SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

         For the Fiscal Year Ended September 30, 2001

                                       OR

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

                         Commission File Number: 0-26556

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

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

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

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

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

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

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

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

As of November 30, 2001,  there were issued and outstanding  6,848,667 shares of
the  Registrant's   common  stock.  The  Registrant's  voting  stock  is  traded
over-the-counter  and is listed on the Nasdaq  National  Market under the symbol
"KFBI." The aggregate  market value of the voting stock held by nonaffiliates of
the  Registrant,  based on the closing  sales price of the  Registrant's  common
stock as quoted on the Nasdaq  National  Market on November  30, 2001 of $13.19,
was $72,463,051.

                       DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of Registrant's  Annual Report to  Shareholders  for the Fiscal
        Year Ended September 30, 2001 ("Annual Report") (Parts I and II).

     2. Portions of Registrant's  Definitive Proxy Statement for the 2002 Annual
        Meeting of Shareholders (Part III).

<PAGE>

                                                      PART I
Item 1.  Business

General

Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was organized on
June 16, 1995 for the purpose of becoming the holding  company for Klamath First
Federal  Savings and Loan  Association  ("Association")  upon the  Association's
conversion from a federal mutual to a federal stock savings and loan association
("Conversion").  The  Conversion  was completed on October 4, 1995. At September
30, 2001,  the Company had total assets of $1.5 billion,  total deposits of $1.2
billion  and  shareholders'  equity of $114.1  million.  All  references  to the
Company herein include the Association where applicable.

The  Association  was  organized in 1934.  The  Association  is regulated by the
Office  of  Thrift  Supervision  ("OTS")  and its  deposits  are  insured  up to
applicable limits under the Savings  Association  Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). The Association also is a member
of the Federal Home Loan Bank ("FHLB") System through the FHLB of Seattle.

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

In September 2001, the Association  acquired 13 branches from Washington  Mutual
Bank ("WAMU"), 11 of which are located on the northern and southern Oregon coast
and two of which are located in northeastern Oregon. These locations enhance the
Association's  geographic coverage on the coast and in northeastern  Oregon. The
acquisition  was  accounted  for as a purchase  and  resulted in the addition of
approximately $179.3 million in loans, assumption of $423.5 million in deposits,
and addition of 124  experienced  branch  personnel on the  acquisition  date of
September 7, 2001.  As part of the  purchase,  the Company also  recorded  $15.0
million of core deposit intangible and $24.1 million of other intangible assets.
See Note 2 of the Notes to Consolidated  Financial  Statements  contained in the
Annual Report and the Form 8-K/A filed on November 21, 2001.

The Association is a progressive,  community-oriented financial institution 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,  as well as  commercial  real estate and  multi-family  residential
loans, loans to consumers,  and loans for commercial purposes.  At September 30,
2001, permanent residential one- to four-family real estate loans totaled $421.5
million,  or  60.12% of total  loans.  While the  Association  has  historically
emphasized  fixed  rate  mortgage  lending,  it has been  diversifying  its loan
portfolio by focusing on  increasing  the number of  originations  of commercial
real estate loans,  multi-family  residential  loans,  residential  construction
loans,  small  business  loans  and  non-mortgage  consumer  loans.  Significant
progress was made toward  increasing  the  commercial  and consumer loans in the
portfolio with the purchase of the branches from WAMU. These newer loan products
generally  carry  adjustable  rates,  higher  yields,  or shorter terms than the
traditional  fixed rate mortgages.  This lending strategy is designed to enhance
earnings,  reduce  interest  rate risk,  and  provide a more  complete  range of
financial  services  to  customers  and  the  local  communities  served  by the
Association.  At September  30, 2001,  the  Association's  total loan  portfolio
consisted of 70.57% fixed rate and 29.43% adjustable rate loans, after deducting
loans in process and non-performing loans.
<PAGE>

Announcement of Stock Repurchase

In September  2001, the Company  announced its intention to repurchase 5% of its
outstanding  common stock, or approximately  340,800 shares,  to be accomplished
through the open market over a twelve month period. As of November 30, 2001, the
Company had repurchased  217,000 shares,  or 63.67% of the planned shares,  at a
weighted average price of $13.18.

Market Area

As a result of the branch  acquisition  in 2001, the  Association's  market area
expanded to include 53 locations  in 26 of Oregon's 36 counties.  In addition to
the 13 branches  acquired from WAMU,  new in-store  branches have been opened in
Pendleton and Ontario,  Oregon and Kennewick  and Richland,  Washington.  During
2001,  a new  branch was also  completed  in  Redmond,  Oregon,  providing  more
complete service to that community than the previously operated loan center. The
Association's  primary market area,  which  encompasses  the State of Oregon and
some adjacent areas of California,  Idaho, and Washington,  can be characterized
as a  predominantly  rural  area  containing  a number of  communities  that are
experiencing  moderate to rapid population  growth. The population growth in the
market area,  particularly in Southern Oregon,  has been supported in large part
by the agreeable  climate,  and by favorable real estate values.  The economy of
the market  area is still based  primarily  on  agriculture  and lumber and wood
products, but is experiencing  diversification into light manufacturing,  health
care and other services, and other sectors. Tourism is a significant industry in
many regions of the market area including Central Oregon and the Oregon coast.

Yields Earned and Rates Paid

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

                                                                                      At                        Year Ended
                                                                           -------------              --------------------------
                                                                           September 30,                 September 30,
                                                                                    2001               2001      2000       1999
                                                                                   -----              -----     -----      -----

Weighted average yield:
<S>                                                                                <C>                 <C>       <C>        <C>
   Loans receivable................................................                7.92%               7.86%     7.64%      7.80%
   Mortgage-backed and related securities..........................                5.74                6.02      5.86       5.50
   Investment securities...........................................                5.58                5.64      6.00       5.88
   Federal funds sold..............................................                3.27                4.13      5.59       4.93
   Interest-earning deposits.......................................                2.81                4.06      5.63       4.75
   FHLB stock......................................................                7.00                6.75      6.69       7.50

Combined weighted average yield on
 interest-bearing assets...........................................                6.71                6.99      7.22       7.25
                                                                                   -----              -----     -----      -----
Weighted average rate paid on:
   Tax and insurance reserve.......................................                1.29                3.85      2.02       2.07
   Passbook and statement savings..................................                2.05                2.26      1.78       2.15
   Interest-bearing checking. . . . . . . . . . . .................                1.37                1.08      1.12       1.23
   Money market  . . . ............................................                3.21                3.85      4.17       3.87
   Certificates of deposit.........................................                5.32                5.76      5.40       5.38
   FHLB advances/Short term borrowings.............................                5.73                5.95      5.90       5.26

Combined weighted average rate on
 interest-bearing liabilities......................................                4.44                4.81      4.72       4.52
                                                                                   -----              -----     -----      -----
Interest rate spread...............................................                2.27%               2.18%     2.50%      2.73%
                                                                                   =====              =====     =====      =====
</TABLE>
<PAGE>


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

Reference is made to the section entitled "Average Balances, Net Interest Income
and  Yields  Earned  and  Rates  Paid" on page 16 of the 2001  Annual  Report to
Shareholders  ("Annual  Report")included as Exhibit 13 to this Form 10- K, which
section is incorporated herein by reference.

Interest Sensitivity Gap Analysis

Reference is made to the section entitled "Interest Sensitivity Gap Analysis" on
page 13 of the Annual Report, which section is incorporated herein by reference.

Rate/Volume Analysis

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

Lending Activities

General. As a federally chartered savings and loan association,  the Association
has  authority to originate and purchase  loans  secured by real estate  located
throughout the United States. Notwithstanding this nationwide lending authority,
over 65% of the mortgage  loans in the  Association's  portfolio  are secured by
properties  located in Klamath,  Jackson and Deschutes  counties in Southern and
Central   Oregon.   With  the  expanded  market  area  provided  by  the  branch
acquisitions  in  1997  and  2001,  the   Association's   mortgage  lending  has
diversified  throughout  the  state of  Oregon.  It is  management's  intention,
subject to market  conditions,  that the Association  will continue to originate
long-term mortgage loans for the purchase,  construction or refinance of one- to
four-family residential real estate to meet the needs of customers in our market
area.  However,  to enhance  interest  income and reduce interest rate risk, the
Association  is placing  increased  emphasis on the  origination  or purchase of
adjustable rate loans secured by one- to four- family residential,  multi-family
residential  and  commercial  real  estate,  the  majority  of which are located
outside Klamath, Jackson, and Deschutes counties.  Subject to market conditions,
the  Association  sells  loans to Fannie  Mae  (formerly  the  Federal  National
Mortgage Association) and other agents.

Permanent  residential  one- to  four-family  mortgage  loans amounted to $421.5
million,  or 60.12%, of the Association's total loan portfolio before net items,
at  September  30,  2001.  The  Association  originates  other loans  secured by
multi-family  residential  and  commercial  real estate,  construction  and land
loans.  Those loans  amounted to $152.2  million,  or 21.71%,  of the total loan
portfolio,  before net items, at September 30, 2001.  Approximately  18.17%,  or
$127.4 million, of the Association's total loan portfolio,  before net items, as
of September  30, 2001,  consisted of non-real  estate  loans.  Commercial  real
estate and non-real estate loans increased significantly as a result of the WAMU
branch  acquisition.  The acquisition  included $179.3 million in loans of which
$118.8 million were  commercial  real estate and  commercial  business loans and
$50.7 million were consumer loans.

Permissible  loans-to-one  borrower by the Association are generally  limited to
15% of unimpaired capital and surplus.  The Association's  loan-to-one  borrower
limitation  was $17.8 million at September 30, 2001. At September 30, 2001,  the
Association had 52 borrowing  relationships with outstanding  balances in excess
of $1.0 million,  the largest of which amounted to $5.4 million and consisted of
seven loans,  five of which were secured by  commercial  and single  family real
estate and two of which are unsecured.

The  Association  has emphasized the  origination or purchase of adjustable rate
loans in order to increase the interest rate  sensitivity of its loan portfolio.
The  Association  has been  successful in expanding the production of adjustable
rate  consumer   loans  and  has  purchased   adjustable   rate  single  family,
multi-family   residential  and  non-   residential   real  estate  loans.   See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS  -- Market Risk and  Asset/Liability  Management"  and
"INTEREST SENSITIVITY GAP ANALYSIS" in the Annual Report. At September 30, 2001,
$203.7 million,  or 29.43%, of loans in the Association's  total loan portfolio,
after loans in process and  non-performing  loans,  consisted of adjustable rate
loans. At September 30, 2000,  $78.6 million,  or 10.62%,  of the  Association's
loans carried  adjustable  rates. The dramatic increase in adjustable rate loans
is  primarily  attributable  to the  portfolio of loans  acquired  with the WAMU
branches.
<PAGE>

Loan Portfolio  Analysis.  The following table sets forth the composition of the
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
                                                                         At September 30,
                              ---------------------------------------------------------------------------------------------------
                                    2001                 2000                 1999                 1998                1997
                              ---------------       ---------------      ---------------      ---------------     ---------------
                               Amount Percent        Amount Percent       Amount Percent       Amount Percent      Amount Percent
                              ------- -------       ------- -------      ------- -------      ------- -------     ------- -------
                                                                      (Dollars in thousands)


