<PAGE>


                                   EXHIBIT 13

                       1997 Annual Report to Shareholders

<PAGE>
                                  EXHIBIT 13

                       1997 Annual Report to Shareholders



CORPORATE  PROFILE  Klamath  First  Bancorp,  Inc.  (Nasdaq:  KFBI) is a unitary
savings and loan holding company,  headquartered in Klamath Falls,  Oregon.  The
Company's subsidiary,  Klamath First Federal Savings and Loan Association, has a
63 year history,  dating back to its beginning in 1934.  The Company  provides a
diversified line of loan and deposit services to individuals, families and small
business  owners.  The  Company  recognizes  there is great value in serving the
rural  communities of the Northwest and will continue to serve these communities
through its  traditional  "Hands On" personal  banking style using  conventional
delivery  channels.  The  Company  will  also  give  customers  a choice  to use
technology  such as ATMs and  telephone  banking  at their  convenience.  At its
fiscal  year-end,  September 30, 1997,  Klamath First  Bancorp,  Inc. had assets
totaling  $980.1  million  operating  in 33  offices in 22  counties  throughout
Oregon.

1997 HIGHLIGHTS

       *   Total assets, loans, deposits and earnings reached new Company highs.
       *   Completed a major 25 branch acquisition, adding $241.3 million in 
           deposits and 42,000 new accounts, increasing deposits to $674.0 
           million, or a 68.63% increase.
       *   Completed 10% stock buy back in January 1997.
       *   Paid quarterly dividends totaling $.30 per share.
       *   Increased loans by 16.45%, or $77.9 million.
       *   Added 14 new ATM locations.
       *   Introduced 24-hour telephone banking.
       *   Added many new checking and savings products.
       *   Expanded consumer and small business lending products.
       *   Earnings reached new high of $8.6 million, 40.07% increase over 
           prior year.

<PAGE>


KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY

TABLE OF CONTENTS

Directors and Officers ................................    3-4

Selected Consolidated Financial Data ..................    5-6

Letter to Our Shareholders ............................    7-8

Executive Officers ....................................      9

Management's Discussion and Analysis of
   Financial Condition and Results of Operations ......  10-20

Common Stock Information ..............................  21-22

Independent Auditors' Report ..........................     23

Consolidated Balance Sheets ...........................     24

Consolidated Statements of Earnings ...................     25

Consolidated Statements of Shareholders' Equity .......     26

Consolidated Statements of Cash Flows .................  27-28

Notes to Consolidated Financial Statements ............  29-52

<PAGE>

Klamath First Federal Savings and Loan Association and
Klamath First Bancorp, Inc. Officers

Gerald V. Brown
President and Chief Executive Officer

Robert A. Tucker
Senior Vice President - Chief Operating Officer

George L. Hall
Senior Vice President - Chief Lending Officer/Secretary

Marshall J. Alexander
Vice President - Chief Financial Officer

Frank X. Hernandez
Human Resources Officer

Robert L. Salley
Vice President

Gerald A. Page
Vice President

Carol Starkweather
Assistant Vice President

Craig M. Moore
Corporate Counsel

Nora L. Boman
Treasurer

and all branch managers

<PAGE>
KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND KLAMATH FIRST BANCORP,
INC. BOARD OF DIRECTORS


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

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

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

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

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

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

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

Bernard Z. Agrons
Retired;  Weyerhauser Company Vice President for the Eastern Oregon Region until
1981;  former State  Representative in the Oregon State Legislature from 1983 to
1991
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth certain  information  concerning the consolidated
financial  position and  consolidated  results of  operations  of Klamath  First
Bancorp,  Inc.  (the Company) at the dates and for the periods  indicated.  This
information  does not purport to be complete  and should be read in  conjunction
with,  and is  qualified  in its  entirety  by  reference  to, the  Consolidated
Financial  Statements  and Notes  thereto  appearing  elsewhere  in this  Annual
Report.
<TABLE>
<CAPTION>

 
                                                                                   At September 30,
                                                               ----------------------------------------------------
                                                                   1997       1996       1995       1994       1993
                                                               --------   --------   --------   --------   --------
FINANCIAL CONDITION DATA                                                            (In thousands)
<S>                                                            <C>        <C>        <C>        <C>        <C>     
Assets .....................................................   $980,078   $671,969   $647,840   $448,939   $403,879
Cash and cash equivalents ..................................     32,043     16,180    175,994     19,557     23,480
Loans receivable, net ......................................    551,464    473,556    403,544    360,122    310,668
Investment securities held to maturity .....................     22,937      9,827     42,209     44,564     57,997
Investment securities available for sale ...................    261,846     75,987     12,606     12,224       --
Mortgage backed & related securities held to maturity ......      5,447      6,783       --         --         --
Mortgage backed & related securities available for sale ....     64,869     74,109       --         --         --
Stock in FHLB of Seattle, at cost ..........................      7,150      4,774      4,426      4,156      3,804
Advances from FHLB of Seattle ..............................    129,000     90,000     20,000       --         --
Deposit liabilities ........................................    673,978    399,673    384,380    389,751    349,952
Shareholders' equity .......................................    144,462    153,411    164,685     49,308     44,949
</TABLE>
<TABLE>
<CAPTION>

                                                                                Years Ended September 30,
                                                               ----------------------------------------------------
                                                                   1997       1996       1995       1994       1993
                                                               --------   --------   --------   --------   --------
SELECTED OPERATING DATA                                                               (In thousands)
<S>                                                            <C>        <C>        <C>        <C>        <C>     
Total interest income ......................................   $ 54,167   $ 45,649   $ 35,107   $ 32,408   $ 31,091
Total interest expense .....................................     29,856     23,286     20,441     16,555     16,070
                                                               --------   --------   --------   --------   --------
Net interest income ........................................     24,311     22,363     14,666     15,853     15,021
Provision for loan losses ..................................        370        120        120        150        120
                                                               --------   --------   --------   --------   --------
Net interest income after provision for loan losses ........     23,941     22,243     14,546     15,703     14,901
Non-interest income ........................................        810        522        381        352      1,112
BIF/SAIF Assessment ........................................       --        2,473       --         --         --
Non-interest expense .......................................     11,764      9,769      6,004      6,034      5,191
                                                               --------   --------   --------   --------   --------
Earnings before income taxes and cumulative effect .........     12,987     10,523      8,923     10,021     10,822
of a change in accounting principle
Provision for income tax ...................................      4,429      4,413      3,349      3,867      3,665
                                                               --------   --------   --------   --------   --------
Earnings before cumulative effect of a change in ...........      8,558      6,110      5,574      6,154      7,157
accounting principle
Cumulative effect of a change in ...........................       --         --         --          866       --
accounting for income taxes ................................       --         --         --         --         --
Net Earnings ...............................................   $  8,558   $  6,110   $  5,574   $  5,288   $  7,157
                                                               ========   ========   ========   ========   ========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
KEY OPERATING RATIOS

                                                                      At or For the Years Ended September 30,
                                                               ----------------------------------------------------
                                                                   1997       1996       1995       1994       1993
PERFORMANCE RATIOS                                             --------   --------   --------   --------   --------
<S>                                                            <C>        <C>        <C>        <C>        <C>     
Return on average assets ...................................       1.14%      0.99%      1.19%      1.26%      1.88%
(net income divided by average assets)
Return on average equity ...................................       5.85%      3.69%     10.44%     10.93%     16.87%
(net income divided by average equity)
Interest rate spread .......................................       2.28%      2.22%      2.73%      3.40%      3.58%
(difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities)
Net interest margin (net interest income as a ..............       3.32%      3.65%      3.24%      3.84%      4.04%
percentage of average interest-earning assets)
Average interest-earning assets to average .................     125.58%    137.78%    111.29%    111.13%    110.61%
interest-bearing liabilities
Net interest income after provision for loan losses ........     203.51%    181.69%    242.27%    260.24%    287.05%
to total non-interest expenses
Non-interest expense to average total assets ...............       1.57%      1.99%      1.29%      1.43%      1.36%
Dividend payout ratio (dividends declared per share ........      34.09%     44.64%      --         --         --
divided by net income per share)

ASSET QUALITY RATIOS
Allowance for loan losses to total loans at ................       0.22%      0.19%      0.19%      0.20%      0.20%
end of period
Non-performing assets to total assets ......................       0.03%      0.04%      0.12%      0.05%      0.07%

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

CAPITAL RATIOS
 
Equity to assets ...........................................      14.74%     22.83%     25.42%     10.98%     11.13%
Tangible capital ratio .....................................      11.06%     19.22%     18.57%     10.98%     11.13%
Core capital ratio .........................................      11.06%     19.22%     18.57%     10.98%     11.13%
Risk-based capital ratio ...................................      23.12%     42.41%     36.87%     22.61%     23.15%

 
OTHER DATA
 
NUMBER OF
Real estate loans outstanding ..............................      8,393      7,704      7,110      6,654      6,169
Deposit accounts ...........................................     82,032     38,651     38,260     35,205     33,147
Full service offices .......................................         32          7          7          6          6
</TABLE>

<PAGE>

To Our Shareholders:

     This  past  year  has  given  us an  opportunity  to  develop  many  of our
strategies  to enhance  shareholder  value that we outlined in our first  annual
meeting. Our largest development this year was our acquisition of 25 Wells Fargo
branches in Oregon.  Terms of our purchase  offer were for a deposit  premium of
6.51% plus the book value of the  buildings  and land. We were very pleased when
Wells  accepted our offer.  We made our  announcement  on March 7, 1997 with the
conversion  scheduled  for July 18th.  This gave us four  months to prepare  and
train branch personnel in the new offices.  Any conversion has its problems with
equipment and business culture, but thanks to the dedication of our officers and
many employees, the conversion was completed as scheduled. Klamath First Federal
is now offering its special brand of "Hands On" customer service in 32 branches.
Today we are operating in 22 of Oregons 36 counties.  In the Wells  transaction
we gained more than $240 million in deposits and many new customers.

     These deposits were invested in securities at varying  maturities  with the
intention of rolling these funds into loans as the investments mature. After the
initial branch  purchase,  there has been an increase in total deposits of $13.6
million.  These funds will also be used to fund loans.  We will actively  pursue
loans in our new  branch  areas  and  other  growing  areas of the  state  while
continuing to keep credit quality a primary  consideration.  Since beginning the
consumer and small  business  loan  programs  last  spring,  we have closed $4.7
million in gross  loans.  Although  these are higher risk  loans,  they are also
higher yielding loans than our traditional real estate lending  activities.  The
consumer and small  business  loans  provide a good and very  necessary  product
offering to many of the new communities we serve.

