EXHIBIT 13

                             1996 Annual Report to Shareholders


<PAGE>

                               TABLE OF CONTENTS
                               -----------------   

DIRECTORS AND OFFICERS...............................  3  

SELECTED CONSOLIDATED FINANCIAL DATA.................  4-5   

LETTER TO OUR SHAREHOLDERS...........................  6-7

EXECUTIVE OFFICERS...................................  8 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

    FINANCIAL CONDITION AND RESULTS OF OPERATION.....  9-22

COMMON STOCK INFORMATION.............................  23

INDEPENDENT AUDITOR'S REPORT.........................  24-25 

CONSOLIDATED BALANCE SHEETS..........................  26-27

CONSOLIDATED STATEMENTS OF EARNINGS..................  28-29

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY......  30

CONSOLIDATED STATEMENTS OF CASH FLOWS................  31-33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........  34-58

BRANCH OFFICERS AND CORPORATE INFORMATION............  59-60 


<PAGE>

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

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

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

Adolph  Zamsky,  Retired;   Certified  Public  Accountant  in  both  Oregon  and
California, working out of Klamath Falls, Oregon from 1945 to 1977

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

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

Timothy  A.  Bailey,  President  of Klamath  Medical  Service  Bureau,  a health
insurance company headquartered in Klamath Falls, Oregon

William C. Dalton, Employed by Malin Potato,  Merrill,  Oregon, potato buyer for
Klamath Potato  Distributors  from 1988 to 1992, and former owner of W.C. Dalton
and Company, farming

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











KLAMATH FIRST FEDERAL SAVINGS & LOAN ASSOCIATION AND KLAMATH FIRST BANCORP, INC.
OFFICERS

Gerald V. Brown, President and Chief Executive Officer
Robert A. Tucker, Senior Vice President - Treasurer
George L. Hall, Senior Vice President - Secretary
Marshall J. Alexander, Vice President and Chief Financial Officer
Frank X. Hernandez, Human Resources Officer
Robert L. Salley, Vice President
Gerald A. Page, Vice President
Carol Starkweather, Assistant Vice President
Tina M. Douglas, Assistant CFO - Controller
Diane Davis, Branch Manager/Ashland
Phillip Waggoner, Branch Manager/Bend
Gale Ramey, Branch Manager/Campus
Tracie Chandler, Branch Manager/Madison
Richard Knight, Branch Manager/Medford
Ted Eslick, Loan Center Manager/Redmond
Donna Ross, Branch Manager/Shasta






                                       3
<PAGE>
<TABLE>
SELECTED  CONSOLIDATED  FINANCIAL DATA 

The following tables set forth certain information  concerning the consolidated financial position and consolidated
results of operations of Klamath First Bancorp, Inc. (the Company) at the dates and for the periods indicated. This
information  does not  purport to be complete  and should be read in  conjunction  with,  and is  qualified  in its
entirety by reference to, the  Consolidated  Financial  Statements  and Notes thereto  appearing  elsewhere in this
Annual Report.
<CAPTION>
FINANCIAL CONDITION DATA                                                             At September 30,
                                                               ----------------------------------------------------
                                                                   1996       1995       1994       1993       1992
                                                               --------   --------   --------   --------   --------
                                                                                     (In thousands)
<S>                                                            <C>        <C>        <C>        <C>        <C>     
Assets .....................................................   $671,969   $647,840   $448,939   $403,879   $366,864

Cash and cash equivalents ..................................     16,180    175,994     19,557     23,480     36,177

Loans receivable, net ......................................    473,556    403,544    360,122    310,668    289,222

Investment securities held to maturity .....................      9,827     42,209     44,564     57,997     30,878

Investment securities available for sale ...................     75,987     12,606     12,224         --         --

Mortgage backed & related securities held to maturity ......      6,783         --         --         --         --

Mortgage backed & related securities available for sale ....     74,109         --         --         --         --

Stock in FHLB of Seattle, at cost ..........................      4,774      4,426      4,156      3,804      3,289

Advances from FHLB of Seattle ..............................     90,000     20,000         --         --         --

Savings deposits ...........................................    399,673    384,380    389,751    349,952    320,430

Shareholders' equity .......................................    153,411    164,685     49,308     44,949     37,792
<CAPTION>
SELECTED OPERATING DATA                                                 Year Ended September 30,
                                             ------------------------------------------------------------------------------
                                                 1996             1995              1994             1993              1992
                                             --------       ----------         ---------       ----------          --------
                                                                               (In thousands)
<S>                                          <C>             <C>               <C>             <C>                 <C>     
Total interest income .....................  $ 45,649        $  35,107         $  32,408       $   31,091          $ 30,690

Total interest expense ....................    23,286           20,441            16,555           16,070            18,941
                                             --------       ----------         ---------       ----------          --------
Net interest income .......................    22,363           14,666            15,853           15,021            11,749

Provision for loan losses .................       120              120               150              120               120
                                             --------       ----------         ---------       ----------          --------
Net interest income after provision
for loan losses ...........................    22,243           14,546            15,703           14,901            11,629

Non-interest income .......................       522              381               352            1,112               343

BIF/SAIF Assessment .......................     2,473                -                 -                -                 -

Non-interest expense ......................     9,769            6,004             6,034            5,191             4,563
                                             --------       ----------         ---------       ----------          --------
Earnings before income taxes and
cumulative effect of a change in
accounting principle ......................    10,523            8,923            10,021           10,822             7,409

Provision for income tax ..................     4,413            3,349             3,867            3,665             2,664
                                             --------       ----------         ---------       ----------          --------
Earnings before cumulative effect
of a change in accounting principle .......     6,110            5,574             6,154            7,157             4,745

Cumulative effect at October 1,1993
of a change in accounting for
income taxes ..............................         -                -               866                -                 -
                                             --------       ----------         ---------       ----------          --------
Net Earnings ..............................  $  6,110        $   5,574         $   5,288       $    7,157          $  4,745
                                             ========       ==========         =========       ==========          ========

                                       4
<PAGE>

<CAPTION>

                                                                             At or For the Year Ended September 30,
                                                                      ----------------------------------------------------------
KEY OPERATING RATIOS                                                    1996         1995         1994         1993         1992
                                                                      ------       ------       ------       ------       ------
<S>                                                                  <C>          <C>          <C>          <C>          <C>    
PERFORMANCE RATIOS

Return on average assets
(net income divided by average assets) .....................           0.99%        1.19%        1.26%        1.88%        1.34%

Return on average equity
(net income divided by average equity) .....................           3.69%       10.44%       10.93%       16.87%       13.11%


Interest rate spread (difference between average yield on
interest-earning assets and average cost of
interest-bearing liabilities) ..............................           2.22%        2.73%        3.40%        3.58%        2.91%


Net interest margin (net interest income as a percentage
of average interest-earning assets) ........................           3.65%        3.24%        3.84%        4.04%        3.42%


Average interest-earning assets to average interest-bearing
liabilities ................................................         137.78%      111.29%      111.13%      110.61%      109.16%


Net interest income after provision for loan losses to total
non-interest expenses ......................................         181.69%      242.27%      260.24%      287.05%      254.85%

                                                                                                                   
Non-interest expense to average total assets ...............           1.99%        1.29%        1.43%        1.36%        1.29%
                                                                                                                   
Dividend payout ratio (dividends declared per share
divided by net income per share) ...........................          44.64%            -            -            -            -


ASSET QUALITY RATIOS

Allowance for loan losses to total loans at end of period ..           0.19%        0.19%        0.20%        0.20%        0.19%

Non-performing assets to total assets ......................           0.04%        0.12%        0.05%        0.07%        0.46%

Non-performing loans to total loans, before net items ......           0.04%        0.18%        0.05%        0.06%        0.45%


CAPITAL RATIOS

Equity to assets ...........................................          22.83%       25.42%       10.98%       11.13%       10.30%

Tangible capital ratio .....................................          19.22%       18.57%       10.98%       11.13%       10.30%

Core capital ratio .........................................          19.22%       18.57%       10.98%       11.13%       10.30%

Risk-based capital ratio ...................................          42.41%       36.87%       22.61%       23.15%       20.82%

OTHER DATA

NUMBER OF

Real estate loans outstanding ..............................           7,704        7,110        6,654        6,169        5,867

Deposit accounts ...........................................          38,651       38,260       35,205       33,147       31,945
                                                                                                                   
Full service offices .......................................               7            7            6            6            5
                                                                                                                   
</TABLE>
                                       5
<PAGE>
Dear Shareholder:

   October 4, 1996 marked our first anniversary as a stock company.  During this
past year we have been busy and, we believe,  successful in implementing many of
the strategies to enhance shareholder value that we outlined at our first Annual
Shareholders'  Meeting last April.  

     Growth in our core savings and loan  business  resulted in loan and deposit
growth and good  earnings  this past year.  Fiscal 1996 net  earnings  were $6.1
million,  which  includes  the  effect  of a $2.5  million  one-time  assessment
recorded on September 30, 1996 to recapitalize the Savings Association Insurance
Fund and also a loss-on-sale of $1.6 million on the Association's  investment in
a U.S. federal securities mutual bond fund.

     New loan originations were approximately $135.6 million,  which resulted in
a 17.3%  increase in our total loan  portfolio.  This was  accomplished  through
competitive loan pricing,  aggressive marketing,  excellent customer service and
the  opening in March  1996 of a new  lending  office in  Redmond,  Oregon.  The
Redmond office has shown good  acceptance and we are excited about its prospects
in that  fast  growing  community.  By the new  year we hope to add to our  loan
product  mix by  introducing  a new  "Equity  Credit  Line."  

     Our  deposit  base  increased  $15.3  million or 4.0%  during the year.  We
introduced two new checking  accounts this past year: a "Basic Checking" account
for  customers  who write a limited  number  of checks  each  month and a "Small
Business  Checking" account to offer our small business customers an alternative
to the traditional  commercial  checking account. 

     In addition to taking  measures  aimed at  increasing  our core business of
deposit taking and residential  mortgage lending,  we have sought other means to
leverage our  capital.  We have  aggressively  used  borrowed  funds to purchase
investment securities with the aim of earning the difference between the cost of
the  borrowings  and the return  earned on the  investment  securities.  This is
commonly known as "wholesale  leveraging."  At September 30, 1996, we had $104.9
million in  borrowed  funds,  of which  $56.9  million  was  primarily  used for
liquidity to fund loan growth and $48.0 million was used to purchase  investment
securities.  This strategy has been successful as evidenced by a 1.23% return on
assets on these activities.  Subject to market  conditions,  we plan to continue
and expand this activity.  

     Another  shareholder  value  enhancement  strategy is our dividend  policy.
Since becoming a stock company we have paid a dividend each quarter,  increasing
from $0.05 per share in January  to $0.065 in April to our  currently  announced
level of $0.07 per share.  

     Many of our  shareholders  are aware that several  newly  converted  thrift
institutions have authorized  special "return of capital"  distributions,  which
were entirely or  substantially  tax free. In each instance that we know of, the
institution never filed a consolidated tax return,  which, under complex federal
income tax  regulations,  is a critical factor in determining  whether a special
distribution  will be taxable or not. After  extensive  analysis and discussions
with the Internal Revenue Service, we have concluded that, at this time, current
federal  income tax  regulations  effectively  preclude  a  tax-free  "return of
capital" distribution to our shareholders.  Nevertheless, the Board of Directors
will  continue  to assess the  viability  of all other  shareholder  enhancement
strategies  that suggest a  comparable  long-term  benefit to our  shareholders.


     Stock  repurchases are another element of our shareholder value enhancement
strategy that we  implemented  last year.  This past  September we completed the
repurchase of 5.07% of our  outstanding  common shares by  repurchasing  620,655
shares at an  average  price of $14.33 per share.  These  repurchases  increased
earnings per share by $0.01 and return on equity by 17 basis  points.  

                                       6
<PAGE>

     The final element of our  shareholder  value  enhancement  strategy that we
discussed  at last year's  Annual  Meeting was the  expansion  of our  franchise
through the acquisition of other institutions or their branches.  We continue to
explore such  expansion  opportunities.  

     We appreciate your support.  "We'd Be Honored" if you stopped by one of our
branches to say hello or call us if you have any questions.

Sincerely,

/s/ Gerald V. Brown
--------------------
Gerald V. Brown,
President and Chief Executive Officer


/s/ Rodney N. Murray
---------------------
Rodney N. Murray,
Chairman of the Board

                                       7
<PAGE>

                          CORPORATE EXECUTIVE OFFICERS


George L. Hall has been with Klamath First Federal Savings and Loan  Association
since 1988. He is Senior Vice  President-Lending/Secretary  responsible  for all
lending  activities  of the  Association.  Mr. Hall brought over twelve years of
expertise in mortgage  lending to Klamath First Federal.  He has also served the
institution as a Loan Officer and Branch Manager. 

Robert A. Tucker has been with Klamath First Federal Savings & Loan  Association
since 1973. He is Senior Vice President-Operations/Treasurer responsible for all
operations of the Association.  In his 23 years with Klamath First Federal,  Mr.
Tucker  has  served  as  Loan  Officer,  Assistant  Secretary,  Branch  Manager,
Assistant Vice President and Vice President.

Gerald V. Brown has been with Klamath  First  Federal  since 1957. He began as a
teller,  and, in his 39 years with Klamath  First  Federal,  has  progressed  up
through  the ranks to his  current  position as  President  and Chief  Executive
Officer.  Mr.  Brown has  served on the Board of  Directors  for  Klamath  First
Federal Savings & Loan Association since 1994.

Marshall  J.  Alexander  has been  with  Klamath  First  Federal  Savings & Loan
Association  since 1986. He began as the  Association's  Controller,  and became
Vice  President and Chief  Financial  Officer in August of 1994.  Mr.  Alexander
brought over ten years experience in financial management to the Association. He
supervises  the  accounting  department  as well as  manages  the  assets of the
Association.


                                       8
<PAGE>

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


GENERAL                                   

     Klamath First Bancorp, Inc. (the "Company"), an Oregon corporation,  became
the unitary  savings and loan holding  company for Klamath First Federal Savings
and Loan Association (the "Association").
   
     The  Association  is a  traditional,  community-oriented,  savings and loan
association  that focuses on 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.
   
     The Company's  profitability  depends primarily on its net interest income,
which is the difference between interest and dividend income on interest-earning
assets,  principally  loans and investment  securities,  and interest expense on
interest-bearing  deposits  and  borrowings.  Because the  Company is  primarily
dependent on net interest  income for its  earnings,  the focus of the Company's
planning  is to devise and  employ  strategies  that  provide  stable,  positive
spreads  between  the  yield  on   interest-earning   assets  and  the  cost  of
interest-bearing  liabilities  in order to  maximize  the  dollar  amount of net
interest income.  The Company's net earnings are dependent,  to a lesser extent,
on the level of its non-interest income, such as service charges and other fees,
and its  non-interest  expense,  such as  employee  compensation  and  benefits,
occupancy and equipment  expense,  deposit insurance  premiums and miscellaneous
other expenses, as well as federal and state income tax expense.
 
     The  Association is regulated by the Office of Thrift  Supervision  ("OTS")
and  its  deposits  are  insured  up to  applicable  limits  under  the  Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC").  