Real estate loans:
  Permanent residential
<S>                          <C>       <C>         <C>      <C>        <C>       <C>          <C>      <C>       <C>      <C>
    one- to four-family      $421,499   60.12%     $639,165  85.12%    $647,130   83.56%      $577,471  81.95%   $498,595  86.47%
  Multi-family residential     23,257    3.32        19,015   2.53       18,412    2.38         19,230   2.73      16,881   2.93
  Construction                 21,674    3.09        25,289   3.37       53,219    6.87         64,289   9.12      30,487   5.29
  Agricultural                  4,218    0.60            --     --           --      --             --     --          --     --
  Commercial                   99,318   14.17        42,277   5.63       37,079    4.79         29,457   4.18      22,639   3.93
  Land                          3,697    0.53         3,394   0.45        2,064    0.27          2,185   0.31       1,586   0.27
                              ------- -------       ------- ------      ------- -------        ------- ------     ------- ------
Total real estate loans       573,663   81.83       729,140  97.10      757,904   97.87        692,632  98.29     570,188  98.89
                              ------- -------       ------- ------      ------- -------        ------- ------     ------- ------
Non-real estate loans:
  Savings accounts              2,091    0.30         1,957   0.26        1,800    0.23          1,991   0.28       1,711   0.30
  Home improvement and         50,464    7.20         8,338   1.11        6,726    0.87          5,750   0.82       3,486   0.60
    home equity loans
  Other consumer               18,697    2.67         6,888   0.92        4,568    0.59          2,287   0.32       1,148   0.20
  Commercial                   56,098    8.00         4,586   0.61        3,443    0.44          2,043   0.29          42   0.01
                              ------- -------       ------- ------      ------- -------        ------- ------     ------- ------
Total non-real estate loans   127,350   18.17        21,769   2.90       16,537    2.13         12,071   1.71       6,387   1.11
                              ------- -------       ------- ------      ------- -------        ------- ------     ------- ------
 Total loans                  701,013  100.00%      750,909 100.00%     774,441  100.00%       704,703 100.00%    576,575 100.00%
                                      =======               ======              =======                ======             ======
Less:
Undisbursed portion of loans    8,473                10,350              24,176                 26,987             17,096
Deferred loan fees              4,599                 7,440               7,988                  7,620              6,358
Allowance for loan losses       7,951                 4,082               2,484                  1,950              1,296
                              -------               -------             -------                -------            -------
Net loans                    $679,990              $729,037            $739,793               $668,146           $551,825
                              =======               =======             =======                =======            =======
</TABLE>
<PAGE>

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

                                                      At September 30,
                                     --------------------------------------------------
                                                   2001                     2000
                                     -----------------------  -------------------------
                                       Amount        Percent        Amount      Percent
                                      -------        -------       -------      -------
                                                    (Dollars in thousands)

<S>                                  <C>             <C>          <C>           <C>
                                     --------        -------      --------      -------
Fixed rate . . . . .                 $488,559         70.57%      $661,160       89.38%
Adjustable-rate...                    203,719         29.43         78,598       10.62
                                     --------        -------      --------      -------
     Total........                   $692,278        100.00%      $739,758      100.00%
                                     ========        =======      ========      =======
</TABLE>

Permanent  Residential  One- to Four-Family  Mortgage Loans. The primary lending
activity of the Association  has been the  origination of permanent  residential
one- to  four-family  mortgage  loans.  Management  believes that this policy of
focusing on  single-family  residential  mortgage  loans has been  successful in
contributing  to interest  income while  keeping  delinquencies  and losses to a
minimum.  At September 30, 2001, $421.5 million, or 60.12%, of the Association's
total loan portfolio,  before net items, consisted of permanent residential one-
to four-family  mortgage loans,  down from $639.2 million at September 30, 2000.
The decrease in one- to four-family  mortgages  resulted primarily from the sale
and  securitization  of  $190.3  million  of such  loans in  February  2001.  At
September  30,  2001,  the  average  balance  of  the  Association's   permanent
residential one- to four-family mortgage loans was $77,957.

The  Association   presently  originates  both  fixed-rate  mortgage  loans  and
adjustable  rate mortgages  ("ARMs")  secured by one- to four-family  properties
with terms of 15 to 30 years. Historically,  most of the loans originated by the
Association   have  been  fixed  rate  loans  secured  by  one-  to  four-family
properties. At September 30, 2001, $386.4 million, or 55.82%, of the total loans
after  loans in  process  and  non-performing  loans  were  fixed  rate  one- to
four-family loans and $37.5 million,  or 5.42%, were ARM loans.  Borrower demand
for ARM loans  versus  fixed-rate  mortgage  loans is a function of the level of
interest rates,  the  expectations of changes in the level of interest rates and
the difference between the initial interest rates and fees charged for each type
of loan. The relative amount of fixed-rate mortgage loans and ARM loans that can
be  originated  at any time is  largely  determined  by the demand for each in a
competitive environment. In order to improve interest rate risk, the Association
sells the majority of its  conforming  fixed rate one- to  four-family  mortgage
production.

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

The loan fees charged,  interest rates and other provisions of the Association's
ARM loans are  determined  by the  Association  on the basis of its own  pricing
criteria  and  competitive  market  conditions.   At  September  30,  2001,  the
Association  charged  origination  fees  ranging  from 1.00% to 1.75% on its ARM
loans.

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

The retention of ARM loans in the Association's  loan portfolio helps reduce the
Association's  exposure  to  changes in  interest  rates.  There  are,  however,
unquantifiable  credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising  interest  rates,  the risk of default on ARM loans may  increase as a
result  of  repricing  with  increased  costs  to the  borrower.  The ARM  loans
originated by the Association  generally provide, as a marketing incentive,  for
initial rates of interest  below the rates which would apply were the adjustment
index used for pricing  initially  (discounting).  Increased risks of default or
delinquency could occur because of discounting the rate.  Another  consideration
is that although ARM loans allow the  Association to increase the sensitivity of
its asset base to changes in the  interest  rates,  the extent of this  interest
sensitivity  is limited by the periodic and lifetime  interest  rate  adjustment
limits.  Because of these considerations,  the Association has no assurance that
yields on ARM loans will be sufficient to offset increases in the  Association's
cost of funds.

The loan-to-value ratio,  maturity and other provisions of the loans made by the
Association  generally  have  reflected the policy of making loans in accordance
with sound lending  practices,  market  conditions  and  underwriting  standards
established by the Association.  The Association's lending policies on permanent
residential  one- to  four-family  mortgage  loans  generally  limit the maximum
loan-to-value  ratio to 97% of the  lesser of the  appraised  value or  purchase
price of the property.  All permanent  residential one- to four-family  mortgage
loans  in  excess  of  an  80%  loan-to-value  ratio  require  private  mortgage
insurance.

The  Association  also has a  limited  amount  of  non-owner-occupied  permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten  using  generally  the same  criteria as  owner-occupied  permanent
residential  one-  to  four-family  mortgage  loans,  except  that  the  maximum
loan-to-value  ratio is generally  80% of the lesser of the  appraised  value or
purchase  price of the  property  and such loans are  generally  provided  at an
interest rate higher than owner-occupied loans.

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

Historically, the Association has not originated significant amounts of mortgage
loans on  second  residences.  However,  with  the  branch  offices  in Bend and
Redmond,  located near popular ski areas and other outdoor  activities,  and the
concentration   of  branches  along  the  Oregon  coast,   also  located  in  an
increasingly  popular resort and vacation area,  the  Association  believes that
there is an  opportunity  to engage in such lending within the parameters of its
current underwriting policies. At September 30, 2001, $4.3 million, or 0.62%, of
the Association's loan portfolio consisted of loans on second homes.


<PAGE>

Commercial and Multi-Family  Real Estate Loans. The Association has historically
engaged in a limited amount of multi-family  and commercial real estate lending.
The Association  purchases  participations  in loans secured by multi-family and
commercial real estate in order to increase the balance of adjustable rate loans
in the portfolio. See "-- Loan Originations, Purchases, and Sales." At September
30, 2001, $23.3 million,  or 3.32%, of the  Association's  total loan portfolio,
before  net  items,   consisted  of  loans  secured  by  existing   multi-family
residential real estate and $99.3 million, or 14.17%, of the Association's total
loan  portfolio,  before  net items,  consisted  of loans  secured  by  existing
commercial  real estate.  The  Association's  commercial and  multi-family  real
estate loans primarily include loans secured by office buildings, small shopping
centers,  churches,  mini-storage warehouses and apartment buildings. All of the
Association's  commercial  and  multi-family  real  estate  loans are secured by
properties  located  in the  Association's  primary  market  area.  The  average
outstanding  balance  of  commercial  and  multi-family  real  estate  loans was
$272,390  at  September  30,  2001,  the  largest  of which  was a $4.7  million
commercial real estate loan secured by a grocery store.  This loan has performed
in accordance with its terms since origination.  Originations of commercial real
estate and multi-family  residential real estate amounted to 16.46%, 11.09%, and
5.74% of the  Association's  total loan  originations  in the fiscal years ended
September  30,  2001,  2000,  and  1999,  respectively.  As  part  of  the  WAMU
acquisition  in  September  2001,  the  Association  purchased  $9.1  million in
multi-family  residential  loans and $54.6  million in  commercial  real  estate
loans.  During the year  ended  September  30,  2000 the  Association  purchased
$507,600 in commercial real estate participations.

The Association's  commercial and multi-family  loans generally have terms which
range up to 25 years  and  loan-to-value  ratios of up to 75%.  The  Association
currently  originates fixed and adjustable rate commercial and multi-family real
estate loans.  Commercial real estate and multi-family adjustable rate loans are
priced to be  competitive  with other  commercial  lenders in the  Association's
market area. A variety of terms are  available to meet specific  commercial  and
multi-family  residential  financing  needs.  As of September  30, 2001,  $100.1
million,  or 14.46%,  after loans in process and non-performing  loans, of other
mortgage loans,  including  commercial and multi-family  residential real estate
loans, had adjustable rates of interest.

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

Construction   Loans.  The  Association  makes  all-in-one   construction  loans
(construction loans that convert to permanent  financing) to individuals for the
construction of their single-family residences. The Association also makes loans
to builders  for the  construction  of  single-family  residences  which are not
presold at the time of origination ("speculative loans") and for construction of
commercial properties.  Permanent construction loans generally begin to amortize
as permanent  residential one- to four-family  mortgage loans within one year of
origination unless extended. Speculative loans are scheduled to pay off in 12 to
18 months. At September 30, 2001,  construction  loans amounted to $21.7 million
(including $7.6 million of speculative  loans),  or 3.09%, of the  Association's
total loan  portfolio  before net items.  The Company  purchased $1.7 million in
commercial  construction loans from WAMU as part of the branch purchase. Much of
the  Association's  speculative  construction  lending had been in the Portland,
Oregon market.  There was a softening of the market due to rising interest rates
and  oversupply  in  that  market  early  in  fiscal  year  2000.  As a  result,
construction  loan  volumes  decreased  significantly  during  the  years  ended
September 30, 2001 and 2000.  Permanent  construction loans have rates and terms
which   generally  match  the   non-construction   loans  then  offered  by  the
Association,  except that during the construction  phase, the borrower pays only
interest on the loan. The Association's  construction loan agreements  generally
provide  that  loan  proceeds  are  disbursed  in  increments  as   construction
progresses.  The Association periodically reviews the progress of the underlying
construction project through physical inspections.  Permanent construction loans
are  underwritten  pursuant to the same general  guidelines used for originating
permanent one- to four-family loans. Permanent construction lending is generally
limited to the Association's primary market area.
<PAGE>

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

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

Loan proceeds are disbursed  only as  construction  progresses  and  inspections
warrant.  These loans are  underwritten  to the same  standards  and to the same
terms and requirements as one- to four-family  purchase  mortgage loans,  except
the loans provide for  disbursement of funds during a construction  period of up
to one year.  During this  period,  the  borrower  is  required to make  monthly
payments of accrued  interest on the  outstanding  loan  balance.  Disbursements
during  the  construction  period  are  limited  to no more than the  percent of
completion.  Up to 97%  loan-to-value  upon  completion of  construction  may be
disbursed if private mortgage insurance above 80% loan-to-value is in place.

Land  Loans.  The  Association  makes  loans to  individuals  for the purpose of
acquiring  land upon  which to build  their  permanent  residence.  These  loans
generally have 20 year amortization  periods, with a balloon payment due in five
years, and maximum  loan-to-value  ratios of 80%. As of September 30, 2001, $3.7
million,  or 0.53%, of the Association's  total loan portfolio consisted of land
loans.

Commercial  Business  Lending.  With the  purchase  of the  branches  from WAMU,
commercial business loans increased significantly.  The Association's commercial
business lending activities focuses primarily on small to medium size businesses
owned  by  individuals  well  known to the  Association  and who  reside  in the
Association's  primary market area. At September 30, 2001,  commercial  business
loans amounted to $56.1 million, or 8.00% of the total loan portfolio and 44.05%
of total  non-real  estate  loans.  Included in these loans are $11.9 million of
agricultural loans. See "-- Agricultural Lending."

Commercial  business loans may be unsecured  loans, but generally are secured by
various types of business collateral other than real estate (such as, inventory,
equipment, etc.). In many instances,  however, such loans are often also secured
by junior liens on real estate. Lines of credit are generally renewable and made
for a one-year term and are  generally  variable rate indexed to the prime rate.
Term loans are generally  originated with three to five year maturities,  with a
maximum of seven years,  on a fully  amortizing  basis.  As with commercial real
estate loans, the Association  generally  requires annual  financial  statements
from its  commercial  business  borrowers and, if the borrower is a corporation,
personal guarantees from the principals.

