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, 2002

                                       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

     Indicate by check mark whether the Registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). YES X NO

     As of November 29, 2002, there were issued and outstanding 6,746,481 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  29, 2002 of $15.15,
was  $85,830,492.  For  purposes  of  this  calculation,  common  stock  of  the
Registrant  held by officers  and  directors of the  Registrant  and the Klamath
First Federal  Savings and Loan  Association  Employee Stock  Ownership Plan are
considered affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of Registrant's  Annual Report to  Shareholders  for the Fiscal
Year Ended September 30, 2002 ("Annual Report") (Parts I and II).

     2. Portions of Registrant's  Definitive Proxy Statement for the 2003 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, 2002, the Company had total assets of $1.5 billion, total
deposits  of $1.1  billion  and  shareholders'  equity  of $119.9  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 and expanded and  complemented 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  2002  Annual  Report  to  Shareholders  ("Annual
Report"), included as Exhibit 13 to this Form 10-K.

     The Association is a progressive,  community-oriented financial institution
that focuses on serving  customers 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,
2002, permanent residential one- to four-family real estate loans totaled $339.4
million,  or  54.53% 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 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,
2002, the Association's  total loan portfolio consisted of 66.43% fixed rate and
33.57%   adjustable   rate  loans,   after   deducting   loans  in  process  and
non-performing loans.

Market Area

     The  Association  continues  to  expand  its  market  area  in  Oregon  and
Washington. Upon the acquisition of 13 branches from WAMU in September 2001, the
Association had a presence in 26 of Oregon's 36 counties and had one

                                        1
<PAGE>


in-store  branch  in the  state of  Washington.  In fiscal  2002,  new  in-store
branches were opened in Hermiston, Eugene and Springfield,  Oregon and Richland,
Washington.  Also during  fiscal  2002,  a second  branch was opened in Medford,
Oregon,  expanding service to that community.  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
sectors.  Tourism is a significant  industry in many regions of the market area,
including  Central Oregon and the Oregon coast.  The addition of branches in the
Eugene-Springfield  metropolitan  area provides access to this major  population
center.

Yields Earned and Rates Paid

     The following table sets forth,  for the periods and at the date indicated,
the weighted  average  yields earned on  interest-earning  assets,  the weighted
average interest rates paid on  interest-bearing  liabilities,  and the interest
rate spread between the weighted average yields earned and rates paid.
<TABLE>
<CAPTION>
                                                                                             Year Ended
                                                                At                          September 30,
                                                           September 30,        --------------------------------------
                                                               2002             2002             2001            2000
                                                              ------           ------           ------          ------
Weighted average yield:
<S>                                                            <C>              <C>              <C>              <C>
   Loans receivable ............................               7.36%            7.90%            7.86%            7.64%
   Mortgage-backed and related securities ......               5.54             5.18             6.02             5.86
   Investment securities .......................               4.80             4.72             5.64             6.00
   Federal funds sold ..........................               1.70             2.09             4.13             5.59
   Interest-earning deposits ...................               1.79             1.75             4.06             5.63
   FHLB stock ..................................               6.05             6.25             6.75             6.69

Combined weighted average yield on
 interest-bearing assets .......................               6.28             6.35             6.99             7.22
                                                               ----             ----             ----             ----
Weighted average rate paid on:
   Tax and insurance reserve ...................               1.29             2.85             3.85             2.02
   Passbook and statement savings ..............               0.75             1.13             2.26             1.78
   Interest-bearing checking ...................               0.44             0.74             1.08             1.12
   Money market ................................               1.44             2.00             3.85             4.17
   Certificates of deposit .....................               4.00             4.35             5.76             5.40
   FHLB advances/Short term borrowings .........               5.07             5.69             5.95             5.90

Combined weighted average rate on
 interest-bearing liabilities ..................               3.19             3.31             4.81             4.72
                                                               ----             ----             ----             ----

Interest rate spread ...........................               3.09%            3.04%            2.18%            2.50%
                                                               ====             ====             ====             ----

</TABLE>







                                        2
<PAGE>


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

     Reference is made to the section entitled "Average  Balances,  Net Interest
Income and Yields Earned and Rates Paid" on page 13 of the Annual Report,  which
section is incorporated herein by reference.

Interest Sensitivity Gap Analysis

     Reference  is  made  to the  section  entitled  "Interest  Sensitivity  Gap
Analysis" on page 10 of the Annual Report,  which section is incorporated herein
by reference.

Rate/Volume Analysis

     Reference is made to the section entitled "Rate/Volume Analysis" on page 14
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.  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 $339.4
million,  or 54.53%, of the Association's  total loan portfolio before net items
at  September  30,  2002.  The  Association  originates  other loans  secured by
multi-family  residential  and  commercial  real estate,  construction  and land
loans.  Those loans  amounted to $137.6  million,  or 22.11%,  of the total loan
portfolio  before net items at September  30,  2002.  Approximately  23.36%,  or
$145.4 million,  of the Association's  total loan portfolio before net items, as
of September  30, 2002,  consisted of non-real  estate  loans.  Commercial  real
estate and non-real estate loans increased significantly as a result of the WAMU
branch acquisition in September 2001. 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.  Fiscal  2002  showed
continued growth in non-real estate loans.

     Permissible  loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation  was $15.4 million at September 30, 2002. At September 30, 2002,  the
Association had 54 borrowing  relationships with outstanding  balances in excess
of $1.0 million,  the largest of which amounted to $7.2 million and consisted of
eight loans,  five of which were secured by  commercial  and single  family real
estate and three of which were 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, 2002,  $207.5
million, or 33.57%, of loans in the

                                        3
<PAGE>


Association's  total loan  portfolio  after loans in process and  non-performing
loans,  consisted  of  adjustable  rate loans.  At September  30,  2001,  $203.7
million, or 29.43%, of the Association's loans carried adjustable rates.

                                        4
<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,
                                 --------------------------------------------------------------------------------------------------
                                        2002                2001                2000                1999                1998
                                 -----------------   -----------------   -----------------    ----------------    -----------------
                                   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 ......   $339,404    54.53%  $421,499    60.12%  $639,165    85.12%  $647,130    83.56%  $577,471    81.95%
  Multi-family residential ...     21,595     3.47     23,257     3.32     19,015     2.53     18,412     2.38     19,230     2.73
  Construction ...............     15,224     2.45     21,674     3.09     25,289     3.37     53,219     6.87     64,289     9.12
  Agricultural ...............      4,889     0.79      4,218     0.60       --      --            --    --            --    --
  Commercial .................     91,703    14.73     99,318    14.17     42,277     5.63     37,079     4.79     29,457     4.18
  Land .......................      4,164     0.67      3,697     0.53      3,394     0.45      2,064     0.27      2,185     0.31
                                 --------  -------   --------  -------   --------  -------    -------  -------    -------  --------
Total real estate loans ......    476,979    76.64    573,663    81.83    729,140    97.10    757,904    97.87    692,632    98.29
                                 --------  -------   --------  -------   --------  -------    -------  -------    -------  --------

Non-real estate loans:
  Savings accounts ...........      1,262     0.20      2,091     0.30      1,957     0.26      1,800     0.23      1,991     0.28
  Home improvement and home
    equity loans .............     65,092    10.46     50,464     7.20      8,338     1.11      6,726     0.87      5,750     0.82
  Other consumer .............     16,926     2.72     18,697     2.67      6,888     0.92      4,568     0.59      2,287     0.32
  Commercial .................     62,102     9.98     56,098     8.00      4,586     0.61      3,443     0.44      2,043     0.29
                                 --------  -------   --------  -------   --------  -------    -------  -------    -------  --------
Total non-real estate loans ..    145,382    23.36    127,350    18.17     21,769     2.90     16,537     2.13     12,071     1.71
                                 --------  -------   --------  -------   --------  -------    -------  -------    -------  --------
 Total loans .................    622,361   100.00%   701,013   100.00%   750,909   100.00%   774,441   100.00%   704,703   100.00%
                                           =======             =======             =======             =======             =======
Less:
Undisbursed portion of loans .      3,609               8,473              10,350              24,176              26,987
Deferred loan fees ...........      3,911               4,599               7,440               7,988               7,620
Allowance for loan losses ....      7,376               7,951               4,082               2,484               1,950
                                 --------            --------            --------            --------            --------
Net loans ....................   $607,465            $679,990            $729,037            $739,793            $668,146
                                 ========            ========            ========            ========            ========
</TABLE>