     Growth in our core loan business  lines resulted in loan and deposit growth
that produced  good earnings this past year.  Fiscal 1997 net earnings were $8.6
million,  which represents a new company high and an increase of 40.07% from the
same  period  last  year  when  earnings  were  $6.1  million.  While  new  loan
originations  were slightly less than one year ago,  $135.4 million at September
30, 1996  compared to $126.9  million at September 30, 1997,  the  Association's
loan demand is still  considered  good. To supplement the loan production in our
primary market areas,  we purchased  $15.6 million in loans  throughout the year
from other areas of the state. We continue to have strong loan demand within our
market area.  This demand was  complemented  with higher  yielding  Oregon-based
construction  loans and adjustable rate  multi-family and commercial real estate
loans,  both  purchased  and  originated  through  our  association  with  other
financial  institutions  and mortgage brokers in Oregon.  The additional  income
generated on these  higher  yielding  loans  should  continue to be reflected in
earnings in future quarters. Credit quality continues to be very strong as shown
by  nonperforming  assets as a percent of total  assets of 0.03% at fiscal  year
end.

     We anticipate  that internal  growth will continue to increase,  especially
with statewide exposure at our 32 branch locations. With our acquisition,  total
assets reached a new high of $980.1  million and deposits  reached a record high
of $674.0 million.  The $308.1 million increase in total assets was supported by
the acquisition  which contributed  approximately  $251 million to asset growth.
Net loans receivable contributed an additional $77.9 million, a 16.45% increase.
We  have a large  increase  in  investment  securities  from  $85.8  million  at
September 30, 1996 to $284.8  million at September  30, 1997.  This increase was
primarily due to the cash  received in the  acquisition  which was  subsequently
placed in investment  securities.  Mortgage-backed  securities  decreased  $10.6
million as a result of normal principal  payments received which were reinvested
in loans as part of our ongoing strategy to fund loan growth.

     Our dividend policy is another  shareholder  value  enhancement.  Since our
conversion  to a publicly  held stock company in October of 1995, we have paid a
cash dividend each quarter,  increasing  from $0.05 per share in January of 1996
to our current level of $0.08 per share.

     One of our  strategies to reduce excess  capital was the  repurchase of our
stock.  We started  this year with  shareholders  equity of $153.4  million and
10,242,360  outstanding shares for a book value of $14.98 per share. The company
repurchased  10% of  its  shares  in  January  1997  and  ended  the  year  with
shareholders  equity of $144.5 million and a decrease in shares  outstanding to
9,235,582.  Our book value  increased  to $15.64 per share,  while our return on
equity improved from 3.69% at September 30, 1996 to 5.85% at September 30, 1997.

     The  development  of many new deposit  products,  as a direct result of the
Wells Fargo branch  acquisition,  should  improve our fee income and position us
for good future deposit growth.  We continue to believe there is great value and
opportunity in smaller  communities  throughout the northwest,  and that banking
customers  in these  markets  still  appreciate  and  continue  to  support  the
traditional  community banking product delivery  channels.  Our Association will
continue to extend the same quality customer service with the "Hands On" banking
style Klamath First Federal has exhibited throughout its 63-year history.
<PAGE>

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

Sincerely,



Gerald V. Brown,                        Rodney N. Murray,  
President and Chief Executive Officer   Chairman of the Board
 



<PAGE>
CORPORATE EXECUTIVE OFFICERS

Corporate Executive Officer Profiles

Gerald V. Brown has been with Klamath First Federal Savings and Loan Association
since 1957. He began as a teller, and, in his 40 years with the Association, has
progressed  up through the ranks to his current  position as President and Chief
Executive  Officer.  Mr Brown has served on the Board of  Directors  for Klamath
First Federal Savings & Loan Association since 1994.

Robert  A.  Tucker  has  been  with  Klamath  First  Federal  Savings  and  Loan
Association  since 1973.  He is Senior Vice  President-Chief  Operating  Officer
responsible  for all  operations  of the  Association.  In his 24 years with the
Association Mr. Tucker has served as Loan Officer,  Assistant Secretary,  Branch
Manager, Assistant Vice President and Vice President.

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

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


<PAGE>


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

General
Klamath First  Bancorp,  Inc. (the  "Company"),  an Oregon  corporation,  is the
unitary  savings and loan holding  company for Klamath First Federal Savings and
Loan Association (the "Association").

The  Association  is  a  traditional,   community-oriented,   savings  and  loan
association  that focuses on customer  service  within its primary  market area.
Accordingly,  the Association is primarily  engaged in attracting  deposits from
the general  public  through  its  offices  and using those and other  available
sources of funds to originate  permanent  residential  one- to four-family  real
estate  loans  within its market  area and to a lesser  extent  commercial  real
estate  and  multi-family  residential  loans and loans to  consumers  and small
businesses.

The Company's  profitability depends primarily on its net interest income, which
is the  difference  between  interest  and dividend  income on  interest-earning
assets,  principally  loans and investment  securities,  and interest expense on
interest-bearing  deposits  and  borrowings.  Because the  Company is  primarily
dependent on net interest  income for its  earnings,  the focus of the Company's
planning  is to devise and  employ  strategies  that  provide  stable,  positive
spreads  between  the  yield  on   interest-bearing   assets  and  the  cost  of
interest-bearing  liabilities  in order to  maximize  the  dollar  amount of net
interest income.  The Company's net earnings are dependent,  to a lesser extent,
on the level of its non-interest income, such as service charges and other fees,
and the controlling of its non-interest  expense,  such as employee compensation
and benefits,  occupancy and equipment  expense,  deposit insurance premiums and
miscellaneous other expenses, as well as federal and state income taxes.

In July 1997,  the Company,  through the  Association,  acquired 25 former First
Interstate Bank branches from Wells Fargo Bank,  N.A. The  transaction  included
purchase of the branch facilities and assumption of approximately $241.3 million
in  deposit  liabilities.  The  acquisition  was  accounted  for  as a  purchase
transaction whereby all assets acquired and liabilities assumed were recorded at
their fair values at the acquisition date.

The Association is regulated by the Office of Thrift Supervision ("OTS") and its
deposits  are insured up to  applicable  limits  under the  Savings  Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").

The  Association  is a  member  of  the  Federal  Home  Loan  Bank  system.  The
Association  conducts its business  through 32 office  facilities,  and one loan
production  office,  with the main office located in Klamath Falls,  Oregon. The
Association  considers  its  primary  market  area to be the  state  of  Oregon,
particularly the 22 counties in which the offices are located.

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

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

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

<TABLE>
<CAPTION>

        TOTAL ASSETS
       (In thousands)
<S>  <C>      <C>     
     1997     $980,078
     1996      671,969
     1995      647,840
     1994      448,939
     1993      403,879
     
</TABLE>

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

At September 30, 1997, the Association's  one-year cumulative gap was a negative
33.22%  of total  assets  compared  to a  negative  25.88%  of total  assets  at
September 30, 1996.

The Association  continues to primarily  originate fixed rate residential  loans
for its  portfolio.  In an effort to reduce its exposure to interest  rate risk,
the Association has: (i) purchased adjustable rate  mortgage-backed  securities,
(ii) purchased  participations  in adjustable  rate commercial and multi- family
loans,  (iii)  developed  shorter term consumer loan  products,  (iv)  developed
shorter term adjustable and fixed rate business loans, and (v) emphasized longer
term fixed rate deposits. The Association will continue to explore opportunities
in these areas.

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

                                                   At September 30,
                                      ----------------------------------------
                                          1997            1996            1995
                                      --------        --------        --------
                                                   (In thousands)
<S>                                   <C>             <C>             <C>        
Earning assets maturing ........      $199,320        $174,921        $253,115
or repricing within one year 
Interest-bearing ...............       524,942         348,852         260,073
liabilities maturing or
repricing within one year 
Deficiency of earning ..........       (33.22)%        (25.88)%         (1.07)%
assets over interest-
bearing liabilities as a
percent of total assets 

Percent of assets to ...........        37.97%          50.14%          97.32%
liabilities maturing or
repricing within one year 
</TABLE>

<PAGE>


Liquidity and Capital Resources

The Company generates cash through operating  activities,  primarily as a result
of net income.  The  adjustments to reconcile net income to net cash provided by
operations during the periods presented consisted primarily of the provision for
loan losses,  depreciation  and amortization  expense,  amortization of deferred
loan  origination  fees,  increases or decreases in various escrow  accounts and
increases  or  decreases  in other  assets  and  liabilities.  A major  one-time
adjustment to cash this year  resulted  from the Wells Fargo branch  acquisition
which  contributed  approximately  $220.9 million in cash. The primary investing
activity of the Association is lending,  which is funded with cash provided from
operations and financing  activities,  as well as proceeds from amortization and
prepayments on existing loans and mortgage  backed and related  securities.  For
additional information about cash flows from operating, financing, and investing
activities,  see the  Consolidated  Statements  of Cash  Flows  included  in the
Consolidated Financial Statements.

The  Association is required under  applicable  federal  regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. government,
federal agency and other  investments  having  maturities of five years or less.
OTS  regulations  effective  for  the  current  year  required  that  a  savings
association  maintain  liquid assets of not less than 5.00% of its average daily
balance of net withdrawable  deposit accounts and borrowings payable in one year
or less, of which short- term liquid assets must consist of not less than 1.00%.
Effective  November 24, 1997, the OTS has revised the requirement  from 5.00% to
4.00%,  and eliminated the short term cash  liquidity  requirement of 1.00%.  At
September 30, 1997,  the  Association's  regulatory  liquidity,  as measured for
regulatory purposes, was 31.56%.

Under capital standards mandated by the Financial Institution Reform,  Recovery,
and Enforcement  Act, the Association  must have: (i) tangible  capital equal to
1.5% of adjusted total assets, (ii) core capital equal to 3.0% of adjusted total
assets,  and  (iii)  total  risk-based  capital  equal to 8.0% of  risk-weighted
assets.  At September  30, 1997,  the  Association  was in  compliance  with all
regulatory capital requirements  effective as of such date, with tangible,  core
and risk-based capital of 11.1%, 11.1% and 23.1%, respectively.  (See Note 16 to
Consolidated Financial Statements.)