Commercial  business  lending  generally  involves greater risk than residential
mortgage  lending and involves  risks that are different  from those  associated
with residential,  commercial and multi-family real estate lending.  Real estate
lending is generally considered to be collateral based lending with loan amounts
based  on  predetermined  loan  to  collateral  values  and  liquidation  of the
underlying  real estate  collateral is viewed as the primary source of repayment
in the event of borrower default.  Although  commercial business loans are often
collateralized by equipment,  inventory,  accounts  receivable or other business
assets,  the  liquidation  of collateral  in the event of a borrower  default is
often not a sufficient  source of repayment  because accounts  receivable may be
uncollectible  and  inventories and equipment may be obsolete or of limited use,
among other things.  Accordingly,  the  repayment of a commercial  business loan
primarily depends on the  creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and sometimes insufficient source
of repayment.

As part of its commercial  business lending  activities,  the Association issues
standby  letters  of  credit or  performance  bonds as an  accommodation  to its
borrowers.
<PAGE>

Agricultural  Lending.  Historically,  the  Association has not offered loans on
agricultural properties or for agricultural production,  even though agriculture
is a major industry in the Association's market area. As part of the WAMU branch
acquisition,  the Company  purchased  $4.2 million of  agricultural  real estate
loans and $11.9 million of agricultural production loans. At September 30, 2001,
agricultural  loans  amounted  to $16.1  million,  or 2.33%,  of the total  loan
portfolio; $4.2 million of these loans were secured by real estate.

In underwriting agricultural operating loans, the Association considers the cash
flow of the borrower based upon the expected  income stream as well as the value
of  collateral  used to  secure  the  loan.  Collateral  generally  consists  of
livestock or cash crops produced by the farm, such as grains, corn, and alfalfa.
In addition to considering cash flow and obtaining a blanket  security  interest
in the farm's cash crop, the  Association  may also  collateralize  an operating
loan with the equipment,  breeding stock, real estate, and federal  agricultural
program payments to the borrower.

Agricultural  real estate loans primarily are secured by first liens on farmland
and improvements  thereon located in the  Association's  market area, to service
the needs of the Association's existing customers.

Among the greater and more common risks to  agricultural  lending can be weather
conditions and disease.  These risks can be mitigated  through  multi-peril crop
insurance.  During  the  last  fiscal  year,  water  reservoir  supplies  in the
Association's  market  area  have been down 30% to 70%  compared  to  historical
averages.  The lack of water has the  potential to decrease  yields and increase
energy  costs  for  the  Association's  borrowers.  However,  very  few  of  the
Association's agricultural loans are secured by real estate or operations in the
Klamath Basin,  which was affected by curtailment of irrigation water during the
summer of 2001,  and those  being  financed  have  liquid  secondary  sources of
repayment.  Commodity prices also present a risk which may be reduced by the use
of set price contracts.

Federal  savings and loan  associations  are authorized to make loans secured by
business  or  agricultural  real  estate in amounts up to 400% of capital and to
make  additional  loans to  businesses  and farms  (which  may,  but need not be
secured by real estate) in amounts up to 20% of assets  provided  that all loans
in excess of the 10% of assets must be made to small  businesses  and farms that
qualify as small  businesses.  Effective  January 1, 2002 the OTS  increased the
dollar amount limit in the definition of small business loans from $1 million to
$2 million and farm loans from $500,000 to $2 million. As of September 30, 2001,
the Association is well within the regulatory limits for such business loans.

Consumer and Other  Lending.  The  Association  originates a variety of consumer
loans.  Such loans  generally have shorter terms to maturity and higher interest
rates than mortgage  loans.  At September 30, 2001, the  Association's  consumer
loans totaled approximately $71.3 million, or 10.17%, of the Association's total
loans. A total of $50.6 million in consumer loans were added to the portfolio as
part of the WAMU branch  acquisition.  The Association's  consumer loans consist
primarily of home  improvement  and equity  loans,  automobile  loans,  boat and
recreational vehicle loans, unsecured loans, and deposit account loans.

In recent  periods,  the  Association has emphasized the origination of consumer
loans due to their  shorter terms and higher  yields than  residential  mortgage
loans.  The  Association  anticipates  that it  will  continue  to be an  active
originator  of  these  loans.  Factors  that  may  affect  the  ability  of  the
Association  to increase  its  originations  in this area include the demand for
such loans, interest rates and the state of the local and national economy.

The  Association  offers  open-ended  "preferred"  lines of  credit  on either a
secured or unsecured basis.  Secured lines of credit are generally  secured by a
second  mortgage on the borrower's  primary  residence.  Secured lines of credit
have an  interest  rate  that is one to two  percentage  points  above the prime
lending rate while the rate on unsecured lines is two to three percentage points
above this prime  lending  rate. In both cases,  the rate adjusts  monthly.  The
Association  requires  repayment of at least 2% of the unpaid principal  balance
monthly.  At September 30, 2001,  $4.5 million was outstanding on approved lines
of credit.

The Association  offers home equity and home improvement  loans that are made on
the security of primary residences.  Loans normally have terms of up to 15 years
requiring  monthly  payments of principal and  interest.  At September 30, 2001,
home equity  loans and home  improvement  loans  amounted to $50.5  million,  or
70.82% of consumer loans, and 7.20% of total loans.
<PAGE>

At September 30, 2001, the Association's  automobile loan portfolio  amounted to
$9.5  million,  or 13.37%,  of  consumer  loans and 1.36% of total loans at such
date. The maximum term for the Association's  automobile loans is 72 months with
the amount  financed  based upon a percent of purchase  price.  The  Association
generally requires all borrowers to maintain the automobile insurance, including
collision,  fire and theft,  with a maximum  allowable  deductible  and with the
Association listed as loss payee.

At September 30, 2001,  unsecured  consumer loans amounted to $848,816,  or less
than 1%, of total loans. These loans are made for a maximum of 36 months or less
with fixed rates of interest and are offered primarily to existing  customers of
the Association.

Consumer  loans  potentially  have a greater risk than do  residential  mortgage
loans,  particularly  in the case of loans  that are  unsecured  or  secured  by
rapidly  depreciating  assets such as automobiles  and other  vehicles.  In such
cases, any repossessed  collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the  outstanding  loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not  warrant  further  substantial  collection  efforts  against  the
borrower  beyond  obtaining a deficiency  judgment.  In addition,  consumer loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss,  divorce,  illness or
personal bankruptcy.  Furthermore,  the application of various federal and state
laws,  including federal and state bankruptcy and insolvency laws, may limit the
amount  that  can be  recovered  on such  loans.  At  September  30,  2001,  the
Association had no consumer loans accounted for on a nonaccrual basis.

Loan Maturity and Repricing.  The following table sets forth certain information
at September 30, 2001 regarding the dollar amount of total loans, after loans in
process and non-performing loans, maturing in the Association's portfolio, based
on the  contractual  terms to maturity or repricing  date.  Demand loans,  loans
having no stated schedule of repayments and no stated  maturity,  and overdrafts
are reported as due in one year or less.

<TABLE>
<CAPTION>

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

Permanent residential
   one- to four-family:
<S>                              <C>                     <C>                  <C>              <C>
                                 ---------               --------             --------         --------
  Adjustable rate..........        $22,500               $ 15,045             $     --         $ 37,545
  Fixed rate...............          1,762                  2,715              381,929          386,406
Other mortgage loans:
  Adjustable rate..........         30,039                 68,442                1,640          100,121
  Fixed rate...............          3,902                 11,581               25,993           41,476
Non-real estate loans:
   Adjustable rate.........         55,383                 10,649                   21           66,053
   Fixed rate..............          4,934                 19,099               36,644           60,677
                                 ---------               --------             --------         --------
    Total loans............       $118,520               $127,531             $446,227         $692,278
                                 =========               ========             ========         ========
</TABLE>

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

The dollar  amount of all  loans,  net of loans in  process  and  non-performing
loans,  due one year after  September 30, 2001,  which have fixed interest rates
and have adjustable rates, was $478.0 million and $95.8 million, respectively.
<PAGE>

Loan Commitments.  The Association  issues  commitments for fixed and adjustable
rate loans  conditioned upon the occurrence of certain events.  Such commitments
are made on  specified  terms and  conditions  and are honored for up to 45 days
from   commitment.   The  Association  had  outstanding   loan   commitments  of
approximately  $20.8 million at September 30, 2001 consisting of $5.8 million of
variable rate loans and $15.0 million of fixed rate loans.  See Note 14 of Notes
to the Consolidated Financial Statements contained in the Annual Report.

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

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

Loan  Originations,  Purchases  and Sales.  The  Association  has  originated  a
majority  of the loans in its  portfolio.  During the year ended  September  30,
2001, the  Association  originated  $136.5  million in total loans,  compared to
$97.2 million in the same period of 2000. The higher level of loan  originations
was  attributable  to decreasing  interest rates and the expansion of the branch
network.  The  Association  has a program  to sell loans to Fannie Mae and other
lenders.  Through  this  program,  $30.7  million  in fixed rate loans were sold
during the year ended  September 30, 2001, all of which were one- to four-family
mortgages.  Servicing  was  retained  on the loans  sold to  Fannie  Mae and was
released on loans sold to other  brokers.  Also during the year ended  September
30, 2001,  the Company  securitized  $190.3  million of fixed rate single family
mortgages through Fannie Mae. Servicing was retained on these loans.

As noted previously, the Association purchased $179.3 million in loans from WAMU
as part of the branch acquisition.  The Association has also purchased permanent
residential  one- to  four-family  mortgage  loans on detached  residences  from
various  localities  throughout  the Western United  States,  primarily  Oregon,
Washington,  and California.  These loans were underwritten on the same basis as
permanent  residential  one- to four-family  real estate loans originated by the
Association. At September 30, 2001, the balance of such loans was $7.3 million.

The Association also purchases  multi-family and commercial real estate mortgage
loans secured by properties  within the  Association's  primary  market area. At
September 30, 2001, the balance of such purchased loans was $13.1 million. These
loans were  underwritten  on the same basis as similar  loans  originated by the
Association.
<PAGE>

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

                                                          Year Ended September 30,
                                                   -------------------------------------
                                                      2001          2000         1999
                                                   ---------     ---------     ---------
                                                                 (In thousands)

<S>                                                 <C>           <C>           <C>
Total net loans at beginning of period......        $729,037      $739,793      $668,146
                                                   ---------     ---------     ---------
Loans originated and purchased:
 Real estate loans originated (1)...........          93,907        81,671       209,723
 Real estate loans purchased................          83,192           508        15,500
 Non-real estate loans originated...........          42,586        15,575        14,471
 Non-real estate loans purchased............          99,720            --            --
                                                   ---------     ---------     ---------
   Total loans originated...................         319,405        97,754       239,694
                                                   ---------     ---------     ---------
Loan reductions:
 Principal paydowns.........................        (145,544)      (98,853)     (159,161)
 Loans sold.................................         (30,709)       (6,315)       (5,584)
 Loans securitized..........................        (190,300)           --            --
 Other reductions (2).......................          (1,899)       (3,342)       (3,302
                                                   ---------     ---------     ---------)
    Total loan reductions...................        (368,452)     (108,510)     (168,047)
                                                   ---------     ---------     ---------
Total net loans at end of period............        $679,990      $729,037      $739,793
                                                   =========     =========     =========
<FN>

(1)      Includes decreases/increases from loans-in-process.
(2)      Includes net reductions due to deferred loans fees, discounts net of amortization,
            provision for loan loss and transfers to real estate owned.
</FN>
</TABLE>

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

In accordance with Statement of Financial  Accounting Standards ("SFAS") No. 91,
which deals with the accounting  for  non-refundable  fees and costs  associated
with originating or acquiring loans, the Association's loan origination fees and
certain related direct loan origination costs are offset,  and the resulting net
amount is deferred  and  amortized  as income over the  contractual  life of the
related loans as an adjustment to the yield of such loans,  or until the loan is
paid in full. At September  30, 2001,  the  Association  had $4.6 million of net
loan fees which had been  deferred and are being  recognized  as income over the
contractual maturities of the related loans.