     The  Association  is a member of the  Federal  Home Loan Bank  system.  The
Association conducts its business through seven office facilities,  and one loan
production  office,  with the main office located in Klamath Falls,  Oregon. The
Association  considers  its primary  market area to be the  counties of Klamath,
Deschutes and Jackson in Southern and Central Oregon.

                                       9
<PAGE>

FEDERAL LEGISLATION

     On  September  30,  1996,   the  President   signed  into  law  an  omnibus
appropriations  act (the "Act") that  includes  several  changes that affect the
Association.  The  signed  Act (i)  recapitalizes  the SAIF  through a  one-time
special  assessment;  (ii)  provides  for the  conditional  merger  of the  Bank
Insurance  Fund  ("BIF")  and the SAIF as of  January  1, 1999 into one  Deposit
Insurance  Fund  ("DIF"),  at which  time banks and  thrifts  would pay the same
deposit  insurance  premiums;  and (iii) grants financial  institutions  limited
regulatory relief.  

     With  respect to the  assessment  to  recapitalize  SAIF,  the Act requires
SAIF-insured  institutions to recapitalize  the SAIF through a one-time  special
assessment of 65.7 basis points on the SAIF deposit  assessment base, payable no
later than  November 29, 1996.  Based on the  Association's  assessment  base of
$376.4  million  at March  31,  1995,  the date  used in the Act,  the  one-time
assessment is $2.5 million and was accrued  during the quarter  ended  September
30, 1996. 

     In separate  legislation  enacted  this past year,  the  reserve  method of
accounting for thrift and bad debt reserves (including the percentage of taxable
income method) was repealed for tax years beginning after December 31, 1995. The
resulting  change in accounting  method triggers bad debt reserve  recapture for
post-1987 reserves over a six-year period,  thereby generating an additional tax
liability.  At September 30, 1996, the Association's post-1987 reserves amounted
to $3.8  million.  Pre-1988  reserves  would only be subject to recapture if the
institution fails to qualify as a thrift. A special provision suspends recapture
of  post-1987  reserves  for  up to  two  years  if,  during  those  years,  the
institution  satisfies a "residential loan  requirement."  Notwithstanding  this
special provision,  however,  recapture would be required to begin no later than
the first taxable year beginning after December 31, 1997.


<TABLE>

(Graph in hardcopy report)
      TOTAL ASSETS
     (in thousands)

<CAPTION>

         TOTAL
YEAR    ASSETS
<S>   <C>    
1996  $671,969
1995   647,840
1994   448,939
1993   403,879
1992   366,864
</TABLE>


                                       10
<PAGE>
CHANGE IN INDEPENDENT AUDITORS

     On May 21, 1996, the Company's Board of Directors, at the recommendation of
the Audit  Committee,  terminated  the  engagement  of KPMG Peat Marwick LLP and
engaged  Deloitte & Touche LLP, as the  Company's  auditors.  

     The report of KPMG Peat Marwick LLP on the Company's  financial  statements
for either of the last two fiscal years  preceding the date of  termination  did
not contain an adverse  opinion or a disclaimer of opinion and was not qualified
or modified as to  uncertainty,  audit scope, or accounting  principles,  except
that the report of KPMG Peat Marwick LLP dated  November 3, 1995 with respect to
the  Company's  financial  statements at September 30, 1994 and 1995 and for the
three years in the period ended  September 30, 1995  disclosed  that the Company
changed  its method of  accounting  for certain  investments  in debt and equity
securities and its method of accounting for income taxes in fiscal 1994 to adopt
the provisions of Statement of Financial  Accounting  Standard ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and SFAS No.
109, "Accounting for Income Taxes", respectively.

     During the Company's two most recent  fiscal years and  subsequent  interim
periods  preceding the date of the  termination  of the  engagement of KPMG Peat
Marwick LLP, the company was not in  disagreement  with KPMG Peat Marwick LLP on
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure, or auditing scope or procedure, which disagreement,  if not resolved
to the  satisfaction  of KPMG Peat  Marwick  LLP,  would have  caused  KPMG Peat
Marwick LLP to make  reference  to the  subject  matter of the  disagreement  in
connection with its report. 

     The Company  had not  consulted  with  Deloitte & Touche LLP during its two
most recent fiscal years nor during any  subsequent  interim period prior to its
engagement  regarding the  application  of accounting  principles to a specified
transaction,  either  completed or proposed,  or the type of audit  opinion that
might be rendered on the Company's financial statements.

ASSET AND LIABILITY MANAGEMENT AND INTEREST RATE RISK

     The ability to maximize net interest  income is largely  dependent upon the
achievement  of a positive  interest  rate spread that can be  sustained  during
fluctuations  in  prevailing  interest  rates.  Interest rate  sensitivity  is a
measure  of the  difference  between  amounts  of  interest-earning  assets  and
interest-bearing  liabilities  which  either  reprice  or mature  within a given
period of time. The difference,  or the interest rate repricing "gap",  provides
an indication of the extent to which an institution's  interest rate spread will
be affected by changes in interest rates. A gap is considered  positive when the
amount of  interest-rate  sensitive  assets exceeds the amount of  interest-rate
sensitive   liabilities,   and  is  considered   negative  when  the  amount  of
interest-rate   sensitive   liabilities  exceeds  the  amount  of  interest-rate
sensitive  assets.  Generally,  during a period  of  rising  interest  rates,  a
negative  gap  within  shorter  maturities  would  result in a  decrease  in net
interest  income.  Conversely,  during a period of  falling  interest  rates,  a
negative  gap within  shorter  maturities  would  result in an  increase  in net
interest income.  

     At September 30, 1996,  the  Association's  one-year  cumulative  gap was a
negative  25.88% of total assets compared to a negative 1.07% of total assets at
September 30, 1995 and a negative  30.05% at September  30, 1994.  The September
30,  1995  one-year  cumulative  gap was  unusually  low  and was a  substantial
improvement  for the Company  compared to prior years.  This was a result of the
subscription  funds from the initial stock  offering being invested in overnight
funds,  or for gap, the less than  one-year  repricing  period.  The  cumulative
one-year  gap has  remained  improved.  


                                       11
<PAGE>

     The Association  continues to primarily  originate  fixed rate  residential
loans for its  portfolio.  In an effort to reduce its exposure to interest  rate
risk,  the  Association  has:  (i)  purchased  adjustable  rate  mortgage-backed
securities,  (ii) placed greater emphasis on the origination of  adjustable-rate
residential loans, and (iii) emphasized longer term fixed rate deposits. We will
continue to explore opportunities in these areas.

<TABLE>

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

<CAPTION>
                                                                At September 30,
                                                -----------------------------------------------
                                                    1996                1995               1994
                                                --------            --------            -------                  
                                                                 (In thousands)
<S>                                             <C>                 <C>                 <C>    
Earning assets maturing or repricing
within one year .......................         $174,921            $253,115            $84,926

Interest-bearing liabilities                     
maturing or repricing within one
year ..................................          348,852             260,073            219,845

Deficiency of earning assets over
interest-bearing liabilities as a
percent of total assets ...............           (25.88)%            ( 1.07)%           (30.05)%

Percent of assets to liabilities
maturing or repricing within one
year ..................................            50.14%              97.32%             38.63%

                                       12
<PAGE>
INTEREST SENSITIVITY GAP ANALYSIS

The following table presents the difference between the Company's  interest-earning  assets and interest-bearing  liabilities within
specified  maturities at September 30, 1996. This table does not necessarily  indicate the impact of general interest rate movements
on the Company's net interest  income  because the repricing of certain assets and  liabilities is subject to competitive  and other
limitations.  As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in
fact mature or reprice at different times and at different volumes.
<CAPTION>
                                       Greater     Greater    Greater     Greater     Greater     Greater     Greater
                                          than        than       than        than        than        than        than       
                          3 Months    3 Months    6 Months     1 to 3      3 to 5     5 to 10    10 to 20          20
ASSETS                     or Less to 6 Months   to 1 Year      Years       Years       Years       Years       Years        TOTAL
                          -------- ----------- ----------- ---------- ----------- -----------   ---------  ----------  -----------
PERMANENT 1-4 MORTGAGES                                               (In thousands)
<S>                       <C>        <C>         <C>         <C>        <C>         <C>         <C>        <C>         <C>       
Adjustable Rate ........  $ 18,946     $ 4,788     $17,415    $ 1,109        $  -       $   -       $   -       $   -    $  42,258
                                                                                                                          
Fixed Rate .............       198         146         540        308         790      10,912      79,686     317,552      410,132
                                                                                                                          
OTHER MORTGAGE LOANS
                                                                                                                         
Adjustable Rate ........     2,673         466       5,604        249           -           -           -           -        8,992
                                                                                                                         
Fixed Rate .............         -           -          96        106       1,982       2,157      10,062          74       14,477
                                                                                                                          
Mortgage Backed and 
Related Securities .....    48,520      16,259      16,253          -           -           -           -           -       81,032
                                                                                                                          
Non-Real Estate Loans ..       451         337         371        494         342         583       1,341           -        3,919
                                                                                                                          
Investment Securities ..    33,077       2,000       6,781      4,914      37,592      16,507           -           -      100,871
                          -------- ----------- ----------- ---------- ----------- -----------   ---------  ----------  ----------- 
Total Rate Sensitive 
Assets .................  $103,865     $23,996     $47,060    $ 7,180     $40,706     $30,159     $91,089    $317,626    $ 661,681
                          ======== =========== =========== ========== =========== ===========   =========  ==========  ===========
LIABILITIES
                                                                                                                          
Deposits
     - Fixed Maturity ..   $52,085     $50,307     $74,463    $67,092     $20,736     $24,505       $   -       $   -    $ 289,188
                                                                                                                          
Deposits - Now .........     1,821       1,821       3,642      8,499       8,499           -           -           -       24,282
                                                                                                                          
Deposits
     - Money Market ....    13,607      14,129      14,129     10,466           -           -           -           -       52,331
                                                                                                                           
Deposits - Passbook ....     2,528       2,528       5,057     11,799      11,799           -           -           -       33,711
                                                                                                                          
Other Interest
Bearing Liabilities ....    98,735      14,000           -          -           -           -           -           -      112,735
                          -------- ----------- ----------- ---------- ----------- -----------   ---------  ----------  -----------
Total Rate Sensitive 
Liabilities ............  $168,776     $82,785     $97,291    $97,856     $41,034     $24,505       $   -       $   -    $ 512,247
                          ======== =========== =========== ========== =========== ===========   =========  ==========  ===========
Interest Rate 
Sensitivity Gap ........  $(64,911)  $ (58,789)  $ (50,231)  $(90,676)  $    (328)  $   5,654   $  91,089    $317,626    $ 149,434
                                                                                                                          
Cumulative Interest 
Rate Sensitivity Gap ...  $(64,911)  $(123,700)  $(173,931)  $264,607)  $(264,935)  $(259,281)  $(168,192)   $149,434
                                                                                                                          
Sensitivity Gap to
Total Assets ...........    (9.66%)     (8.75%)     (7.48%)   (13.49%)     (0.05%)      0.84%      13.56%      47.27%
                                                                                                                         
Cumulative Interest
Rate Sensitivity Gap
To Total Assets ........    (9.66%)    (18.41%)    (25.88%)   (39.38%)    (39.43%)    (38.59%)    (25.03%)     22.24%
</TABLE>
                                       13
<PAGE>                                                                  
     Certain  shortcomings  are inherent in gap  analysis  that may result in an
institution  with  a  nominally  negative  gap  having  interest  rate  behavior
associated  with a  positive  gap.  For  example,  although  certain  assets and
liabilities may have similar maturities or periods to repricing,  they may react
in different degrees to changes in market interest rates.

LIQUIDITY AND CAPITAL RESOURCES

     The Company  generates cash through  operating  activities,  primarily as a
result of net  income.  The  adjustments  to  reconcile  net  income to net cash
provided by operations during the periods presented  consisted  primarily of the
provision for loan losses,  depreciation and amortization expense,  amortization
of deferred  loan  origination  fees,  increases or decreases in various  escrow
accounts and increases or decreases in other assets and liabilities. The primary
investing  activity of the  Association  is  lending,  which is funded with cash
provided  from  operations  and financing  activities,  as well as proceeds from
amortization  and  prepayments on existing loans and mortgage backed and related
securities  and proceeds from  maturities of other  investment  securities.  For
additional information about cash flows from operating,  financing and investing
activities,  see the  Consolidated  Statements  of Cash  Flows  included  in the
Consolidated Financial Statements.

     The  Association  is  required  under  applicable  federal  regulations  to
maintain  specified  levels of "liquid"  investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
or less.  Current OTS regulations  require that a savings  association  maintain
liquid  assets  of not less  than  5.00% of its  average  daily  balance  of net
withdrawable  deposit  accounts and  borrowings  payable in one year or less, of
which short-term liquid assets must consist of not less than 1.00%. At September
30, 1996, the  Association's  regulatory  liquidity,  as measured for regulatory
purposes,  was  10.47%.  

     Under  capital  standards  mandated by the  Financial  Institution  Reform,
Recovery,  and Enforcement  Act, the Association must have: (i) tangible capital
equal to 1.5% of  adjusted  total  assets,  (ii) core  capital  equal to 3.0% of
adjusted  total  assets,  and (iii) total  risk-based  capital  equal to 8.0% of
risk-weighted  assets.  At September 30, 1996, the Association was in compliance
with  all  regulatory  capital  requirements  effective  as of such  date,  with
tangible,  core and risk-based capital of 19.2%, 19.2% and 42.4%,  respectively.
(See Note 15 To Consolidated Financial Statements). 

                                 ASSET QUALITY

NON-PERFORMING ASSETS

     At  September  30,  1996,  the ratio of  non-performing  assets  (including
non-accrual loans,  accruing loans greater than 90 days delinquent,  real estate
owned and other  repossessed  assets) to total assets was .04%. The  Association
intends to seek to maintain asset quality by continuing its focus on one-to-four
family  lending.  However,  in its  efforts  to expand  and  diversify  its loan
portfolio,  the Association  intends to evaluate other available lending options
such as credit cards,  equity lines of credit, and other consumer loan products.
In doing this,  the  Association  will  evaluate the trade off  associated  with
planned loan growth and the greater  credit risk  associated  with such forms of
lending.
                                       14
<PAGE>

CLASSIFIED ASSETS

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

     In accordance with  regulatory  requirements,  the Association  reviews and
classifies  on a regular  basis,  and as  appropriate,  its  assets as  "special
mention",  "substandard",  "doubtful" and "loss". In 1996 the  Classification of
Assets Committee  changed its  classification of asset categories to include the
more common classification category Special Mention. In the past the Association
included  what  normally  was  considered  Special  Mention  in the  Substandard
category. However, to conform to the more common practice, the assets previously
classified   Substandard  are  now  classified  as  either  Special  Mention  or
Substandard  per  the  category's   definitions.   All  non-accrual   loans  and
non-performing assets are included in classified assets.