<PAGE>

INTEREST SENSITIVITY GAP ANALYSIS

The   following   table   presents   the   difference   between  the   Company's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at September 30, 1997. This table does not  necessarily  indicate the
impact of general  interest rate movements on the Company's net interest  income
because  the  repricing  of  certain  assets  and   liabilities  is  subject  to
competitive and other limitations.  As a result,  certain assets and liabilities
indicated as maturing or otherwise  repricing within a stated period may in fact
mature or reprice at different times and at different volumes.
<TABLE>
<CAPTION>
                                             3 Months  6 Months      1 Year    3 Years    5 Years   10 Years    Greater
                                  3 Months         to        to          to         to         to         to       than
                                   or Less   6 Months    1 Year     3 Years    5 Years   10 Years   20 Years   20 Years     TOTAL
                                 ---------  ---------  ---------  ---------  ---------  ---------  ---------  --------- ---------
ASSETS                                                              (In thousands)
 
Permanent 1-4 Mortgages
<S>                              <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>       <C>      
  Adjustable Rate .............. $  16,817  $   4,496  $  16,290  $   1,495      $--        $--        $--        $--   $  39,098
  Fixed Rate ...................       601      1,170      6,481        343      1,807     14,943     81,081    364,856   471,282

Other Mortgage Loans
  Adjustable Rate ..............     3,207      4,273      8,922      3,977      3,628       --         --         --      24,007
  Fixed Rate ...................      --            9        696        934      4,802      2,607      9,377         73    18,498

Mortgage Backed and ............    28,271     19,554     21,720       --         --         --         --         --      69,545
Related Securities

Non-Real Estate Loans
  Adjustable Rate ..............       451        210        451        597        382        559      1,434       --       4,084
  Fixed Rate ...................       467         56      1,239        161       --         --         --         --       1,923

Investment Securities ..........    49,074      5,908      8,957     87,121    131,382     10,096      4,929      2,029   299,496
                                 ---------  ---------  ---------  ---------  ---------  ---------  ---------  --------- ---------
Total Rate Sensitive ........... $  98,888  $  35,676  $  64,756  $  94,628  $ 142,001  $  28,205  $  96,821  $ 366,958 $ 927,933
Assets
                                 =========  =========  =========  =========  =========  =========  =========  ========= =========
LIABILITIES
 
Deposits - Fixed Maturity ...... $  88,989  $  70,757  $  82,465  $  85,561  $  26,808  $  21,023      $--        $--   $ 375,603
Deposits - Interest ............     5,682      5,682     11,363     26,514     26,514       --         --         --      75,755
Bearing Checking
Deposits - Money Market ........    27,969     29,045     29,045     21,515       --         --         --         --     107,574
Deposits - Passbook and ........     4,738      4,738      9,477     22,113     22,113       --         --         --      63,179
Statement Savings
Other Interest Bearing .........   136,077     10,000      8,915       --         --         --         --         --     154,992
Liabilities
                                 ---------  ---------  ---------  ---------  ---------  ---------  ---------  --------- ---------
Total Rate Sensitive ........... $ 263,455  $ 120,222  $ 141,265  $ 155,703  $  75,435  $  21,023      $--        $--   $ 777,103
Liabilities
                                 =========  =========  =========  =========  =========  =========  =========  ========= =========
Interest Rate .................. $(164,567) $ (84,546) $ (76,509) $ (61,075) $  66,566  $   7,182  $  96,821  $ 366,958 $ 150,830
Sensitivity Gap

Cumulative Interest Rate ....... $(164,567) $(249,113) $(325,622) $(386,697) $(320,131) $(312,949) $(216,128) $ 150,830
Sensitivity Gap
Sensitivity Gap to Total Assets    (16.79%)    (8.63%)    (7.81%)    (6.23%)     6.79%      0.73%      9.88%     37.45%
Cumulative Interest Rate .......   (16.79%)   (25.42%)   (33.22%)   (39.46%)   (32.66%)   (31.93%)   (22.05%)    15.39%
Sensitivity Gap to Total Assets

</TABLE>
<PAGE>


Asset Quality

Non-Performing Assets
At September 30, 1997, the ratio of non-performing  assets (including nonaccrual
loans,  accruing loans greater than 90 days  delinquent,  real estate owned, and
other repossessed  assets) to total assets was .03%. The Association  intends to
maintain asset quality by continuing its focus on  one-to-four  family  lending.
With  the   introduction  of  other  lending  options  such  as  commercial  and
multi-family  real estate  loans,  equity lines of credit,  other  consumer loan
products,  and commercial  loans,  the  Association  has evaluated the trade off
associated  with planned loan growth and the greater credit risk associated with
such forms of lending.

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

In  accordance  with  regulatory  requirements,   the  Association  reviews  and
classifies  on a regular  basis,  and as  appropriate,  its  assets as  "special
mention,"  "substandard,"  "doubtful,"  and  "loss."  All  nonaccrual  loans and
non-performing assets are included in classified assets.

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

                                                       At September 30,
                                            ------------------------------------
                                             1997           1996           1995
                                            ------         ------         ------
                                                       (In thousands)
<S>                                         <C>            <C>            <C>   
Loss ..............................         $ --           $ --           $ --
Doubtful ..........................           --             --             --
Substandard .......................            304            281          1,095
Special Mention ...................            843            645           --
                                            ______         ______         ______
                                            $1,147         $  926         $1,095
                                            ======         ======         ======
</TABLE>

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

<PAGE>

The following  table sets forth at the dates  indicated the loan loss  allowance
and charge-offs:
<TABLE>
<CAPTION>
                                                      At September 30,
                                            ------------------------------------
                                              1997           1996           1995
                                            ------         ------         ------
                                                       (In thousands)
<S>                                         <C>            <C>            <C>   
Loan loss allowance ...............         $1,296         $  928         $  808
Charge-offs .......................              2           --               67

</TABLE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30,
1997 AND 1996

General
The most  significant  event for the Company was the July 1997 acquisition of 25
former First  Interstate  Bank branches from Wells Fargo Bank, N.A. The branches
are located in rural  Oregon  communities,  complementing  the  existing  branch
network and expanding the Company's  delivery of its "hands-on banking" style to
customers throughout the state of Oregon.

With the  acquisition  and other  activities  throughout  the year, net earnings
increased  $2.4 million or 40.1% from $6.1 million for the year ended  September
30, 1996, to $8.6 million for the year ended  September  30, 1997.  Net interest
income  increased  $1.9  million or 8.7% from $22.4  million  for the year ended
September 30, 1996 to $24.3 million for the year ended  September 30, 1997. This
increase was primarily  attributable  to an increase in total  average  interest
earning  assets from $613.2 at  September  30, 1996 to $732.3 at  September  30,
1997.  The  increase  in net  interest  income was  augmented  by an increase in
non-interest  income from $0.5 million for the year ended  September 30, 1996 to
$0.8 million for the year ended  September 30, 1997.  This increase is primarily
attributable  to an increase in service fee income due to the addition of the 25
acquired branches which contributed approximately 42,000 additional accounts.

<PAGE>

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

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

                                                             Years Ended September 30,
                        -------------------------------------------------------------------------------------------
                                      1997                           1996                           1995
                        -----------------------------   ----------------------------   ----------------------------
                          Average              Yield/    Average              Yield/    Average              Yield/
                          Balance   Interest     Rate    Balance   Interest     Rate    Balance   Interest     Rate
                         --------   --------  -------   --------   --------  -------   --------   --------  -------
INTEREST-EARNING ASSETS                                         (In thousands)
 
<S>                      <C>        <C>         <C>     <C>        <C>         <C>     <C>        <C>         <C>  
Loans receivable .....   $515,555   $ 40,851    7.92%   $440,510   $ 35,262    8.00%   $381,689   $ 30,117    7.89%
Mortgage backed ......     74,349      4,716    6.34%     52,275      3,137    6.00%       --         --       --
and related securities
Investment securities     112,319      6,847    6.10%     87,929      5,382    6.12%     52,097      3,868    7.43%
Federal funds sold ...     17,533        931    5.31%      6,521        462    7.09%      7,021        514    7.32%
Interest earning            6,132        327    5.32%     21,372      1,059    4.95%      8,438        338    4.01%
deposits
FHLB stock ...........      6,431        495    7.70%      4,552        348    7.64%      3,935        270    6.86%
                         --------   --------    ----    --------   --------    ----    --------   --------    -----
Total interest-earning    732,319     54,167    7.40%    613,159     45,650    7.45%    453,180     35,107    7.75%
assets   
Non-interest-earning       16,527                          2,130                         13,661
assets
                         --------                       --------                       --------                       
Total Assets             $748,846                       $615,289                       $466,841
                         ========                       ========                       ========                       
<CAPTION>
 
INTEREST-BEARING LIABILITIES
 
Tax and insurance ....   $  4,614   $    137    2.97%   $  4,490   $    148    3.30%   $  4,533   $    180    3.97%
reserve
Passbook and statement     40,281      1,271    3.15%     34,198        983    2.87%     44,345      1,235    2.78%
savings
Interest-bearing .....     35,892        791    2.20%     22,064        546    2.47%     22,242        542    2.44%
checking
Money market .........     62,171      2,391    3.85%     50,308      1,950    3.88%     55,891      2,206    3.95%
Certificates of ......    312,511     18,012    5.76%    282,446     16,772    5.94%    264,873     15,328    5.79%
deposit
FHLB advances/Short ..    127,659      7,254    5.68%     51,517      2,888    5.60%     15,305        950    6.21%
term borrowings
                         --------   --------    ----    --------   --------    ----    --------   --------    -----
Total interest-bearing    583,128     29,856    5.12%    445,023     23,287    5.23%    407,189     20,441    5.02%
liabilities  
Non-interest-bearing       19,417                          4,892                          6,279
liabilities                
                         --------                       --------                       --------                       
Total liabilities         602,545                        449,915                        413,468
Shareholders' equity      146,301                        165,374                         53,373
                         --------                       --------                       --------                       
Total Liabilities and    $748,846                       $615,289                       $466,841
Shareholders' Equity 
                         ========                       ========                       ========                       
Net interest income                  $24,311                        $22,363                        $14,666
                                    ========                       ========                       ========                       
Interest rate spread                            2.28%                          2.22%                          2.73%
                                              =======                        =======                        =======          
Net interest margin                             3.32%                          3.65%                          3.24%
                                              =======                        =======                        =======          
Average interest-earning
assets to average 
interest-bearing 
liabilities                                   125.58%                        137.78%                        111.29%
                                              =======                        =======                        =======
</TABLE>



<PAGE>

RATE/VOLUME ANALYSIS

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

<TABLE>
<CAPTION>

 
                                                   For the Years Ended September 30,          For the Years Ended September 30,
                                                1996 VS 1997 Increase (Decrease) Due To    1995 VS 1996 Increase (Decrease) Due To
                                                ---------------------------------------    ---------------------------------------- 
                                                                            Net Increase                               Net Increase
                                                 Rate    Volume  Rate/Vol     (Decrease)   Rate     Volume   Rate/Vol     (Decrease)
INTEREST-EARNING ASSETS                         -----   -------     -----       -------    -----   -------     ------       ------- 
                                                                                   (In thousands)
<S>                                             <C>     <C>        <C>          <C>        <C>     <C>        <C>           <C>    
Loans .......................................   $(357)  $ 6,007    $  (61)      $ 5,589    $ 436   $ 4,642    $    67       $ 5,145
Mortgage backed and related securities ......     179     1,324        76         1,579     --        --        3,137         3,137
Investment securities .......................     (22)    1,493        (6)        1,465     (679)    2,660       (467)        1,514
Federal funds sold ..........................    (116)      781      (196)          469      (16)      (37)         1           (52)
Interest earning deposits ...................      79      (754)      (57)         (732)      80       518        123           721
FHLB stock ..................................       2       144         1           147       31        42          5            78
                                                -----   -------     -----       -------    -----   -------     ------        ------ 
Total Interest-Earning Assets ............   $   (235) $  8,995    $ (243)      $ 8,517    $(148)  $ 7,825      2,866       $10,543
                                               ======   =======     =====       =======    =====   =======     ======        ======