<PAGE>

Asset Quality

Delinquent  Loans.  The  following  table  sets  forth  information   concerning
delinquent  loans at September 30, 2001, in dollar amount and as a percentage of
the  Association's  total loan portfolio.  The amounts  presented  represent the
total  outstanding  principal  balances  of the related  loans,  rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>

                          Permanent residential
                              1-4 family             Construction          Non-Real Estate             Total
                           -------------------    -------------------    -------------------    -------------------
                           Amount   Percentage    Amount   Percentage    Amount   Percentage    Amount   Percentage
                           ------   ----------    ------   ----------    ------   ----------    ------   ----------

                                                               (Dollars in thousands)

Loans delinquent
<S>                          <C>         <C>        <C>           <C>       <C>          <C>      <C>         <C>
 for 90 days and more.....   $270        0.04%      $ --          --%       $--          --%      $270        0.04%
</TABLE>


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

For real estate loans,  in the event a loan is past due for 30 days or more, the
Association will attempt to arrange an in-person  interview with the borrower to
determine the nature of the delinquency; based upon the results of the interview
and its review of the loan status,  the  Association  may  negotiate a repayment
program  with  the  borrower.  If a  loan  remains  past  due  at 60  days,  the
Association performs an in-depth review of the loan status, the condition of the
property and the circumstances of the borrower.  If appropriate,  an alternative
payment  plan is  established.  At 90 days past due,  a letter  prepared  by the
Association is sent to the borrower  describing the steps to be taken to collect
the loan, including acceptance of a voluntary  deed-in-lieu of foreclosure,  and
of the initiation of foreclosure proceedings.  A decision as to whether and when
to  initiate  foreclosure  proceedings  is made by senior  management,  with the
assistance of legal counsel, at the direction of the Board of Directors.

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

Nonaccrual,  Past Due and Restructured  Loans. The Association's  non-performing
assets  consist  of  nonaccrual  loans,  accruing  loans  greater  than  90 days
delinquent,  real  estate  owned and  other  repossessed  assets.  All loans are
reviewed on a regular  basis and are placed on a nonaccrual  status when, in the
opinion  of  management,   the  collection  of  additional  interest  is  deemed
insufficient to warrant further accrual.  Generally,  the Association places all
loans more than 90 days past due on nonaccrual status. Uncollectible interest on
loans is  charged-off  or an allowance for losses is  established by a charge to
earnings equal to all interest  previously  accrued and interest is subsequently
recognized  only to the extent  cash  payments  are  received  until  delinquent
interest is paid in full and, in management's  judgment,  the borrower's ability
to make periodic interest and principal payments is back to normal in which case
the loan is returned to accrual status.

Real estate  acquired by  foreclosure  is  classified as real estate owned until
such  time as it is sold.  See Note 1 of  Notes  to the  Consolidated  Financial
Statements contained in the Annual Report. When such property is acquired, it is
recorded at the lower of the balance of the loan on the  property at the date of
acquisition  (not to exceed  the net  realizable  value) or the  estimated  fair
value. Costs, excluding interest,  relating to holding the property are expensed
as  incurred.  Valuations  are  periodically  performed  by  management  and  an
allowance  for losses is  established  by a charge to operations if the carrying
value of the property exceeds its estimated net realizable  value.  From time to
time, the  Association  also acquires  personal  property which is classified as
other  repossessed  assets and is carried on the books at estimated  fair market
value and disposed of as soon as commercially reasonable.
<PAGE>

As of September 30, 2001, the  Association's  total nonaccrual loans amounted to
$270,000,  or 0.04% of total loans, before net items, compared with $810,000, or
0.21% of total loans, before net items, at September 30, 2000.  Nonaccrual loans
at September  30, 2000  consisted  primarily of 12 loans on one- to  four-family
residences.  Most of these loans were subsequently  obtained through foreclosure
and sold, thus reducing the balance of nonaccrual loans.

At September 30, 2001, the Association had no restructured loans.

Real estate  owned  decreased  from the prior year  primarily as a result of the
sale of real estate properties during the year ended September 30, 2001.

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

                                                                 At September 30,
                                                2001       2000        1999         1998         1997
                                              ------     ------      ------       ------       ------
                                                              (Dollars in thousands)

Non-accruing loans:
<S>                                          <C>         <C>         <C>          <C>         <C>
    One- to four-family real estate ......      $270       $715        $915         $513         $245
    Commercial real estate................        --         --       2,400           --           --
    Consumer..............................        --         95          --           11            9
Accruing loans greater than 90
  days delinquent.........................        --         --          --           --           --
                                              ------     ------      ------       ------       ------
    Total non-performing loans............       270        810       3,315          524          254
                                              ------     ------      ------       ------       ------
Real estate owned.........................       446        788       1,495           --           --
Other repossessed assets..................        --         --          --           --           --
                                              ------     ------      ------       ------       ------
    Total repossessed assets..............       446        788       1,495           --           --
                                              ------     ------      ------       ------       ------
    Total non-performing assets...........     $ 716     $1,598      $4,810         $524         $254
                                              ======     ======      ======       ======       ======
Total non-performing assets as a
  percentage of total assets..............      0.05%      0.16%       0.46%        0.05%        0.03%
                                              ======     ======      ======       ======       ======
Total non-performing loans as a
  percentage of total loans,
  before net items........................      0.10%      0.21%       0.62%        0.07%        0.04%
                                              ======     ======      ======       ======       ======
Allowance for loan losses as a
  percentage of total non-performing
  assets..................................   1110.47%    255.44%      51.64%      372.14%      510.38%
                                             =======     ======      ======       ======       ======
Allowance for loan losses as a percentage
  of total non-performing loans...........   2944.81%    503.95%      74.93%      372.14%      510.38%
                                             =======     ======      ======       ======       ======
</TABLE>

The  allowance  for loan  losses as a  percentage  of both total  non-performing
assets and total non-performing  loans has increased  significantly at September
30, 2001.  These increases are a direct result of allowance  recorded related to
the loans purchased from WAMU.  Because the majority of the loans purchased from
WAMU were  commercial  and  consumer  loans with higher  associated  risks,  the
allowance  increased,  yet, because the loans were added in September 2001 there
has not been an impact causing the level of  non-performing  loans and assets to
increase.
<PAGE>

For the year ended  September  30,  2001,  the amount of gross income that would
have been  recorded in the period then ended if  non-accrual  loans and troubled
debt  restructurings had been current according to their original terms, and the
amount of interest income on such loans that was included in net income for each
of such periods, were, in both cases, less than 1% of total interest income.

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

As of September 30, 2001,  total  classified  assets  amounted to 0.18% of total
assets,   consistent  with  0.16%  at  September  30,  2000.  Assets  classified
substandard at September 30, 2001 totaled $2.7 million and included  $270,393 in
one- to four-family  residential loans, a $2.0 million land development loan and
$445,855 in  foreclosed  real estate  consisting  of single  family  residences.
Assets  classified  substandard  at September  30, 2000 totaled $1.7 million and
included  $358,288 in one- to  four-family  construction  loans and  $788,400 in
foreclosed  real  estate  consisting  of  single  family  residences  that  were
originally  speculative  construction  loans.  These  problem  assets  were  not
concentrated in any one market area.

Impaired  Loans.  Management  generally  identifies  loans to be  evaluated  for
impairment when such loans are on nonaccrual  status or have been  restructured.
However, not all nonaccrual loans are impaired. In accordance with SFAS No. 114,
"Accounting  by  Creditors  for  Impairment  of a Loan," as amended by SFAS 118,
loans are considered  impaired when it is probable that the Association  will be
unable to collect all amounts  contractually due,  including  scheduled interest
payments.  Factors  involved  in  determining  impairment  include,  but are not
limited to, the financial condition of the borrower, the value of the underlying
collateral, and current economic conditions.

Allowance  for Loan Losses.  The  allowance  for loan losses is  maintained at a
level  considered  adequate by  management  to provide for probable  loan losses
based  on  management's   assessment  of  various  factors  affecting  the  loan
portfolio, including a review of all loans for which full collectibility may not
be reasonably  assured,  an overall  evaluation of the quality of the underlying
collateral,  economic  conditions,  historical  loan loss  experience  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.  The  level of  allowance  for loan  losses  is  determined  based on
stratifying  the loan portfolio in to classes based on risk. For example,  loans
are stratified based on type of interest rate (fixed or adjustable),  age of the
loan  (less  seasoned  loans  are  assigned  a  higher  percentage),  geographic
location,  and type of loan.  Each stratum is assigned an  appropriate  level of
allowance percentage based on historical loss experience and risk level assigned
to the type of loans.  While  management  believes it uses the best  information
available  to  determine  the  allowance  for  loan  losses,  unforeseen  market
conditions  could result in adjustments to the allowance for loan losses and net
earnings could be significantly  affected, if circumstances differ substantially
from the assumptions  used in making the final  determination.  At September 30,
2001, the  Association  had an allowance for loan losses of $8.0 million,  which
was equal to 1110.47% of non-performing assets and 1.13% of total loans.
<PAGE>

Provisions for loan losses are charged to earnings to bring the total  allowance
for  loan  losses  to a  level  deemed  appropriate  by  management.  Management
considers  historical  loan loss  experience,  the  volume  and type of  lending
conducted by the Association,  industry standards,  the amount of non-performing
assets,  general  economic  conditions  (particularly  as  they  relate  to  the
Association's  market area), and other factors related to the  collectibility of
the Association's  loan portfolio in their  determination of the adequacy of the
allowance and the provision.  The  provisions  for loan losses  charged  against
income for the years ended September 30, 2001, 2000 and 1999 were $387,000, $1.8
million,  and  $932,000,  respectively.  Management  believes  that  the  amount
maintained in the allowance  will be adequate to absorb  probable  losses in the
portfolio.

The year ended  September 30, 2001 included two  transactions  that affected the
allowance  and provision  for loan losses.  The sale of $190.3  million in fixed
rate  single  family  loans to Fannie Mae  reduced  the  required  allowance  on
mortgage  loans.  In  conjunction  with the  sale,  $231,000  of  allowance  was
reclassified as part of the basis of the resulting  mortgage-backed  securities.
The reduction in the loan portfolio  reduced the need for  additional  allowance
and thus the  provision  for loan  losses  was much  lower  this  year  than the
previous  year.  The  WAMU  acquisition  added  $179.3  million  of loans to the
portfolio, a significant proportion of which were commercial and consumer loans.
These  non-homogeneous  loans by nature have higher  credit risk. As part of the
acquisition,  an  allowance  for loan  losses  was  established  related  to the
acquired  loans based on the types of loans and the best  information  available
regarding the factors which may affect their collectibility.  The higher balance
of the allowance for loan losses  reflects these changes  whereby a block of low
risk  single  family  mortgage  loans were sold and were  replaced by a block of
higher risk loans from the acquired branches.

The following table sets forth for the periods indicated  information  regarding
changes in the  Association's  allowance  for loan losses.  All  information  is
before net items.
<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                   --------------------------------------------------------
                                                       2001        2000        1999        1998        1997
                                                   --------    --------    --------    --------    --------
                                                                            (Dollars in thousands)
<S>                                                <C>         <C>         <C>         <C>         <C>
Total loans outstanding........................    $701,013    $750,909    $774,441    $704,703    $576,575
                                                 ==========     ========  =========   =========   =========
Average loans outstanding......................    $611,095    $747,842    $721,658    $614,457    $515,555
                                                 ==========     ========  =========   =========   =========
Allowance at beginning of period...............    $  4,082     $ 2,484   $   1,950    $  1,296    $    928
                                                   --------    --------    --------    --------    --------
Loans charged off:
   One- to four-family.........................          (3)         --        (392)         --          --
   Construction................................         (19)        (32)         --          --          (2)
   Commercial real estate......................          --        (559)         --          --          --
   Commercial business.........................         (12)         --          --         (17)         --
   Consumer....................................         (56)        (16)         (6)         (3)         --
                                                   ---------     -------   ---------   ---------   ---------
       Total charge offs                                (90)       (607)       (398)        (20)         (2)
                                                   --------    --------    --------    --------    --------
Recoveries of loans previously charged off:
   Commercial real estate......................          34         440          --          --          --
   Consumer....................................           8           1          --          --          --
                                                   --------       ------   ---------   ---------    --------
        Total recoveries                                 42         441          --          --          --
                                                   --------     --------   ---------   ---------    --------
   Net chargeoffs                                       (48)       (166)       (398)        (20)         (2)