The following  table sets forth at the dates indicated the amounts of classified
assets:
<TABLE>
<CAPTION>

                                               At September 30,
                                             ----------------------
                                             1996     1995     1994
                                             ----    -----    -----
                                                (In thousands)
<S>                                        <C>      <C>      <C>   
                                                             
Loss ...................................   $    -   $    -   $   33
                                                             
Doubtful ...............................        -        -       59
                                                             
Substandard ............................      281    1,095    1,018
                                                             
Special Mention ........................      645        -        -
                                             ----    -----    -----
                                           $  926   $1,095   $1,110
                                             ====    =====    =====

</TABLE>
                                           

ALLOWANCE FOR LOAN LOSSES

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


                                       15
<PAGE>

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

                                             At September 30,
                                            ------------------
                                            1996   1995   1994
                                            ----   ----   ----
                                              (In thousands)
<S>                                         <C>    <C>    <C> 
Loan loss allowance ....................    $928   $808   $755
                                                         
Charge-offs ............................       -     67     23
</TABLE>
<TABLE>

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

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

                                                      Years Ended September 30,
                           --------------------------------------------------------------------------------------------------------
                                         1996                                  1995                                 1994
                           ----------------------------          ----------------------------          ----------------------------
                            Average              Yield/            Average             Yield/           Average              Yield/
                            Balance    Interest   Rate             Balance   Interest   Rate            Balance   Interest    Rate
                           --------    --------  ------          ---------  ---------  ------          --------   --------   ------
INTEREST-EARNING ASSETS                                                                                                      
                                                                         (In thousands)
<S>                        <C>         <C>         <C>            <C>        <C>        <C>            <C>        <C>         <C>  
Loans receivable .......   $440,510    $ 35,262    8.00%          $381,689   $ 30,117   7.89%          $338,679   $ 27,511    8.12%
                                                                                                                             
Mortgage backed and 
related securities .....     52,275       3,005    5.75%                 -          -                         -          -       -

                                                                                                                             
Investment securities ..     87,929       5,514    6.27%            52,097      3,869   7.43%            56,995      4,041    7.09%
                                                                                                                             
Federal funds sold .....     23,011       1,259    5.47%            13,005        722   5.55%             9,359        320    3.42%
                                                                                                                             
Interest bearing
deposit ................      4,882         262    5.37%             2,454        130   5.30%             3,394        183    5.39%
                                                                                                                    
FHLB Stock .............      4,552         348    7.64%             3,935        270   6.86%             3,969        353    8.89%
                           --------    --------                  ---------  ---------                  --------   --------        
Total interest-earning 
assets .................    613,159      45,650    7.45%           453,180     35,108   7.75%           412,396     32,408    7.86%
                                                                                                                             
Non-interest-earning
assets .................      2,130                                 13,661                                8,216                    
                           --------    --------                  ---------  ---------                  --------   --------        
Total Assets ...........   $615,289                               $466,841                             $420,612                    
                           ========                              =========                             ========                    
                                                                                                                            

                                       16
<PAGE>
<CAPTION>

                                                      Years Ended September 30,
                           --------------------------------------------------------------------------------------------------------
                                         1996                                  1995                                 1994
                           ----------------------------          ----------------------------          ----------------------------
                            Average              Yield/           Average              Yield/           Average              Yield/
                            Balance    Interest   Rate            Balance    Interest   Rate            Balance   Interest    Rate
                           --------    --------  ------          --------   ---------  ------          --------   --------   ------
INTEREST-BEARING
LIABILITIES
<S>                        <C>         <C>       <C>              <C>        <C>      <C>              <C>        <C>       <C>  
Tax and insurance
reserve ................   $  4,490    $    148    3.30%          $  4,533   $    180   3.97%          $  4,489   $    184    4.10%
                                                                                                                             
Passbook accounts ......     34,198         983    2.87%            44,345      1,235   2.78%            44,237      1,183    2.67%
                                                                                                                             
Now accounts ...........     22,064         546    2.47%            22,242        542   2.44%            21,654        558    2.58%
                                                                                                                             
Money market accounts ..     50,308       1,950    3.88%            55,891      2,206   3.95%            65,944      2,193    3.33%
                                                                                                                             
Certificate accounts ...    282,446      16,772    5.94%           264,873     15,327   5.79%           234,772     12,436    5.30%
                                                                                                                             
FHLB advances/Short 
term borrowings ........     51,517       2,888    5.60%            15,305        950   6.21%                 -          -
                           --------    --------                  ---------  ---------                  --------   --------         
Total interest-bearing
liabilities ............    445,023      23,287    5.23%           407,189     20,440   5.02%           371,096     16,554    4.46%
                                                                                                                             
Non-interest-bearing 
liabilities ............      4,892                                  6,279                                1,132                   
                           --------    --------                  ---------  ---------                  --------   --------         

Total liabilities ......    449,915                                413,468                              372,228                   
                           --------                              ---------                             --------                 
                                                                                    
Shareholders' equity        165,374                                 53,373                               48,384                   
                           --------                              ---------                             --------                 
Total liabilities
and shareholders'
equity .................   $615,289                               $466,841                             $420,612                   
                           ========                              =========                             ========        

                                                                                                                             
Net interest income ....               $ 22,363                              $ 14,668                              $15,854        
                                       ========                             =========                             ========          
                                                                                                                            
Interest rate spread ...                           2.22%                                2.73%                                 3.40%
                                                 ======                               =======                                ======
                                                                                                                             
Net interest margin ....                           3.65%                                3.24%                                 3.84%
                                                 ======                               =======                                ======
                                                                                                                             
Average interest-earning 
assets to average 
interest-bearing 
liabilities ............                         137.78%                              111.29%                               111.13%
                                                 ======                               =======                                ======

                                       17
<PAGE>
                                                        RATE/VOLUME ANALYSIS

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

<CAPTION>
                                         For the Years Ended September 30,               For the Years Ended September 30,
                              ------------------------------------------------    ---------------------------------------------
                                                  1995 VS 1996                                    1995 VS 1994            
                              ------------------------------------------------    ---------------------------------------------
                                             Increase (Decrease) Due To                     Increase (Decrease) Due To
                                                                  Net Increase                                      Net Increase
                                  Rate      Volume    Rate/Vol    (Decrease)          Rate      Volume    Rate/Vol    (Decrease)
                              --------   ---------   ---------    ------------    --------    --------    --------  -----------
                                                                          (In thousands)
INTEREST EARNING ASSETS
<S>                           <C>         <C>         <C>             <C>         <C>         <C>         <C>         <C>     
Loans .....................   $    420    $  4,641    $     85        $  5,146    $   (788)   $  3,494    $   (100)   $  2,606
                                                                                                                                  
Mortgage backed and
related securities ........          -           -       3,006           3,006           -           -           -           -
                                                                                                                                  
Investment securities .....       (604)      2,662        (416)          1,642         191        (347)        (16)       (172)
                                                                                                                                 
Federal funds sold ........        (10)        555          (8)            537         199         125          78         402
                                                                                                                                
Interest bearing
deposits ..................          2         129           2             133          (3)        (51)          1         (53)
                                                                                                                                
FHLB stock ................         31          42           5              78         (81)         (3)          1         (83)
                              --------   ---------   ---------    ------------    --------    --------    --------  -----------
Total Interest-Earning
Assets ....................   $   (161)   $  8,029    $  2,674        $ 10,542    $   (482)   $  3,218    $    (36)   $  2,700
                              ========   =========   =========    ============    ========    ========    ========  ===========

INTEREST BEARING LIABILITIES
                                                                                                                                  
Tax and insurance reserves    $    (30)   $     (2)   $      -        $    (32)   $     (6)   $      2    $      -    $     (4)
                                                                                                                                  
Passbook accounts .........         40        (282)         (9)           (251)         49           3           -          52
                                                                                                                                   
Now accounts ..............          7          (4)          -               3         (30)         15          (1)        (16)
                                                                                                                                   
Money market accounts .....        (39)       (221)          4            (256)        409        (334)        (62)         13
                                                                                                                               
Certificate accounts ......        397       1,017          32           1,446       1,150       1,594         147       2,891
                                                                                                                                  
FHLB advances/Short term
borrowings ................        (93)      2,249        (221)          1,935           -           -         950         950
                              --------   ---------   ---------    ------------    --------    --------    --------  -----------
Total Interest-Bearing
Liabilities ...............   $    282    $  2,757    $   (194)       $  2,845    $  1,572    $  1,280    $  1,034    $  3,886
                              ========   =========   =========    ============    ========    ========    ========  ===========
Increase (Decrease) in Net
Interest Income ...........                                           $  7,697                                        $ (1,186)
                                                                  ============                                      ===========
</TABLE>


                                       18
<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1996.

GENERAL

     Net  earnings  increased  $500,000  or 8.9% from $5.6  million for the year
ended September 30, 1995, to $6.1 million for the year ended September 30, 1996.
This increase was attributable to several factors. Net interest income increased
$7.7 million or 52.4% from $14.7  million for the year ended  September 30, 1995
to $22.4  million for the year ended  September  30,  1996.  This  increase  was
primarily attributable to an increase in total average  interest-earning  assets
from $453.2 at September 30, 1995 to $613.2 at September 30, 1996.  The increase
in net  interest  income was  partially  offset by an increase  in  non-interest
expense of $6.2 million or 103.3% from $6.0 million for the year ended September
30, 1995 to $12.2 million for the year ended  September 30, 1996.  This increase
is primarily  attributable to a $1.7 million  increase in compensation  expense,
due  largely to the  Employee  Stock  Option  Plan  ("ESOP"),  the $2.5  million
BIF/SAIF  assessment,  and the  $1.6  million  loss  on  sale  of an  investment
subsequent to year end.

INTEREST INCOME

     Additional  interest  income  generated by the $146.4  million  increase in
average interest  earning assets  contributed to an increase of $10.5 million or
29.9% from $35.1 million for the year ended  September 30, 1995 to $45.6 million
for the year  ended  September  30,  1996.  Of this  increase,  $5.1  million is
attributable to additional  loan income due to an increase in loans  receivable.
The increase in loans  receivable  was primarily a result of strong new purchase
loan originations  exceeding loan refinancing which resulted in greater net loan
growth  for  1996.  

     The  remaining  increase  of $5.4  million  was a result of  investing  the
proceeds  of the stock sale and  borrowings  in 30 year  adjustable  rate agency
mortgage  backed  securities  ("MBS"),  fixed rate U.S.  agency  securities with
maturities of less than five years,  fixed and adjustable  corporate  securities
and overnight  funds.  The average  balance of  investments  increased by $101.2
million for the year ended  September  30,  1996  compared  with the  comparable
period in 1995.

INTEREST EXPENSE

     Interest  expense  increased  $2.8 million due to increases in deposits and
borrowings.  Interest  expense on deposits  increased  $1.0 million or 5.2% from
$19.3  million for the year ended  September  30, 1995 to $20.3  million for the
year ended  September 30, 1996.  Total deposits  increased by $15.3 million from
September  30, 1995 to September  30,  1996,  and the average  interest  paid on
interest-bearing  deposits  increased  22 basis  points  from 4.99% for the year
ended  September 30, 1995 to 5.21% for the year ended  September 30, 1996.  This
increase was a result of the  increased  pricing  competition  in the  Company's
market  area.  Interest  expense on  borrowings  increased  $1.9  million due to
increased  borrowings  of $84.9  million.  The Company will  continue to rely on
borrowings  to fund  loan  growth as long as we can  borrow  at lower  rates for
comparable maturities than required to attract similar structured deposits.

PROVISION FOR LOAN LOSSES

     The  provision  for loan losses was $120,000  with no  recoveries or charge
offs during the year ended  September  30, 1996  compared to $120,000 and charge
offs of $67,000 during the year ended  September 30, 1995, for a net increase in
provision  for the year of $120,000.  At September  30, 1996,  the allowance for
loan losses was equal to 356.9% of  non-performing  assets compared to 106.6% at
September 30, 1995.  The increase in the coverage ratio at year end 1996 was the
result of a decrease in non-accrual  loans which were foreclosed and sold during
the year.

                                       19
<PAGE>
NON-INTEREST INCOME

     Non-interest  income  increased  $141,000 or 37.0% to $522,000 for the year
ended  September 30, 1996 from  $381,000 for the year ended  September 30, 1995.
The increase was attributable to increases in fees and service charges and other
income, as a result of increased loan activity,  ATM fees and service charges on
checking accounts.

NON-INTEREST EXPENSE

     Non-interest  expense increased $6.2 million, or 103.3%, for the year ended
September  30,  1996,  from a total of $6.0  million for the prior year to $12.2
million for the year ended  September 30, 1996. Of this  increase,  $2.5 million
was  attributable  to  the  BIF/SAIF  special   assessment,   $1.6  million  was
attributable  to the loss on sale of an  investment  subsequent to year end, and
$1.7 million is attributable to an increase in compensation expense. Of the $1.7
million  increase in compensation  expense,  $1.4 million is due to compensation
expense  associated with the ESOP. The ratio of non-interest  expense to average
total  assets was 1.99% and 1.29% for the years  ended  September  30,  1996 and
1995, respectively.

INCOME TAXES

     The  provision for income taxes  increased  $1.0 million for the year ended
September 30, 1996 compared with the prior year, primarily as a result of higher
pretax earnings.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1994 AND 1995

GENERAL

     Earnings  decreased  $580,000 or 9.4%, from $6.2 million for the year ended
September 30, 1994 to $5.6 million for the year ended September 30, 1995, before
the  cumulative  effect of a change in method of accounting for income taxes due
to the  adoption of SFAS No. 109 on October 1, 1993.  This  decrease  was mainly
attributable  to a decrease in interest  rate spread from 3.4% at September  30,
1994 to 2.7% at  September  30,  1995  which  resulted  in net  interest  income
decreasing by $1.2 million, or 7.5%. 

     Net earnings  increased  $286,000,  or 5.4%, from $5.3 million for the year
ended  September 30, 1994 to $5.6 million for the year ended  September 30, 1995
in the absence of the prior year's $866,000  cumulative  effect of the change in
method of accounting for income taxes. The additional reasons for the changes in
net earnings are discussed more specifically below.

INTEREST INCOME

     The additional  interest income  generated by the $43.0 million increase in
average balance of loans  receivable in 1995 over the prior year slightly offset
the 23 basis point  decrease in loan yield from the prior year to produce a $2.6
million increase in interest income from loans. The increase in loans receivable
was  primarily a result of strong loan  demand and less loan  refinancing  which
resulted in greater net loan growth for 1995 despite less loan  production.  The
decrease  in loan  yield  was  primarily  a result of the  refinancing  to lower
yielding  loans over the  previous  year while  rates were still  declining  and
initiating an adjustable rate program this year  emphasizing  rates below market
rates  (teaser  rates) to  generate  adjustable  rate loan  volume.  

                                       20
<PAGE>
     The average balance of investment  securities  decreased by $4.9 million in
1995  compared  with 1994. A 34 basis point  increase in the yield on investment
securities from the prior year did not offset the decrease in volume,  resulting
in a $172,000 decrease in interest income from investment  securities.  Interest
income on federal funds sold increased $401,845 in 1995 from 1994 as a result of
investing  the  proceeds  of the stock  sale  during  the  subscription  period.
Investment  securities  include an investment of $12.6 million in a U.S. Federal
securities  mutual bond fund  classified  as  available  for sale. A decrease in
interest rates during 1995 resulted in increasing the carrying value of the U.S.
Federal securities mutual bond fund at September 30, 1995 by $382,000.