                                        5
<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,
                                                    ----------------------------------------------------------------
                                                                2002                                2001
                                                    --------------------------            --------------------------
                                                      Amount           Percent              Amount           Percent
                                                    ---------          -------            ---------          -------
                                                                         (Dollars in thousands)

<S>                                                  <C>                <C>                <C>              <C>
Fixed rate... . . . . .                              $410,499            66.43%            $488,559          70.57%
Adjustable-rate.........                              207,458            33.57              203,719          29.43
                                                     --------           ------             --------         ------
     Total..............                             $617,957           100.00%            $692,278         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, 2002,  $339.4 million,  or 54.53%, of the
Association's  total loan  portfolio,  before net items,  consisted of permanent
residential  one- to  four-family  mortgage  loans,  down from $421.5 million at
September  30,  2001.  At  September  30,  2002,  the  average  balance  of  the
Association's  permanent  residential  one- to  four-family  mortgage  loans was
$78,397.

     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, 2002, $311.4 million, or 50.40%, of the total loans
after  loans in  process  and  non-performing  loans  were  fixed  rate  one- to
four-family loans and $28.4 million,  or 4.59%, 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, while ARM loans are retained in the portfolio.

     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, 2002,
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  offers several loan products which are  competitive  with other
institutions originating mortgages in the Association's primary market area. The
Association has introduced variable rate loan products that bear fixed rates for
the first three or five years and then  reprice annually  thereafter.  The loans
which bear   fixed  rates for five years are  indexed to the  One-Year  Constant
Maturity  Treasury Bill Index and have a maximum rate increase of 5.00% over the
life of the loan. The loans which bear fixed rates for the first three years are
indexed  to the FHLB of Seattle  12-Month  Short  Term  Advance  Rate and have a
maximum  increase of 6.00% over the life of the loan. All ARM loan products have
a maximum  increase  or decrease of 2.00% in any one year.  As a  supplement  to
origination of ARM loans, the Association purchases ARMs from other institutions
when suitable loans can be found which meet its underwriting criteria.

     The  Association  qualifies an 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 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

                                        6
<PAGE>


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.

     Commercial and Multi-Family  Real Estate Loans. The Association  originates
loans secured by  multi-family  and  commercial  real estate and also  purchases
participations  in loans secured by multi-family and commercial real estate when
suitable  investments can be found. See "-- Loan  Originations,  Purchases,  and
Sales." At September 30, 2002,  $21.6 million,  or 3.47%,  of the  Association's
total loan  portfolio  before net items  consisted of loans  secured by existing
multi-family  residential  real  estate and $91.7  million,  or  14.73%,  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.  Substantially  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 $248,667 at  September  30, 2002,  the
largest of which was a $3.5  million  commercial  real estate loan  secured by a
motel.  Originations of commercial real estate and multi-family residential real
estate  amounted  to 11.2%,  16.46% and 11.09% of the  Association's  total loan
originations  in the fiscal  years ended  September  30, 2002,  2001,  and 2000,
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, 2002 the
Association purchased $1.7 million in commercial real estate participations. The
properties  securing  these loans were located within the  Association's  market
area.

     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, 2002, $105.6 million, or 17.07%, after

                                        7
<PAGE>


loans in process and  non-performing  loans of other mortgage  loans,  including
commercial and multi-family  residential real estate loans, had adjustable rates
of interest.

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

     Construction Loans. The Association makes construction loans 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.  Speculative  loans are scheduled to pay
off in 12 to 18 months.  At September 30, 2002,  construction  loans amounted to
$15.2 million  (including $4.6 million of speculative  loans),  or 2.45%, of the
Association's  total loan portfolio before net items. The Association  purchased
$1.7 million in  commercial  construction  loans from WAMU as part of the branch
purchase.  During the construction phase, the borrower pays only interest on the
disbursed  loan  proceeds  until  maturity,  when the total  amount is due.  The
Association's  construction loan agreements generally provide that loan proceeds
are  disbursed  in  increments  as  construction  progresses.   The  Association
periodically reviews the progress of the underlying construction project through
physical inspections.

     Construction  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 construction lending by limiting construction loans to qualified
owner-occupied borrowers with construction performed by qualified state licensed
builders located primarily in the  Association's  market area. The Association's
underwriting  criteria  are  designed to evaluate and minimize the risks of each
construction loan.

     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, 2002, $4.2
million,  or 0.67%, of the Association's  total loan portfolio consisted of land
loans.

     Commercial  Business  Lending.  The purchase of the  branches  from WAMU in
September  2001 included  significant  commercial  business loans as well as the
lending  expertise  needed  for  commercial  lending  activities.  As a  result,
commercial  business lending has increased due to both loans purchased from WAMU
and new originations  during fiscal 2002. The Association's  commercial business
lending  activities  focus 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, 2002,  commercial  business loans amounted
to $62.1 million, or 9.98% of the total loan portfolio and

                                        8
<PAGE>


42.72% of total non-real estate loans. Included in these loans are $14.2 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 cash flow and profitability of the business,
and  creditworthiness  of the borrower (and guarantors) and requires  successful
operation  and  management  of the  business  entity  while  liquidation  of the
collateral  is a  secondary  and  sometimes  insufficient  source of  repayment.
Consequently,  repayment  of such loans may be affected  by adverse  business or
economic conditions.

     As part of its commercial  business  lending  activities,  the  Association
issues standby letters of credit or performance bonds as an accommodation to its
borrowers. See "-- Loan Commitments and Letters of Credit."

     Agricultural  Lending.  The Association did not offer loans on agricultural
properties or for  agricultural  production  until the WAMU branch  acquisition,
even though agriculture is a major industry in the Association's market area. As
part of the WAMU branch acquisition,  the Association  purchased $4.2 million of
agricultural  real estate  loans and $11.9  million of  agricultural  production
loans, as well as obtaining  lending personnel with expertise in originating and
monitoring  agricultural  loans.  At  September  30,  2002,  agricultural  loans
amounted to $19.1 million,  or 3.07%, of the total loan portfolio;  $4.9 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.  Payments on  agricultural  operating  loans
depend on the successful  operation of the farm, which may be adversely affected
by weather conditions that limit crop yields,  fluctuations in market prices for
agricultural products and livestock,  and changes in government  regulations and
subsidies.

     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.  Uncertain  supplies  of water  in some  market  areas  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

                                        9
<PAGE>


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, 2002,
the Association was 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, 2002,  the  Association's
consumer  loans totaled $83.3 million,  or 13.38%,  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  in  September  2001.  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.

     The  Association  has placed  increasing  emphasis  on 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  consumer  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 and unsecured  lines of
credit have  interest  rates that vary above the prime lending rate based on the
credit risk of the borrower,  collateral,  and loan amount.  In both cases,  the
rate adjusts monthly. The Association requires minimum payment of interest only,
and  depending  on the loan  product,  may  require  at  least 2% of the  unpaid
principal balance monthly.  At September 30, 2002, $29.4 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,
2002, home equity loans and home improvement loans amounted to $65.1 million, or
78.16% of consumer loans, and 10.46% of total loans.