Provision for loans losses.....................         387       1,764         932         674         370
Acquisitions...................................       3,761          --          --          --          --
Allowance reclassified with loan securitization        (231)         --           --         --          --
                                                 ----------     --------  ---------   ---------   ---------
Allowance at end of period.....................  $    7,951     $ 4,082   $   2,484   $   1,950   $   1,296
                                                 ==========     ========  =========   =========   =========
Allowance for loan losses as a percentage
 of total loans outstanding....................       1.13%       0.54%       0.32%       0.28%       0.22%
                                                      ====        ====        ====        ====        ====
Ratio of net charge-offs to average loans
 outstanding during the period.................       0.01%       0.02%       0.06%         --%         --%
                                                      ====        ====        ====         ===         ===
</TABLE>
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      At September 30,
                       -------------------------------------------------------------------------------------------------------------
                                      2001                                  2000                                  1999
                                   Percent of                            Percent of                            Percent of
                       -----------------------------------  -----------------------------------  -----------------------------------
                          Amount Allowance in   Percent of     Amount Allowance in   Percent of     Amount Allowance in   Percent of
                              of  Category to  Total Loans         of  Category to  Total Loans         of  Category to  Total Loans
                       Allowance  Total Loans  by Category  Allowance  Total Loans  by Category  Allowance  Total Loans  by Category
                       --------- ------------  -----------  --------- ------------  -----------  --------- ------------  -----------
                                                                 (Dollars in thousands)

Permanent residential
<S>                       <C>           <C>        <C>         <C>           <C>        <C>         <C>           <C>        <C>
  1-4 family............. $1,292        0.19%       60.12%     $1,449        0.19%       85.12%     $1,103        0.14%       83.56%
Multi-family residential.    540        0.08         3.32         365        0.05         2.53         267        0.03         2.38
Construction.............     12        0.01         3.09         420        0.05         3.37         221        0.03         6.87
Agriculture..............    158        0.02         0.60          --          --           --          --          --           --
Commercial real estate...  3,611        0.52        14.17       1,403        0.19         5.63         730        0.09         4.79
Land.....................    324        0.02         0.53         168        0.02         0.45          28          --         0.27
Commercial and industrial  1,325        0.19         8.00          86        0.01         0.61          23          --         0.44
Consumer.................    689        0.10        10.17         191        0.03         2.29         112        0.02         1.69
                          ------               -----------  ---------               -----------  ---------              -----------
   Total................. $7,951        1.13%      100.00%     $4,082        0.54%      100.00%     $2,484        0.31%      100.00%
                          ======               ===========  =========               ===========  =========              ===========
<CAPTION>

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

Permanent residential
<S>                       <C>           <C>        <C>         <C>           <C>        <C>
  1-4 family............. $1,141        0.16%       81.95%       $887        0.15%       86.51%
Multi-family residential.    124        0.02         2.73         121        0.02         2.93
Construction.............    116        0.02         9.12          --          --         5.31
Agriculture..............     --          --           --          --          --           --
Commercial real estate...    444        0.07         4.18         250        0.04         3.93
Land.....................     29          --         0.31          12          --         0.27
Commercial and industrial     14          --         0.29          --          --         0.01
Consumer.................     82        0.01         1.42          26        0.01         1.04
                         -------               -----------  ---------               -----------
   Total................. $1,950        0.28%      100.00%     $1,296        0.22%      100.00%
                         =======               ===========  =========               ===========
</TABLE>

<PAGE>


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

Investment Activities

Federally  chartered  savings  institutions  have the  authority  to  invest  in
securities of various federal agencies,  certain insured certificates of deposit
of banks and savings  institutions,  certain  bankers'  acceptances,  repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.  OTS regulations  restrict investments in corporate
debt  securities  of any  one  issuer  in  excess  of  15% of the  Association's
unimpaired capital and unimpaired  surplus,  as defined by federal  regulations,
which totaled  $118.8  million at September 30, 2001,  plus an additional 10% if
the  investments  are  fully  secured  by  readily  marketable  collateral.  See
"REGULATION  --  Federal  Regulation  of  Savings  Associations  -- Loans to One
Borrower"  for a discussion  of  additional  restrictions  on the  Association's
investment activities.

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

Investment  securities  held to maturity  are carried at cost and  adjusted  for
amortization  of premiums and accretion of discounts.  As of September 30, 2001,
the investment  securities  portfolio held to maturity  consisted of $135,388 in
tax-exempt  securities issued by states and municipalities and $457,000 in other
obligations.  Securities  to be held  for  indefinite  periods  of time  and not
intended to be held to maturity are classified as available for sale and carried
at fair value.  Securities available for sale include securities that management
intends to use as part of its  asset/liability  management  strategy that may be
sold in response to changes in interest rates or significant prepayment risks or
both. As of September 30, 2001,  the portfolio of securities  available for sale
consisted of $40.9 million in securities  issued by the U.S.  Treasury and other
federal  government  agencies,  $33.6 million in tax exempt securities issued by
states and municipalities,  $15.5 million in federal agency preferred stock, and
$64.7 million in investment grade corporate investments.

During the years ended September 30, 2001,  2000, and 1999,  neither the Company
nor the Association held any off-balance sheet derivative financial  instruments
in  their  investment  portfolios  to which  the  provisions  of SFAS  No.  133,
"Disclosure about Derivative  Financial  Instruments and Fair Value of Financial
Instruments," would apply.
<PAGE>


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


                                                                                At September 30,
                                               ---------------------------------------------------------------------------------
                                                           2001                        2000                         1999
                                               -----------------------     -----------------------     -------------------------
                                               Amortized          Fair     Amortized          Fair     Amortized            Fair
                                                    Cost         Value          Cost         Value          Cost           Value
                                               ---------     ---------     ---------     ---------     ---------       ---------
                                                                                 (In thousands)
Held to maturity:
<S>                                            <C>           <C>           <C>           <C>           <C>             <C>
  State and municipal obligations............. $     135     $     137     $     267     $     270     $     560       $     577
  Other obligations...........................       457           457           457           457            --              --

Available for sale:
  U.S. Government obligations.................    40,120        40,852        49,190        48,786        74,227          73,960
  State and municipal obligations.............    32,951        33,640        25,600        24,943        24,848          23,881
  Corporate obligations.......................    65,404        64,718        43,899        42,899        62,037          60,807
  FHLMC preferred stock.......................    15,716        15,466            --            --            --              --
                                               ---------     ---------     ---------     ---------     ---------       ---------
    Total.....................................  $154,783      $155,270      $119,413      $117,355      $161,672        $159,225
                                               =========     =========     =========     =========     =========       =========
</TABLE>
<TABLE>
<CAPTION>

                                                                                At September 30,
                                               ---------------------------------------------------------------------------------
                                                           2001                        2000                         1999
                                               ------------------------    ------------------------    -------------------------
                                               Amortized     Percent of    Amortized     Percent of    Amortized      Percent of
                                                    Cost      Portfolio         Cost      Portfolio         Cost       Portfolio
                                               ---------     ---------     ---------     ---------     ---------       ---------
                                                                            (Dollars in thousands)
Held to maturity:
<S>                                             <C>             <C>         <C>             <C>         <C>               <C>
  State and municipal obligations.............  $    135          0.09%     $    267          0.22%     $    560            0.35%
  Other obligations........................          457          0.29           457          0.38            --              --

Available for sale:
  U.S. Government obligations.................    40,120         25.92        49,190         41.20        74,227           45.91
  State and municipal obligations.............    32,951         21.29        25,600         21.44        24,848           15.37
  Corporate obligations.......................    65,404         42.26        43,899         36.76        62,037           38.37
  FHLMC preferred stock.......................    15,716         10.15            --            --            --              --
                                               ---------     ---------     ---------     ---------     ---------       ---------

    Total.....................................  $154,783        100.00%     $119,413        100.00%     $161,672          100.00%
                                               =========     =========     =========     =========     =========       =========
</TABLE>
<PAGE>


The following table sets forth the maturities and weighted average yields of the
debt securities in the investment portfolio at September 30, 2001.
<TABLE>
<CAPTION>

                                    One Year        After One Through      After Five Through           After Ten
                                      or Less             Five Years              Ten Years               Years             Totals
                             -------------------  --------------------   --------------------   --------------------   -----------
                               Amount      Yield    Amount       Yield      Amount      Yield     Amount       Yield
                             --------      -----   -------       -----    --------      -----     ------       -----     ---------
                                                            (Dollars in thousands)

Held to maturity:
  State and municipal
<S>                          <C>           <C>     <C>           <C>      <C>           <C>       <C>          <C>       <C>
     obligations.............$    135      9.96%   $    --         --     $    --         --      $    --        --      $    135
  Other obligations..........      --        --         --         --          --         --          457      8.07%          457
Available for sale:
  U.S. Government
   obligations...............  15,003      4.68%    15,200       4.35%      9,917       3.50%          --        --        40,120
  State and municipal
   obligations...............      --        --        586       6.00%        943       6.42%      31,422      7.62%       32,951
  Corporate obligations......  10,012      6.47%    35,562       5.42%         --         --       19,830      4.29%       65,404
  FHLMC preferred stock......  15,716      4.66%        --         --          --         --           --        --        15,716
                             --------              -------               --------                  ------                --------
    Total.................... $40,866              $51,348                $10,860                 $51,709                $154,783
                             ========              =======               ========                  ======                ========
</TABLE>


At  September  30, 2001 the Company  did not hold any  securities  from a single
issuer, other than the U.S. Government, whose aggregate book value was in excess
of 10% of the Company's shareholders' equity, or $11.4 million.
<PAGE>

Mortgage-Backed and Related Securities

At September 30, 2001, the Company's net  mortgage-backed and related securities
totaled $423.3 million at fair value ($421.3  million at amortized cost) and had
a  weighted  average  yield of  5.74%.  At  September  30,  2001,  12.87% of the
mortgage-backed and related securities were adjustable rate securities.

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

The second group, called collateralized mortgage obligations ("CMOs"),  consists
of  securities  created  from and secured by the  securities  in the first group
described above. CMOs are an example of a security called a derivative,  because
they are derived from mortgage  pass-through  securities.  Underwriters  of CMOs
create these  securities  by dividing up the interest and  principal  cash flows
from the pools of mortgages and selling these different  slices of cash flows as
a new and different  class of individual  securities or "tranches." At September
30,  2001,  the Company held $337.7  million of CMOs,  comprised of two classes,
planned  amortization  class tranches ("PACs") and Floaters.  The least volatile
CMOs are PACs. With PACs, the yields, average lives, and lockout periods when no
payments are received are designed to closely  follow the actual  performance of
the  underlying  MBS. PACs are available in a variety of short term  maturities,
usually two, three, five, or seven years. CMO floaters are similar to adjustable
rate mortgages; they carry an interest rate that changes in a fixed relationship
to an interest rate index,  typically the London Interbank Offer Rate ("LIBOR").
Floaters  usually have caps that determine the highest interest that can be paid
by the  securities.  Except for caps on floaters,  PACs and floaters may help to
manage interest rate risk by reducing asset duration.  They also may help manage
price  volatility  since they  typically  have short  maturities or coupons that
reset monthly or quarterly to reflect changes in the index rate.

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

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

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

                                                                                At September 30,
                                              -------------------------------------------------------------------------------
                                                         2001                         2000                       1999
                                              ------------------------     -----------------------     ----------------------
                                               Amortized          Fair     Amortized          Fair     Amortized         Fair
                                                    Cost         Value          Cost         Value          Cost        Value
                                              ----------      --------     ---------       -------     ---------      -------
                                                                             (In thousands)
Held to maturity:
<S>                                             <C>           <C>            <C>           <C>           <C>          <C>
  GNMA........................................   $ 1,621       $ 1,642       $ 2,160       $ 2,146       $ 2,601      $ 2,596

Available for sale:
  Fannie Mae..................................    56,833        57,194        13,498        13,598        24,319       24,410
  FHLMC.......................................    19,538        19,797        32,902        33,282        18,375       18,371
  GNMA........................................     6,816         6,977        10,728        10,681        11,783       11,768
  CMOs........................................   336,452       337,670        18,355        17,770        18,598       18,146
                                              ----------      --------     ---------       -------     ---------      -------
    Total.....................................  $421,260      $423,280       $77,643       $77,477       $75,676      $75,291
                                              ==========      ========     =========       =======     =========      =======

</TABLE>
<TABLE>
<CAPTION>
                                                                                At September 30,
                                               --------------------------------------------------------------------------------
                                                        2001                        2000                        1999
                                               ------------------------    ------------------------    ------------------------
                                               Amortized     Percent of    Amortized     Percent of    Amortized     Percent of
                                                    Cost      Portfolio         Cost      Portfolio         Cost      Portfolio
                                               ---------     ----------    ---------     ----------    ---------     ----------
                                                                            (Dollars in thousands)
Held to maturity:
<S>                                             <C>             <C>          <C>            <C>          <C>            <C>
  GNMA........................................   $ 1,621          0.38%      $ 2,160          2.78%      $ 2,601          3.44%

Available for sale:

  Fannie Mae..................................    56,833         13.49        13,498         17.38        24,319         32.13
  FHLMC.......................................    19,538          4.64        32,902         42.38        18,375         24.28
  GNMA........................................     6,816          1.62        10,728         13.82        11,783         15.57
  CMOs........................................   336,452         79.87        18,355         23.64        18,598         24.58
                                              ----------      --------     ---------       -------     ---------       -------
    Total.....................................  $421,260        100.00%      $77,643        100.00%      $75,676        100.00%
                                              ==========      ========     =========       =======     =========       =======
</TABLE>



Interest-Earning Deposits

The Company had  interest-earning  deposits in the FHLB of Seattle  amounting to
$4.9 million and $4.4 million at September 30, 2001 and 2000, respectively.
<PAGE>

Deposit Activities and Other Sources of Funds

General.  Deposits are the primary source of the Association's funds for lending
and other investment purposes. In addition to deposits,  the Association derives
funds from loan principal  repayments.  Loan repayments are a relatively  stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term  basis to compensate  for reductions in the  availability  of funds
from other  sources.  They may also be used on a longer  term basis for  general
business purposes.