INTEREST-BEARING LIABILITIES

Tax and insurance reserves ...............   $    (15) $      4    $   --       $   (11)   $ (30)  $    (2)   $   --            (32)
Savings ..................................         96       175        17           288       40      (283)        (9)         (252)
Interest bearing checking ................        (60)      342       (37)          245        8        (4)       --              4
Money market .............................        (15)      460        (4)          441      (40)     (220)         4          (256)
Certificates of deposit ..................       (493)    1,785       (52)        1,240      400     1,017         27         1,444
FHLB advances/Short term borrowings ......         40     4,267        59         4,366      (92)    2,248       (218)        1,938
                                             --------  --------   -------       -------    -----   -------     ------        ------
Total Interest-Bearing Liabilities .......   $   (447) $  7,033    $  (17)      $ 6,569    $ 286   $ 2,756     $ (196)      $ 2,846
                                             ========  ========   =======       =======    =====   =======     ======        ======
Increase (Decrease) in Net Interest Income                                      $ 1,948                                     $ 7,697
                                                                                =======                                      ======

</TABLE>

<PAGE>
 
Interest Income
The $119.2 million increase in average interest earning assets contributed to an
increase in interest  income of $8.5 million or 18.7% from $45.6 million for the
year ended  September 30, 1996 to $54.2 million for the year ended September 30,
1997. Of this increase,  $5.6 million is  attributable to additional loan income
due to an increase in loans  receivable.  The increase in loans  receivable  was
primarily a result of new purchase loan originations  exceeding loan refinancing
and purchase of  participation  loans which  resulted in greater net loan growth
for 1997.

During the year ended September 30, 1996, 77.2% of interest income was generated
by loans receivable  compared to 75.4% for the year ended September 30, 1997. In
most cases,  loans will generate  higher average yields than  investments.  As a
result,  the average yield on interest  earning assets  decreased  slightly from
7.45%  for the  year  ended  September  30,  1996 to 7.40%  for the  year  ended
September 30, 1997.

The  remaining  increase  in  interest  income of $2.9  million  was a result of
investing  the proceeds of the  acquisition  and  borrowings  in fixed rate U.S.
Government and agency securities with maturities of less than five years,  fixed
and  adjustable  rate  corporate  securities  and overnight  funds.  The average
balance of investments and mortgage backed and related  securities  increased by
$46.5 million for the year ended September 30, 1997 compared with the comparable
period in 1996.

Interest Expense
Interest expense  increased $6.6 million due to increases in interest expense on
deposits and borrowings.  Interest expense on deposits increased $2.2 million or
10.9% from $20.3 million for the year ended  September 30, 1996 to $22.5 million
for the year ended  September  30,  1997.  Total  deposits  increased  by $274.3
million from September 30, 1996 to September 30, 1997, arising  principally from
the acquisition of the 25 former First Interstate Bank branches from Wells Fargo
Bank,  N.A.  However,  the average  interest paid on  interest-bearing  deposits
decreased  23 basis points from 5.21% for the year ended  September  30, 1996 to
4.98% for the year ended  September 30, 1997.  This decrease was a result of the
lower cost of deposits acquired in the branch  acquisition.  Interest expense on
borrowings   increased  $3.6  million  due  to  a  147.8%  increase  in  average
borrowings,  from $51.5 million for the year ended  September 30, 1996 to $127.7
million for the year ended September 30, 1997.

Provision for Loan Losses
The  provision for loan losses was $370,000,  recoveries  were zero,  and charge
offs were  $1,369  during  the year  ended  September  30,  1997  compared  to a
provision of $120,000  with no  recoveries or charges offs during the year ended
September  30, 1996.  At September  30, 1997,  the allowance for loan losses was
equal to 510.4% of  non-performing  assets  compared to 356.9% at September  30,
1996.  The increase in the coverage  ratio at year end 1997 was the result of an
increase in the allowance  based on  origination  and purchase of commercial and
multi-family   loans  which  have  higher  associated  risk  than  the  one-  to
four-family loans traditionally made by the Association.

Non-Interest Income
Non-interest  income increased $289,000 or 55.4 % to $811,000 for the year ended
September  30, 1997 from  $522,000 for the year ended  September  30, 1996.  The
increase was  attributable to increases in fees and service charges  principally
as a result of the increase in the number of deposit accounts subject to service
charges obtained in the branch acquisition.

Non-Interest Expense
Non-interest  expense decreased $477,875,  or 3.9%, for the year ended September
30, 1997, from a total of $12.2 million for the prior year, to $11.8 million for
the year ended September 30, 1997. Several factors impacted non-interest expense
for the period.  Expense for 1996 included $2.5 million for the BIF/SAIF special
assessment,  and $1.6 million related to the recognition of a loss on sale of an
investment  subsequent  to year end.  These  items  did not  recur in 1997.  The
resulting decrease in non-interest expense was offset by a $2.7 million increase
in compensation  expense for 1997. Of the $2.7 million  increase in compensation
expense,  $1.1  million  is due to  compensation  expense  associated  with  the
Management Recognition and Development Plan ("MRDP"),  which was not in place in
the prior year.  An  additional  $1.1 million is primarily due to an increase in
salaries and wages paid to the additional employees from the branch acquisition.
The ratio of  non-interest  expense to average  total assets was 1.57% and 1.99%
for the years ended September 30, 1997 and 1996, respectively.

<TABLE>
<CAPTION>

TOTAL RETURN PERFORMANCE
                                            10-05-95  03-31-96  09-30-96  03-31-97  09-30-97
                                            --------  --------  --------  --------   -------
<S>                                          <C>       <C>       <C>       <C>       <C>    
Klamath First Bancorp, Inc. ................ $100.00   $134.25   $144.37   $180.24   $228.14
The Nasdaq Index (U.S. Companies) ..........  100.00    109.02    122.11    121.17    167.62
SNL $500 Million to $1 Billion Thrift Index . 100.00    105.06    117.60    144.41    195.97
</TABLE>
<PAGE>

Income Taxes
The provision for income taxes remained  consistent for the year ended September
30, 1997  compared  with the prior year.  Although  earnings  for the year ended
September 30, 1997 were higher than for the same period of 1996, the Company was
able to  recognize  the tax benefit  related to the capital  loss on sale of the
U.S. Federal  securities mutual bond fund,  thereby reducing tax expense for the
year.  At September  30, 1996,  when the capital  loss was  recognized  for book
purposes,  a valuation  allowance  was created to offset the  deferred tax asset
because the Company was not assured of being able to realize a capital  gain and
the related tax benefit.  During the year ended September 30, 1997, the Company,
through  the  sale of  certain  investments,  realized  a  capital  gain for tax
purposes  that  assures  realization  of the tax  benefit  and thus  reduced the
valuation allowance to zero.


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

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

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

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

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

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

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

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

Income Taxes
The  provision  for  income  taxes  increased  $1.1  million  for the year ended
September 30, 1996 compared with the prior year, primarily as a result of higher
pretax earnings.



<PAGE>

<TABLE>
<CAPTION>
                           KFBI HISTORICAL STOCK PRICE
                                FISCAL YEAR END
--------------------------------------------------------------------------------
               Sepember 30, 1996                              September 30, 1997
---------------------------------              ---------------------------------
<S>        <C>   <C>      <C>                  <S>        <C>   <C>      <C>    
October    5th   1995     12.5000              October    5th   1996     14.5000
October    10th  1995     12.8750              October    10th  1996     14.3750
October    15th  1995     13.1250              October    15th  1996     14.3750
October    20th  1995     13.1250              October    20th  1996     14.3750
October    25th  1995     12.8750              October    25th  1996     14.1250
October    30th  1995     12.7500              October    30th  1996     14.0625
November   5th   1995     12.8750              November   5th   1996     14.0000
November   10th  1995     13.1250              November   10th  1996     14.5000
November   15th  1995     12.8750              November   15th  1996     14.6250
November   20th  1995     12.8125              November   20th  1996     14.5620
November   25th  1995     13.0000              November   25th  1996     14.0620
November   30th  1995     13.2813              November   30th  1996     14.7500
December   5th   1995     13.1875              December   5th   1996     15.0620
December   10th  1995     13.3750              December   10th  1996     15.0000
December   15th  1995     13.3750              December   15th  1996     14.8750
December   20th  1995     13.1250              December   20th  1996     15.7500
December   25th  1995     13.6250              December   25th  1996     15.7500
December   30th  1995     13.7500              December   30th  1996     15.6250
January    5th   1996     13.1870              January    5th   1997     15.8750
January    10th  1996     13.1250              January    10th  1997     15.6250
January    15th  1996     12.9375              January    15th  1997     16.1250
January    20th  1996     13.2500              January    20th  1997     16.0000
January    25th  1996     13.1250              January    25th  1997     15.8750
January    30th  1996     13.2500              January    30th  1997     15.5000
February   5th   1996     13.2500              February   5th   1997     15.0000
February   10th  1996     13.5000              February   10th  1997     15.3750
February   15th  1996     13.5000              February   15th  1997     15.2500
February   20th  1996     13.1250              February   20th  1997     15.4370
February   25th  1996     12.8750              February   25th  1997     15.6250
February   30th  1996     13.1250              February   30th  1997     15.5000
March      5th   1996     12.6250              March      5th   1997     16.5000
March      10th  1996     12.8750              March      10th  1997     18.6250
March      15th  1996     12.8750              March      15th  1997     18.1250
March      20th  1996     12.7500              March      20th  1997     18.0000
March      25th  1996     13.0000              March      25th  1997     17.6250
March      30th  1996     13.3800              March      30th  1997     17.6250
April      5th   1996     13.2500              April      5th   1997     16.8120
April      10th  1996     13.2500              April      10th  1997     17.3750
April      15th  1996     13.6870              April      15th  1997     16.6562
April      20th  1996     13.6250              April      20th  1997     17.0000
April      25th  1996     13.8125              April      25th  1997     17.2500
April      30th  1996     13.7500              April      30th  1997     17.7500
May        5th   1996     13.6250              May        5th   1997     18.0000
May        10th  1996     13.2500              May        10th  1997     18.3750
May        15th  1996     13.6250              May        15th  1997     18.1250
May        20th  1996     13.7500              May        20th  1997     18.1250
May        25th  1996     14.0000              May        25th  1997     18.3120
May        30th  1996     13.8750              May        30th  1997     18.5000
June       5th   1996     14.1250              June       5th   1997     18.8750
June       10th  1996     14.0620              June       10th  1997     18.9370
June       15th  1996     14.1250              June       15th  1997     19.0000
June       20th  1996     13.9370              June       20th  1997     18.7500
June       25th  1996     14.0000              June       25th  1997     18.7500
June       30th  1996     14.5000              June       30th  1997     19.1250
July       5th   1996     14.1250              July       5th   1997     18.8750
July       10th  1996     13.8750              July       10th  1997     20.1250
July       15th  1996     13.7500              July       15th  1997     19.5000
July       20th  1996     14.0000              July       20th  1997     18.8750
July       25th  1996     13.3750              July       25th  1997     18.7500
July       30th  1996     13.3750              July       30th  1997     19.2500
August     5th   1996     13.5620              August     5th   1997     19.0000
August     10th  1996     13.6870              August     10th  1997     19.2500
August     15th  1996     14.0000              August     15th  1997     19.3125
August     20th  1996     13.7500              August     20th  1997     19.1250
August     25th  1996     14.0620              August     25th  1997     19.1250
August     30th  1996     14.1250              August     30th  1997     19.6250
September  5th   1996     14.1870              September  5th   1997     20.1250
September  10th  1996     14.3750              September  10th  1997     20.5000
September  15th  1996     14.3120              September  15th  1997     20.1250
September  20th  1996     14.2500              September  20th  1997     20.5000
September  25th  1996     14.2500              September  25th  1997     22.3750
September  30th  1996     14.2500              September  30th  1997     22.1250
</TABLE>
<PAGE>
COMMON STOCK INFORMATION

Since October 4, 1995,  Klamath First  Bancorp's  common stock has traded on the
National  Association  of  Security  Dealers  Automated  Quotations   ("NASDAQ")
National Market System under the symbol "KFBI".  As of November 26, 1997,  there
were  approximately  5,117  shareholders  of record or through nominee or street
name accounts with brokers.

