and Interagency
Guidelines  Prescribing  Standards  for Safety and Soundness  ("Guidelines")  to
implement  safety and soundness  standards  required by the FDIA. 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.  The agencies also proposed asset quality and earnings
standards  which,  if  adopted,  would be added  to the  Guidelines.  If the OTS
determines  that the  Association  fails to meet any standard  prescribed by the
Guidelines,  the agency may require the  Association  to submit to the agency 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

                                      26

<PAGE>



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 (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, 1996, the qualified  thrift  investments of the  Association  were
approximately 92.20% 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 is 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  CAMEL   examination   rating)  will  be  deemed  to  be
"undercapitalized"  and may be subject to certain restrictions.  See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."

      As required  by federal  law,  the OTS has  proposed a rule  revising  its
minimum core capital  requirement  to be no less  stringent than that imposed on
national banks. The OTS has proposed that only those savings  associations rated
a composite  one (the highest  rating) under the CAMEL rating system for savings
associations  will be  permitted  to operate at or near the  regulatory  minimum
leverage  ratio of 3%.  All  other  savings  associations  will be  required  to
maintain  a  minimum  leverage  ratio  of 4% to 5%.  The OTS  will  assess  each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable  requirement.  No assurance can be given as to
the final  form of any such  regulation,  the date of its  effectiveness  or the
requirement applicable to the Association.


                                      27

<PAGE>



      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, land and residential  construction
loans are  assigned a 100% risk weight,  as are  nonqualifying  residential  and
multi-family  mortgage loans and  nonresidential  construction  loans.  The book
value of assets in each category is  multiplied by the weighing  factor (from 0%
to 100%) assigned to that  category.  These products are then totalled 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  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  OTS has  incorporated  an  interest  rate  risk  component  into  its
regulatory  capital  rule.  Under the rule,  savings  associations  with  "above
normal"  interest rate risk exposure  would be subject to a deduction from total
capital for purposes of calculating  their risk-based  capital  requirements.  A
savings  association's  interest rate risk is measured by the decline in the net
portfolio  value of its  assets  (i.e.,  the  difference  between  incoming  and
outgoing  discounted cash flows from assets,  liabilities and off-balance  sheet
contracts)  that would result from a  hypothetical  200 basis point  increase or
decrease in market interest rates divided by the estimated economic value of the
association's  assets,  as calculated in accordance with guidelines set forth by
the OTS.  A savings  association  whose  measured  interest  rate risk  exposure
exceeds 2% must deduct an interest rate risk component in calculating  its total
capital under the  risk-based  capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%,  multiplied by the  estimated  economic  value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk-based capital requirement. Under
the  rule,  there  is a  two  quarter  lag  between  the  reporting  date  of an
institution's  financial  data  and the  effective  date  for  the  new  capital
requirement  based on that data. A savings  association with assets of less than
$300 million and  risk-based  capital  ratios in excess of 12% is not subject to
the interest rate risk component,  unless the OTS determines otherwise. The rule
also provides  that the Director of the OTS may waive or defer an  association's
interest  rate  risk   component  on  a   case-by-case   basis.   Under  certain
circumstances,  a savings  association may request an adjustment to its interest
rate risk  component if it believes that the  OTS-calculated  interest rate risk
component  overstates  its interest  rate risk  exposure.  In addition,  certain
"well-capitalized"  institutions  may  obtain  authorization  to use  their  own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated  amount. The OTS has postponed the date that the component
will  first be  deducted  from an  institution's  total  capital  until  savings
associations  become  familiar with the process for  requesting an adjustment to
its interest rate risk component.


                                      28

<PAGE>


<TABLE>

      The following table presents the Association's capital levels at September 30, 1996.

<CAPTION>
                                                                                                To Be
                                                                                 Categorized as "Well
                                                                                   Capitalized" Under
                                                                 For Capital        Prompt Corrective
                                              Actual       Adequacy Purposes         Action Provision
                                 -------------------      ------------------      -------------------     
                                       Amount  Ratio           Amount  Ratio           Amount   Ratio
                                 ------------  -----      -----------  -----      -----------   -----

<S>                              <C>            <C>       <C>            <C>      <C>            <C>  
Total Capital                    $121,036,745   42.4%     $22,832,496    8.0%     $28,540,620    10.0%
 (To Risk Weighted Assets)
Tier I Capital                    120,108,925   42.1               --     --       17,124,372     6.0
 (To Risk Weighted Assets)
Tier I Capital                    120,108,925   19.2       18,746,701    3.0       31,244,502     5.0
 (To Total Assets)
Tangible Capital                  120,108,925   19.2        9,373,351    1.5               --      --
 (To Tangible Capital)
</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, 1996, the  Association's  limit on
loans  to  one  borrower  was  $18.0   million.   At  September  30,  1996,  the
Association's  largest  aggregate  amount  of  loans  to one  borrower  was $1.4
million.