INTEREST EXPENSE

     Savings deposit interest expense  increased $2.9 million for the year ended
September 30, 1995 as compared to the  comparable  period in 1994.  The increase
was  attributable to a $20.8 million increase in the average balance of deposits
during this period, which can be primarily attributed to the increase in savings
account activity during the stock sale subscription period. The weighted average
rate paid on deposits increased 51 basis points from 4.46% during the year ended
September 30, 1994 to 4.97% during the year ended  September  30, 1995.  Average
FHLB advances  outstanding during this period were $15.3 million with a weighted
average rate of 6.21%.

PROVISION FOR LOAN LOSSES

     The  provision  for loan losses was  $120,000,  recoveries  were zero,  and
charge offs were $67,000  during the year ended  September  30, 1995 compared to
$150,000 and charge offs of $23,000  during the year ended  September  30, 1994,
for a net increase in provision for the year of $53,000.  At September 30, 1995,
the  allowance  for loan  losses was equal to 106.60% of  non-performing  assets
compared to 311.98% at September 30, 1994. The decrease in the coverage ratio at
year end 1995 was the result of foreclosure  proceedings  initiated  against two
properties,  which  totalled  $445,343  of the  total  non-performing  assets of
$758,000.  No losses are  expected on these loans as the loans are well  secured
with an estimated value of $745,000, or an excess loan to value of $299,657.

NON-INTEREST INCOME

     Non-interest  income increased  $29,000,  or 8.2%, to $381,000 for the year
ended  September 30, 1995 from  $352,000 for the year ended  September 30, 1994.
The increase was mainly  attributable to increased  income from the sale of real
estate owned.

NON-INTEREST EXPENSE

     Non-interest  expense  decreased  $30,000,  or  0.5%,  for the  year  ended
September  30, 1995,  from a total of $6.03  million for the prior year to $6.00
million for the year ended  September 30, 1995. Of this  decrease,  $200,000 was
attributable  to a  decrease  in  compensation  and  benefit  expense  in  1995,
primarily  reflecting certain one-time increased bonus payments to employees and
increased fees paid to directors in the prior year. This was partially offset by
an  increase  in SAIF  insurance  premiums,  primarily  as a result of growth in
deposits,  costs  incident to greater loan volume and  increased  occupancy  and
personnel  expenses as a result of the new Klamath  Falls,  Oregon  branch.  The
ratio of  non-interest  expense to average  total assets was 1.43% and 1.29% for
the years ended September 30, 1994 and 1995, respectively

                                       21
<PAGE>

INCOME TAXES

     Effective  October  1, 1993,  the  Association  adopted  SFAS No. 109 which
requires a change from the  deferred  method of  accounting  for income taxes of
Accounting  Principles Board ("APB") No. 11 to the asset and liability method of
accounting for income taxes.  The  implementation  of SFAS No. 109 decreased net
earnings by $866,000 for the year ended  September  30, 1994.  

     The  provision  for  income  taxes  decreased  $517,000  for the year ended
September 30, 1995 compared with the prior year,  primarily as a result of lower
pretax earnings.

<TABLE>

(Graph in hardcopy report)
   TOTAL NET EARNINGS
    (in thousands)

<CAPTION>
             NET 
YEAR    EARNINGS
<S>       <C>  
1996      $6,110
1995       5,574
1994       5,288
1993       7,157
1992       4,745                                   
</TABLE>

                                       22
<PAGE>

                            COMMON STOCK INFORMATION

     Since October 4, 1995,  Klamath First Bancorp's  common stock has traded on
the National  Association of Security Dealers  Automated  Quotations  ("NASDAQ")
National  Market System under the symbol "KFBI".  As of October 11, 1996,  there
were  approximately  4,400  shareholders  of record or through nominee or street
name  accounts  with brokers.  

     The following  represents reported high and low trading price and dividends
declared each respective quarter of fiscal 1996. Information as to market prices
for the Company's common stock is not presented for fiscal year 1995 because the
shares were not yet issued and outstanding.
 
<TABLE>
<CAPTION>

                                                 
                                                  DIVIDEND
FISCAL 1996                   HIGH         LOW    DECLARED
                            ------     -------   ----------
<S>                         <C>        <C>       <C>       
First Quarter ...........   13 3/4     12 1/16   $    0.050
                                                 
Second Quarter ..........   13 3/4      12 1/2   $    0.065
                                                 
Third Quarter ...........   14 5/8          13   $    0.065
                                                 
Fourth Quarter ..........   14 3/4      13 3/8   $    0.070
</TABLE>

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

                                       23
<PAGE>

INDEPENDENT AUDITORS'  REPORTS

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

     We have  audited the  accompanying  consolidated  balance  sheet of Klamath
First Bancorp, Inc. and subsidiary (the "Company") as of September 30, 1996, and
the related consolidated  statement of earnings,  shareholders' equity, and cash
flows for the year then ended. These consolidated  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects, the financial position of Klamath First Bancorp, Inc. and
subsidiary as of September  30, 1996,  and the results of their  operations  and
their cash flows for the year then ended, in conformity with generally  accepted
accounting principles.



/s/ Deloitte & Touche LLP
--------------------------
Deloitte & Touche LLP



Portland, Oregon
November 25, 1996



                                       24
<PAGE>


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

     We have  audited the  accompanying  consolidated  balance  sheet of Klamath
First Bancorp,  Inc. and  subsidiaries as of September 30, 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for the
two  years  then  ended.  These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  statements based on our audits. 

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Klamath
First Bancorp, Inc. and subsidiaries as of September 30, 1995 and the results of
their operations and their cash flows for the two years then ended in conformity
with generally  accepted  accounting  principles.  

     As  discussed  in  note 1 to the  consolidated  financial  statements,  the
Company  changed its method of accounting  for certain  investments  in debt and
equity  securities  and its method of accounting for income taxes in fiscal 1994
to adopt the provisions of Financial  Accounting  Standards Board's Statement of
Financial   Accounting   Standards  (SFAS)  No.  115,  "Accounting  for  Certain
Investments in Debt and Equity  Securities",  and SFAS No. 109,  "Accounting for
Income Taxes", respectively.


/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP

Portland, Oregon
November 3, 1995


                                       25
<PAGE>

<TABLE>
        KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                  September 30,
                                                       ------------------------------
ASSETS                                                          1996             1995
                                                       -------------    -------------
<S>                                                    <C>              <C>          
Cash and due from banks ............................   $   6,841,554    $   4,033,723
                                                                        
Interest bearing deposits ..........................               -          994,157
                                                                        
Federal funds sold .................................       9,338,079      170,966,390
                                                       -------------    -------------
Total cash and cash equivalents ....................      16,179,633      175,994,270
                                                                        
Investment securities available for sale,
at fair value (amortized cost:
$77,071,211 and $13,723,044) .......................      75,986,611       12,605,654
                                                                        
Investment securities held to maturity,
at amortized cost (fair value:
$9,860,165 and $42,178,800) ........................       9,827,193       42,209,497
                                                                        
Mortgage backed and related securities
available for sale, at fair value
(amortized cost: $74,249,350) ......................      74,109,321                -                
                                                                        
Mortgage backed and related securities
held to maturity, at amortized cost
(fair value: $6,736,007) ...........................       6,783,001                -
                                                                        
Loans receivable, net ..............................     473,555,988      403,543,725
                                                                        
Real estate owned ..................................          69,483           24,384
                                                                        
Premises and equipment, net ........................       4,964,262        5,231,903
                                                                        
Stock in Federal Home Loan Bank of
Seattle, at cost ...................................       4,773,800        4,425,900
                                                                        
Accrued interest receivable, net ...................       5,037,285        3,431,594
                                                                        
Other assets .......................................         682,814          372,654
                                                       -------------    -------------
Total assets .......................................   $ 671,969,391    $ 647,839,581
                                                       =============    =============
                                                                        



                                       26
<PAGE>

LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                        
<CAPTION>
                                                                  September 30,
                                                       ------------------------------
LIABILITIES                                                     1996             1995
                                                       -------------    -------------
<S>                                                    <C>              <C>          
                                                                        
Savings deposits ...................................   $ 399,673,180    $ 384,379,531
                                                                        
Stock over subscription ............................               -       65,685,300
                                                                        
Accrued interest on savings deposits ...............         712,408        1,028,766
                                                                        
Advances from borrowers for taxes
and insurance ......................................       7,831,127        7,966,422
                                                                        
Advances from Federal Home Loan Bank
of Seattle .........................................      90,000,000       20,000,000
                                                                        
Short term borrowings ..............................      14,904,400                -
                                                                        
Accrued interest on borrowings .....................         323,163                -
                                                                        
Pension liability ..................................         668,088          616,035
                                                                        
Deferred federal and state income taxes ............         735,596          896,876
                                                                        
Other liabilities ..................................       3,710,455        2,581,586
                                                       -------------    -------------
Total liabilities ..................................     518,558,417      483,154,516
                                                       -------------    -------------
                                                                    
SHAREHOLDERS' EQUITY
                                                                        
Preferred stock, $.01 par value,
500,000 shares authorized; none issued                             -                -
                                                       
Common stock, $.01 par value,
35,000,000 shares authorized,
1996 - 11,612,470
issued, 10,242,360 outstanding;
1995 - issued and outstanding 12,233,125 shares ....         116,124          122,331

Additional paid-in capital .........................     110,762,678      119,230,653
                                                                        
Retained earnings - substantially restricted .......      59,082,479       55,811,362
                                                                        
Unearned shares issued to ESOP .....................      (8,807,850)      (9,786,500)
                                                                        
Unearned shares issued to MRDP .....................      (6,694,470)               -
                                                                        
Net unrealized loss on securities available for sale      (1,047,987)        (692,781)
                                                       -------------    -------------
Total shareholders' equity .........................     153,410,974      164,685,065
                                                       -------------    -------------
Total liabilities and shareholders' equity .........   $ 671,969,391    $ 647,839,581
                                                       =============    =============

See notes to consolidated financial statements.
</TABLE>

                                       27
<PAGE>
<TABLE>
  KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS
<CAPTION>
                                                     Years ended September 30,
                                           ---------------------------------------
INTEREST INCOME                                   1996          1995          1994
                                           -----------   -----------   -----------
<S>                                        <C>           <C>           <C>       
Loans receivable .......................   $35,261,655   $30,116,911   $27,511,193
                                                                       
Mortgage backed and related securities .     3,004,823             -             -
                                                                       
Investment securities ..................     5,862,520     4,138,524     4,393,812
                                                                       
Federal funds sold .....................     1,258,614       721,940       320,095
                                                                       
Interest bearing deposits ..............       261,811       129,716       182,516
                                           -----------   -----------   -----------
Total interest income ..................    45,649,423    35,107,091    32,407,616
                                           -----------   -----------   -----------
INTEREST EXPENSE
                                                                       
Savings deposits .......................    20,251,039    19,310,599    16,370,065
                                                                       
FHLB advances ..........................     2,689,790       949,059             -
                                                                       
Other ..................................       345,698       181,515       184,336
                                           -----------   -----------   -----------
Total interest expense .................    23,362,896    20,441,173    16,554,401
                                           -----------   -----------   -----------
Net interest income ....................    23,286,527    14,665,918    15,853,215

Provision for loan losses ..............       120,000       120,000       150,000
                                           -----------   -----------   -----------
Net interest income after provision
for loan losses ........................    22,242,896    14,545,918    15,703,215
                                           -----------   -----------   -----------
NON-INTEREST INCOME
                                                                       
Fees and service charges ...............       260,320       185,053       143,829
                                                                       
Gain on sale of real estate owned ......        22,233        84,022        49,725
                                                                       
Other income ...........................       239,105       112,090       158,544
                                           -----------   -----------   -----------
Total non-interest income ..............       521,658       381,165       352,098
                                           -----------   -----------   -----------
NON-INTEREST EXPENSE
                                                                       
Compensation, employee benefits and
related expense ........................     4,476,052     2,753,726     2,953,508
                                                                       
Occupancy expense ......................       971,431       917,364       821,365
                                                                       
Data processing expense ................       343,319       318,819       282,064
                                                                       
Insurance premium expense ..............       907,825       877,366       818,311
                                                                       
Special SAIF assessment ................     2,472,954             -             -
                                                                       
Loss on sale of real estate owned ......         6,271             -             -
                                                                       
Realized loss on U.S. Federal
securities mutual bond fund ............     1,642,625             -             -
                                                                       
Other expense ..........................     1,421,753     1,136,780     1,159,210
                                           -----------   -----------   -----------
Total non-interest expense .............    12,242,230     6,004,055     6,034,458
                                           -----------   -----------   -----------
</TABLE>


                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                     Years ended September 30,
                                           ---------------------------------------
INTEREST INCOME                                   1996          1995          1994
                                           -----------   -----------   -----------
<S>                                        <C>           <C>           <C>       
Earnings before income taxes and
cumulative effect of a change
in accounting principle ................    10,522,324     8,923,028    10,020,855
                                                                       
Provision for income tax ...............     4,412,527     3,348,925     3,866,001
                                           -----------   -----------   -----------
Net earnings before cumulative
effect of a change in accounting
principle ..............................     6,109,797     5,574,103     6,154,854
                                                                       
Cumulative effect at October 1, 1993
of a change in accounting
for income taxes .......................             -             -       866,518
                                           -----------   -----------   -----------
Net earnings ...........................   $ 6,109,797   $ 5,574,103   $ 5,288,336
                                           ===========   ===========   ===========

Earnings per common share (based on
weighted average shares outstanding) ...   $       .56           N/A           N/A
                                                                       
Weighted average number of shares 
outstanding ............................    11,004,939           N/A           N/A
                                                                       

See notes to consolidated financial statements.
</TABLE>


                                       29
<PAGE>

<TABLE>
                     KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
                                                 Additional                  Unearned    Unrealized       Unearned            Total
                     Common Stock Common Stock       paid-in     Retained  ESOP shares gain(loss) on  shares issued   shareholders'
                           Shares       Amount       capital     earnings      at cost    securities        to MRDP          equity
                     ------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
<S>                   <C>              <C>      <C>           <C>          <C>          <C>             <C>            <C>         
Balance at 
October 1, 1993 ..... $         -      $     -  $          -  $44,948,923  $         -  $         -     $       -      $ 44,948,923

Unrealized loss on
securities available 
for sale ............           -            -             -            -            -     (929,615)             -         (929,615)

Net earnings ........           -            -             -    5,288,336            -            -              -        5,288,336
                     ------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at 
September 30, 1994 ..           -            -             -   50,237,259            -     (929,615)             -       49,307,644
                                
Issuance of common 
stock ...............  12,233,125      122,331   119,230,653            -   (9,786,500)           -              -      109,566,484

Unrealized gain on
securities avail-
able for sale .......           -            -             -            -            -      236,834              -          236,834

Net earnings ........           -            -             -    5,574,103            -            -              -        5,574,103
                     ------------ ------------ ------------- ------------ ------------ ------------- -------------- ---------------
Balance at 
September 30, 1995 ..  12,233,125      122,331   119,230,653   55,811,362   (9,786,500)    (692,781)             -      164,685,065

Cash dividends ......           -            -             -   (2,838,680)           -            -              -       (2,838,680)

Earned ESOP shares ..           -            -       417,652            -      978,650            -              -        1,396,302

Unrealized loss on
investments available
for sale ............           -            -             -            -            -     (355,206)             -         (355,206)

Unearned shares issued 
to MRDP Trust .......           -            -             -            -            -            -     (6,694,470)      (6,694,470)


Stock retirement .....   (620,655)       (6,207)  (8,885,627)           -            -            -              -       (8,891,834)

Net earnings .........          -             -            -    6,109,797            -            -              -        6,109,797
                      ------------ ------------ ------------ ------------ ------------ ------------- -------------- ---------------
Balance at September 
30, 1996 .............$11,612,470      $116,124 $110,762,678  $59,082,479  ($8,807,850) ($1,047,987)    ($6,694,47)    $153,410,974
                      ============ ============ ============ ============ ============ ============= ============== ===============

See notes to consolidated financial statements.