     At September 30, 2002, the Association's automobile loan portfolio amounted
to $7.7 million,  or 9.19%,  of consumer  loans and 1.23% of total loans at that
date. The maximum term for the Association's  automobile loans is 72 months with
the amount financed based upon a percentage 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, 2002,  unsecured  consumer loans amounted to $5.1 million,
or less than 1%, of total loans. These loans are made for a maximum of 48 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

                                       10
<PAGE>


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, 2002,  the  Association  had $248,000 in consumer
loans accounted for on a nonaccrual basis.

     Loan  Maturity  and  Repricing.  The  following  table sets  forth  certain
information  at September  30, 2002  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)
<S>                                              <C>                     <C>                      <C>                     <C>
Permanent residential
   one- to four-family:
  Adjustable rate...................             $ 19,116                 $ 9,256                 $     --                $ 28,372
  Fixed rate........................                  853                   1,626                  308,948                 311,427
Other mortgage loans:
  Adjustable rate...................               32,996                  72,276                      237                 105,509
  Fixed rate........................                  609                   4,516                   22,385                  27,510
Non-real estate loans:
  Adjustable rate...................               64,557                   8,951                       69                  73,577
  Fixed rate........................                3,616                  19,244                   48,702                  71,562
                                                 --------                --------                 --------                --------
    Total loans.....................             $121,747                $115,869                 $380,341                $617,957
                                                 ========                ========                 ========                ========
</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, 2002,  which have fixed interest rates
and have adjustable rates, was $405.4 million and $90.8 million, respectively.

     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
60 days from  commitment.  The Association had outstanding  loan  commitments of
approximately $33.0 million at September 30, 2002 consisting of $12.9 million of
variable  rate loans and $20.1  million of fixed rate loans.  See Note 14 of the
Notes to 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  developers,   builders,   existing  customers,
newspapers,  radio,  periodical  advertising  and  walk-in  customers,  although
referrals from local realtors have 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.


                                       11
<PAGE>


     The  Association's   loan  approval  process  is  intended  to  assess  the
borrower's ability to repay the loan, the viability of the loan, the adequacy of
the  value of the  property  that will  secure  the  loan,  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 a credit  officer with
appropriate underwriting authority for approval.  Certain large loans, where the
borrower has  aggregate  debt with the  Association  of $1 million or more,  are
reviewed  by the  board of  directors.  For  those  relationships  in which  the
aggregate debt with the Association is $3 million or greater,  board approval is
required prior to funding of the loan. 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,
2002, the  Association  originated  $281.7  million in total loans,  compared to
$136.5  million  during  the same  period  of  2001.  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, $68.7 million in fixed rate loans were
sold  during  the year  ended  September  30,  2002,  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. 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, 2002, the balance of such loans was $4.4 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,  2002,  the balance of such  purchased  loans was $9.5
million.  These  loans were  underwritten  on the same  basis as  similar  loans
originated by the Association.


                                       12
<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,
                                                                          ----------------------------------------------
                                                                              2002               2001               2000
                                                                          ---------         ----------          --------
                                                                                           (In thousands)

<S>                                                                       <C>                <C>                <C>
Total net loans at beginning of period......................              $679,990           $729,037           $739,793
                                                                          --------           --------           --------
Loans originated and purchased:
 Real estate loans originated (1)...........................               161,278             93,907             81,671
 Real estate loans purchased................................                 1,683             83,192                508
 Non-real estate loans originated...........................               120,388             42,586             15,575
 Non-real estate loans purchased............................                    --             99,720                 --
                                                                          --------           --------           --------
   Total loans originated and purchased.....................               283,349            319,405             97,754
                                                                          --------           --------           --------
Loan reductions:
 Principal paydowns.........................................              (287,526)          (145,544)           (98,853)
 Loans sold.................................................               (68,661)           (30,709)            (6,315)
 Loans securitized..........................................                    --           (190,300)                --
 Other reductions (2).......................................                   313             (1,899)            (3,342)
                                                                          --------           --------           --------
    Total loan reductions...................................              (355,874)          (368,452)          (108,510)
                                                                          --------           --------           --------
Total net loans at end of period............................              $607,465           $679,990           $729,037
                                                                          ========           ========           ========
<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, 2002,  the  Association  had $3.9 million of net
loan fees which had been  deferred and are being  recognized  as income over the
contractual maturities of the related loans.



                                       13
<PAGE>


Asset Quality

     Delinquent  Loans.  The following table sets forth  information  concerning
delinquent  loans at September 30, 2002, 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     Commercial           Commercial
                            1-4 family            Real Estate        Non-Real Estate          Consumer              Total
                         Amount  Percentage    Amount  Percentage   Amount  Percentage    Amount  Percentage   Amount  Percentage
                                                            (Dollars in thousands)
<S>                        <C>        <C>      <C>          <C>       <C>        <C>       <C>         <C>     <C>          <C>
Loans delinquent for
90 days and more.....      $444       0.07%    $ 353        0.06%     $47        0.01%     $247        0.04%   $1,091       0.18%
</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, and reviewed by the Board of Directors.

     For commercial loans, the borrowers are assigned to a commercial lender who
is  responsible  for  monitoring  the  relationship   including   collecting  on
delinquencies. When necessary, repossession, foreclosure, or other action may be
taken including use of outside counsel.

     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 the Notes to 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

                                       14
<PAGE>


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.

     As of September 30, 2002, the Association's total nonaccrual loans amounted
to $1.1  million,  or 0.18% of total  loans,  before  net items,  compared  with
$270,000,  or 0.04% of total loans,  before net items,  at  September  30, 2001.
Nonaccrual  loans at September 30, 2002 by type are detailed in the table below.
The  increase in  nonaccrual  loans is  primarily  attributable  to increases in
nonaccrual  commercial and consumer  loans.  The balance of these types of loans
increased considerably with the WAMU branch acquisition in 2001 and so it is not
unexpected that there is an increase in nonaccrual loans of these types.

     At September 30, 2002, the Association had $188,000 in restructured loans.

     Real estate owned  increased  from the prior year  primarily as a result of
the  foreclosure on a commercial  property  during the year ended  September 30,
2002.  Properties  held as real  estate  owned at  September  30,  2001 were all
subsequently sold.

     The  following   table  sets  forth  the  amounts  and  categories  of  the
Association's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>

                                                                                         At September 30,
                                                                2002            2001           2000          1999             1998
                                                                                    (Dollars in thousands)
<S>                                                           <C>           <C>              <C>           <C>              <C>

Non-accruing loans:
    One- to four-family real estate .....................       $444           $270            $715          $915             $513
    Commercial real estate...............................        353             --              --         2,400               --
    Commercial non-real estate...........................         47             --              --            --               --
    Consumer.............................................        247             --              95            --               11
Accruing loans greater than 90
  days delinquent........................................         --             --              --            --               --
                                                              ------          -----          ------        ------             ----
    Total non-performing loans...........................      1,091            270             810         3,315              524
                                                              ------          -----          ------        ------             ----
Real estate owned........................................        717            446             788         1,495               --
Other repossessed assets.................................         42             --              --            --               --
                                                              ------          -----          ------        ------             ----
    Total repossessed assets.............................        759            446             788         1,495               --
                                                              ------          -----          ------        ------             ----
    Total non-performing assets..........................     $1,850          $ 716          $1,598        $4,810             $524
                                                              ======          =====          ======        ======             ====

Total non-performing assets as a
  percentage of total assets.............................       0.12%          0.05%           0.16%         0.46%            0.05%

Total non-performing loans as a
  percentage of total loans,
  before net items.......................................       0.18%          0.04%           0.21%         0.62%            0.07%

Allowance for loan losses as a
  percentage of total non-performing
  assets.................................................     398.70%       1110.47%         255.44%        51.64%          372.14%

Allowance for loan losses as a percentage
  of total non-performing loans..........................     676.08%       2944.81%         503.95%        74.93%          372.14%
</TABLE>


                                       15
<PAGE>


     The allowance for loan losses as a percentage of both total  non-performing
assets and total non-performing  loans has decreased  significantly at September
30, 2002.  These decreases are the result of increases in  non-performing  loans
and  non-performing  assets at September 30, 2002.  At September  30, 2001,  the
allowance  balance was greatly  increased due 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 had not been an impact
causing the level of  non-performing  loans and assets to increase by  September
30,  2001.  At present,  the  performance  of the  purchased  loans has exceeded
expectations and the Association  believes that current reserves are adequate to
cover the risk in the  portfolio  based on  current  levels of  delinquency  and
non-performing assets.