Deposits.  The Association's  deposits are attracted principally from within the
Association's  primary market area through the offering of a broad  selection of
deposit instruments, including checking accounts, negotiable order of withdrawal
("NOW") accounts, money market deposit accounts,  passbook and statement savings
accounts, and certificates of deposit. Included among these deposit products are
individual  retirement  account  ("IRA")  certificates of  approximately  $112.7
million at September 30, 2001.  Deposit  account terms vary,  with the principal
differences being the minimum balance  required,  the time period the funds must
remain on deposit and the interest rate.

Beginning in 1996, the  Association  began  accepting  deposits from outside its
primary market area through both private placements and brokered deposits if the
terms of the deposits  fit the  Association's  specific  needs and are at a rate
lower than the rates on similar maturity borrowings through the FHLB of Seattle.
At September 30, 2001, these deposits  totaled $11.7 million,  or 1.01% of total
deposits.

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

For the year  ended  September  30,  2001,  the  Association  experienced  a net
increase  in deposits  (before  interest  credited)  of $430.4  million.  Of the
increase, $423.5 million is attributable to the acquisition of the branches from
WAMU. The remaining  increase of $6.9 million is primarily  related to increases
in  deposits  throughout  the branch  network and  specifically  at the four new
branch locations established during fiscal year 2001.

At September  30, 2001,  certificate  accounts  maturing  during the year ending
September 30, 2002 totaled $366.2 million. Based on historical  experience,  the
Association  expects  that  a  significant  amount  will  be  renewed  with  the
Association at maturity.  In the event a significant amount of such accounts are
not renewed at maturity,  the Association  would not expect a resultant  adverse
impact on  operations  and  liquidity  because  of the  Association's  borrowing
capacity. See "-- Borrowings."

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

The following table  indicates the amount of certificate  accounts with balances
of $100,000 or greater by time  remaining  until  maturity as of  September  30,
2001.
<TABLE>
<CAPTION>


                                                          Certificate
                  Maturity Period                            Accounts
                                                         ------------
                                                        (In thousands)
<S>                                                          <C>

                     Three months or less...............      $40,130
                     Over three through six months......       31,555
                     Over six through twelve months.....       21,679
                     Over twelve months.................       41,274
                                                             --------
                         Total..........................     $134,638
                                                             ========
</TABLE>

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


                                                                                  At September 30,
                                                   2001                                 2000                             1999
                                      ---------------------------           --------------------------------      -----------------
                                                 Percent                              Percent                               Percent
                                                      of     Increase                      of       Increase                     of
                                         Amount    Total    (Decrease)        Amount    Total      (Decrease)       Amount    Total
                                      ---------   ------     --------       --------   ------       --------      --------   ------
                                                                               (Dollars in thousands)

<S>                                  <C>          <C>        <C>            <C>        <C>          <C>           <C>        <C>
Certificates of deposit..........      $543,880    47.17%    $171,132       $372,748    53.60%      ($19,338)     $392,086    54.43%

Transaction accounts:

Non-interest checking............       130,649    11.33       76,309         54,340     7.81         2,021         52,319     7.26
Interest-bearing checking........       116,756    10.13       44,570         72,186    10.38         4,883         67,303     9.34
Passbook and statement savings...        77,646     6.74       29,699         47,947     6.90        (11,843)       59,790     8.30
Money market deposits............       283,893    24.63      135,733        148,160    21.31           (743)      148,903    20.67
                                      ---------   ------     --------       --------   ------       --------      --------   ------
Total transaction accounts.......       608,944    52.83      286,311        322,633    46.40         (5,682)      328,315    45.57
                                      ---------   ------     --------       --------   ------       --------      --------   ------
Total deposits...................    $1,152,824   100.00%    $457,443       $695,381   100.00%      ($25,020)     $720,401   100.00%
                                      =========   ======     ========       ========   ======       ========      ========   ======
<FN>

The majority of the increases noted for the year ended September 30, 2001 relate
to the WAMU branch acquisition.
</FN>
</TABLE>

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

                                                     Year Ended September 30,
                                              --------------------------------------
                                                    2001          2000         1999
                                              -----------    ----------     --------
                                                           (Dollars in thousands)

<S>                                           <C>             <C>           <C>
Beginning balance........................        $695,381      $720,401     $689,541
                                              -----------    ----------     --------
Increase due to acquired deposits........         423,457            --           --
Net inflow (outflow) of deposits before
 interest credited.......................           6,902       (49,728)       6,251
Interest credited........................          27,084        24,708       24,609
                                               ----------      --------     --------
Net increase (decrease) in deposits......         457,443       (25,020)      30,860
                                               ----------      --------     --------
Ending balance...........................      $1,152,824      $695,381     $720,401
                                               ==========      ========     ========
</TABLE>
<PAGE>

Borrowings.  Deposit  liabilities  are  the  primary  source  of  funds  for the
Association's  lending and investment  activities  and for its general  business
purposes.  The  Association  may rely upon  advances  from the FHLB of  Seattle,
reverse repurchase  agreements and bank lines of credit to supplement its supply
of  lendable  funds and to meet  deposit  withdrawal  requirements.  The FHLB of
Seattle serves as the Association's primary borrowing source after deposits.

The FHLB of Seattle  functions as a central  reserve bank  providing  credit for
savings and loan  associations and certain other member financial  institutions.
As a member,  the  Association  is required to own capital  stock in the FHLB of
Seattle and is  authorized  to apply for  advances on the security of certain of
its  mortgage  loans  and  other  assets   (principally   securities  which  are
obligations  of,  or  guaranteed  by,  the  U.S.  Government)  provided  certain
creditworthiness  standards have been met. Advances are made pursuant to several
different  credit  programs.  Each credit  program has its own interest rate and
range of  maturities.  Depending  on the program,  limitations  on the amount of
advances are based on the financial  condition of the member institution and the
adequacy of  collateral  pledged to secure the credit.  As a member of the FHLB,
the  Association  maintains a credit line that is a percentage of its regulatory
assets,  subject to collateral  requirements.  At September 30, 2001, the credit
line was 30% of total assets of the Association.  Advances are collateralized in
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB,  by certain  mortgages  or deeds of trust and  securities  of the U.S.
Government and agencies thereof.

The Company has established  credit lines at two commercial banks.  These credit
lines represent  aggregate borrowing capacity of $16.7 million. At September 30,
2001, borrowings under these lines of credit totaled $1.7 million.

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

                                                       At September 30,
                                                     ---------------------
                                                     2001             2000
                                                     ----             ----
Weighted average rate paid on:
<S>                                                  <C>              <C>
  FHLB advances...............................       5.73%            5.90%
  Short term borrowings.......................       5.58%            9.01%

</TABLE>
<TABLE>
<CAPTION>
                                                   Year Ended September 30,
                                                  -------------------------
                                                      2001             2000
                                                  --------         --------
                                                    (Dollars in thousands)
Maximum amount outstanding at any month end:
<S>                                               <C>              <C>
                                                  --------         --------
  FHLB advances...............................    $173,000         $230,000
  Short term borrowings.......................       6,400            3,000

Approximate average balance:
  FHLB advances...............................     170,521          207,218
  Short term borrowings.......................       3,265            1,290

Approximate weighted average rate paid on:
  FHLB advances...............................        5.90%            5.88%
  Short term borrowings.......................        8.22             9.34
</TABLE>

Subsidiaries.  The  Association  established  an operating  subsidiary,  Pacific
Cascades Financial,  Inc.,  effective July 14, 2000. Pacific Cascades Financial,
Inc. is an Oregon chartered corporations,  of which the Association owns 100% of
its  capital  stock.  Pacific  Cascades  Financial  serves as the  Association's
trustee  on  deeds  of  trust  and  as  trustee   handles  normal   reconveyance
transactions   on  paid-off   Association   loans,   and  handles   non-judicial
foreclosures.
<PAGE>

The  Association  also owns 100% of the capital stock of Klamath First Financial
Services,  Inc.  Klamath First  Financial  serves as an  investment  subsidiary,
providing investment and brokerage services to customers.

The Company  established  a  subsidiary,  Klamath First Capital Trust I, in July
2001 for the purpose of issuing mandatorily redeemable preferred securities. See
Note 13 to the Consolidated Financial Statements contained in the Annual Report.
<PAGE>

                          REGULATION OF THE ASSOCIATION

General

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

Federal Regulation of Savings Associations

Office of Thrift  Supervision.  The OTS is an  office in the  Department  of the
Treasury subject to the general oversight of the Secretary of the Treasury.  The
OTS has extensive authority over the operations of savings  associations.  Among
other functions,  the OTS issues and enforces  regulations  affecting  federally
insured savings associations and regularly examines these institutions.

All savings  associations are required to pay assessments to the OTS to fund the
agency's operations.  The general assessments,  paid on a semi-annual basis, are
determined  based  on  the  savings   association's   total  assets,   including
consolidated subsidiaries.  The Association's OTS assessment for the fiscal year
ended September 30, 2001 was $188,441.

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

The Association,  as a member of the FHLB of Seattle, is required to acquire and
hold  shares of capital  stock in the FHLB of Seattle in an amount  equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (i.e.,  borrowings)  from the FHLB of
Seattle.  The  Association  is in  compliance  with  this  requirement  with  an
investment in FHLB of Seattle stock of $12.7 million at September 30, 2001.

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

Federal Deposit Insurance Corporation. The FDIC is an independent federal agency
established  originally  to insure  the  deposits,  up to  prescribed  statutory
limits,  of federally  insured banks and to preserve the safety and soundness of
the banking industry.  The FDIC maintains two separate insurance funds: the Bank
Insurance  Fund ("BIF") and the SAIF.  The  Association's  deposit  accounts are
insured by the FDIC under the SAIF to the maximum  extent  permitted  by law. As
insurer of the Association's deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.

Under  applicable  regulations,  the FDIC assigns an institution to one of three
capital categories based on the institution's  financial information,  as of the
reporting period ending seven months before the assessment  period.  The capital
categories  are: (i)  well-capitalized,  (ii) adequately  capitalized,  or (iii)
undercapitalized.  An  institution  is also  placed in one of three  supervisory
subcategories  within each capital group.  The supervisory  subgroup to which an
institution  is assigned is based on a  supervisory  evaluation  provided to the
FDIC by the  institution's  primary federal  regulator and information  that the
FDIC determines to be relevant to the institution's  financial condition and the
risk posed to the deposit  insurance  funds.  An  institution's  assessment rate
depends on the capital category and supervisory category to which it is assigned
with the most well-capitalized, healthy institutions receiving the lowest rates.

Effective  January  1,  1997,  the  premium  schedule  for BIF and SAIF  insured
institutions  ranged  from  0  to  27  basis  points.   However,   SAIF  insured
institutions  and BIF  insured  institutions  are  required  to pay a  Financing
Corporation  assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s.  This amount is currently equal to about 2.1 basis
points for each $100 in domestic  deposits for both BIF and SAIF members.  These
assessments, which may be revised based upon the level of BIF and SAIF deposits,
will continue until the bonds mature in the year 2015.