                                       30
<PAGE>

            KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
                                                                          Years ended September 30,                               
                                                          -----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES                               1996             1995             1994
                                                          -------------    -------------    -------------                        
<S>                                                       <C>              <C>              <C>          
Net earnings ..........................................   $   6,109,797    $   5,574,103    $   5,288,336
                                                          -------------    -------------    -------------                      
ADJUSTMENTS TO RECONCILE NET EARNINGS
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES

Depreciation .........................................          403,074          360,069          317,589
                                                                                            
Provision for loan losses .............................         120,000          120,000          150,000
                                                                                            
Compensation expense related to ESOP benefit ..........       1,396,302                -                -
                                                                                            
Net amortization of premiums paid
on investment and mortgage backed
and related securities ................................         210,599          204,444          246,771
                                                                                            
Realized loss on sale of U.S. Federal
securities mutual bond fund ...........................       1,642,625                -                -
                                                                                            
Increase in deferred loan fees, net of amortization ...         703,055          490,802          914,139
                                                                                            
Accretion of discounts on purchased loans .............         (14,683)          (7,239)         (26,359)
                                                                                            
Net gain on sale of real estate owned and premises and
equipment .............................................          (5,209)         (33,544)         (58,811)
                                                                                            
FHLB stock dividends ..................................        (347,900)        (269,600)        (352,600)
                                                                                            
CHANGES IN ASSETS AND LIABILITIES
                                                                                            
Accrued interest receivable ...........................      (1,605,691)        (160,744)        (166,118)
                                                                                            
Other assets ..........................................        (310,160)         188,504          (23,691)
                                                                                            
Accrued interest on savings deposits ..................        (316,358)         630,370          (34,495)
                                                                                            
Accrued interest on borrowings ........................         323,163                -                -
                                                                                            
Pension liabilities ...................................          52,053           58,020                -
                                                                                            
Deferred federal and state income taxes ...............        (409,246)         746,966          532,517
                                                                                            
Other liabilities .....................................         315,996         (185,361)         478,936
                                                          -------------    -------------    -------------                       
Total adjustments .....................................       2,157,620        2,142,687        1,977,878
                                                          -------------    -------------    -------------                        
Net cash provided by operating activities .............       8,267,417        7,716,790        7,266,214
                                                          -------------    -------------    -------------                          


                                       31
<PAGE>

<CAPTION>
                                                                         Years ended September 30,                               
                                                          -----------------------------------------------
                                                                   1996             1995             1994
                                                          -------------    -------------    -------------                     
CASH FLOWS FROM INVESTING ACTIVITIES
<S>                                                       <C>              <C>              <C>          
Proceeds from maturity of investment securities held to
maturity ..............................................      69,552,392        7,006,177                -
                                                                                            
Principal repayments received on mortgage backed and
related securities ....................................      12,083,872                -                -
                                                                                            
Principal repayments received on loans ................      64,529,602       40,398,099       79,225,557
                                                                                            
Loan originations .....................................    (135,566,747)     (84,714,297)    (130,024,113)
                                                                                            
Purchase of investment securities held to maturity ....     (42,971,553)      (4,855,539)        (537,478)
                                                                                            
Purchase of investment securities available for sale ..     (60,969,781)               -                -
                                                                                            
Purchase of mortgage backed and related securities held
to maturity ...........................................      (7,423,182)               -                -
                                                                                            
Purchase of mortgage backed and related securities 
available for sale ....................................     (84,123,187)               -                -

                                                                                            
Proceeds from sale of real estate owned and premises 
and equipment .........................................         177,595          359,033          406,417
                                                                                            
Purchases of premises and equipment ...................        (136,406)      (1,167,757)        (553,602)
                                                          -------------    -------------    -------------                       
Net cash used in investing activities .................    (184,847,395)     (42,974,284)     (51,483,219)
                                                          -------------    -------------    -------------                         


                                       32
<PAGE>

<CAPTION>
                                                                          Years ended September 30,                                
                                                          -----------------------------------------------
                                                                   1996             1995             1994
                                                          -------------    -------------    -------------                     
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                       <C>              <C>              <C>          
Increase/(decrease) in savings deposits, 
net of withdrawal .....................................   $  15,293,649    $  (5,370,987)    $ 39,798,168
                                                                                           
Proceeds from FHLB advances ...........................     105,000,000       20,000,000                -
                                                                                           
Repayments of FHLB advances ...........................     (35,000,000)               -                -
                                                                                          
Proceeds from short term borrowings ...................      21,938,300                -                -
                                                                                        
Repayments of short term borrowings ...................      (7,033,900)               -                - 
                                                                                           
Proceeds from issuance of common stock ................               -      121,268,633                -
                                                                                           
Proceeds from stock over subscription .................               -       65,685,300                -
                                                                                            
Repayment from stock over subscription ................     (65,685,300)               -                -
                                                                                           
Funding provided to ESOP for purchase of common 
stock .................................................               -       (9,786,500)               -                
                                                                                           
Funding provided to MRDP Trust for purchase of common 
stock .................................................      (6,694,470)               -                -
                                                                                         
Stock retirement ......................................      (8,891,834)               -                - 
                                                                                            
Advances from borrowers for tax and insurance .........        (135,297)        (101,700)         496,161
                                                                                                         
Dividends paid ........................................      (2,025,807)               -                - 
                                                          -------------    -------------    -------------                     
Net cash provided by financing activities .............      16,765,341      191,694,746       40,294,329
                                                          -------------    -------------    -------------                        
Net (decrease) increase in cash and cash equivalents ..    (159,814,637)     156,437,252       (3,922,676)
                                                                                            
Cash and cash equivalents at beginning of year ........     175,994,270       19,557,018       23,479,694
                                                          -------------    -------------    -------------                     
Cash and cash equivalents at end of year ..............   $  16,179,633    $ 175,994,270     $ 19,557,018
                                                          =============    =============     ============
                                                                                            

SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID
                                                                                            
Interest paid .........................................   $  23,483,212    $  19,810,803    $ 16,589,906
                                                                                            
Income taxes paid .....................................       4,555,053        2,570,000       4,020,000
                                                                                           
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
                                                                                           
Transfer of investment securities from held to 
maturity to available for sale at estimated fair 
market value ..........................................   $  27,171,074               $-              $-
                                                                                           
Transfer of mortgage backed and related securities 
from held to maturity to available for sale at 
estimated fair value...................................       1,717,890                -               -
                                                                                           
Net unrealized gain (loss) on securities available 
for sale ..............................................        (355,206)         236,834        (929,615)
                                                                                           
Dividends declared and accrued in other liabilities ...         812,873                -               -

See notes to consolidated financial statements.
</TABLE>


                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)Summary of Significant Accounting Policies

Principles  of  Consolidation  

     The accompanying  consolidated financial statements include the accounts of
Klamath  First  Bancorp,  Inc.  (the  Company) and its  wholly-owned  subsidiary
Klamath  First  Federal  Savings and Loan  Association  (the  Association).  The
Company became the holding  company of the  Association  upon  conversion of the
Association from a federally-chartered  mutual savings and loan association to a
federally-chartered  capital stock savings and loan association  (Note 11). This
transaction  has  been  accounted  for in a  manner  similar  to a  "pooling  of
interests" in accordance with APB Opinion No. 16, "Business Combinations."

     The Company's consolidated financial statements also include the assets and
liabilities of First Service  Corporation  of Southern  Oregon ("FSC") which was
wholly-owned  by the  Association.  As of July  31,  1996,  FSC  was  officially
liquidated  into the  Association.  All  significant  intercompany  balances and
transactions have been eliminated in consolidation for September 30, 1995.

Nature of Operations

     The Company and subsidiary provide banking and limited nonbanking  services
to its  customers  who are located  principally  in the  Klamath,  Jackson,  and
Deschutes  counties of Southern and Central  Oregon.  These  services  primarily
include  attracting  deposits  from the  general  public and using  such  funds,
together  with  other  borrowings,  to  invest in  various  real  estate  loans,
investment securities, and mortgage backed and related securities.

Use of Estimates

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

Investment Securities

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

     During   December  1995,  the  Association   reclassified   $27,171,074  of
investment  securities and $1,717,890 of mortgage backed and related  securities
from held to maturity to  available  for sale at fair  values,  with  unrealized
gains and losses of $200,508 and $100,421,  respectively.  The  reclassification
was made in accordance  with the Financial  Accounting  Standards Board ("FASB")
special report,  "A Guide to  Implementation  of Statement 115 on Accounting for
Certain  Investments in Debt and Equity  Securities",  that permitted a one-time
reassessment  of the  appropriateness  of the held to  maturity  classification,
without  affecting  the  classification  of the  remaining  securities  held  to
maturity.

Stock Investments

     The Company  held stock in the  Federal  Home Loan Bank  ("FHLB")  and U.S.
Federal  securities  mutual  bond fund at  September  30,  1996 and 1995.  These
investments are carried at the lower of cost or fair value.


                                       34
<PAGE>

Provision for Loan Losses

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

     Delinquent  interest on loans past due 90 days or more is charged off or an
allowance  established  by a charge to income equal to all  interest  previously
accrued 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.  

     Effective October 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS No. 118,  "Accounting by
Creditors for Impairment of a Loan-Income  Recognition and  Disclosures."  These
statements address the disclosure  requirements and allocations of the allowance
for credit losses for certain  impaired  loans. A loan within the scope of these
statements is considered impaired when, based on current information and events,
it is  probable  that a  creditor  will be unable to  collect  all  amounts  due
according to the contractual  terms of the loan agreement,  including  scheduled
interest payments.

     When a loan has  been  identified  as being  impaired,  the  amount  of the
impairment  is  measured  by using  discounted  cash  flows,  except  when it is
determined  that the sole source of repayment  for the loan is the  operation or
liquidation of the underlying  collateral.  In such case, the current fair value
of the  collateral,  reduced by costs to sell, is used.  When the measurement of
the impaired loan is less than the recorded  investment  in the loan  (including
accrued  interest,  net deferred loan fees or costs, and unamortized  premium or
discount), an impairment is recognized by creating or adjusting an allocation of
the allowance for credit losses.  SFAS No. 114, as amended,  does not change the
timing of charge-offs of loans to reflect the amount  ultimately  expected to be
collected. At September 30, 1996, the Company had no loans deemed to be impaired
as defined by SFAS 114.

Depreciation of Premises and Equipment

     Premises and equipment are depreciated on the straight-line  basis over the
estimated  useful lives of the various  classes of assets from their  respective
dates of acquisition.

Taxes on Income

     The Company has adopted SFAS No. 109,  "Accounting for Income Taxes", which
caused a cumulative  effect of $866,518 in the September  30, 1994  consolidated
statement of  earnings.  Under the asset and  liability  method of SFAS No. 109,
deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.

Loan Origination Fees

     Loan origination fees and direct costs are deferred and recognized over the
contractual  lives of the related  loans as an  adjustment  of the loans'  yield
using the level-yield method.


                                       35
<PAGE>

Unearned Discounts

     Loan discounts are accreted to income over the average lives of the related
loans using the level-yield interest method, adjusted for estimated prepayments.

Real Estate Owned

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

Pension Cost

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

Earnings Per Common Share

     Earnings per common share is computed  based on weighted  average number of
shares of common stock and common stock  equivalents  assumed to be  outstanding
during the period.  Earnings per common share were not  calculated for September
30, 1995, as no shares were outstanding during the year. (Note 11).

Cash Equivalents

     Cash  equivalents  are  considered  to be cash held as demand  deposits  at
various banks and regulatory agencies. In the consolidated financial statements,
"cash and due from banks",  "interest  bearing cash deposits" and "Federal funds
sold" are considered to be cash equivalents.

(2) Cash and Due from Banks

     The Company is required to  maintain an average  reserve  balance  with the
Federal  Reserve Bank, or maintain such reserve balance in the form of cash. The
amount of this required reserve balance was approximately  $475,000 and $469,000
at September  30, 1996 and 1995,  respectively,  and was met by holding cash and
maintaining an average  balance with the Federal  Reserve Bank in excess of this
amount.


                                       36
<PAGE>

(3)Investments and Mortgage Backed and Related Securities

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

                                                         September 30, 1996
                                            ----------------------------------------------                                      
                                             Cost Basis or   Gross Unrealized         Fair
                                            Amortized Cost  Gains      Losses        Value                          
                                            -------------- ------  ----------  -----------     
Investment securities available for sale
<S>                                            <C>         <C>     <C>         <C>        
U.S. Federal securities
mutual bond fund ...........................   $12,080,418    $ -         $ -  $12,080,418
                                                                                                       
U.S. GOVERNMENT OBLIGATIONS
                                                                                                       
Maturing after one year through five years .    43,720,065      -     875,092   42,844,973
                                                                                                       
Maturing after five years through ten years     15,996,758      -     217,858   15,778,900
                                                                                                       
STATE AND MUNICIPAL OBLIGATIONS
                                                                                                       
Maturing after one year through five years .       250,000    820           -      250,820
                                                                                                       
CORPORATE OBLIGATIONS
                                                                                                       
Maturing after one year through five years .     5,023,970  7,530           -    5,031,500
                                            -------------- ------  ----------  -----------     
                                               $77,071,211 $8,350  $1,092,950  $75,986,611
                                            ============== ======  ==========  ===========     
                                                                                                       

     On October  31,  1996 the Company  sold its  interest  in the U.S.  Federal securities
mutual bond in the amount of $12,080,418 resulting in a realized loss of  $1,642,625.  The
realized  loss has  been  appropriately  reflected  in the consolidated financial statements
as of September 30, 1996.
<CAPTION>

                                                             September 30, 1996
                                                --------------------------------------------
                                                 Amortized      Gross Unrealized       Fair 
                                                      Cost      Gains     Losses       Value
                                                ----------   -------- ----------   ---------                   
Investment securities held
to maturity:
                                                                                                                
STATE AND MUNICIPAL
OBLIGATIONS
<S>                                             <C>          <C>         <C>       <C>       
                                                                                                                
Maturing within one year ....................   $  181,351   $     -     $   523   $  180,828
                                                                                                                
Maturing after one year through five years ..      535,680         -       5,893      529,787

Maturing after five years through ten years .      510,388     28,262          -      538,650

                                                                                                                
CORPORATE OBLIGATIONS
                                                                                                                
Maturing within one year ....................    6,599,774      11,926         -    6,611,700
                                                                                                                
Maturing after one year through five years...    2,000,000           -       800    1,999,200
                                                ----------   -------- ----------   ---------                   
                                                $9,827,193   $  40,188   $ 7,216   $9,860,165
                                                ==========   =========   =======   ==========