     For the year ended  September  30,  2002,  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, 2002,  total  classified  assets  amounted to 0.30% of
total assets,  an increase from 0.16% at September 30, 2001.  Assets  classified
substandard at September 30, 2002 totaled $4.4 million and included  $353,781 in
one- to  four-family  residential  loans,  a  $843,144  land  development  loan,
$2.1million  in commercial  real estate and $758,663 in  foreclosed  real estate
consisting of five single family residences,  a commercial property, and a boat.
Assets  classified  substandard  at September  30, 2001 totaled $2.7 million and
included $270,393 in one- to four-family construction loans, a $2.0 million land
development  loan and $445,855 in  foreclosed  real estate  consisting of single
family residences.  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 No. 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 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

                                       16
<PAGE>


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,
2002, the  Association  had an allowance for loan losses of $7.4 million,  which
was equal to 398.70% of non-performing assets and 1.19% of total loans.

     Provisions  for loan  losses  are  charged to  earnings  to bring the total
allowance  for  loan  losses  to  a  level  deemed  appropriate  by  management.
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, 2002,  2001 and 2000
were $156,000, $387,000, and $1.8 million 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 and  securitization  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 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.


                                       17
<PAGE>



     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>

                                                                   At or for the Year Ended September 30,
                                                      2002           2001          2000          1999          1998
                                                                         (Dollars in thousands)
<S>                                               <C>           <C>           <C>           <C>           <C>
Total loans outstanding .......................   $ 622,361     $ 701,013     $ 750,909     $ 774,441     $ 704,703

Average loans outstanding .....................   $ 660,246     $ 611,095     $ 747,842     $ 721,658     $ 614,457

Allowance at beginning of period ..............   $   7,951     $   4,082     $   2,484     $   1,950     $   1,296
                                                  ---------     ---------     ---------     ---------     ---------
Loans charged off:
     One- to four-family ......................        --              (3)         --            --            --
     Construction .............................        --             (19)          (32)         --            --
     Commercial real estate ...................        (323)           --          (559)         (392)         --
     Commercial business ......................        (134)          (12)         --            --             (17)
     Consumer .................................        (290)          (56)          (16)           (6)           (3)
                                                  ---------     ---------     ---------     ---------     ---------
          Total charge offs ...................        (747)          (90)         (607)         (398)          (20)
                                                  ---------     ---------     ---------     ---------     ---------
Recoveries of loans previously charged off:
     Commercial real estate ...................        --              34           440          --            --
     Consumer .................................          16             8             1          --            --
                                                  ---------     ---------     ---------     ---------     ---------
          Total recoveries ....................          16            42           441          --            --
                                                  ---------     ---------     ---------     ---------     ---------
Provision for loans losses ....................         156           387         1,764           932           674
Acquisitions ..................................        --           3,761          --            --            --
Allowance reclassified with loan securitization        --            (231)         --            --            --
                                                  ---------     ---------     ---------     ---------     ---------
Allowance at end of period ....................   $   7,376     $   7,951     $   4,082     $   2,484     $   1,950
                                                  =========     =========     =========     =========     =========
Allowance for loan losses as a percentage
 of total loans outstanding ...................        1.19%         1.13%         0.54%         0.32%         0.28%

Ratio of net charge-offs to average loans
 outstanding during the period ................        0.11%         0.01%         0.02%         0.06%          --%
</TABLE>

                                       18
<PAGE>


     The  following  tables set 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,

                                2002                                     2001                                     2000
                             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 Loan  by Category    Allowance   Total Loans  by Category    Allowance   Total Loans  by Category
                                                               (Dollars in thousands)
<S>                <C>            <C>        <C>           <C>            <C>        <C>           <C>            <C>        <C>
Permanent
  residential 1-4
  family.........  $1,191         0.19%       54.53%       $1,292         0.19%       60.12%       $1,449         0.19%       85.12%
Multi-family
  residential....     528         0.09         3.47           540         0.08         3.32           365         0.05         2.53
Construction.....     422         0.07         2.45            12         0.01         3.09           420         0.05         3.37
Agriculture......     169         0.03         0.79           158         0.02         0.60            --           --           --
Commercial real
  estate.........   2,611         0.42        14.73         3,611         0.52        14.17         1,403         0.19         5.63
Land.............      77         0.01         0.67           324         0.02         0.53           168         0.02         0.45
Commercial and
  industrial.....   1,560         0.25         9.98         1,325         0.19         8.00            86         0.01         0.61
Consumer.........     818         0.13        13.38           689         0.10        10.17           191         0.03         2.29
                   ------                    ------        ------                    ------        ------                    ------


   Total.........  $7,376         1.19%      100.00%       $7,951         1.13%      100.00%       $4,082         0.54%      100.00%
                   ======                    ======        ======                    ======        ======                    ======
</TABLE>
<TABLE>
<CAPTION>
                                                                   At September 30,

                                                     2000                                         1999
                                                  Percent of                                    Percent of
                                        Amount  Allowance in    Percent of            Amount  Allowance in   Percent of
                                            of   Category to   Total Loans                of   Category to  Total Loans
                                     Allowance   Total Loans   by Category         Allowance   Total Loans  by Category
                                                                   (Dollars in thousands)

<S>                                     <C>            <C>           <C>              <C>             <C>        <C>
Permanent residential
  1-4 family....................        $1,103         0.14%         83.56%           $1,141          0.16%      81.95%
Multi-family residential........           267         0.03           2.38               124          0.02        2.73
Construction....................           221         0.03           6.87               116          0.02        9.12
Agriculture.....................            --           --             --                --            --          --
Commercial real estate..........           730         0.09           4.79               444          0.07        4.18
Land............................            28           --           0.27                29            --        0.31
Commercial and industrial.......            23           --           0.44                14            --        0.29
Consumer........................           112         0.02           1.69                82          0.01        1.42
                                        ------                      ------            ------                    ------

   Total........................        $2,484         0.31%        100.00%           $1,950          0.28%     100.00%
                                        ======                      ======            ======                    ======
</TABLE>


                                       19
<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  $102.8  million at September 30, 2002,  plus an additional 10% if
the  investments  are  fully  secured  by  readily  marketable  collateral.  See
"REGULATION OF THE ASSOCIATION--  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 or Board of Directors 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, 2002,
the  Company  had no held to  maturity  securities.  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,
2002, the portfolio of securities  available for sale consisted of $42.0 million
in tax exempt securities issued by states and  municipalities,  $18.1 million in
federal agency  preferred stock, and $59.4 million in investment grade corporate
investments.

     During the years ended  September  30, 2002,  2001,  and 2000,  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, Accounting for Derivative Instruments and Hedging Activities, would apply.