        The high and low common stock prices by quarter were as follows:
<TABLE>
<CAPTION>

                                Years Ended September 30,
                     ---------------------------------------------
                             1997                      1996
                     -------------------       -------------------            
                       High          Low         High          Low
                     ------       ------       ------       ------
<S>                 <C>          <C>          <C>          <C>    
First quarter       $ 16.13      $ 13.94      $ 13.75      $ 12.06
Second quarter        18.63        15.00        13.75        12.50
Third quarter         19.13        16.50        14.63        13.00
Fourth quarter        22.50        18.63        14.75        13.38
</TABLE>

The cash dividends declared by quarter were as follows:
<TABLE>
<CAPTION>
                                       Years Ended September 30,
                                    ------------------------------
                                      1997                    1996
                                    ------                  ------
<S>                                 <C>                     <C>   
First quarter                       $0.070                  $0.050
Second quarter                       0.075                   0.065
Third quarter                        0.075                   0.065
Fourth quarter                       0.080                   0.070
</TABLE>

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


<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the  accompanying  consolidated  balance sheets of Klamath First
Bancorp,  Inc. and subsidiary (the "Company") as of September 30, 1997 and 1996,
and the related consolidated  statements of earnings,  shareholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these  financial  statements  based on our audits.  The  financial
statements for the year ended  September 30, 1995 were audited by other auditors
whose report dated November 3, 1995  expressed an  unqualified  opinion on those
statements.

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

In our opinion,  such 1997 and 1996 consolidated  financial  statements  present
fairly,  in all  material  respects,  the  financial  position of Klamath  First
Bancorp,  Inc. and  subsidiary as of September 30, 1997 and 1996 and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.







/s/ Deloitte & Touche LLP
Portland, Oregon
October 30, 1997




<PAGE>



KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
 
                                                                                September 30,
                                                                      -----------------------------
                                                                              1997             1996
ASSETS                                                                ------------    -------------
 
<S>                                                                   <C>             <C>          
Cash and due from banks ...........................................   $  24,503,768   $   6,981,732
Interest earning deposits with banks ..............................       1,431,087       3,078,688
Federal funds sold and securities .................................       6,108,341       6,119,213
purchased under agreements to resell
                                                                      -------------   -------------
   Total cash and cash equivalents ................................      32,043,196      16,179,633

Investment securities available for sale, at fair value ...........     261,846,320      75,986,611
  (amortized cost: $261,869,234 and $77,071,211)
Investment securities held to maturity, at amortized cost .........      22,937,314       9,827,193
(fair value: $22,968,997 and $9,860,165)
Mortgage backed and related securities available for sale, ........      64,868,633      74,109,321
at fair value (amortized cost: $64,097,246 and $74,249,350)
Mortgage backed and related securities held to maturity, ..........       5,446,957       6,783,001
at amortized cost (fair value: $5,518,648 and $6,736,007)
Loans receivable, net .............................................     551,463,590     473,555,988
Real estate owned .................................................            --            69,483
Premises and equipment, net .......................................      11,671,124       4,964,262
Stock in Federal Home Loan Bank of Seattle, at cost ...............       7,150,400       4,773,800
Accrued interest receivable .......................................       7,626,164       5,043,132
Core deposit intangible ...........................................      13,083,695            --
Other assets ......................................................       1,940,655         676,967
                                                                      -------------   -------------
   Total assets ...................................................   $ 980,078,048   $ 671,969,391
                                                                      =============   =============

LIABILITIES AND SHAREHOLDERS' EQUITY
 
LIABILITIES
Deposit liabilities ...............................................   $ 673,977,901   $ 399,673,180
Accrued interest on deposits ......................................       1,215,745         712,408
Advances from borrowers for taxes and insurance ...................       8,915,486       7,831,127
Advances from Federal Home Loan Bank of Seattle ...................     129,000,000      90,000,000
Short term borrowings .............................................      17,077,500      14,904,400
Accrued interest on borrowings ....................................         512,716         323,163
Pension liabilities ...............................................         727,140         668,088
Deferred federal and state income taxes ...........................       1,911,573         735,596
Other liabilities .................................................       2,277,544       3,710,455
                                                                      -------------   -------------
  Total liabilities ...............................................     835,615,605     518,558,417
                                                                      -------------   -------------

SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares authorized; .......            --              --
none issued
Common stock, $.01 par value, 35,000,000 shares authorized, .......         104,295         116,124
September 30, 1997 - 10,429,534 issued, 9,235,582 outstanding;
September 30, 1996 - 11,612,470 issued, 10,242,360  outstanding 
Additional paid-in capital ........................................      92,601,639     110,762,678
Retained earnings-substantially restricted ........................      64,744,995      59,082,479
Unearned shares issued to ESOP ....................................      (7,829,200)     (8,807,850)
Unearned shares issued to MRDP ....................................      (5,623,340)     (6,694,470)
Net unrealized gain (loss) on securities available for sale, ......         464,054      (1,047,987)
net of tax
                                                                      -------------   -------------
  Total shareholders' equity ......................................     144,462,443     153,410,974
                                                                      -------------   -------------
  Total liabilities and shareholders' equity ......................   $ 980,078,048   $ 671,969,391
                                                                      =============   =============

      See notes to consolidated financial statements.
</TABLE>


<PAGE>

KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
 
<TABLE>
<CAPTION>


                                                                    Years Ended September 30,
                                                         ---------------------------------------------
                                                                  1997            1996            1995
                                                         -------------   -------------   -------------
INTEREST INCOME
<S>                                                      <C>             <C>             <C>          
  Loans receivable ...................................   $  40,850,478   $  35,261,655   $  30,116,911
  Mortgage backed and related securities .............       4,716,184       3,137,046            --
  Investment securities ..............................       7,342,604       5,730,296       4,138,524
  Federal funds sold and securities purchased under ..         930,980         462,140         513,621
     agreements to resell
  Interest earning deposits ..........................         326,521       1,058,286         338,035
                                                         -------------   -------------   -------------
    Total interest income ............................      54,166,767      45,649,423      35,107,091
                                                         -------------   -------------   -------------
INTEREST EXPENSE
  Deposit liabilities ................................      22,464,345      20,251,039      19,310,599
  Advances from FHLB of Seattle ......................       6,270,615       2,689,790         949,059
  Other ..............................................       1,120,858         345,698         181,515
                                                         -------------   -------------   -------------
    Total interest expense ...........................      29,855,818      23,286,527      20,441,173
                                                         -------------   -------------   -------------
    Net interest income ..............................      24,310,949      22,362,896      14,665,918

Provision for loan losses ............................         370,000         120,000         120,000
                                                         -------------   -------------   -------------

Net interest income after provision for ..............      23,940,949      22,242,896      14,545,918
  loan losses
                                                         -------------   -------------   -------------

NON-INTEREST INCOME
  Fees and service charges ...........................         668,779         260,320         185,053
  Gain on sale of real estate owned ..................          27,946          22,233          84,022
  Other income .......................................         113,883         239,105         112,090
                                                         -------------   -------------   -------------
    Total non-interest income ........................         810,608         521,658         381,165
                                                         -------------   -------------   -------------
NON-INTEREST EXPENSE
  Compensation, employee benefits and related expense        7,143,516       4,476,052       2,753,726
  Occupancy expense ..................................         919,880         694,912         655,188
  Data processing expense ............................         480,889         343,319         318,819
  Insurance premium expense ..........................         376,029         907,825         877,366
  Special SAIF assessment ............................            --         2,472,954            --
  Loss on sale of investments ........................          14,531       1,642,625            --
  Loss on sale of real estate owned ..................            --             6,271            --
  Other expense ......................................       2,829,510       1,698,272       1,398,956
                                                         -------------   -------------   -------------
    Total non-interest expense .......................      11,764,355      12,242,230       6,004,055
                                                         -------------   -------------   -------------
Earnings before income taxes .........................      12,987,202      10,522,324       8,923,028

Provision for income tax .............................       4,429,452       4,412,527       3,348,925
                                                         -------------   -------------   -------------

Net earnings .........................................   $   8,557,750   $   6,109,797   $   5,574,103
                                                         =============   =============   =============

Earnings per common share (based on weighted .........   $        0.88   $        0.56             N/A
  average shares outstanding)
Weighted average number of common shares .............       9,762,459      11,004,939             N/A
   and common stock equivalents outstanding

</TABLE>


      See notes to consolidated financial statements.