                                       37
<PAGE>
<CAPTION>
          
                                                         September 30, 1995
                                            --------------------------------------------------------
                                             Cost Basis Or          Gross Unrealized            Fair
                                            Amortized Cost        Gains         Losses         Value
                                            --------------   ----------    -----------  ------------                             
<S>                                            <C>           <C>           <C>           <C>        
Investment securities available for sale
U.S. Federal securities mutual bond fund ...   $13,723,044            $-   $ 1,117,390   $12,605,654
                                            ==============   ===========   ===========   ===========            
Investment securities held to maturity
                                                                                         
U.S. GOVERNMENT OBLIGATIONS
                                                                                         
Maturing after one year through five years .   $13,079,782            $-   $   143,532   $12,936,250
                                                                                         
Maturing after five years through ten years     13,996,443        62,597             -    14,059,040
                                                                                         
Maturing after ten years ...................     1,885,225             -         7,282     1,877,943
                                                                                         
STATE AND MUNICIPAL OBLIGATIONS
                                                                                         
Maturing after five years through ten years        511,874        40,493             -       552,367
                                                                                         
CORPORATE OBLIGATIONS
                                                                                         
Maturing within one year ...................     6,032,223        21,097             -     6,053,320
                                                                                         
Maturing after one year through five years .     6,703,950             -         4,070     6,699,880
                                            --------------   -----------   -----------  ------------                             
                                               $42,209,497   $   124,187   $   154,884   $42,178,800
                                            ==============   ===========   ===========   ===========                        



<CAPTION>
                                                         September 30, 1996
                                            --------------------------------------------------------
                                                                    Gross Unrealized            Fair
                                            Amortized Cost        Gains         Losses         Value
                                            --------------    ----------   -----------  ------------                             
                                                                                        
MORTGAGE BACKED AND RELATED SECURITIES
AVAILABLE FOR SALE
<S>                                            <C>           <C>           <C>           <C>        
FNMA maturing after ten years ..............   $15,905,450   $    68,004   $    14,292   $15,959,162
                                                                                         
FHLMC maturing after ten years .............    39,204,476        61,911        87,527    39,178,860
                                                                                         
SBA maturing after ten years ...............    19,139,424         1,902       170,027    18,971,299
                                            --------------    ----------   -----------  ------------                             
                                               $74,249,350   $   131,817   $   271,846   $74,109,321
                                            ==============   ===========   ===========   ===========                        
                                                                                       


                                       38
<PAGE>

<CAPTION>
                                                         September 30, 1996
                                            --------------------------------------------------------
                                                                    Gross Unrealized            Fair
                                            Amortized Cost        Gains         Losses         Value
                                            --------------    ----------   -----------  ------------                             
MORTGAGE BACKED AND RELATED SECURITIES 
HELD TO MATURITY
                                                                                         
<S>                                            <C>                    <C>  <C>           <C>        
GNMA maturing after ten years ..............   $ 6,783,001            $-   $    46,994   $ 6,736,007
                                            ==============       ======    ===========  ============                             
                                                                                      
</TABLE>

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

     The Company pledged investment  securities of $10,146,000 and $8,990,000 to
secure public deposits at September 30, 1996 and 1995, respectively.

     The Company has also pledged securities of $15,177,000 to secure short-term
borrowings of reverse repurchase agreements at September 30, 1996. (Note 9)



                                       39
<PAGE>


4) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                       September 30,
                                                ---------------------------
                                                        1996           1995
                                                ------------   ------------
REAL ESTATE LOANS
<S>                                             <C>            <C>         
Permanent residential 1-4 family ............   $447,004,234   $381,683,453

Multi-family residential ....................      6,555,483      7,432,704

Construction ................................     14,276,158      9,806,875

Commercial ..................................     15,644,797     13,984,331

Land ........................................      1,151,573      1,072,019
                                                ------------   ------------
Total real estate loans .....................    484,632,245    413,979,382
                                                ------------   ------------
NON-REAL ESTATE LOANS

Savings account .............................      1,640,294      1,965,531

Home improvement ............................      1,976,728              -

Other .......................................        302,397        366,828
                                                ------------   ------------
Total non-real estate loans .................      3,919,419      2,332,359
                                                ------------   ------------
Total loans .................................    488,551,664    416,311,741

LESS

Undisbursed portion of loans ................      8,622,476      7,203,187

Deferred loan fees ..........................      5,445,380      4,757,009

Allowance for loan losses ...................        927,820        807,820
                                                ------------   ------------
                                                $473,555,988   $403,543,725
                                                ============   ============

</TABLE>
     The weighted  average interest rate on loans at September 30, 1996 and
1995 was 7.74% and 7.73%, respectively.

     The Company serviced loans owned by others of $1,240,003,  $1,692,000,
and $1,981,000 at September 30, 1996, 1995 and 1994, respectively.


                                       40
<PAGE>

<TABLE>
<CAPTION>
Activity in  allowance  for loan losses is  summarized  as follows:
  
                                            Years ended September 30,
                                        ----------------------------------
                                             1996        1995         1994
                                        ---------   ---------    ---------
<S>                                     <C>         <C>          <C>      
Balance, beginning of year ..........   $ 807,820   $ 754,803    $ 627,550

Charge-offs .........................           -     (66,983)     (22,747)

Additions ...........................     120,000     120,000      150,000
                                        ---------   ---------    ---------
Balance, end of year ................   $ 927,820   $ 807,820    $ 754,803
                                        =========   =========    =========

</TABLE>
5) Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                       September 30,
                                                --------------------------
                                                       1996           1995
                                                -----------    -----------
<S>                                             <C>            <C>        
Land ........................................   $ 1,056,269    $ 1,056,269
                                                               
Office buildings and construction in progress     5,384,136      5,377,006
                                                               
Furniture, fixtures and equipment ...........     1,874,784      1,746,527
                                                               
Automobiles .................................        36,226         36,226
                                                               
Less accumulated depreciation ...............    (3,387,153)    (2,984,125)
                                                -----------    -----------
                                                $ 4,964,262    $ 5,231,903
                                                ===========    ===========


</TABLE>
(6) Accrued Interest Receivable

The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>
                                                         September 30,
                                                  --------------------------
                                                          1996          1995
                                                  ------------   -----------
<S>                                                 <C>           <C>       
Loans receivable ...............................    $3,232,731    $2,774,153

Mortgage backed and related securities .........       765,187             -

Investment securities ..........................     1,039,367       657,441
                                                  ------------   -----------
                                                    $5,037,285    $3,431,594
                                                  ============   ===========
 
</TABLE>



                                       41
<PAGE>

(7) Savings Deposits

The following is a summary of savings deposits:
<TABLE>
<CAPTION>

                                                                September 30,
                                            ------------------------------------------------------              
                                                          1996                         1995
                                                    Amount    Percent            Amount    Percent
                                            --------------    -------      ------------    -------
<S>                                         <C>                <C>         <C>               <C>   
Non-interest checking .....................   $    161,283       0.0%            $    -          -
                                            --------------    -------      ------------    -------
NOW accounts, 2.53% and 2.50%, respectively     24,282,019       6.1         22,037,105        5.7
                                            --------------    -------      ------------    -------
Passbook accounts, 3.05% to 3.30% and 3.00%
to 3.25%, respectively ....................     33,711,189       8.4         37,237,212        9.7
                                            --------------    -------      ------------    -------
Money market deposit accounts, variable
rates of 2.53% to 4.55% and 2.50% to 4.64%,
respectively ..............................     52,330,731      13.1         48,011,632       12.5
                                            --------------    -------      ------------    -------
CERTIFICATE ACCOUNTS
                                                                                                                 
Less than 4% ..............................      1,633,300       0.4          1,943,080        0.5
                                                                                                                 
4.00% to 5.99% ............................    220,873,790      55.3        165,112,903       43.0

6.00% to 7.99% ............................     44,574,877      11.2         83,008,401       21.6
                                                                                                                 
8.00% to 9.99% ............................     22,105,991       5.5         27,029,198        7.0
                                            --------------    -------      ------------    -------
                                               289,187,958      72.4        277,093,582       72.1
                                            --------------    -------      ------------    -------
                                            $  399,673,180     100.0%      $384,379,531      100.0%
                                            ==============    =======      ============    =======


                                       42
<PAGE>

Following is a summary of interest expense on deposits:
<CAPTION>
                                                      Years ended September 30,
                                           ---------------------------------------
                                                  1996          1995          1994
                                           -----------   -----------   -----------
<S>                                        <C>           <C>           <C>        
NOW accounts ...........................   $   546,383   $   542,169   $   557,968

Passbook accounts ......................       982,814     1,235,170     1,183,115

Money market deposit accounts ..........     1,950,419     2,206,038     2,193,356

Certificate accounts ...................    16,835,250    15,395,663    12,489,201
                                           -----------   -----------   -----------
                                            20,314,866    19,379,040    16,423,640

Less early withdrawal penalties ........        63,827        68,441        53,575
                                           -----------   -----------   -----------
Net interest on deposits ...............   $20,251,039   $19,310,599   $16,370,065
                                           ===========   ===========   ===========
 
</TABLE>
The weighted  average  interest rate of savings  deposits was 5.26% and 4.96% at
September 30, 1996 and 1995, respectively.



At September 30, 1996, deposit maturities were as follows:

<TABLE>
<CAPTION>
<S>                                                          <C>         
Within 1 year ............................................   $212,876,848
                                           
1 year to 3 years ........................................     74,462,772
                                           
3 years to 5 years .......................................     67,092,484
                                           
Thereafter ...............................................     45,241,076
                                                             -----------
                                                             $399,673,180
                                                             ============

Deposits  in  excess of  $100,000  aggregated  $64,936,532  and  $67,387,146  at
September  30, 1996 and 1995,  respectively.  Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").  
</TABLE>


                                       43
<PAGE>

(8) Advances from FHLB 

     As a member of the FHLB, the Association  maintains a credit line that is a
percentage  of their  total  regulatory  assets,  subject  to  collateralization
requirements.  At September  30,  1996,  the credit line was 30 percent 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,  securities  of the U.S.  Government  and agencies
thereof and cash on deposit  with the FHLB.  At  September  30, 1996 the minimum
book value of eligible collateral pledged for these borrowings was $103,061,850.

<TABLE>

Scheduled maturites of advances from the FHLB were as follows:
<CAPTION>
                                                                            September 30,
                                                -------------------------------------------------------------------------
                                                            1996                                       1995
                                                                     Range of                                    Range of 
                                                     Amount    Interest Rates                    Amount    Interest Rates   
                                                -----------    --------------            --------------    --------------     
FHLB ADVANCES
<S>                                             <C>               <C>                       <C>                     <C>  
Due within one year .........................   $65,000,000       5.40%-5.64%               $20,000,000             5.94%
                                                                                                      
After three but within four years ...........    25,000,000       5.53%-5.74%                         -                -
                                                -----------                              --------------       
                                                $90,000,000                                 $20,000,000
                                                ===========                              ==============                       


Financial  data  pertaining  to the  weighted  average  cost,  the level of FHLB advances and the related interest expense
were as follows:
<CAPTION>
                                                                                    Year ended September 30,
                                                                              ----------------------------------
                                                                                     1996           1995    1994
                                                                              -----------    -----------    ----
<S>                                                                           <C>            <C>              <C>
Weighted average interest rate at end of year .............................          5.50%          5.94%      -

Weighted daily average interest rate during the year ......................          5.60%          6.21%      -

Daily average FHLB advances ...............................................   $47,986,339    $15,304,932      $-

Maximum FHLB advances at any month end ....................................    90,000,000     22,000,000       -

Interest expense during the year ..........................................     2,689,790        949,059       -

</TABLE>


                                       44
<PAGE>

(9) Short Term Borrowings

Securities  sold  under  agreements  to  repurchase  in  1996  consisted  of the
following:

Reverse repurchase agreements              $14,904,400

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

     All of the reverse  repurchase  agreements were due within 30 days and were
renewed  subsequent  to  year  end  with  additional  principal  outstanding  of
approximately $53,000 and an interest rate of 5.65%.

<TABLE>
Financial  data  pertaining  to the  weighted  average  cost,  the level of  securities  sold  under
agreements to repurchase and the related interest expense were as follows:
<CAPTION>
                                                                           Year ended September 30,
                                                                         ---------------------------
                                                                                 1996    1995   1994
                                                                         ------------  ------ ------
<S>                                                                       <C>             <C>    <C>
Weighted average interest rate at end of year .........................          5.65%      -      -

Weighted daily average interest rate during the year ..................          5.55%      -      -

Daily average of securities sold under agreements to repurchase .......   $ 3,530,795     $ -    $ -

Maximum securities sold under agreements to repurchase at any month end    14,904,000       -      -

Interest expense during the year ......................................       196,130       -      -


The Company has an unused line of credit totaling $15.0 million with U.S. National Bank of Oregon at
September 30, 1996 and 1995.


                                       45
<PAGE>

(10) Taxes on Income

<CAPTION>
The following is a summary of income tax expense:

                                                     Years ended September 30,
                                              ----------------------------------------
                                                     1996           1995          1994
                                              -----------    -----------   -----------
CURRENT TAXES
<S>                                           <C>            <C>           <C>        
Federal ...................................   $ 4,384,720    $ 2,154,240   $ 3,302,357

State .....................................       437,053        447,719       677,646
                                              -----------    -----------   -----------
Current tax provision .....................     4,821,773      2,601,959     3,980,003
                                              -----------    -----------   -----------
DEFERRED TAXES

Federal ...................................      (372,005)       618,488       (94,385)

State .....................................       (37,241)       128,478       (19,617)
                                              -----------    -----------   -----------
Deferred tax provision ....................      (409,246)       746,966      (114,002)
                                              -----------    -----------   -----------
Provision for income taxes ................   $ 4,412,527    $ 3,348,925   $ 3,866,001
                                              ===========    ===========   ===========


An analysis of income tax expense,  setting  forth the reasons for the variation
from the "expected" Federal corporate income tax rate of 34.0% and the effective
rate provided, is as follows:
<CAPTION>
                                                            Years ended September 30,
                                                           ---------------------------
                                                            1996      1995       1994
                                                           ------    ------     ------
<S>                                                         <C>       <C>        <C>  
Federal "expected" corporate income tax rate ........       34.0%     34.0%      34.0%

State income taxes, net of Federal income tax benefit        2.2       4.4        4.4

Nondeductible ESOP compensation expense .............        4.0         -          -

Other ...............................................        1.7       (.9)        .2
                                                           ------    ------     ------
                                                            41.9%     37.5%      38.6%
                                                           ======    ======     ======
</TABLE>


                                       46
<PAGE>

     Deferred  income  taxes for the years  ended  September  30,  1996 and 1995
reflect  the impact of  "temporary  differences"  between  amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by tax
laws. 