                                       20
<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,
                                            2002                  2001                  2000
                                   Amortized     Fair    Amortized       Fair  Amortized       Fair
                                        Cost    Value         Cost      Value       Cost      Value
                                                             (In thousands)
<S>                                 <C>        <C>        <C>        <C>        <C>        <C>

Held to maturity:
  State and municipal obligations   $   --     $   --     $    135   $    137   $    267   $    270

Available for sale:
  U.S. Government obligations ...       --         --       40,120     40,852     49,190     48,786
  State and municipal obligations     39,578     42,026     32,951     33,640     25,600     24,943
  Corporate obligations .........     61,648     59,423     65,404     64,718     43,899     42,899
  FHLMC preferred stock .........     18,715     18,093     15,716     15,466       --         --
                                    --------   --------   --------   --------   --------   --------
    Total .......................   $119,941   $119,542   $154,326   $154,813   $118,956   $116,898
                                    ========   ========   ========   ========   ========   ========
</TABLE>
<TABLE>
<CAPTION>
                                                                                              At September 30,
                                                                           2002                      2001                   2000
                                                             Amortized  Percent of     Amortized  Percent of   Amortized  Percent of
                                                                  Cost   Portfolio          Cost   Portfolio        Cost   Portfolio
                                                                                         (Dollars in thousands)
<S>                                                           <C>          <C>          <C>          <C>        <C>          <C>
Held to maturity:
  State and municipal obligations.........................    $     --         --%      $    135       0.09%    $    267       0.23%

Available for sale:
  U.S. Government obligations.............................          --         --         40,120      26.00       49,190      41.35
  State and municipal obligations.........................      39,578      33.00         32,951      21.35       25,600      21.52
  Corporate obligations...................................      61,648      51.40         65,404      42.38       43,899      36.90
  FHLMC preferred stock...................................      18,715      15.60         15,716      10.18           --         --
                                                              --------     ------       --------     ------     --------     ------

    Total.................................................    $119,941     100.00%      $154,326     100.00%    $118,956     100.00%
                                                              ========     ======       ========     ======     ========     ======
</TABLE>

     The following  table sets forth the maturities and weighted  average yields
of the debt securities in the investment portfolio at September 30, 2002.
<TABLE>
<CAPTION>

                                    One Year          After One Through       After Five Through          After Ten
                                     or Less              Five Years              Ten Years                 Years
                              Amount       Yield     Amount        Yield     Amount         Yield     Amount      Yield
                                                                (Dollars in thousands)
Available for sale:
  State and municipal
<S>                          <C>           <C>      <C>            <C>           <C>        <C>      <C>           <C>
   obligations (1)              $100       4.45%       $485        4.13%         $790       4.42%    $38,203       5.14%
  Corporate obligations       17,890       3.42%     23,923        4.98%           --         --      19,835       2.46%
  FHLMC preferred stock           --         --          --          --            --         --      18,715       3.10%
                             _______                _______                      ____                _______
    Total                    $17,990                $24,408                      $790                $76,753
                             =======                =======                      ====                =======
<FN>

(1)  Interest  on state and  municipal  obligations  is  tax-exempt  for federal
     income tax  purposes.  The yields  reported  have not been  calculated on a
     tax-equivalent basis.
</FN>
</TABLE>

                                       21
<PAGE>


     At September 30, 2002 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 $12.0 million.

Mortgage-Backed and Related Securities

     At September  30,  2002,  the  Company's  net  mortgage-backed  and related
securities,  all designated  available-for-sale,  totaled $650.8 million at fair
value  ($640.3  million at amortized  cost) and had a weighted  average yield of
5.54%.  At  September  30,  2002,  24.50%  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, 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, 2002, the Company held $438.6 million of CMOs, comprised primarily
of three classes, planned amortization class tranches ("PACs"), Sequentials, 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 be more
stable and predictable  than 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").  Sequentials, as the
name  implies,  pay principal and interest  sequentially.  For example,  the "A"
tranche receives payments of principal and interest first, while the "B" and "C"
tranches  only receive  interest  until the "A" tranche  principal  par value is
completely  paid. Then the "B" tranche begins  receiving  principal and interest
until all of its principal is paid,  and so on.  Sequential pay CMOs are created
to obtain a more predictable cash flow than the underlying  simple  pass-through
securities.  However,  the cash flow risk from the  underlying  pool remains the
same. 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

                                       22
<PAGE>


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.

     During the year ended September 30, 2002, MBS with a fair value of $376,335
were transferred from the  held-to-maturity  category to the  available-for-sale
portfolio. The Company does not have plans to purchase or classify securities as
held-to-maturity in the foreseeable future.

     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,
                                        2002                      2001                    2000

                             Amortized         Fair   Amortized          Fair   Amortized         Fair
                                  Cost        Value         Cost        Value        Cost        Value
                                                             (In thousands)
<S>                         <C>          <C>          <C>          <C>          <C>          <C>
Held to maturity:
  GNMA..................    $       --   $       --   $    1,621  $     1,642   $    2,160   $    2,146

Available for sale:

Fannie Mae ..............      128,867      130,233       56,833       57,194       13,498       13,598
FHLMC ...................       56,605       57,348       19,538       19,797       32,902       33,282
GNMA ....................       24,346       24,593        6,816        6,977       10,728       10,681
CMOs ....................      430,487      438,622      336,452      337,670       18,355       17,770
                            ----------   ----------   ----------   ----------   ----------   ----------

  Total .................   $  640,305   $  650,796   $  421,260   $  423,280   $   77,643   $   77,477
                            ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>
<TABLE>
<CAPTION>
                                                 At September 30,
                            2002                      2001                      2000
                   Amortized    Percent of   Amortized    Percent of   Amortized     Percent of
                        Cost     Portfolio        Cost     Portfolio        Cost      Portfolio
                                            (Dollars in thousands)
<S>                 <C>             <C>       <C>             <C>        <C>            <C>

Held to maturity:
  GNMA........      $     --            --    $  1,621          0.38%    $ 2,160          2.78%

Available for sale:

Fannie Mae....       128,867         20.13      56,833         13.49      13,498         17.38
FHLMC ........        56,605          8.84      19,538          4.64      32,902         42.38
GNMA .........        24,346          3.80       6,816          1.62      10,728         13.82
CMOs .........       430,487         67.23     336,452         79.87      18,355         23.64
                    --------        ------    --------        ------     -------        ------
  Total ......      $640,305        100.00%   $421,260        100.00%    $77,643        100.00%
                    ========        ======    ========        ======     =======        ======
</TABLE>

Other Interest-Earning Assets

     The Company had an other  interest-earning  asset of $457,000 earning 8.07%
and maturing in May 2112.

Interest-Earning Deposits

     The Company had interest-earning  deposits in the FHLB of Seattle amounting
to $5.9 million and $4.9 million at September 30, 2002 and 2001, respectively.

Deposit Activities and Other Sources of Funds

                                       23
<PAGE>



     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  individual   retirement   account  ("IRA")
certificates and  certificates of deposit.  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.

     The  Association  occasionally  accepts  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, 2002,  these  deposits  totaled $2.3  million,  or 0.20% of total
deposits.

     Interest rates paid, maturity terms,  service fees and withdrawal penalties
are  established   and  reviewed  on  a  periodic  basis  by  the   Association.
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, 2002, the  Association  experienced a net
decrease in deposits (before interest  credited) of $38.2 million.  The majority
of the decrease relates to declining balances in certificates of deposit.  Early
in the year the Association  made a conscious  effort to reduce interest expense
on higher-priced  certificate  accounts resulting in a decrease of $87.1 million
for certificates as they matured and were not renewed.  Checking,  savings,  and
money market accounts increased $76.3 million during the year.

     At September 30, 2002, certificate accounts maturing during the year ending
September 30, 2003 totaled $275.7 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.  The
majority of the Association's depositors are residents of the State of Oregon.