                                      29

<PAGE>




      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 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.


                           REGULATION OF THE COMPANY

General

      The Company is a 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.

                                      30

<PAGE>




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.

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
  
                                     31
<PAGE>
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.

      Tax Bad Debt  Reserves.  For taxable years  beginning  prior to January 1,
1996,   savings   institutions   such  as  the  Association  which  met  certain
definitional  tests  primarily  relating to their assets and the nature of their
business  ("qualifying  thrifts")  were permitted to establish a reserve for bad
debts  and to  make  annual  additions  thereto,  which  additions  may,  within
specified  formula  limits,  have been  deducted in  arriving  at their  taxable
income.  The Association's  deduction with respect to "qualifying  loans", which
are generally loans secured by certain interests in real property, may have been
computed using an amount based on the Association's actual loss experience, or a
percentage  equal  to 8% of the  Association's  taxable  income,  computed  with
certain  modifications  and reduced by the amount of any permitted  additions to
the nonqualifying reserve. Each year the Association selected the most favorable
way to calculate the deduction  attributable  to an addition to the tax bad debt
reserve.

      Recently enacted legislation repealed the reserve method of accounting for
bad debt reserves for tax years  beginning after December 31, 1995. As a result,
savings associations will no longer be able to calculate their deduction for bad
debts   using  the   percentage-of-taxable-income   method.   Instead,   savings
associations  will be  required  to compute  their  deduction  based on specific
charge-offs  during  the  taxable  year or, if the  savings  association  or its
controlled  group had  assets of less than $500  million,  based on actual  loss
experience  over a period of  years.  This  legislation  also  requires  savings
associations  to recapture  into income over a six-year  period their  post-1987
additions to their bad debt tax  reserves,  thereby  generating  additional  tax
liability.  At September 30, 1996, the Association's post-1987 reserves totalled
approximately  $3.8 million.  The recapture may be suspended for up to two years
if,  during  those  years,   the  institution   satisfies  a  residential   loan
requirement.   The  Association   anticipates   meeting  the  residential   loan
requirement for the taxable year ending September 30, 1997.

      Under  prior law,  if the  Association  failed to satisfy  the  qualifying
thrift  definitional  tests in any  taxable  year,  it would be  unable  to make
additions to its bad debt reserve. Instead, the Association would be required to
deduct bad debts as they occur and would  additionally  be required to recapture
its bad debt reserve  deductions  ratably over a multi-year period. At September
30,  1996,  the  Association's  total  bad debt  reserve  for tax  purposes  was
approximately   $14.3  million.   Among  other  things,  the  qualifying  thrift
definitional  tests required the  Association to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations of
the United States or any agency or instrumentality  thereof, certain obligations
of a state or  political  subdivision  thereof,  loans  secured by  interests in
improved  residential  real property or by savings  accounts,  student loans and
property used by the Association in the conduct of its banking  business.  Under
current  law,  a savings  association  will not be  required  to  recapture  its
pre-1988  bad  debt  reserves  if  it  ceases  to  meet  the  qualifying  thrift
definitional tests.

     Distributions.  To the  extent  that  the  Association  makes  "nondividend
distributions"  to the Company that are considered as made: (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses  exceeds the amount  that would have been  allowed  under the  experience
method;  or (ii) from the  supplemental  reserve  for  losses on loans  ("Excess

                                       32
<PAGE>
Distributions"), then an amount based on the amount distributed 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.  Thus,  any dividends to the Company that would
reduce amounts  appropriated to the  Association's bad debt reserve and deducted
for  federal   income  tax  purposes  would  create  a  tax  liability  for  the
Association.  The amount of additional taxable income  attributable to an Excess
Distribution  is an amount  that,  when reduced by the tax  attributable  to the
income,  is equal to the amount of the  distribution.  Thus, if the  Association
makes a "nondividend  distribution",  then  approximately one and one-half times
the amount so used would be  includable  in gross income for federal  income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and local
taxes).  See  "REGULATION  OF THE  ASSOCIATION"  for  limits on the  payment  of
dividends by the  Association.  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,  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 .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.