<TABLE>

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

<CAPTION>
                                                              September 30,
                                                       ----------------------
                                                            1996         1995
                                                       ---------   ----------
DEFERRED TAX ASSETS
<S>                                                   <C>          <C>      
Deferred loan fees ................................   $  525,560   $1,157,492
                                                                   
Allowance for losses on loans .....................      369,768      324,634
                                                                   
Unrealized loss on securities available for sale ..      176,643      424,608
                                                                   
Pension liability .................................      263,893      237,173
                                                                   
SAIF special assessment ...........................      976,319            -
                                                                   
Unearned ESOP shares ..............................      129,076            -
                                                                   
Other .............................................            -        3,811
                                                       ---------   ----------
Total gross deferred tax assets ...................    2,441,259    2,147,718
                                                       ---------   ----------
                                                                   
DEFERRED TAX LIABILITIES
                                                                   
FHLB stock dividends ..............................    1,256,630    1,090,832
                                                                   
Tax bad debt reserve in excess of base-year reserve    1,472,206    1,472,206
                                                                   
Other .............................................      448,019      481,556
                                                       ---------   ----------
Total gross deferred tax liabilities ..............    3,176,855    3,044,594
                                                       ---------   ----------
Net deferred tax liability ........................   $  735,596   $  896,876
                                                      ==========   ==========
</TABLE>


     The company has created a valuation  allowance  arising  from the  realized
loss on the U.S. Federal  securities  mutual bond fund of $648,837  offsetting a
deferred tax asset as of September 30, 1996 because management  believes that it
is more likely  than not that the tax asset will not be  realized  by  available
carrybacks,  offsetting  future taxable income from reversing  taxable temporary
differences,  and anticipated  future investment  gains.  There was no valuation
allowance at September 30, 1995. 

     The Company has qualified under  provisions of the Internal Revenue Code to
compute  federal  income  taxes after  deductions  of  additions to the bad debt
reserves.  At September 30, 1996, the Company had a taxable temporary difference
of  approximately  $10,486,000  that arose before 1988  (base-year  amount).  In
accordance  with  SFAS No.  109,  a  deferred  tax  liability  of  approximately
$3,824,000 has not been recognized for the temporary difference. Management does
not expect this temporary difference to reverse in the foreseeable future.


                                       47
<PAGE>

(11) Shareholders' Equity

     The Company was  incorporated  under Oregon law in June 1995 to acquire and
hold all of the  outstanding  capital stock of the  Association,  as part of the
Association's  conversion  from a  federally-chartered  mutual  savings and loan
association. In connection with the conversion, which was consummated on October
4, 1995,  the Company  issued and sold  12,233,125  shares of common  stock (par
value of $.01 per share) at a price of $10.00  per share for net total  proceeds
of $119,352,984  after conversion  expenses of $2,978,266.  The Company retained
one-half of the net proceeds and used the remaining net proceeds to purchase the
newly issued capital stock of the  Association.  The net conversion  proceeds of
$119,352,984  and  over  subscription  proceeds  of  $65,685,300  were  held  in
withdrawable  accounts at the  Association at September 30, 1995.  Since,  among
other things,  all required  regulatory  approvals to consummate  the conversion
were received prior to September 30, 1995, the conversion has been accounted for
as being  effective as of September 30, 1995,  with the net conversion  offering
proceeds of  $119,352,984  shown on the  statement  of  shareholders'  equity as
proceeds  from the sale of common stock and stock  oversubscription  proceeds of
$65,685,300  recorded  as  a  liability.  The  oversubscription   proceeds  were
refunded, with accrued interest, on October 4, 1995.

     Subsequent  to the  ratification  of the  adoption  of the 1996  Management
Recognition  and  Development  Plan  ("MRDP") at the annual  meeting on April 9,
1996,  489,325  shares of stock were  purchased  in the open market at a cost of
$6.7  million,  to be held in trust  for  future  allocation  to  management  in
accordance with the terms of the MRDP.

     During  September  1996,  the Board of  Directors  approved and the Company
engaged in a stock repurchase  program and retirement of 620,655 shares or 5.07%
of the common stock.  

     The Association may not declare or pay cash dividends if the effect thereof
would  reduce  its  regulatory   capital  below  the  amount  required  for  the
liquidation account discussed below. 

     At the  time of  conversion,  the  Association  established  a  liquidation
account in an amount  equal to its retained  earnings as of June 30,  1995,  the
date of the latest statement of financial condition used in the final conversion
prospectus.  The  liquidation  account  will be  maintained  for the  benefit of
eligible withdrawable account holders who have maintained their deposit accounts
in the Association after conversion.  In the event of a complete  liquidation of
the  Association  (and  only in such an  event),  eligible  depositors  who have
continued to maintain  accounts will be entitled to receive a distribution  from
the  liquidation  account  before any  liquidation  may be made with  respect to
common stock. 

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

(12) Employee Benefit Plans

Employee  Retirement  Plan 

     The  Company  is a member  of a  multiple-employer  trusteed  pension  plan
("Plan")  covering  all  employees  with one  year of  service  and pays  direct
pensions to certain retired employees. Pension expense of $198,000, $185,000 and
$120,000 was incurred  during the years ended September 30, 1996, 1995 and 1994,
respectively.  Separate actuarial valuations, including computed value of vested
benefits,  are not made with respect to each contributing  employer, nor are the
plan  assets  so  segregated  by  the  trustee.  The  Plan  had  an  over-funded
accumulated benefit of approximately $385 million at June 30, 1996.

Director Deferred Compensation Plan

     The Company  also has an  unfunded  supplemental  benefits  plan to provide
members  of the  Board  of  Directors  with  supplemental  retirement  benefits.
Supplemental  benefits  are based on monthly fees  approved by the  Compensation
Committee of the Board.  Pension costs  recognized for the years ended September
30, 1996, 1995 and 1994 were $71,053, $70,020 and $0 respectively.  At September
30, 1996 and 1995, the projected  benefit  obligation was $668,088 and $616,035,
respectively. 


                                       48
<PAGE>

Management Recognition and Development Plan ("MRDP")

     In  February  1996,  the Board of  Directors  approved  a MRDP plan for the
benefit of officers and  non-employee  directors  which  authorizes the grant of
489,325 common stock shares. The MRDP was approved by the Company's shareholders
on April 9, 1996.  Those  eligible to receive  benefits  under the MRDP plan are
determined by members of a committee  appointed by the Board of Directors of the
Company.  MRDP  awards  vest  over a  five-year  period  in  equal  installments
beginning on April 9, 1997 (the first  anniversary  of the effective date of the
MRDP) or upon the participant's death or disability.  The Company will recognize
compensation  expense in the  amount of the fair  value of the  common  stock in
accordance  with the vesting  schedule  during the years in which the shares are
payable.  There were no shares  vested  under the plan at  September  30,  1996.
Accordingly, the Company recognized no compensation expense for the MRDP for the
year ended September 30, 1996.

Stock Option Plan

     In  February  1996,  the Board of  Directors  adopted a Stock  Option  Plan
("Stock  Plan") for the benefit of certain  employees and  directors.  The Stock
Plan was approved by the Company's  shareholders  on April 9, 1996.  The maximum
number of common  shares  which may be issued  under the Stock Plan is 1,223,313
shares with a maximum  term of ten years for each option from the date of grant.
The initial awards were granted on April 9, 1996 at the fair value of the common
stock on that date ($13.125). All initial awards vest in equal installments over
a five year period from the grant date and expire  during  April 2006.  Unvested
options become immediately  exercisable in the event of death or disability.  No
options had vested or were exercised as of the year ended September 30, 1996.

(13) Employee Stock Ownership Plan ("ESOP")

     As part of the conversion discussed in note 11, an ESOP was established for
all employees  that are age 21 or older and have  completed two years of service
with the Company.  The ESOP  borrowed  $9,786,500  from the Company and used the
funds to purchase  978,650  shares of the common stock of the Company  issued in
the  conversion.  The  loan  will  be  repaid  principally  from  the  Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an  outstanding  balance of $8,807,850  and $9,786,500 at September 30, 1996 and
1995,  respectively,  and an interest rate of 8.75%.  The loan obligation of the
ESOP is considered  unearned  compensation and, as such, recorded as a reduction
of the Company's shareholders' equity. Both the loan obligation and the unearned
compensation  are  reduced  by the amount of loan  repayments  made by the ESOP.
Shares  purchased  with the loan  proceeds  are held in a suspense  account  for
allocation among  participants as the loan is repaid.  Contributions to the ESOP
and shares released from the suspense  account are allocated among  participants
on the  basis of  compensation  in the year of  allocation.  Benefits  are fully
vested at all times under the ESOP.  Forfeitures  are  reallocated  to remaining
plan  participants and may reduce the Company's  contributions.  Benefits may be
payable upon retirement,  death,  disability,  or separation from service. Since
the Company's annual contributions are discretionary, benefits payable under the
ESOP cannot be  estimated.  Compensation  expense is recognized to the extent of
the fair  value  of  shares  committed  to be  released.  The  Company  recorded
compensation  expense  under the ESOP of $1.4  million  and 97,865  shares  were
allocated among the participants in 1996.


                                       49
<PAGE>

<TABLE>

(14) Fair Value of Financial Instruments

Financial  instruments  have been  construed to generally  mean cash or a contract  that implies an  obligation  to
deliver  cash or another  financial  instrument  to another  entity.  The  estimated  fair values of the  Company's
financial instruments are as follows:
<CAPTION>
 
                                                                September 30, 1996            September 30, 1995
                                                           ---------------------------------------------------------
                                                               Carrying           Fair       Carrying           Fair 
                                                                 amount          value         amount          value            
                                                           ------------      ---------    -----------    ----------- 
FINANCIAL ASSETS
<S>                                                        <C>            <C>            <C>            <C>        
Cash and due from banks ................................   $  6,841,554   $  6,841,554   $  5,027,880   $  5,027,880
                                                                                                        
Federal funds sold .....................................      9,338,079      9,338,079    170,966,390    170,966,390
                                                                                                        
Investment securities available for sale ...............     75,986,611     75,986,611     12,605,654     12,605,654
                                                                                                        
Investment securities held to maturity .................      9,827,193      9,860,165     42,209,497     42,178,800
                                                                                                        
Mortgage backed and related securities available for 
sale ...................................................     74,109,321     74,109,321              -              -
                                                                                                        
Mortgage backed and related securities held to maturity       6,783,001      6,736,007              -              -
                                                                                                        
Loans receivable, net ..................................    473,555,988    467,682,131    403,543,725    408,824,175
                                                                                                        
FHLB stock .............................................      4,773,800      4,773,800      4,425,900      4,425,900
                                                                                                        
FINANCIAL LIABILITIES
                                                                                                        
Savings deposits .......................................    399,673,180    402,769,799    384,379,531    389,681,552
                                                                                                        
FHLB advances ..........................................     90,000,000     89,974,165     20,000,000     19,997,055
                                                                                                        
Short term borrowings ..................................     14,904,400     14,904,400              -              -
                                                                                                        
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
                                                                                                        
Mortgage loan commitments ..............................     10,840,110     10,840,110      7,937,473      7,937,473


     Financial assets and financial  liabilities other than securities are not traded in active markets.  The above
estimates of fair value require subjective  judgments and are approximate.  Changes in the following  methodologies
and assumptions could  significantly  affect the estimates.  These estimates may also vary  significantly  from the
amounts that could be realized in actual transactions.

Financial Assets

     The estimated fair value  approximates  the book value of cash,  interest  bearing cash accounts,  and federal
funds sold. For securities,  the fair value is based on quoted market prices.  The fair value of loans is estimated
by  discounting  future cash flows using current rates at which similar loans would be made. The fair value of FHLB
stock approximates the book value.
</TABLE>


                                       50
<PAGE>

Financial Liabilities

     The estimated fair value of savings deposits, FHLB advances, and short term
borrowings  are  estimated by  discounting  the future cash flows using  current
rates at which similar  deposits,  FHLB advances and short term borrowings would
be made.


Off-Balance Sheet Financial Instruments

     Off-balance  sheet  financial  instruments  are limited to  commitments  to
originate  mortgage loans.  Fair value considers the difference  between current
levels of interest rates and committed  rates.  See note 16 to the  consolidated
financial  statements.  

     The  Company  did not  hold any  derivative  financial  instruments  in its
investment  portfolio at or during the years ended September 30, 1996,  1995, or
1994.

(15) Regulatory Capital Requirements

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital  to  risk-weighted  assets,  of Tier I capital  to total  assets,  and
tangible  capital to tangible assets (set forth in the table below).  Management
believes that the Association  meets all capital adequacy  requirements to which
it is subject as of September 30, 1996.

     As of  September  30,  1996,  the  most  recent  notification  from the OTS
categorized the Association as "well capitalized" under the regulatory framework
for prompt  corrective  action.  To be  categorized as "well  capitalized",  the
Association must maintain minimum total risk-based,  Tier I risk-based, and Tier
I leverage  ratios as set forth in the table.  There are no conditions or events
since that notification that management  believes have changed the institution's
category.



                                       51
<PAGE>

<TABLE>

The Association's actual and required minimum capital ratios are presented in the following table:
<CAPTION>

                                                               As of September 30, 1996
                                -----------------------------------------------------------------------------------
                                                                                               To Be Categorized as 
                                                                                                "Well Capitalized"
                                                                     For Capital            Under Prompt Corrective 
                                                                  Adequacy Purposes              Action Provision
                                                                 --------------------        ----------------------
                                Actual Amount  Actual Ratio            Amount   Ratio              Amount     Ratio
                                -------------  ------------      ------------   -----        ------------     -----             
<S>                              <C>                  <C>        <C>             <C>         <C>              <C>  
Total Capital: (to risk 
weighted assets)..............   $121,036,745         42.4%      $ 22,832,496    8.0%        $ 28,540,620     10.0%

Tier I Capital: (to risk 
weighted assets)..............    120,108,925         42.1%               N/A    N/A           17,124,372      6.0%

Tier I Capital: (to total 
assets).......................    120,108,925         19.2%        18,746,701    3.0%          31,244,502      5.0%

Tangible Capital: (to 
tangible assets)..............    120,108,925         19.2%         9,373,351    1.5%                 N/A       N/A


<CAPTION>
                                                               As of September 30, 1995
                                -----------------------------------------------------------------------------------
                                                                                               To Be Categorized as 
                                                                                                "Well Capitalized"
                                                                     For Capital            Under Prompt Corrective 
                                                                  Adequacy Purposes              Action Provision
                                                                 --------------------        ----------------------
                                Actual Amount  Actual Ratio            Amount   Ratio              Amount     Ratio
                                -------------  ------------      ------------   -----        ------------     -----             
<S>                              <C>                  <C>        <C>             <C>          <C>              <C>  
Total Capital: (to risk
weighted assets) .............   $116,279,395         36.9%      $ 25,227,600     8.0%        $ 31,534,500     10.0%

Tier I Capital: (to risk 
weighted assets) .............    115,471,575         36.6%               N/A      N/A          18,920,700      6.0%
  
Tier I Capital: (to total 
assets) ......................    115,471,575         18.6%        18,647,569     3.0%          31,079,281      5.0%

Tangible Capital: (to 
tangible assets) .............    115,471,575         18.6%         9,323,784     1.5%                 N/A       N/A

</TABLE>

<TABLE>

 (Graph in Hardcopy Report)
    SHARHOLDERS'S EQUITY
      (in thousands)      

<CAPTION>
               TOTAL
YEAR          EQUITY        
<S>        <C>          
1996       $153,411 
1995        164,685
1994         49,308  
1993         44,949
1992         37,792 
</TABLE>
                                       52
<PAGE>

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

                         September 30, 1996              SHAREHOLDERS' EQUITY
                               ------------                          
<S>                            <C>                         <C>       <C>    
Association's Equity .......   $119,820,720                1996      153,411
                               
Unrealized securities loss .        288,205                1995      164,685
                               ------------                          
Tangible capital ...........   $120,108,925                1994       49,308
                               
General valuation allowances        927,820                1993       44,949
                               ------------                          
Total capital ..............   $121,036,745                1992       37,792
                               ============                           
</TABLE>


     On August 23, 1993, the OTS issued a regulation which would add an interest
rate risk component to the risk-based  capital standards (the "final IRR rule").
Institutions  with a greater than normal  interest  rate risk  exposure  will be
required  to take a deduction  from the total  capital  available  to meet their
risk-based  capital  requirement.  That  deduction  is equal to  one-half of the
difference  between the  institution's  actual measured  exposure and the normal
level of exposure as defined by the  regulation.  Although no such deduction was
required as a result of the Association's most recent regulatory examination,  a
deduction may be required as a result of future examinations. The final IRR rule
has been  postponed and it is not  practicable  to determine when it will become
effective.  