                                       24
<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, 2002.
<TABLE>
<CAPTION>


                                                                                   Certificate
                        Maturity Period                                               Accounts
                                                                                 (In thousands)
<S>                                                                                   <C>
                     Three months or less...................................           $11,930
                     Over three through six months..........................            20,209
                     Over six through twelve months.........................            26,181
                     Over twelve months.....................................            50,440
                                                                                      --------
                         Total..............................................          $108,760
                                                                                      ========
</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,
                                                    2002                               2001                                 2000
                                                  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 ........   $  456,719       39.99%  ($87,161)   $  543,880     47.17%   $171,132   $  372,748       53.60%
                                   ----------      ------   --------    ----------    ------    --------   ----------      ------
Transaction accounts:

Non-interest checking ..........      142,773       12.50     12,124       130,649     11.33      76,309       54,340        7.81
Interest-bearing checking ......      125,867       11.02      9,111       116,756     10.13      44,570       72,186       10.38
Passbook and statement savings .       86,001        7.53      8,355        77,646      6.74      29,699       47,947        6.90
Money market deposits ..........      330,646       28.96     46,753       283,893     24.63     135,733      148,160       21.31
                                   ----------      ------   --------    ----------    ------    --------   ----------      ------
Total transaction accounts .....      685,287       60.01     76,343       608,944     52.83     286,311      322,633       46.40
                                   ----------      ------   --------    ----------    ------    --------   ----------      ------
Total deposits .................   $1,142,006      100.00%  ($10,818)   $1,152,824    100.00%   $457,443   $  695,381      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,
                                                                        2002                2001               2000
                                                                                   (Dollars in thousands)
<S>                                                               <C>                 <C>                   <C>
Beginning balance.......................................          $1,152,824            $695,381            $720,401
                                                                  ----------          ----------            --------
Increase due to acquired deposits.......................                  --             423,457                  --
Net inflow (outflow) of deposits before
 interest credited......................................             (38,002)              6,902             (49,728)
Interest credited.......................................              27,184              27,084              24,708
                                                                  ----------          ----------            --------
Net increase (decrease) in deposits.....................             (10,818)            457,443             (25,020)
                                                                  ----------          ----------            --------
Ending balance..........................................          $1,142,006          $1,152,824            $695,381
                                                                  ==========          ==========            ========
</TABLE>

                                       25
<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, 2002, 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, 2002, 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,
                                                                         2002             2001                       2000
Weighted average rate paid on:
<S>                                                                      <C>              <C>                   <C>
  FHLB advances................................................          5.07%            5.73%                 5.90%
  Short term borrowings........................................          4.75%            5.58%                 9.01%
</TABLE>
<TABLE>
<CAPTION>

                                                                                Year Ended September 30,
                                                                         2002              2001              2000
                                                                                 (Dollars in thousands)
Maximum amount outstanding at any month end:
<S>                                                                     <C>           <C>                <C>
  FHLB advances................................................         $205,250      $173,000           $230,000
  Short term borrowings........................................            1,700         6,400              3,000

Approximate average balance:
  FHLB advances................................................          168,333       170,521            207,218
  Short term borrowings........................................            1,705         3,265              1,290

Approximate weighted average rate paid on:
  FHLB advances................................................             5.71%         5.90%              5.88%
  Short term borrowings........................................             4.32%         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  corporation,  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 non-judicial foreclosures.


                                       26
<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. The Company also established Klamath First Capital Trust II in April
2002 for the  purpose of issuing  additional  mandatorily  redeemable  preferred
securities.  See  Note 13 of the  Notes  to  Consolidated  Financial  Statements
contained in the Annual Report.

                                       27
<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, 2002 was $258,994.

     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 $13.5 million at September 30, 2002.

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

     Federal Deposit Insurance  Corporation.  The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and

                                       28
<PAGE>


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 the Association.

     As insurer,  the FDIC imposes deposit insurance  premiums and is authorized
to  conduct   examinations   of  and  to  require   reporting  by   FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the SAIF or the BIF. The FDIC also has the authority to initiate  enforcement
actions  against  savings  institutions,  after giving the OTS an opportunity to
take such action,  and may terminate the deposit insurance if it determines that
the institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.

     The FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1,
or core capital,  to  risk-weighted  assets ("Tier 1 risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.

     The FDIC is  authorized  to increase  assessment  rates,  on a  semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     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 1.70 points for each $100 in domestic deposits for SAIF
and BIF insured institutions. These assessments, which may be revised based upon
the level of BIF and SAIF deposits, will continue until the bonds mature in 2017
through 2019.

     Under the Federal  Deposit  Insurance  Act,  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.

     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

                                       29
<PAGE>


"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,  2002,  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,  it 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,
2002,  the  Association  met the qualified  thrift  investment  test and its QTL
percentage was 79.63%.

     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 "-- Regulation of the Company."

     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.


                                       30
<PAGE>


     The  capital  regulations  require  tangible  capital  of at least  1.5% of
adjusted  total assets (as defined by  regulation).  At September 30, 2002,  the
Association  had tangible  capital of $95.5  million,  or 6.6% of adjusted total
assets,  which is approximately  $73.6 million above the minimum  requirement of
1.5% of adjusted total assets in effect on that date. At September 30, 2002, the
Association  had $40.3 million of intangible  assets  consisting of core deposit
intangible  and  other  intangible  assets  related  to the Wells  Fargo  branch
acquisition in 1997 and 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, 2002,  the
Association  had core capital equal to $95.5 million,  or 6.6% of adjusted total
assets,  which is $37.2 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, 2002,  the  Association  had total  risk-based  capital of
approximately  $102.8 million,  including $95.5 million in core capital and $7.3
million in qualifying  supplementary capital, and risk-weighted assets of $733.7
million,  or total  capital of 14.0% of  risk-weighted  assets.  This amount was
$44.1 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

                                       31
<PAGE>


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.

     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,  2002,  the
Association's limit on loans to one borrower was $15.9 million. At September 30,
2002, the  Association's  largest  aggregate amount of loans to one borrower was
$7.2 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 or 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

                                       32
<PAGE>


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.

     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.






                                       33
<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.

New Federal Legislation

     Gramm-Leach-Bliley   Financial  Services  Modernization  Act  of  1999.  On
November 12, 1999, the  Gramm-Leach-Bliley  Financial Services Modernization Act
of 1999  ("GLBA")  was signed into law.  The purpose of this  legislation  is to
modernize  the  financial  services  industry by  establishing  a  comprehensive
framework to permit  affiliations among commercial banks,  insurance  companies,
securities firms and other financial service providers. Generally, the GLBA:

a.   repealed the historical  restrictions and eliminates many federal and state
     law barriers to  affiliations  among  banks,  securities  firms,  insurance
     companies  and other  financial  service  providers;

b.   provided  a  uniform  framework  for  the  functional   regulation  of  the
     activities of banks, savings  institutions and their holding companies;

c.   broadened the activities that may be conducted by national  banks,  banking
     subsidiaries of bank holding companies and their financial subsidiaries;

                                       34
<PAGE>


d.   provided  an  enhanced  framework  for  protecting  the privacy of consumer
     information;

e.   adopted a number of provisions related to the  capitalization,  membership,
     corporate  governance  and other  measures  designed to modernize  the FHLB
     system;

f.   modified the laws governing the implementation of the CRA; and

g.   addressed  a  variety  of  other  legal  and  regulatory  issues  affecting
     day-to-day operations and long-term activities of financial institutions.

     The GLBA also imposes  certain  obligations  on financial  institutions  to
develop privacy policies,  restrict the sharing of nonpublic  customer data with
nonaffiliated  parties at the customer's request,  and establish  procedures and
practices to protect and secure  customer data.  These privacy  provisions  were
implemented by regulations that were effective on November 12, 2000.  Compliance
with the privacy provisions was required by July 1, 2001.