     Other Federal Tax Matters. There have not been any Internal Revenue Service
audits of the  Association's or the Company'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% (3.3% for the fiscal year ended  September  30,
1996) of income.  Neither the Company's nor the  Association's  state income tax
returns have been audited during the past five years.

Competition

      The  Association  originates  most of its loans to and accepts most of its
deposits  from  residents  of  Klamath,  Jackson  and  Deschutes  counties.  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.

                                      33

<PAGE>




Personnel

      As of September  30,  1996,  the  Association  had 100  full-time  and two
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.

Name                     Age(1)      Position

Gerald V. Brown          60          President and Chief Executive Officer

Robert A. Tucker         48          Senior Vice President and Treasurer

George L. Hall           45          Senior Vice President and Secretary

Marshall J. Alexander    46          Vice President and Chief Financial Officer

--------------
(1)   At September 30, 1996.

      Gerald  V.  Brown  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 and Treasurer since November 1989.

      George L. Hall has been  employed by the  Association  since 1988.  He has
served as Senior Vice President and Secretary since June 1994.

      Marshall J. Alexander has been employed by the Association  since 1986. He
has served as Vice President and Chief Financial Officer since August 1994.

                                      34

<PAGE>



Item 2.     Properties
<TABLE>
      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, 1996.
<CAPTION>
                                Year                          Square
Description/Address           Opened      Leased/Owned        Footage
-------------------           ------      ------------        -------
<S>                           <C>         <C>                 <C>   
Main Office
-----------
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

Loan Center
-----------
585 SW 6th, Suite #2          1996        Leased                 900
Redmond, Oregon
</TABLE>

      The net book value of the Association's  investment in office,  properties
and equipment  totalled  $5.0 million at September  30, 1996.  See Note 5 of the
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.

                                      35

<PAGE>




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, 1996.

                                    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  16 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 page 4 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 8 of the Annual Report is incorporated herein by reference.

Item 8.     Financial Statements and Supplementary Data

      (a)   Financial Statements
            Independent Auditors' Reports*
            Consolidated  Balance  Sheets  as of  September  30,  1996 and 1995*
            Consolidated Statements of Earnings for the Years Ended
             September 30, 1996, 1995 and 1994*
            Consolidated Statements of Shareholders' Equity for the Years Ended
             September 30, 1996, 1995 and 1994*
            Consolidated Statements of Cash Flows for the Years Ended
             September 30, 1996, 1995 and 1994*
            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  contained  in  Note  19 to  the  Consolidated  Financial
Statements included in the Annual Report is incorporated herein by reference.

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

      Reference is made to the  Company's  Current  Report on Form 8-K dated May
21,  1996,  as  amended  on May 31,  1996,  which  are  incorporated  herein  by
reference.



                                      36

<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.

                                      37

<PAGE>



                                    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 George L. Hall***
            10(d)   Employment Agreement with Robert A. Tucker***
            10(e)   1996 Stock Option Plan**
            (13)    Annual Report to Shareholders
            (22)    Subsidiaries of the Registrant

-------------------
*     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.

      (b)   Reports on Form 8-K

            No Reports on Form 8-K were filed during the quarter ended September
30, 1996.

                                      38

<PAGE>



                                        SIGNATURES

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

                                       KLAMATH FIRST BANCORP, INC.


Date:  December 24, 1996               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 24, 1996
Gerald V. Brown                      Executive Officer and
                                     Director (Principal
                                     Executive Officer)
                  
/s/ Marshall J. Alexander
-------------------------            Vice President and      December 24, 1996
Marshall J. Alexander                Chief Financial Officer
                                     (Principal Financial
                                      and Accounting Officer)

/s/ Rodney N. Murray
-------------------------            Chairman of the Board   December 24, 1996
Rodney N. Murray                     of Directors

                                
/s/ Bernard Z. Agrons
-------------------------             Director               December 24, 1996
Bernard Z. Agrons


/s/ Timothy A. Bailey
-------------------------             Director               December 24, 1996
Timothy A. Bailey


/s/ James D. Bocchi
-------------------------             Director               December 24, 1996
James D. Bocchi


/s/ William C. Dalton
-------------------------             Director               December 24, 1996
William C. Dalton


/s/ J. Gillis Hannigan
-------------------------             Director               December 24, 1996
J. Gillis Hannigan


/s/ Adolph Zamasky
-------------------------             Director               December 24, 1996
Adolph Zamsky

<PAGE>