<PAGE>

KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
 

 
                                                                                   Unearned    Unearned    Unrealized        
                               Common       Common      Additional                     ESOP      shares         gain/         Total
                                Stock        Stock         paid-in     Retained      shares   issued to     (loss) on  shareholders'
                               Shares       Amount         capital     earnings     at cost   MRDP Trust   securities        equity
                          -----------  -----------  --------------  ----------- -----------  -----------  -----------  ------------
<S>                        <C>             <C>         <C>          <C>         <C>           <C>          <C>         <C>        
Balance at ..............        --          $--             $--    $50,237,259       $--          $--    $  (929,615) $ 49,307,644
October 1, 1994

Issuance of .............  12,233,125      122,331     119,230,653         --          --           --           --     119,352,894
common stock

Unearned ESOP shares ....    (978,650)        --              --           --    (9,786,500)        --           --      (9,786,500)

Unrealized gain on ......        --           --              --           --          --           --        236,834       236,834
securities available
for sale

Net earnings ............        --           --              --      5,574,103        --           --           --       5,574,103
                          ___________  ___________  ______________  ___________ ___________  ___________  ___________  ____________
Balance at ..............  11,254,475      122,331     119,230,653   55,811,362  (9,786,500)        --       (692,781)  164,685,065
September 30, 1995

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


Earned ESOP shares ......      97,865         --           417,652         --       978,650         --           --       1,396,302

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

Unearned shares issued ..    (489,325)        --              --           --          --     (6,694,470)        --      (6,694,470)
to MRDP Trust

Stock repurchased .......    (620,655)      (6,207)     (8,885,627)        --          --           --           --      (8,891,834)
and retired

Net earnings ............        --           --              --      6,109,797        --           --           --       6,109,797
                          -----------  -----------  --------------  ----------- -----------  -----------  -----------  ------------
Balance at ..............  10,242,360      116,124     110,762,678   59,082,479  (8,807,850)  (6,694,470)  (1,047,987)  153,410,974
September 30, 1996

Cash dividends ..........        --           --              --     (2,895,234)       --           --           --      (2,895,234)

Unrealized gain on ......        --           --              --           --          --           --      1,512,041     1,512,041
securities available
for sale

Stock repurchased........  (1,182,936)     (11,829)    (18,866,299)        --          --           --           --     (18,878,128)

and retired 

ESOP contribution .......      97,865         --           705,260         --       978,650         --           --       1,683,910

MRDP contribution .......      78,293         --              --           --          --      1,071,130         --       1,071,130

Net earnings ............        --           --              --      8,557,750        --           --           --       8,557,750
                          -----------  -----------  --------------  ----------- -----------  -----------  -----------  ------------
Balance at ..............   9,235,582  $   104,295  $   92,601,639  $64,744,995 $(7,829,200) $(5,623,340) $   464,054  $144,462,443
September 30, 1997
                          ===========  ===========  ==============  =========== ===========  ===========  ===========  ============
</TABLE>

      See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                                                KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
                                                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
 

                                                                         Years Ended September 30,
                                                               -------------------------------------------
                                                                       1997            1996           1995
                                                               ------------    ------------    -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                            <C>             <C>             <C>        
   Net earnings ............................................   $  8,557,750    $  6,109,797    $ 5,574,103
                                                               ------------    ------------    -----------

ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
   Depreciation and amortization ...........................        772,204         403,074        360,069
   Provision for loan losses ...............................        370,000         120,000        120,000
   Compensation expense related to ESOP benefit ............      1,683,910       1,396,302           --
   Compensation expense related to MRDP Trust ..............      1,071,130            --             --
   Net amortization of premiums (discounts)  paid on .......        102,626         210,599        204,444
     investment and mortgage backed and related securities 
   Increase in deferred loan fees, net of amortization .....        912,445         703,055        490,802
   Accretion of discounts on purchased loans ...............           (325)        (14,683)        (7,239)
   Other (gains) losses, net ...............................         (3,514)         (5,209)       (33,544)
   Net (gain) loss on sale of investment and mortgage ......         12,387            --             --
     backed and related securities 
   FHLB of Seattle stock dividend ..........................       (495,000)       (347,900)      (269,600)
   Increase in core deposit intangible .....................    (13,386,686)           --             --
   Realized loss on sale of U.S. Federal securities ........           --         1,642,625           --
   mutual bond fund 
CHANGES IN ASSETS AND LIABILITIES
   Accrued interest receivable .............................     (2,583,032)     (1,605,691)      (160,744)
   Other assets ............................................     (1,263,688)       (310,160)       188,504
   Accrued interest on deposit liabilities .................        503,337        (316,358)       630,370
   Accrued interest on borrowings ..........................        189,553         323,163           --
   Pension liabilities .....................................         59,052          52,053         58,020
   Deferred federal and state income taxes .................        714,915        (409,246)       746,966
   Other liabilities .......................................     (1,134,717)        315,996       (185,361)
                                                               ------------    ------------    -----------
Total adjustments ..........................................    (12,475,403)      2,157,620      2,142,687
                                                               ------------    ------------    -----------
Net cash provided (used) by operating activities ...........     (3,917,653)      8,267,417      7,716,790
                                                               ------------    ------------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturity of investment securities .........     48,680,000      69,552,392      7,006,177
     held to maturity 
   Proceeds from maturity of investment securities .........     19,009,324            --             --
     available for sale 
   Principal repayments on mortgage backed and .............      1,313,309            --             --
     related securities held to maturity 
   Principal repayments on mortgage backed and .............     18,923,262      12,083,872           --
      related securities available for sale    
Principal repayments received on loans .....................     56,517,878      64,529,602     40,398,099
Loan originations ..........................................   (135,720,762)   (135,566,747)   (84,714,297)
Purchase of investment securities held .....................    (61,722,409)    (42,971,553)    (4,855,539)
     to maturity 
   Purchase of investment securities available .............   (219,697,100)    (60,969,781)          --
     for sale
   Purchase of mortgage backed and related .................           --        (7,423,182)          --
     securities held to maturity 
   Purchase of mortgage backed and related .................    (14,850,705)    (84,123,187)          --
     securities available for sale
   Purchase of FHLB of Seattle stock .......................     (4,307,500)           --             --
   Proceeds from sale of FHLB of Seattle stock .............      2,425,900            --             --
   Proceeds from sale of investment securities..............     16,066,044            --             --
     available for sale 
   Proceeds from sale of mortgage backed and related .......      5,743,267            --             --
     securities available for sale 
   Proceeds from sale of real estate owned and .............         86,159         177,595        359,033
     premises and equipment 
   Purchases of premises and equipment .....................     (7,176,075)       (136,406)    (1,167,757)
                                                               ------------    ------------    -----------
Net cash used in investing activities ......................   (274,709,408)   (184,847,395)   (42,974,284)
                                                               ------------    ------------    -----------
</TABLE>
(continued)


<PAGE>

KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
                                                                         Years Ended September 30,
                                                               -------------------------------------------
                                                                       1997            1996           1995
                                                               ------------    ------------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES
<S>                                                            <C>             <C>             <C>         
   Increase/(decrease) in deposit ..........................   $274,304,721    $ 15,293,649    $(5,370,987)
    liabilities, net of withdrawals
   Proceeds from FHLB of Seattle advances ..................    184,000,000     105,000,000     20,000,000
   Repayments of FHLB of Seattle advances ..................   (145,000,000)    (35,000,000)          --
   Proceeds from short term borrowings .....................     84,750,150      21,938,300           --
   Repayments of short term borrowings .....................    (82,577,050)     (7,033,900)          --
   Proceeds from issuance of common stock ..................           --              --      121,268,633
   Proceeds from stock oversubscription ....................           --              --       65,685,300
   Repayment from stock oversubscription ...................           --       (65,685,300)          --
   Funding provided to ESOP for purchase of ................           --              --       (9,786,500)
   common stock
   Purchase stock for MRDP Trust ...........................           --        (6,694,470)          --
   Stock repurchase and retirement .........................    (18,878,128)     (8,891,834)          --
   Advances from borrowers for taxes and insurance .........      1,084,359        (135,297)      (101,700)
   Dividends paid ..........................................     (3,193,428)     (2,025,807)          --
                                                               ------------    ------------    -----------
Net cash provided by financing activities ..................    294,490,624      16,765,341    191,694,746
                                                               ------------    ------------    -----------
Net (decrease) increase in cash and cash ...................     15,863,563    (159,814,637)   156,437,252
  equivalents

Cash and cash equivalents at beginning of year .............     16,179,633     175,994,270     19,557,018
                                                               ------------    ------------    -----------
Cash and cash equivalents at end of year ...................   $ 32,043,196    $ 16,179,633    $175,994,270
                                                               ============    ============    ===========
SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID
Interest paid ..............................................   $ 29,162,927    $ 23,483,212    $19,810,803
Income taxes paid ..........................................      3,373,457       4,555,053      2,570,000

SUPPLEMENTAL SCHEDULE OF NONCASH  INVESTING ACTIVITIES
Transfer of investment securities from held ................          $--      $ 27,171,074          $--
  to maturity to available for sale at
  estimated fair value
Transfer of mortgage backed and related ....................           --         1,717,890           --
  securities from held to maturity to
  available for sale at estimated fair
  value
Net unrealized gain (loss) on securities ...................      1,512,041        (355,206)       236,834
  available for sale, net of tax
Dividends declared and accrued in other ....................        834,363         812,873           --
  liabilities
</TABLE>

      See notes to consolidated financial statements.


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation
The  consolidated  financial  statements  include the accounts of Klamath  First
Bancorp,  Inc. (the  "Company") and its  wholly-owned  subsidiary  Klamath First
Federal  Savings and Loan  Association  (the  "Association").  All  intercompany
accounts and transactions have been eliminated in consolidation.

Certain  prior year  amounts have been  reclassified  to conform to current year
presentation.

Nature of Operations
The Company provides banking and limited  non-banking  services to its customers
who  are  located   throughout  the  state  of  Oregon,   principally  in  rural
communities.  These  services  primarily  include  attracting  deposits from the
general public and using such funds,  together with other borrowings,  to invest
in  various  real  estate  loans,  consumer  and  commercial  loans,  investment
securities and mortgage backed and related securities.

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

Cash Equivalents
The Company considers cash and due from banks, interest bearing deposits held at
domestic banks,  federal funds sold, and security  resale  agreements to be cash
and cash equivalents for purposes of the Consolidated Statement of Cash Flows.

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

During December 1995, the Association  reclassified  $27.2 million of investment
securities and $1.7 million of mortgage backed and related  securities from held
to maturity to available  for sale at fair  values,  with  unrealized  gains and
losses of $200,508 and $100,421,  respectively. The reclassification was made in
accordance with the Financial  Accounting Standards Board (FASB) special report,
A Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity  Securities,  that permitted a one-time  reassessment  of the
appropriateness  of the held to maturity  classification,  without affecting the
classification  of the remaining  securities held to maturity.  Unrealized gains
and losses on  securities  available  for sale are  excluded  from  earnings and
reported  net of tax as a  separate  component  of  shareholders'  equity  until
realized.

Stock Investments
The  Company  holds  stock in the  Federal  Home Loan Bank of  Seattle  (FHLB of
Seattle). This investment is carried at the lower of cost or fair value.

Loans
Loans held for investment are stated at the principal amount outstanding, net of
deferred loan fees and unearned income.  Loan origination fees,  commitment fees
and certain direct loan  origination  costs are  capitalized and recognized as a
yield  adjustment  over the lives of the loans  using the level-  yield  method.
Unearned  discounts are accreted to income over the average lives of the related
loans using the level yield method, adjusted for estimated prepayments.

Interest  income is recorded  as earned.  Management  ceases to accrue  interest
income on any loan that  becomes 90 days or more  delinquent  and  reverses  all
interest accrued up to that time. Thereafter, interest income is accrued only if
and when, in management's opinion, projected cash proceeds are deemed sufficient
to repay both principal and interest.  All loans for which interest is not being
accrued are referred to as loans on nonaccrual status.