     The USA Patriot Act. In response to the terrorist events of September 11th,
2001,  President  George W. Bush signed  into law the Uniting and  Strengthening
America by  Providing  Appropriate  Tools  Required to  Intercept  and  Obstruct
Terrorism  Act of 2001,  or the USA PATRIOT  Act, on October 26,  2001.  The USA
PATRIOT Act gives the federal government new powers to address terrorist threats
through enhanced  domestic  security  measures,  expanded  surveillance  powers,
increased information sharing, and broadened anti-money laundering requirements.
By way of amendments  to the Bank Secrecy Act,  Title III of the USA PATRIOT Act
takes measures intended to encourage  information  sharing among bank regulatory
agencies and law enforcement  bodies.  Further,  certain provisions of Title III
impose  affirmative  obligations  on a broad  range of  financial  institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.

     Among  other  requirements,  Title III of the USA  PATRIOT  Act imposes the
following requirements with respect to financial institutions:

               - Pursuant  to  Section  352,  all  financial  institutions  must
          establish anti-money laundering programs that include, at minimum: (i)
          internal policies, procedures, and controls, (ii) specific designation
          of an anti-money laundering compliance officer, (iii) ongoing employee
          training programs,  and (iv) an independent audit function to test the
          anti- money  laundering  program.  - Section 326 of the Act authorizes
          the Secretary of the Department of Treasury, in conjunction with other
          bank regulators, to issue regulations by October 26, 2002 that provide
          for minimum  standards with respect to customer  identification at the
          time new accounts are opened.

               - Section 312 of the Act  requires  financial  institutions  that
          establish, maintain, administer, or manage private banking accounts or
          correspondent  accounts  in the United  States for  non-United  States
          persons  or  their  representatives   (including  foreign  individuals
          visiting the United States) to establish appropriate,  specific,  and,
          where  necessary,  enhanced due diligence  policies,  procedures,  and
          controls designed to detect and report money laundering.

               -  Effective  December  25,  2001,  financial   institutions  are
          prohibited from establishing,  maintaining,  administering or managing
          correspondent  accounts for foreign shell banks (foreign banks that do
          not have a physical  presence in any country),  and will be subject to
          certain  recordkeeping   obligations  with  respect  to  correspondent
          accounts of foreign banks.

               - Bank  regulators  are directed to consider a holding  company's
          effectiveness  in combating  money  laundering  when ruling on Federal
          Reserve Act and Bank Merger Act applications.

     To date, it has not been possible to predict the impact the USA PATRIOT Act
and its implementing regulations may have on the Company and the Association.

     Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
Act") was signed  into law by  President  Bush on July 30,  2002 in  response to
public concerns regarding corporate accountability in connection with the recent

                                       35
<PAGE>


accounting   scandals  at  Enron  and   WorldCom.   The  stated   goals  of  the
Sarbanes-Oxley  Act are to  increase  corporate  responsibility,  to provide for
enhanced penalties for accounting and auditing  improprieties at publicly traded
companies and to protect  investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws.

     The Sarbanes-Oxley Act is the most far-reaching U.S. securities legislation
enacted in some time. The Sarbanes-Oxley Act generally applies to all companies,
both U.S. and non-U.S.,  that file or are required to file periodic reports with
the Securities and Exchange  Commission  ("SEC"),  under the Securities Exchange
Act of 1934 ("Exchange Act").

     The  Sarbanes-Oxley  Act  includes  very  specific  additional   disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive  additional  disclosure,  corporate  governance and
other related rules and mandates  further  studies of certain  issues by the SEC
and the  Comptroller  General.  The Sarbanes-  Oxley Act represents  significant
federal  involvement in matters  traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.

     The Sarbanes-Oxley Act addresses, among other matters:

          -    audit committees;

          -    certification  of  financial  statements  by the chief  executive
               officer and the chief financial officer;

          -    the forfeiture of bonuses or other  incentive-based  compensation
               and profits from the sale of an issuer's  securities by directors
               and senior officers in the twelve month period following  initial
               publication  of  any  financial  statements  that  later  require
               restatement;

          -    a prohibition  on insider  trading  during pension plan black out
               periods;

          -    disclosure of off-balance sheet transactions;

          -    a prohibition on personal loans to directors and officers;

          -    expedited filing requirements for Form 4s;

          -    disclosure of a code of ethics and filing a Form 8-K for a change
               or waiver of such code;

          -    "real time" filing of periodic reports

          -    the formation of a public accounting oversight board;

          -    auditor independence; and

          -    various increased criminal penalties for violations of securities
               laws.

     The  Sarbanes-Oxley  Act contains  provisions  which became  effective upon
enactment  on July 30,  2002 and  provisions  which will become  effective  from
within 30 days to one year from  enactment.  The SEC has been delegated the task
of enacting rules to implement  various of the provisions with respect to, among
other matters, disclosure in periodic filings pursuant to the Exchange Act.





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<PAGE>


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.

     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

                                       37
<PAGE>


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  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.  Subsequent to September 30, 2002, the Company was notified
by the IRS of its intention to perform an audit of the tax year 1999 (year ended
September 30, 2000).

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  Oregon state income tax returns have been audited during the past
five  years.  The  Association  is  subject to  Washington  state  Business  and
Organization  tax at the rate of 1.5% of gross  receipts for the  operations  in
that state. There have not been any audits of the Company's Washington state tax
returns during the past five years.


                                       38
<PAGE>


Competition

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

Personnel

     As of  September  30,  2002,  the  Association  had 429  full-time  and 103
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        59      President and Chief Executive Officer

Marshall J. Alexander   51      Executive Vice President and Chief
                                Financial Officer

Ben A. Gay              55      Executive Vice President and Chief
                                Credit Officer

Frank X. Hernandez      47      Senior Vice President and Chief
                                Operations Officer

Craig M. Moore          45      Senior Vice President/Chief Auditor/Corporate
                                Counsel/Secretary

M. Isabel Castellanos   41      Senior Vice President - Retail Banking

Walter F. Dodrill       51      Senior Vice President - Business Banking

James E. Essany         48      Senior Vice President - Corporate
                                Marketing Director

Nina G. Drake           49      Vice President - Human Resource Manager
<FN>
_________________________________
(1)         At September 30, 2002.
</FN>
</TABLE>

     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 1983 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 31 years of  experience  in
banking,  and has  been  an  active  member  of  numerous  civic  and  community
organizations.

                                       39
<PAGE>


     Marshall J.  Alexander  has 27 years of banking  experience,  including  16
years with the Association.  He has served as Vice President and Chief Financial
Officer since August 1994 and was named an Executive  Vice President in December
2000.

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

     Frank X.  Hernandez  has been  employed by the  Association  since 1992. He
served as Human Resources  Officer until July 1998 when he was appointed  Senior
Vice  President  and Chief  Operating  Officer.  He has 21 years  experience  in
banking operations.

     Craig M.  Moore  has a banking  career of more than 25 years,  with five of
those years at Klamath First. He is an attorney,  a Certified  Internal  Auditor
and a Certified Financial Services Auditor.

     M. Isabel  Castellanos  has 21 years  experience in banking with  extensive
experience in management, sales, and training.

     Walter F.  Dodrill has served as Senior Vice  President  and Manager of the
Business  Banking  Group of the Company  since  January  2002.  Mr.  Dodrill was
previously employed by Western Bank from February 1974 to December 2001. Western
Bank became a division of Washington  Mutual in January 1996. Mr. Dodrill served
as Senior  Vice  President  - Regional  Credit  Administrator  and  Senior  Vice
President  - Regional  Manager  for Western  Bank.  Mr.  Dodrill has 29 years of
experience in banking and has been active in civic and community organizations.

     James E.  Essany is a native of Gary,  Indiana  and a  graduate  of Indiana
University  with a  Bachelor's  of Science in  Marketing.  He began his  banking
career in 1979 and worked with three  financial  institutions  in Indiana before
joining Klamath First in May of 2000.