The FDIC is authorized to raise the assessment  rates in certain  circumstances.
The FDIC has exercised  this  authority  several times in the past and may raise
insurance  premiums in the future. If such action is taken by the FDIC, it could
have an adverse effect on the earnings of the Association.

Under the FDIA,  insurance  of  deposits  may be  terminated  by the FDIC upon a
finding that the institution has engaged in unsafe or unsound  practices,  is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
OTS.  Management of the Association does not know of any practice,  condition or
violation that might lead to termination of deposit insurance.

Liquidity  Requirements.  Under OTS  regulations,  each savings  institution  is
required to maintain an average daily  balance of specified  liquid assets equal
to a  monthly  average  of not  less  than a  specified  percentage  of its  net
withdrawable  deposit  accounts  plus  short-term  borrowings.   This  liquidity
requirement  is currently 4%, but may be changed from time to time by the OTS to
any amount within the range of 4% to 10%. Monetary  penalties may be imposed for
failure to meet liquidity  requirements.  The Association has never been subject
to monetary penalties for failure to meet its liquidity requirements.
<PAGE>

Prompt  Corrective  Action.  The OTS is  required  to take  certain  supervisory
actions against  undercapitalized  savings  associations,  the severity of which
depends upon the  institution's  degree of  undercapitalization.  Generally,  an
institution  that has a ratio of total capital to  risk-weighted  assets of less
than 8%, a ratio of Tier I (core) capital to risk- weighted  assets of less than
4%, or a ratio of core  capital to total  assets of less than 4% (3% or less for
institutions  with  the  highest   examination   rating)  is  considered  to  be
"undercapitalized."  An institution  that has a total  risk-based  capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is
less  than  3% is  considered  to be  "significantly  undercapitalized"  and  an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically  undercapitalized."  Subject to a narrow  exception,
the  OTS is  required  to  appoint  a  receiver  or  conservator  for a  savings
institution that is "critically  undercapitalized." OTS regulations also require
that a capital restoration plan be filed with the OTS within 45 days of the date
a  savings   institution   receives   notice  that  it  is   "undercapitalized,"
"significantly  undercapitalized" or "critically  undercapitalized."  Compliance
with the plan must be guaranteed by any parent  holding  company in an amount of
up to the lesser of 5% of the  institution's  assets or the amount  which  would
bring the institution into compliance with all capital  standards.  In addition,
numerous  mandatory  supervisory  actions  become  immediately  applicable to an
undercapitalized   institution,   including,   but  not  limited  to,  increased
monitoring by regulators and restrictions on growth,  capital  distributions and
expansion.  The OTS  also  could  take  any  one of a  number  of  discretionary
supervisory  actions,  including  the  issuance of a capital  directive  and the
replacement of senior executive officers and directors.

At September 30, 2001, the  Association  was  categorized as "well  capitalized"
under the prompt corrective action regulations of the OTS.

Standards for Safety and Soundness. The federal banking regulatory agencies have
prescribed,  by regulation,  standards for all insured  depository  institutions
relating to:  (i) internal  controls,  information  systems and  internal  audit
systems; (ii) loan documentation;  (iii) credit underwriting; (iv) interest rate
risk  exposure;  (v) asset  growth;  (vi) asset  quality;  (vii)  earnings;  and
(viii) compensation,  fees and benefits ("Guidelines"). The Guidelines set forth
the safety and  soundness  standards  that the federal  banking  agencies use to
identify and address problems at insured depository  institutions before capital
becomes  impaired.  If the OTS determines that the Association fails to meet any
standard prescribed by the Guidelines, the agency may require the Association to
submit to the agency an acceptable plan to achieve compliance with the standard.
Management  is aware of no  conditions  relating to these  safety and  soundness
standards which would require submission of a plan of compliance.

Qualified   Thrift  Lender  Test.  All  savings   associations,   including  the
Association,  are  required to meet a qualified  thrift  lender  ("QTL") test to
avoid certain  restrictions  on their  operations.  This test requires a savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code ("Code").  Under either test, such assets primarily
consist of residential  housing related loans and investments.  At September 30,
2001, the Association met the test and its QTL percentage was 74.70%.

Any  savings  association  that  fails to meet the QTL test  must  convert  to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "-- Savings and Loan Holding Company Regulations."

Capital  Requirements.  Federally  insured  savings  associations,  such  as the
Association, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a  leverage  ratio  (or  core  capital)  requirement  and a  risk-based  capital
requirement applicable to such savings associations.
<PAGE>

The capital  regulations  require  tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation).  At September 30, 2001, the Association
had tangible capital of $73.2 million,  or 5.2% of adjusted total assets,  which
is approximately $51.9 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date. At September 30, 2001, the  Association had
$44.1 million of intangible  assets  consisting of core deposit  intangible  and
other intangible assets related to the Wells Fargo branch acquisition in 1997and
the WAMU branch acquisition in 2001.

The capital  standards  also require core capital  equal to at least 3% to 4% of
adjusted total assets,  depending on an institution's  supervisory  rating. Core
capital  generally  consists of tangible  capital.  At September  30, 2001,  the
Association  had core capital equal to $73.2 million,  or 5.2% of adjusted total
assets,  which is $16.5 million above the minimum leverage ratio  requirement of
4% as in effect on that date.

The OTS  risk-based  requirement  requires  savings  associations  to have total
capital of at least 8% of risk-weighted  assets.  Total capital consists of core
capital,  as defined above, and  supplementary  capital.  Supplementary  capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital.

In determining the amount of risk-weighted assets, all assets, including certain
off-balance  sheet items,  are  multiplied by a risk weight,  ranging from 0% to
100%, based on the risk inherent in the type of asset. For example,  the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to- four
family first lien mortgage  loans not more than 90 days  delinquent and having a
loan-to-value  ratio of not more than 80% at origination  unless insured to such
ratio by an insurer approved by Fannie Mae or FHLMC.

On  September  30,  2001,  the  Association  had  total  risk-based  capital  of
approximately  $81.0 million,  including  $73.2 million in core capital and $7.8
million in qualifying  supplementary capital, and risk-weighted assets of $782.5
million,  or total  capital of 10.4% of  risk-weighted  assets.  This amount was
$18.4 million above the 8% requirement in effect on that date.

The OTS is  authorized  to  impose  capital  requirements  in  excess  of  these
standards on individual  associations on a case-by-case  basis.  The OTS and the
FDIC are authorized and, under certain  circumstances  required, to take certain
actions   against  savings   associations   that  fail  to  meet  their  capital
requirements.  The OTS is  generally  required to take  action to  restrict  the
activities of an  "undercapitalized  association"  (generally  defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based  capital
ratio or an 8% risk-based  capital ratio).  Any such  association  must submit a
capital  restoration  plan and until  such plan is  approved  by the OTS may not
increase its assets,  acquire another institution,  establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is  authorized  to impose the  additional  restrictions  that are  applicable to
significantly undercapitalized associations.

The OTS is also generally  authorized to reclassify an association  into a lower
capital category and impose the restrictions  applicable to such category if the
institution  is  engaged in unsafe or  unsound  practices  or is in an unsafe or
unsound condition.

The imposition by the OTS or the FDIC of any of these measures on the Company or
the  Association may have a substantial  adverse effect on their  operations and
profitability.

Limitations on Capital  Distributions.  The OTS imposes various  restrictions on
savings  associations  with respect to their  ability to make  distributions  of
capital,  which include  dividends,  stock redemptions or repurchases,  cash-out
mergers  and other  transactions  charged to the capital  account.  The OTS also
prohibits a savings  association  from declaring or paying any dividends or from
repurchasing  any of its stock if, as a result of such  action,  the  regulatory
capital of the  association  would be reduced  below the amount  required  to be
maintained  for the  liquidation  account  established  in  connection  with the
association's mutual to stock conversion.
<PAGE>

The Association may make a capital  distribution  without OTS approval  provided
that the  Association  notifies  the OTS 30 days before it declares  the capital
distribution  and that the following  requirements  are met: (i) the Association
has a regulatory rating in one of the two top examination  categories,  (ii) the
Association is not of supervisory  concern,  and will remain  adequately or well
capitalized,  as  defined  in the  OTS  prompt  corrective  action  regulations,
following the proposed distribution,  and (iii) the distribution does not exceed
the  Association's  net income for the calendar  year-to-date  plus retained net
income for the previous two calendar years (less any dividends previously paid).
If the Association does not meet these stated  requirements,  it must obtain the
prior approval of the OTS before declaring any proposed distributions.

In the event the Association's  capital falls below its regulatory  requirements
or the OTS notifies it that it is in need of more than normal  supervision,  the
Association's  ability to make  capital  distributions  will be  restricted.  In
addition, no distribution will be made if the Association is notified by the OTS
that a proposed  capital  distribution  would  constitute  an unsafe and unsound
practice, which would otherwise be permitted by the regulation.

Loans to One  Borrower.  Federal law  provides  that  savings  institutions  are
generally subject to the national bank limit on loans to one borrower. A savings
institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus.  An additional
amount may be lent, equal to 10% of unimpaired  capital and surplus,  if secured
by  specified   readily-marketable   collateral.  At  September  30,  2001,  the
Association's limit on loans to one borrower was $17.8 million. At September 30,
2001, the  Association's  largest  aggregate amount of loans to one borrower was
$5.4 million, all of which were performing according to their original terms.

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

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

Transactions with Affiliates. Savings associations must comply with Sections 23A
and 23B of the Federal Reserve Act relative to  transactions  with affiliates in
the same  manner and to the same  extent as if the  savings  association  were a
Federal Reserve member Association.  Generally,  transactions  between a savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain of these  transactions,  such as loans to an  affiliate,  are
restricted  to a percentage  of the  association's  capital.  Affiliates  of the
Association  include the Company and any company  which is under common  control
with the  Association.  In addition,  a savings  association may not lend to any
affiliate  engaged  in  activities  not  permissible  for a savings  association
holding  company or acquire the securities of most  affiliates.  The OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a case
by case basis.

Certain  transactions with directors,  officers or controlling  persons are also
subject to conflict of interest  regulations enforced by the OTS. These conflict
of interest  regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
<PAGE>

Community  Reinvestment  Act.  Under  the  federal  Community  Reinvestment  Act
("CRA"),  all federally-  insured  financial  institutions have a continuing and
affirmative  obligation  consistent with safe and sound  operations to help meet
all the credit needs of its  delineated  community.  The CRA does not  establish
specific  lending  requirements  or programs nor does it limit an  institution's
discretion  to develop the types of products and  services  that it believes are
best suited to meet all the credit needs of its  delineated  community.  The CRA
requires  the  federal   banking   agencies,   in  connection   with  regulatory
examinations,  to assess an institution's  record of meeting the credit needs of
its  delineated  community  and to take such record into  account in  evaluating
regulatory  applications  to  establish  a new branch  office  that will  accept
deposits,  relocate an existing office, or merge or consolidate with, or acquire
the  assets  or assume  the  liabilities  of, a  federally  regulated  financial
institution,   among  others.   The  CRA  requires   public   disclosure  of  an
institution's CRA rating. The Association received a "satisfactory"  rating as a
result of its latest evaluation.

Regulatory and Criminal Enforcement Provisions.  The OTS has primary enforcement
responsibility  over savings  institutions and has the authority to bring action
against all  "institution-affiliated  parties," including stockholders,  and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful  action  likely to have an adverse  effect on an  insured  institution.
Formal  enforcement action may range from the issuance of a capital directive or
cease and desist  order to  removal  of  officers  or  directors,  receivership,
conservatorship  or termination of deposit  insurance.  Civil  penalties cover a
wide range of violations  and can amount to $27,500 per day, or $1.1 million per
day in especially egregious cases. Under the FDIA, the FDIC has the authority to
recommend  to the  Director  of the OTS that  enforcement  action be taken  with
respect  to a  particular  savings  institution.  If  action is not taken by the
Director,   the  FDIC  has   authority  to  take  such  action   under   certain
circumstances.  Federal  law also  establishes  criminal  penalties  for certain
violations.
<PAGE>

                            REGULATION OF THE COMPANY

General

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

Company Acquisitions

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

Holding Company Activities

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

Potential Impact of Current Legislation on Future Results of Operations

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

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

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

Affiliate Restrictions

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

Qualified Thrift Lender Test

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


                                    TAXATION

Federal Taxation

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

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

The  provisions  repealing  the  current  thrift bad debt  rules were  passed by
Congress as part of "The Small  Business  Job  Protection  Act of 1996." The new
rules eliminated the 8% of taxable income method for deducting  additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions  recapture all or a portion
of their  bad debt  reserves  added  since  the base  year  (last  taxable  year
beginning  before January 1, 1988).  The Association  has previously  recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on net income or federal  income tax  expense.  For  taxable
years  beginning after December 31, 1995, the  Association's  bad debt deduction
will be determined on the basis of net charge-offs  during the taxable year. The
new rules allow an  institution  to suspend bad debt reserve  recapture  for the
1996 and 1997 tax years if the institution's lending activity for those years is
equal to or greater than the institution's average mortgage lending activity for
the six taxable years  preceding 1996 adjusted for inflation.  For this purpose,
only home purchase or home  improvement  loans are included and the  institution
can elect to have the tax years with the  highest  and lowest  lending  activity
removed from the average calculation. If an institution is permitted to postpone
the reserve  recapture,  it must begin its six year  recapture no later than the
1998 tax year  (fiscal  year ending  September  30, 1999 for the  Company).  The
unrecaptured  base year reserves will not be subject to recapture as long as the
institution  continues  to carry on the business of banking.  In  addition,  the
balance of the pre-1988 bad debt  reserves  continue to be subject to provisions
of present law referred to below that  require  recapture in the case of certain
excess distributions to shareholders.