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

Delinquent  interest  on  loans  past due 90 days or more is  charged  off or an
allowance  established  by a charge to income equal to all  interest  previously
accrued.  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 Owned
Property acquired through  foreclosure or deed in lieu of foreclosure is carried
at the lower of  estimated  fair value,  less  estimated  costs to sell,  or the
balance of the loan on the  property at date of  acquisition,  not to exceed net
realizable  value.  Costs  excluding  interest,  relating to the  improvement of
property are  capitalized,  whereas  those  relating to holding the property are
charged to expense.

Premises and Equipment
Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful  lives of the various  classes of assets from their  respective  dates of
acquisition.  Estimated  useful lives range up to 30 years for buildings,  up to
the lease term for  leasehold  improvements,  three years for  automobiles,  and
three to fifteen years for furniture and equipment.

Mortgage Servicing
Fees earned for servicing loans are reported as income when the related mortgage
loan  payments are  collected.  Loan  servicing  costs are charged to expense as
incurred.

Effective January 1, 1997, the Company records its mortgage  servicing rights at
fair  value in  accordance  with SFAS No.  125,  Accounting  for  Transfers  and
Servicing of Financial Assets and  Extinguishment of Liabilities,  which amended
SFAS Nos. 65,  Accounting  for Certain  Mortgage  Banking  Activities,  and 122,
Accounting for Mortgage Servicing Rights.  SFAS No. 125 requires the Association
to allocate the total cost of all mortgage  loans sold,  whether  originated  or
purchased,  to the mortgage  servicing  rights and the loans  (without  mortgage
servicing  rights) based on their  relative fair values if it is  practicable to
estimate  those  fair  values.  As of  September  30,  1997 the  Company  had no
servicing assets.

Core Deposit Intangible
On July 18, 1997 the Company assumed $241.3 million of deposits from Wells Fargo
Bank, N.A. for a core deposit premium of $16.4 million.  In conjunction with the
assumption of these deposits the Company also acquired 25 branch  facilities (24
owned and one leased) located  throughout  Oregon.  In accordance with generally
accepted accounting  principles for purchase  transactions,  the assets acquired
and liabilities assumed were recorded at fair value and the core deposit premium
was  allocated  to premises  and  equipment in the amount of $3.0 million and to
core  deposit  intangible  in the amount of $13.4  million.  The  recorded  core
deposit intangible is being amortized to non-interest expense on a straight-line
basis over 8.1 years.

Income  Taxes The  Company  accounts  for income  taxes in  accordance  with the
provisions of SFAS No. 109,  Accounting for Income Taxes, which requires the use
of the asset and  liability  method of accounting  for income taxes.  Under this
method,  deferred tax assets and  liabilities  are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.
<PAGE>
Pension Cost
It is the Company's  policy to fund  retirement  costs as they are accrued.  All
such costs are computed on the basis of accepted actuarial methods.

Employee Stock Ownership Plan
The Company  sponsors an Employee Stock  Ownership  Plan  ("ESOP").  The ESOP is
accounted  for in  accordance  with the American  Institute of Certified  Public
Accountants  ("AICPA")  Statement of Position  93-6,  Employer's  Accounting for
Employee Stock  Ownership  Plans.  Accordingly,  the shares held by the ESOP are
reported as unearned  shares issued to the employee stock  ownership plan in the
statement  of  financial  condition.  As shares are  released  from  collateral,
compensation  expense is recorded  equal to the then current market price of the
shares, and the shares become outstanding for earnings per share calculations.

Management Recognition and Development Plan
The Company sponsors a Management Recognition and Development Plan ("MRDP"). The
MRDP is  accounted  for in  accordance  with  SFAS No.  31,  Treatment  of Stock
Compensation  Plans in EPS Computations which is an interpretation of Accounting
Principles  Board (APB) Opinion No. 15, Earnings per Share, and a modification
of FASB  Interpretation  No. 28,  Accounting for Stock  Appreciation  Rights and
Other  Variable  Stock Option or Award Plans.  The plan  authorizes the grant of
common  stock  shares to  certain  officers  and  directors,  which  vest over a
five-year period in equal installments.  The Company will recognize compensation
expense  in the amount of the cost of the common  stock in  accordance  with the
vesting schedule during the years in which the shares are payable. When the MRDP
awards are  allocated,  the common stock shares become common stock  equivalents
for earnings per share calculations.

Earnings per Common Share
Earnings per common  share  ("EPS") is computed  based on the  weighted  average
number of shares of common  stock and  common  stock  equivalents  assumed to be
outstanding  during  the  period.  ESOP  shares  committed  to be  released  are
considered  common stock  equivalents for earnings per share  calculations.  The
Company  allocates  10% of the ESOP  shares  each  year at which  time  they are
considered common stock outstanding. Allocated MRDP shares are considered common
stock  equivalents  until vesting at which time they are considered common stock
outstanding.  Options granted but not exercised under the Company's Stock Option
Plan  are   considered   common  stock   equivalents   for  earnings  per  share
calculations.

Stock Based Compensation
The Company accounts for stock  compensation using the intrinsic value method as
prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees,  and
related  interpretations.  Under the intrinsic value based method,  compensation
cost for stock  options is measured as the excess,  if any, of the quoted market
price of stock at grant date over the amount an employee must pay to acquire the
stock. Stock options granted by the Company have no intrinsic value at the grant
date and, under APB No. 25, there is no compensation expense to be recorded.

Effective  October 1, 1996,  the Company  adopted SFAS No. 123,  Accounting  for
Stock-Based Compensation,  which encourages,  but does not require, companies to
record  compensation  cost for stock based employee  compensation  plans at fair
value. The fair value approach measures compensation costs based on factors such
as the term of the  option,  the  market  price at grant  date,  and the  option
exercise price, with expense recognized over the vesting period. See Note 13 for
pro forma  effect on net  income  and  earnings  per share as if the fair  value
method had been used.

Recently Issued Accounting Pronouncements
During the current fiscal year, the Financial  Accounting Standards Board issued
the following new accounting pronouncements.

In February 1997, SFAS No. 128,  Earnings per Share, was issued.  This statement
will be effective  for the Company  beginning  after  December  15,  1997.  This
Statement  establishes standards for computing and presenting EPS and applies to
entities  with  publicly  held common  stock or  potential  common  stock.  This
Statement  simplifies the standards for computing  earnings per share previously
prescribed by APB Opinion No. 15, Earnings per Share,  and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a  presentation  of basic EPS. It also requires dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital structures.  This statement requires restatement of all prior period EPS
data presented.  The impact of the adoption of this statement is not expected to
be material to the Company.

In  February  1997,  SFAS No.  129,  Disclosure  of  Information  about  Capital
Structure,  was issued.  SFAS No. 129  establishes  standards for  disclosing an
entity's capital structure and applies to all entities. This Statement continues
the previous  requirements  to disclose  certain  information  about an entity's
capital  structure found in APB Opinions No. 10, Omnibus Opinion - 1996, and No.
15, Earnings per Share,  and SFAS No. 47,  Disclosure of Long-Term  Obligations,
for entities  that were subject to the  requirements  of those  standards.  This
Statement is  effective  for  financial  statements  beginning  with the quarter
ending December 31, 1997. It contains no change in disclosure  requirements  for
entities that were previously  subject to the requirements of Opinions 10 and 15
and Statement 47. The adoption of the provisions of SFAS No. 129 is not expected
to have a significant impact on the financial statements of the Company.
<PAGE>
In June 1997,  SFAS No. 131,  Disclosures  about  Segments of an Enterprise  and
Related  Information,  was issued.  This Statement is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 redefines how operating segments
are  determined  and requires  disclosure of certain  financial and  descriptive
information about the Company's operating segments.
<TABLE>
<CAPTION>

    TOTAL NET EARNINGS
      (in thousands)
<S>  <C>      <C>   
     1997     $8,558
     1996      6,110
     1995      5,574
     1994      5,288
     1993      7,157
</TABLE>

(2)  Acquisition  
As of July  18,  1997,  the  Company,  through  its  subsidiary,  completed  the
acquisition  of 25 former branch  offices of First  Interstate  Bank Oregon from
Wells Fargo Bank, N.A. The  transaction,  which was accounted for as a purchase,
included acquisition of branch premises (24 owned and one leased) and assumption
of  approximately  $241.3 million in deposit  liabilities.  The balance sheet at
September 30, 1997 reflects  inclusion of all assets and liabilities  related to
the transaction.  Income and expense related to the transaction and operation of
the branches for the period from July 18 to September  30, 1997 are reflected in
the income statement. As a result of this transaction,  core deposit intangibles
of $13.4 million were recorded  which will be amortized  over the estimated life
of 8.1 years.

(3) Cash and Due from Banks
The Company is required to maintain an average  reserve balance with the Federal
Reserve Bank, or maintain such reserve  balance in the form of cash.  The amount
of this required reserve balance was approximately  $1.7 million and $475,000 at
September  30,  1997 and 1996,  respectively,  and was met by  holding  cash and
maintaining an average  balance with the Federal  Reserve Bank in excess of this
amount.




<PAGE>

(4) Investments and Mortgage Backed and Related Securities

Amortized cost and approximate  fair value of securities  available for sale and
held to maturity are summarized by type and maturity as follows:
<TABLE>
<CAPTION>
 
                                                                September 30, 1997
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
 
U.S. Government obligations:
<S>                                        <C>            <C>            <C>            <C>         
  Maturing within one year .............   $ 13,965,878   $      9,375   $        878   $ 13,974,375
  Maturing after one year through ......    162,907,463         72,214        317,301    162,662,376
   five years
  Maturing after five years through ....      8,988,131         12,454         36,210      8,964,375
   ten years
State and municipal obligations:
  Maturing after one year through ......        793,692         10,504           --          804,196
   five years
  Maturing after five years ............        100,000            730           --          100,730
  through ten years
  Maturing after ten years .............      7,966,716        225,807         10,348      8,182,175

Corporate obligations:
  Maturing within one year .............     18,220,348           --              455     18,219,893
  Maturing after one year through ......     48,927,006         38,519         27,325     48,938,200
   five years
                                           ------------   ------------   ------------   ------------
                                           $261,869,234   $    369,603   $    392,517   $261,846,320
                                           ============   ============   ============   ============

<CAPTION>

                                                                September 30, 1996
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
 
U.S. Federal securities mutual
<S>                                        <C>            <C>            <C>            <C>         
  bond fund ............................   $ 12,080,418            $--            $--   $ 12,080,418