     Nina G. Drake  joined  Klamath  First in June 2002 as Vice  President-Human
Resources.  She has an extensive  background  in human  resource  management  in
financial institutions and related industries. She earned her Master of Business
Administration  in May  2002  and  holds a  lifetime  certification  as a Senior
Professional in Human Resource Management (SPHR).

                                       40
<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, 2002.
<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

2420 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
<CAPTION>


                                       41
<PAGE>


                                   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

<CAPTION>

                                       42
<PAGE>


                                                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                    Owned                        4,911
Baker City, Oregon

1095 Oregon Avenue                 2001                    Owned                        4,382
Bandon, Oregon

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

199 North Nehalem                  2001                    Owned                        2,400
Clatskanie, Oregon
<CAPTION>


                                       43
<PAGE>



                                                Year                                                        Square
Description/Address                             Opened                         Leased/Owned                             Footage
<S>                                <C>                    <C>                          <C>
212 South 5th Street               2001                    Owned                        6,200
Coos Bay, Oregon

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

430 Highway 101                    2001                    Owned                        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                    Owned                        2,416
Seaside, Oregon

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

411 Pacific Avenue                 2001                    Owned                        2,819
Tillamook, Oregon

620 Stewart Avenue                 2002                    Owned                        2,721
Medford, Oregon

2659 Olympic Street                2002                   Leased                          528
Springfield, Oregon

4550 West 11th Avenue              2002                   Leased                          528
Eugene, Oregon

Backoffice Processing Facilities

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

714 Main Street                    2001                   Leased                       14,532
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 $23.4 million at September 30, 2002.  See Note 6 of the Notes
to Consolidated Financial Statements contained in the Annual Report.

</FN>
</TABLE>

                                       44
<PAGE>


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, 2002.


                                       45
<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  16 of  the  Annual  Report  is  incorporated  herein  by
reference.

Item 6.  Selected Financial Data

     The   information   contained   under  the  section   captioned   "Selected
Consolidated  Financial  Data"  on  pages  5  and  6 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  Discussion
and Analysis of Financial Condition and Results of Operations" beginning on page
7 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  Discussion
and Analysis of Financial Condition and Results of Operations -- Market Risk and
Asset/Liability  Management"  beginning  on  page  7 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, 2002 and 2001*
                 Consolidated Statements of Earnings for the Years Ended
                    September 30, 2002, 2001 and 2000*
                 Consolidated Statements of Shareholders' Equity for the Years
                    Ended September 30, 2002, 2001 and 2000*
                 Consolidated Statements of Cash Flows for the Years Ended
                    September 30, 2002, 2001 and 2000*
                 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 35 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, 2002.



                                       46
<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"  and  "Directors'  Compensation"  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.

          Equity  Compensation Plan Information.  The following table summarizes
          share and exercise price information  about the  Corporations'  equity
          compensation plans as of September 30,2002.
<TABLE>
<CAPTION>

                                                                                                                                (c)
                                                                                                               Number of securities
                                                                  (a)                           (b)             remaining available
                                                 Number of securities              Weighted-average             for future issuance
                                                    to be issued upon                exercise price                    under equity
                                                          exercise of                of outstanding              compensation plans
                                                 outstanding options,             options, warrants           (excluding securities
          Plan category                           warrants and rights                    and rights         reflected in column (a))
----------------------------------------    -------------------------     -------------------------     ----------------------------
Equity compensation plans approved
by security holders:
<S>                                                           <C>                           <C>                              <C>
     Option.............................                      879,951                       $13.144                          18,024
     Restricted stock plan..............                           --                            --                          21,851

Equity compensation plans not approved
by security holders:                                              N/A                           N/A                             N/A
                                            -------------------------     -------------------------     ----------------------------
          Total                                               879,951                       $13.144                          39,875
</TABLE>



     (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.

                                       47
<PAGE>


     (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.

Item 14.  Controls and Procedures

          (a) Evaluation of Disclosure Controls and Procedures: An evaluation of
          the  Company's  disclosure  controls  and  procedures  (as  defined in
          Section  13(a)-14(c)  of the  Securities  Exchange  Act of  1934  (the
          "Act"))  was  carried   out  under  the   supervision   and  with  the
          participation  of  the  Company's  Chief  Executive   Officer,   Chief
          Financial  Officer and several other  members of the Company's  senior
          management  within the 90-day period preceding the filing date of this
          annual  report.  The  Company's  Chief  Executive  Officer  and  Chief
          Financial Officer concluded that the Company's disclosure controls and
          procedures  as currently in effect are  effective in enduring that the
          information  required  to be  disclosed  by the  Company in reports it
          files or submits under the Act is (i) accumulated and  communicated to
          the Company's  management  (including the Chief Executive  Officer and
          Chief  Financial  Officer)  in a timely  manner,  and  (ii)  recorded,
          processed,  summarized and reported within the time periods  specified
          in the SEC's rules and forms.

          (b)  Changes in Internal  Controls:  In the year ended  September  30,
          2002,  the Company did not make any  significant  changes in, nor take
          any  corrective  actions  regarding,  its  internal  controls or other
          factors that could significantly affect these controls.

                                       48
<PAGE>


                                     PART IV

Item 15.  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
                99.1    Certification Pursuant   to   Section   906   of   the
                        Sarbanes-Oxley    Act
               ___________________

               *  Incorporated  by  reference to the  Registrant's  Registration
               Statement on Form S-1, filed on June 19, 1995.
               ** Incorporated  reference to the  Registrant's  Definitive Proxy
               Statement for the 1996 Annual Meeting of Shareholders.
               *** Incorporated by reference to the  Registrant's  Form 10-K for
               the year ended September 30, 2001, filed on December 29, 2001.

            (b) Reports on Form 8-K

                    No Current Reports on Form 8-K were filed during the quarter
                    ended September 30, 2002.

                                       49
<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 27, 2002                  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 27, 2002
Kermit K. Houser            Executive Officer and
                            Director (Principal
                            Executive Officer)

/s/ Marshall J. Alexander   Executive Vice President and       December 27, 2002
Marshall J. Alexander       Chief Financial Officer
                            (Principal Financial
                             and Accounting Officer)

/s/ Rodney N. Murray        Chairman of the Board              December 27, 2002
Rodney N. Murray            of Directors

/s/ Bernard Z. Agrons       Director                           December 27, 2002
Bernard Z. Agrons


/s/ Timothy A. Bailey       Director                           December 27, 2002
Timothy A. Bailey


/s/ James D. Bocchi         Director                           December 27, 2002
James D. Bocchi


/s/ William C. Dalton       Director                           December 27, 2002
William C. Dalton


/s/ Dianne E. Spires        Director                           December 27, 2002
Dianne E. Spires


/s/ Donald N. Bauhofer      Director                           December 27, 2002
Donald N. Bauhofer

<PAGE>




                             Certification Required
      by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934

I, Kermit K. Houser, certify that:

(1)  I have reviewed  this annual report on Form 10-K of Klamath First  Bancorp,
     Inc.;

(2)  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

(3)  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

(4)  The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and
     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

(5)  The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

(6)  The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: December 27, 2002

                                                          /s/ Kermit K. Houser
                                                         ----------------------
                                                              Kermit K. Houser
                                         President and Chief Executive Officer

<PAGE>


                             Certification Required
      by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934

I, Marshall J. Alexander, certify that:

(1)  I have reviewed  this annual report on Form 10-K of Klamath First  Bancorp,
     Inc.;

(2)  Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

(3)  Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

(4)  The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and
     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

(5)  The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

(6)  The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: December 27, 2002

                                                      /s/ Marshall J. Alexander
                                                     --------------------------
                                                          Marshall J. Alexander
                           Executive Vice President and Chief Financial Officer