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

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

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

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

State Taxation

The Company and the Association are subject to an Oregon corporate excise tax at
a statutory rate of 6.6% of income.  Neither the Company's nor the Association's
state  income tax returns  have been  audited  during the past five  years.  The
Association is subject to Washington state Business and Organization tax for the
operations in that state.  There have not been any audits of the Company's state
income tax returns during the past five years.

Competition

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

Personnel

As of September 30, 2001,  the  Association  had 385 full-time and 104 part-time
employees.  The employees are not represented by a collective  bargaining  unit.
The Association believes its relationship with its employees is good.

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

Name                      Age(1)   Position

<S>                          <C>   <C>
Kermit K. Houser             58    President and Chief Executive Officer

Robert A. Tucker             53    Executive Vice President and Chief Credit
                                     Officer (Retired effective October 2001)

Ben A. Gay                   54    Executive Vice President and Chief Credit
                                     Officer (Effective September 2001)

Marshall J. Alexander        50    Executive Vice President and Chief
                                     Financial Officer

Frank X. Hernandez           46    Senior Vice President and Chief Operations
                                     Officer

Craig Moore                  44    Senior Vice President/Chief Auditor/Corporate
                                     Counsel
<FN>
______________
(1)      At September 30, 2001.
</FN>
</TABLE>

<PAGE>

Kermit K.  Houser has served as  President  and Chief  Executive  Officer of the
Company and the  Association  since  November  2000.  Mr. Houser was  previously
employed  in various  capacities  by the Bank of America  from 1991 to  November
2000, as senior vice  president and manager for  commercial  banking,  executive
vice  president and senior credit  officer,  and most  recently,  as senior vice
president  and market  executive for Bank of America's  South Valley  commercial
banking,  in  Fresno,  California.  Mr.  Houser  has 30 years of  experience  in
banking,  and has  been  an  active  member  of  numerous  civic  and  community
organizations.

Robert A. Tucker has been employed by the Association  since 1973. He has served
as Senior Vice  President  since  November  1989.  He served as Chief  Operating
Officer from March 1997 to June 1998 and has served as Chief Lending Officer and
Secretary since July 1998. Mr. Tucker retired from the Company effective October
2001.

Ben A. Gay joined  Klamath  First in  September  2001 after a 30-year  career in
commercial banking and insurance,  on both the East and West coasts. Mr. Gay has
served in a variety of managerial  positions in credit risk and loan  management
and has most  recently  served as a western  regional  executive for credit risk
management for a major banking concern.

Marshall J.  Alexander has been employed by the  Association  since 1986. He has
served as Vice President and Chief  Financial  Officer since August 1994 and was
named an Executive Vice President in December 2000.

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

Craig M.  Moore has a banking  career of more than 20 years,  with four of those
years at Klamath First. He is an attorney,  a Certified  Internal  Auditor and a
Certified Financial Services Auditor.
<PAGE>

Item 2.  Properties

The  following  table sets forth the location of the  Association's  offices and
other  facilities used in operations as well as certain  additional  information
relating to these offices and facilities as of September 30, 2001.
<TABLE>
<CAPTION>

                                    Year                           Square
Description/Address               Opened   Leased/Owned           Footage
------------------------          ------   ------------           -------
Main Office
<S>                                 <C>           <C>              <C>
540 Main Street                     1939          Owned            25,660
Klamath Falls, Oregon

Branch Offices

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

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

512 Walker Avenue                   1977          Owned             4,216
Ashland, Oregon

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

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

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

721 Chetco Avenue                   1997          Owned             5,409
Brookings, Oregon

293 North Broadway                  1997          Owned             5,087
Burns, Oregon

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

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

259 North Adams                     1997          Owned             5,803
Coquille, Oregon

106 Southwest 1st Street            1997          Owned             4,700
Enterprise, Oregon
<PAGE>
<CAPTION>
                                    Year                           Square
Description/Address               Opened   Leased/Owned           Footage
------------------------          ------   ------------           -------
<S>                                 <C>           <C>              <C>
555 1st Street                      1997          Owned             1,844
Fossil, Oregon

708 Garibaldi Avenue                1997          Owned             1,400
Garibaldi, Oregon

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

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

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

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

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

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

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

217 Main Street                     1997          Owned             6,067
Nyssa, Oregon

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

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

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

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

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

38770 North Main Street             1997          Owned             2,997
Scio, Oregon
<PAGE>
<CAPTION>
                                    Year                           Square
Description/Address               Opened   Leased/Owned           Footage
------------------------          ------   ------------           -------
<S>                                 <C>           <C>              <C>
508 Main Street                     1997          Owned             2,282
Moro, Oregon

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

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

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

185 East California                 1998          Owned             2,116
Jacksonville, Oregon

1217 Plaza Boulevard, Suite A       2000          Leased            2,400
Central Point, Oregon

948 Southwest 9th Street            2001          Owned             3,277
Redmond, Oregon

2203 SW Court Place                 2001          Leased              540
Pendleton, Oregon

1775 East Idaho Avenue              2001          Leased              693
Ontario, Oregon

2727 South Quillan Street           2001          Leased              693
Kennewick, Washington

2801 Duportail Street               2001          Leased              966
Richland, Washington

303 11th Street                     2001          Leased            2,920
Astoria, Oregon

2245 Main Street                    2001          Leased            4,911
Baker City, Oregon

1095 Oregon Avenue                  2001          Leased            4,382
Bandon, Oregon

110 North Redwood Highway 199       2001          Leased            3,091
Cave Junction, Oregon

199 North Nehalem                   2001          Leased            2,400
Clatskanie, Oregon
<PAGE>
<CAPTION>
                                    Year                           Square
Description/Address               Opened   Leased/Owned           Footage
------------------------          ------   ------------           -------
<S>                                 <C>           <C>              <C>

212 South 5th Street                2001          Leased            6,200
Coos Bay, Oregon

150 South Wall                      2001          Leased            9,271
Coos Bay, Oregon

430 Highway 101                     2001          Leased            4,783
Florence, Oregon

2212 Island Avenue                  2001          Leased            4,616
LaGrande, Oregon

1611 Virginia Avenue                2001          Leased            5,631
North Bend, Oregon

761 Avenue G                        2001          Leased            2,416
Seaside, Oregon

2405 3rd Street                     2001          Leased            4,690
Tillamook, Oregon

411 Pacific Avenue                  2001          Leased            2,819
Tillamook, Oregon

Backoffice Processing Facilities

600 Main Street                     1998          Leased            2,800
Klamath Falls, Oregon

714 Main Street                     2001          Leased           15,185
Klamath Falls, Oregon

533 Main Street                     2000          Leased            1,325
Klamath Falls, Oregon
<FN>

The net  book  value of the  Company's  investment  in  office,  properties  and
equipment  totaled $16.9  million at September 30, 2001.  See Note 6 of Notes to
the Consolidated Financial Statements contained in the Annual Report.
</FN>
</TABLE>

Item 3.  Legal Proceedings

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

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year ended September 30, 2001.

<PAGE>

                                     PART II

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

         The information  contained under the section  captioned  "Common Stock
         Information" on page 19 of the Annual Report is incorporated herein by
         reference.

Item 6.  Selected Financial Data

         The  information  contained  under  the  section  captioned  "Selected
         Consolidated  Financial Data" on pages 8 and 9 of the Annual Report is
         incorporated herein by reference.

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

         The  information  contained  in the  section  captioned  "Management's
         Discussion  and  Analysis  of  Financial   Condition  and  Results  of
         Operations"  beginning on page 10 of the Annual Report is incorporated
         herein by reference.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

         The  information  contained  in the  section  captioned  "Management's
         Discussion  and  Analysis  of  Financial   Condition  and  Results  of
         Operations -- Market Risk and Asset/Liability Management" beginning on
         page 10 of the Annual Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data

         (a)      Financial Statements
                  Independent Auditors' Report*
                  Consolidated Balance Sheets as of September 30, 2001 and 2000*
                  Consolidated Statements of Earnings for the Years Ended
                       September 30, 2001, 2000 and 1999*
                  Consolidated Statements of Shareholders' Equity for the Years
                       Ended September 30, 2001, 2000 and 1999*
                  Consolidated Statements of Cash Flows for the Years Ended
                       September 30, 2001, 2000 and 1999*
                  Notes to the Consolidated Financial Statements*

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

         (b)      Supplementary Data

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

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

          There have been no changes in or  disagreements  with  Accountants  on
          accounting and financial  disclosure  during the year ended  September
          30, 2001.
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

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

Item 11.  Executive Compensation

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         (a)      Security Ownership of Certain Beneficial Owners

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

         (b)      Security Ownership of Management

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

         (c)      Changes in Control

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

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

Item 13.  Certain Relationships and Related Transactions

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

<PAGE>

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

         (a)      Exhibits

                  3(a)     Articles of Incorporation of the Registrant*
                  3(b)     Bylaws of the Registrant*
                  10(a)    Employment Agreement with Kermit K. Houser
                  10(b)    Employment Agreement with Marshall J. Alexander
                  10(c)    Employment Agreement with Frank X. Hernandez
                  10(d)    Employment Agreement with Craig M. Moore
                  10(e)    Employment Agreement with Ben A. Gay
                  10(f)    1996 Stock Option Plan**
                  10(g)    1996 Management Recognition and Development Plan**
                  13       Annual Report to Shareholders
                  21       Subsidiaries of the Registrant
                  23       Consent of Deloitte & Touche LLP with respect to
                              financial statements of the Registrant
___________________
*        Incorporated by reference to the Registrant's Registration Statement on
         Form S-1, filed on June 19, 1995.
**       Incorporated by reference to the Registrant's Definitive Proxy
         Statement for the 1996 Annual Meeting of
         Shareholders.

         (b)      Reports on Form 8-K

               One Current Report on Form 8-K was filed during the quarter ended
          September 30, 2001. On September 12, 2001, the Company filed a Current
          Report  on Form  8-K in  which  it  announced  the  completion  of the
          acquisition of 13 branches from Washington Mutual Bank.
<PAGE>

                                   SIGNATURES

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

                                          KLAMATH FIRST BANCORP, INC.


Date:  December 28, 2001                  By:  /s/ Kermit K. Houser
                                          Kermit K. Houser
                                          President and Chief Executive Officer

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

SIGNATURES                TITLE                                DATE

/s/ Kermit K. Houser      President, Chief                     December 28, 2001
Kermit K. Houser          Executive Officer and
                          Director (Principal
                          Executive Officer)

/s/ Marshall J. Alexander Executive Vice President and         December 28, 2001
Marshall J. Alexander     Chief Financial Officer
                          (Principal Financial
                          and Accounting Officer)

/s/ Rodney N. Murray      Chairman of the Board                December 28, 2001
Rodney N. Murray          of Directors


/s/ Bernard Z. Agrons     Director                             December 28, 2001
Bernard Z. Agrons


/s/ Timothy A. Bailey     Director                             December 28, 2001
Timothy A. Bailey


/s/ James D. Bocchi       Director                             December 28, 2001
James D. Bocchi

/s/ William C. Dalton     Director                             December 28, 2001
William C. Dalton

/s/ J. Gillis Hannigan    Director                             December 28, 2001
J. Gillis Hannigan

/s/ Dianne E. Spires      Director                             December 28, 2001
Dianne E. Spires