     At  periodic   intervals,   the  OTS  and  the  Federal  Deposit  Insurance
Corporation  ("FDIC") routinely examine the Association as part of their legally
prescribed  oversight of the thrift industry.  Based on these examinations,  the
regulators can direct that the Association's financial statements be adjusted in
accordance  with their  findings.  A future  examination  by the OTS or the FDIC
could include a review of certain  transactions or other amounts reported in the
Association's  1996 financial  statements.  In view of the uncertain  regulatory
environment in which the Association now operates,  the extent, if any, to which
a forthcoming regulatory examination may ultimately result in adjustments to the
1996 financial statements cannot presently be determined. 

     On September 30, 1996, the United States  Congress passed and the President
signed into law the omnibus appropriations package, including the Bank Insurance
Fund/Savings  Association  Insurance Fund  ("BIF/SAIF")  and  Regulatory  Burden
Relief packages.  Included in this legislation is a requirement for SAIF-insured
institutions to recapitalize  the SAIF insurance fund through a one-time special
assessment  to be paid  within  60  days of the  first  of the  month  following
enactment.  The FDIC is charged with the ultimate  responsibility of determining
the specific  assessment amount which is 65.7 basis points of the March 31, 1995
SAIF deposit  assessment  base. As the  Association is insured by the SAIF, this
assessment resulted in a pre-tax charge to non-interest  expense for the quarter
ending  September  30,  1996 of $2.5  million  based on the March 31,  1995 SAIF
deposit assessment base of $376.4 million.





                                       53
<PAGE>

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

     The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing  needs of its  customers.
These financial  instruments generally include commitments to originate mortgage
loans.  Those instruments  involve,  to varying degrees,  elements of credit and
interest rate risk in excess of the amount  recognized in the balance sheet. The
Company's  maximum exposure to credit loss in the event of nonperformance by the
borrower is  represented by the  contractual  amount of those  instruments.  The
Company  uses the same  credit  policies  in making  commitments  as it does for
on-balance-sheet  instruments.  Commitments to extend credit are  conditional 60
day  agreements to lend to a customer  subject to the Company's  usual terms and
conditions.  

     At  September  30,  1996,  loan   commitments   amounted  to  approximately
$10,840,110,   comprised  of  a  $146,000  variable  rate  loan  at  6.00%,  and
$10,694,110 in fixed rate loans ranging from 7.00% to 10.875%.  At September 30,
1995, loan commitments  amounted to $7,967,473,  comprised of a $31,000 variable
rate loan at 6.38%,  and  $7,936,473  in fixed rate loans  ranging from 7.00% to
9.75%.  

     The  Company  originates  residential  real  estate  loans and, to a lesser
extent,  commercial  real estate and  consumer  loans.  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.


                                       54
<PAGE>

(17) Parent Company Financial Information

Condensed  financial  information as of September 30, 1996 and 1995, for Klamath
First  Bancorp,  Inc. is presented  and should be read in  conjunction  with the
consolidated financial statements and the notes thereto:
<TABLE>
<CAPTION>

                                                        At September 30,
                                             ------------------------------
Statement of Financial Condition                      1996             1995
                                             -------------    -------------
ASSETS
<S>                                          <C>              <C>          
Cash and cash equivalents ................   $   4,819,110    $ 117,720,840
                                                              
Investment and mortgage backed securities       43,726,942                -
                                                              
Investment in wholly-owned subsidiary ....     119,820,720      114,778,794
                                                              
Other assets .............................       1,038,320                -
                                             -------------    -------------
Total assets .............................   $ 169,405,092    $ 232,499,634
                                             =============    =============
                                                              
LIABILITIES
                                                              
Short-term borrowings ....................   $  14,904,400               $-
                                                              
Stock over subscription ..................               -       65,685,300
                                                              
Accrued conversion costs .................               -        1,915,649
                                                              
Other liabilities ........................       1,089,718          213,620
                                             -------------    -------------
Total liabilities ........................      15,994,118       67,814,569
                                             -------------    -------------
SHAREHOLDERS' EQUITY
                                                              
Common stock .............................         116,124          122,331
                                                              
Additional paid-in capital ...............     110,762,677      119,230,653
                                                              
Retained earnings ........................      58,034,493       55,118,581
                                                              
Unearned ESOP shares at cost .............      (8,807,850)      (9,786,500)
                                                              
Unearned MRDP shares at cost .............      (6,694,470)               -
                                             -------------    -------------
Total shareholder's equity ...............     153,410,974      164,685,065
                                             -------------    -------------
Total liabilities and shareholder's equity   $ 169,405,092    $ 232,499,634
                                             =============    =============

<CAPTION>
                                             For the year ended September 30,
                                             --------------------------------
Statement of Earnings                                       1996         1995
                                                      ----------   ----------
<S>                                                   <C>            <C>
Equity in undistributed income of subsidiary ......   $4,045,267     $     --

Total interest income .............................    3,115,776      229,899

Total interest expense ............................      196,130      203,491

Non-interest income ...............................      857,843         --

Non-interest expense ..............................      484,778         --
                                                      ----------   ----------
Earnings before income taxes ......................    7,337,978       26,408

Provision for income tax ..........................    1,228,181       10,129
                                                      ----------   ----------
Net earnings ......................................   $6,109,797     $ 16,279
                                                      ==========   ==========
</TABLE>

                                       55
<PAGE>

<TABLE>
<CAPTION>

                                                             For the Years Ended September 30,
                                                             -------------------------------
Statement of Cash Flows                                                 1996            1995
                                                               --------------   ------------
<S>                                                            <C>              <C>         
Net cash flows from operating activities ...................   $    (552,188)   $    229,899
                                                               --------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
                                                                                
Investment in subsidiary ...................................        (176,157)    (59,676,492)
                                                                                
Maturity of investment and mortgage backed securities ......      27,734,452               -
                                                                                
Purchase of investment and mortgage backed securities ......     (72,168,427)              -
                                                               --------------   ------------
Net cash flows from investing activities ...................     (44,610,132)    (59,676,492)
                                                               --------------   ------------
                                                                               
CASH FLOWS FROM FINANCING ACTIVITIES
                                                                                
Proceeds from sale of common stock .........................               -     121,268,633
                                                                                
Proceeds from stock over subscription ......................               -      65,685,300
                                                                                
Repayments from stock over subscription ....................     (65,685,300)              -
                                                                                
Proceeds from ESOP loan repayment ..........................         653,601               -
                                                                                
Loan to ESOP ...............................................               -      (9,786,500)
                                                                                
Proceeds from short-term borrowings ........................      21,938,300               -
                                                                                
Repayments of short-term borrowings ........................      (7,033,900)              -
                                                                                
Purchase of stock for MRDP Trust ...........................      (6,694,470)              -
                                                                                
Stock retirement ...........................................      (8,891,834)              -
                                                                                
Dividends paid .............................................      (2,025,807)              -
                                                               --------------   ------------
Net cash flows from financing activities ...................     (67,739,410)    177,167,433
                                                               --------------   ------------
Net increase/(decrease) in cash and cash equivalents .......    (112,901,730)    117,720,840
                                                                                
Cash and cash equivalents beginning of year ................     117,720,840               -
                                                               --------------   ------------
Cash and cash equivalents end of year ......................   $   4,819,110    $117,720,840
                                                               =============    ============
</TABLE>


                                       56
<PAGE>

(18) Recently Issued Accounting Standards 

     In October 1995, the FASB issued SFAS No. 123,  "Accounting for Stock-Based
Compensation",  which applies to all  transactions  in which an entity  acquires
goods or services by issuing  equity  instruments  or by  incurring  liabilities
where the payment amounts are based on the entity's  common stock price,  except
for employee stock ownership plans (ESOP's).  The SFAS covers  transactions with
employees and  non-employees  and is  applicable  to both public and  non-public
entities.

     SFAS No. 123 requires that, except for transactions with employees that are
within  the scope of APB  Opinion  No. 25, all  transactions  in which  goods or
services are the consideration  received for the issuance of equity  instruments
are to be accounted for based on the fair value of the consideration received or
the fair value of the  equity  instrument  issued,  whichever  is more  reliably
measurable.   However,   it  also  allows  an  entity  to  continue  to  measure
compensation  costs for those plans using the  intrinsic  value based  method of
accounting  prescribed  by APB Opinion No. 25,  "Accounting  for Stock Issued to
Employees." Entities electing to follow the accounting methods in Opinion No. 25
must make pro forma  disclosures  of net income and, if presented,  earnings per
share,  as if the fair value method of  accounting  defined in the statement had
been applied.

     SFAS No. 123 will apply to the Company for the year  ending  September  30,
1997.  The Company has not yet  determined  which method it will adopt.  

     In June 1996,  FASB issued  SFAS No. 125,  "Accounting  for  Transfers  and
Servicing of Financial Assets and Extinguishments of Liabilities".  SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of  liabilities  occurring  after  December  31,  1996,  and  is to  be  applied
prospectively.

     SFAS No. 125 provides  accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.  The standards
are based on  consistent  application  of a  financial-components  approach that
focuses on control. Under the approach, after a transfer of financial assets, an
entity  recognizes  the  financial  and  servicing  assets it  controls  and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered,  and  derecognizes  liabilities  when  extinguished.  SFAS No.  125
provides consistent  standards for distinguishing  transfers of financial assets
that are sales from transfers that are secured borrowings.  

     The  Company  plans to  implement  SFAS No.  125 on  January  1, 1997 which
complies with the required date of  implementation.  The Company does not expect
implementation to have a material impact on the Company's  financial position or
results of operations.


                                       57
<PAGE>

(19) Selected Quarterly Financial Data
(unaudited)
<TABLE>
<CAPTION>
                                                          1996
                                      ------------------------------------------
                                      December      March       June   September
                                      --------    -------   --------  ----------
                                                   (In thousands)
<S>                                   <C>        <C>        <C>        <C>     
Total interest income .............   $ 10,919   $ 11,138   $ 11,444   $ 12,149
                                                                       
Total interest expense ............      5,567      5,626      5,781      6,314
                                      --------    -------   --------  ----------
Net interest income ...............      5,352      5,512      5,663      5,835
                                                                       
Provision for loan losses .........         30         30         30         30
                                      --------    -------   --------  ----------
Net interest income after provision      5,322      5,482      5,633      5,805
                                                                       
Non-interest income ...............         79         98         95        249
                                                                       
Non-interest expense ..............      1,840      1,928      1,879      6,595
                                      --------    -------   --------  ----------
Earnings/(loss) before income taxes      3,561      3,652      3,849       (541)
                                                                       
Provision for income tax ..........      1,320      1,245      1,438        409
                                      --------    -------   --------  ----------
Net earnings/(loss) ...............   $  2,241   $  2,407   $  2,411   $   (950)
                                      ========   ========   ========   =========
                                                                       
Net earnings/(loss) per share .....   $    .20   $    .21   $    .22   $   (.09)
                                      ========   ========   ========   =========

In the fourth quarter of 1996, the Company  recorded a $2.5 million  expense for
the special  SAIF  assessment  and a realized  loss on U.S.  Federal  securities
mutual bond fund of $1.6 million.

<CAPTION>

                                                        1995
                                       --------------------------------------
                                       December    March     June   September
                                       --------   ------   ------   ---------  
                                                   (In thousands)
<S>                                      <C>      <C>      <C>         <C>   
Total interest income ................   $8,541   $8,603   $8,945      $9,018
                                                                 
Total interest expense ...............    4,663    4,849    5,208       5,721
                                       --------   ------   ------   --------- 
Net interest income ..................    3,878    3,754    3,737       3,297
                                                                 
Provision for loan losses ............        -       60       30          30
                                       --------   ------   ------   --------- 
Net interest income after provision ..    3,878    3,694    3,707       3,267
                                                                 
Non-interest income ..................       77       92       81         131
                                                                 
Non-interest expense .................    1,566    1,555    1,583       1,300
                                       --------   ------   ------   ---------
Earnings before income taxes .........    2,389    2,231    2,205       2,098
                                                                 
Provision for income tax .............      898      897      833         721
                                       --------   ------   ------   --------- 
Net earnings .........................   $1,491   $1,334   $1,372      $1,377
                                       ========   ======   ======   =========
</TABLE>


                                       58
<PAGE>

Earnings per share were not calculated for September 30, 1995, as no shares were
outstanding during the year.



                    KLAMATH FIRST BANCORP INC. AND SUBSIDIARY
                    BRANCH OFFICES AND CORPORATE INFORMATION

Main Office
540 Main Street
Klamath Falls, OR 97601

Ashland Branch
512 Walker Ave.
Ashland, OR 97520

Bend Branch
61515 S. HWY 97
Bend, OR 97702

Campus Branch
2323 Dahlia Street
Klamath Falls, OR 97601

Madison Branch
2300 Madison
Klamath Falls, OR 97603

Medford Branch
1420 E. McAndrews Rd.
Medford, OR 97504

Redmond Loan Center
585 SW 6th Suite #2
Redmond, OR 97756

Shasta Branch
2943 South 6th Street
Klamath Falls, OR 97603

Corporate Headquarters
540 Main Street
Klamath Falls, Or 97601
(541) 882-3444

Independent Auditors
Deloitte & Touche LLP
3900 U.S. Bancorp Tower
111 SW Fifth Avenue
Portland, OR 97204-3698
(503) 222-1341

General Counsel
William L. Sisemore, AAL
540 Main Street
Klamath Falls, OR 97601
(541) 882-7139


                                       59
<PAGE>

Special Counsel
Breyer and Aguggia
1300 I Street, NW
Suite 470 East
Washington, DC 20005
(202) 737-7900

Transfer Agent
Registrar & Transfer Co.
10 Commerce Drive
Cranford, NJ 07016-3572
1-800-866-1340

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

Form 10-K Information
Available without charge
to shareholders of record
upon written request to
Marshall Alexander,
Chief Financial Officer
Klamath First Bancorp, Inc.
540 Main Street
Klamath Falls, OR 97601


ANNUAL  MEETING  

The annual meeting of  shareholders  will be held  Wednesday,  January 22, 1997,
beginning at 2:00 p.m.,Pacific Time at:


The Shilo Inn
2500 Almond Street
Klamath Falls, OR 97601

Shareholders of record as of the close of business on November 22, 1996 shall be
those entitled to notice of and to vote at the meeting.


                                       60
<PAGE>