U.S. Government obligations:
  Maturing after one year through ......     43,720,065             --        875,092     42,844,973
   five years
  Maturing after five years through ....     15,996,758             --        217,858     15,778,900
   ten years
State and municipal obligations:
  Maturing after one year through ......        250,000            820             --        250,820
   five years
Corporate obligations:
  Maturing after one year through ......      5,023,970          7,530             --      5,031,500
   five years
                                           ------------   ------------   ------------   ------------
                                           $ 77,071,211   $      8,350   $  1,092,950   $ 75,986,611
                                           ============   ============   ============   ============
<PAGE>
<CAPTION>



                                                                September 30, 1997
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
INVESTMENT SECURITIES HELD TO MATURITY:
 
State and municipal obligations:
<S>                                        <C>            <C>            <C>            <C>         
  Maturing within one year .............   $    150,797   $         55            $--   $    150,852
  Maturing after one year through ......        891,678         26,982             34        918,626
   five years
Corporate obligations:
  Maturing within one year .............     19,894,839             --             --     19,894,839
  Maturing after one year through ......      2,000,000          4,680             --      2,004,680
   five years
                                           ------------   ------------   ------------   ------------
                                           $ 22,937,314   $     31,717   $         34   $ 22,968,997
                                           ============   ============   ============   ============

<CAPTION>


                                                                September 30, 1996
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
INVESTMENT SECURITIES HELD TO MATURITY:
 
State and municipal obligations:
<S>                                        <C>            <C>            <C>            <C>         
  Maturing within one year .............   $    181,351            $--   $        523   $    180,828
  Maturing after one year through ......        535,680             --          5,893        529,787
   five years
  Maturing after five years through ....        510,388         28,262             --        538,650
   ten years
Corporate obligations:
  Maturing within one year .............      6,599,774         11,926             --      6,611,700
  Maturing after one year through ......      2,000,000             --            800      1,999,200
   five years
                                           ------------   ------------   ------------   ------------
                                           $  9,827,193   $     40,188   $      7,216   $  9,860,165
                                           ============   ============   ============   ============

<PAGE>
<CAPTION>

MORTGAGE BACKED AND RELATED SECURITIES
                                                                September 30, 1997
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
Mortgage backed and related securities 
available for sale:
 
<S>                                        <C>            <C>            <C>            <C>         
FNMA maturing after ten years ..........   $ 12,775,233   $    139,212   $     17,043   $ 12,897,402

FHLMC maturing after ten years .........     25,881,492        692,304           --       26,573,796

 GNMA maturing after ten years .........      9,708,884         98,821           --        9,807,705

SBA maturing after ten years ...........     15,731,637          1,223        143,130     15,589,730
                                           ------------   ------------   ------------   ------------
                                           $ 64,097,246   $    931,560   $    160,173   $ 64,868,633
                                           ============   ============   ============   ============

<CAPTION>
                                                                September 30, 1996
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
Mortgage backed and related securities 
available for sale:
 
<S>                                        <C>            <C>            <C>            <C>         
FNMA maturing after ten years ..........   $ 15,905,450   $     68,004   $     14,292   $ 15,959,162

FHLMC maturing after ten years .........     39,204,476         61,911         87,527     39,178,860

SBA maturing after ten years ...........     19,139,424          1,902        170,027     18,971,299
                                           ------------   ------------   ------------   ------------
                                           $ 74,249,350   $    131,817   $    271,846   $ 74,109,321
                                           ============   ============   ============   ============

<CAPTION>
                                                                September 30, 1997
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
Mortgage backed and related securities 
held to maturity:

<S>                                        <C>            <C>            <C>            <C>         
GNMA maturing after ten years ..........   $  5,446,957   $     71,691            $--   $  5,518,648
                                           ============   ============   ============   ============
<CAPTION>

                                                                September 30, 1996
                                           ---------------------------------------------------------
                                                                  Gross Unrealized
                                              Amortized   ---------------------------           Fair
                                                   cost          Gains         Losses          value
                                           ------------   ------------   ------------   ------------
Mortgage backed and related securities 
held to maturity:
 
<S>                                        <C>            <C>            <C>            <C>         
GNMA maturing after ten years ..........   $  6,783,001            $--   $     46,994   $  6,736,007
                                           ============   ============   ============   ============
</TABLE>

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

At September 30, 1997 and 1996, the Company  pledged  securities  totaling $26.7
million and $10.1 million,  respectively,  to secure certain public deposits and
for other purposes as required or permitted by law.

The Company has also pledged  securities  of $17.0  million to secure short term
borrowings of reverse  repurchase  agreements  at September 30, 1997.  (See Note
10.)
<PAGE>
(5)  Loans Receivable

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                              September 30,
                                                     ----------------------------   
                                                              1997           1996
Real estate loans:                                   -------------   ------------
<S>                                                  <C>             <C>         
Permanent residential 1-4 family .................   $ 498,486,082   $447,004,234
Multi-family residential .........................      16,881,256      6,555,483
Construction .....................................      30,595,841     14,276,158
Commercial .......................................      22,638,824     15,644,797
Land .............................................       1,586,418      1,151,573
                                                     -------------   ------------
   Total real estate loans .......................     570,188,421    484,632,245

Non-real estate loans:
Savings account ..................................       1,710,930      1,640,294
Home improvement and home equity .................       3,510,812      1,976,728
Other ............................................         803,760        302,397
                                                     -------------   ------------
   Total non-real estate loans ...................       6,025,502      3,919,419
                                                     -------------   ------------
   Total loans ...................................     576,213,923    488,551,664

Less:
Undisbursed portion of loans .....................      17,096,382      8,622,476
Deferred loan fees ...............................       6,357,500      5,445,380
Allowance for loan losses ........................       1,296,451        927,820
                                                     -------------   ------------
                                                     $ 551,463,590   $473,555,988
                                                     =============   ============
</TABLE>

The weighted  average  interest rate on loans at September 30, 1997 and 1996 was
7.82% and 7.74%, respectively.

The Company  serviced loans owned by others of $1.1 million,  $1.2 million,  and
$1.7 million at September 30, 1997, 1996, and 1995, respectively.
 
Activity in allowance for loan losses is summarized as follows:
 
<TABLE>
<CAPTION>
                                                        Years Ended September 30,
                                                ----------------------------------------
                                                       1997           1996          1995
                                                -----------    -----------   -----------
<S>                                             <C>            <C>           <C>        
Balance, beginning of year ..................   $   927,820    $   807,820   $   754,803
Charge offs .................................        (1,369)          --         (66,983)
Additions ...................................       370,000        120,000       120,000
                                                -----------    -----------   -----------
Balance, end of year ........................   $ 1,296,451    $   927,820   $   807,820
                                                ===========    ===========   ===========
</TABLE>

(6) Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                   September 30,
                                           ----------------------------
                                                   1997            1996
                                           ------------    ------------
<S>                                        <C>             <C>         
Land ...................................   $  2,410,937    $  1,056,269
Office buildings and construction ......      9,419,228       5,384,136
   in progress
Furniture, fixtures and equipment ......      3,661,099       1,874,784
Automobiles ............................         36,226          36,226
Less accumulated depreciation ..........     (3,856,366)     (3,387,153)
                                           ------------    ------------
                                           $ 11,671,124    $  4,964,262
                                           ============    ============
</TABLE>

Depreciation  expense was $469,208,  $403,074,  and $360,069 for the years ended
September 30, 1997, 1996, and 1995, respectively.
<PAGE>

(7) Accrued Interest Receivable
<TABLE>
<CAPTION>

The following is a summary of accrued interest receivable:
                                                    September 30,
                                              -----------------------
                                                    1997         1996
                                              ----------   ----------

<S>                                           <C>          <C>       
Loans receivable ..........................   $3,628,624   $3,232,731
Mortgage backed and related securities ....      644,320      765,187
Investment securities .....................    3,353,220    1,045,214
                                              ----------   ----------
                                              $7,626,164   $5,043,132
                                              ==========   ==========
 
</TABLE>


<PAGE>

(8) Deposit Liabilities

The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>

                                                        September 30,
                                   ----------------------------------------------------        
                                               1997                        1996
                                   ------------------------    ------------------------
                                         Amount     Percent          Amount     Percent
                                   ------------    --------    ------------    --------
<S>                                <C>                <C>      <C>                <C>   
Checking accounts, non-interest    $ 52,578,155         7.8%   $    161,283         0.0%
 bearing  
                                   ------------    --------    ------------    --------
Interest-bearing checking ......     75,044,568        11.1      24,282,019         6.1
                                   ------------    --------    ------------    --------

Passbook and statement savings .     63,178,697         9.4      33,711,189         8.4
                                   ------------    --------    ------------    --------

Money market deposits ..........    107,573,735        16.0      52,330,731        13.1
                                   ------------    --------    ------------    --------
Certificates of deposit
 Less than 4% ..................      2,783,927         0.4       1,633,300         0.4
 4.00% to 5.99% ................    310,435,332        46.0     220,873,790        55.3
 6.00% to 7.99% ................     39,599,328         5.9      44,574,877        11.2
 8.00% to 9.99% ................     22,784,159         3.4      22,105,991         5.5
                                   ------------    --------    ------------    --------
                                    375,602,746        55.7     289,187,958        72.4
                                   ------------    --------    ------------    --------
                                   $673,977,901       100.0%   $399,673,180       100.0%
                                   ============    ========    ============    ========
</TABLE>

 
Following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>

 
                                               Years Ended September 30,
                                      ------------------------------------------
                                              1997           1996           1995
                                      ------------   ------------   ------------
<S>                                   <C>            <C>            <C>         
Interest-bearing checking .........   $    791,032   $    546,383   $    542,169
Passbook and statement savings ....      1,270,468        982,814      1,235,170
Money market ......................      2,391,245      1,950,419      2,206,038
Certificates of deposit ...........     18,075,128     16,835,250     15,395,663
                                      ------------   ------------   ------------
                                        22,527,873     20,314,866     19,379,040

Less early withdrawal .............         63,528         63,827         68,441
penalties             
                                      ------------   ------------   ------------
 Net interest on deposits .........   $ 22,464,345   $ 20,251,039   $ 19,310,599
                                      ============   ============   ============

</TABLE>
<PAGE>
 
At September 30, 1997, deposit maturities were as follows:
<TABLE>
 
<S>                     <C>         
Within 1 year           $540,585,948
1 year to 3 years         85,561,544
3 years to 5 years        26,807,651
Thereafter                21,022,758
                        ------------
                        $673,977,901
                        ============
</TABLE>
 
Weighted average interest rates at September 30  were as follows:
<TABLE>
<CAPTION>
 
                                                 1997        1996
                                           ----------  ----------
<S>                                             <C>         <C>  
Interest-bearing checking                       1.92%       2.54%
Passbook and statement savings                  2.75%       3.29%
Money market                                    3.92%       3.96%
Certificates of deposit                         5.87%       5.95%
Weighted average rate for all deposits          4.74%       5.26%
 
</TABLE>


Deposits  in excess of $100,000  totaled  $119.2  million  and $64.9  million at
September  30, 1997 and 1996,  respectively.  Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").



<PAGE>

(9) Advances from FHLB

As a member of the FHLB of Seattle, the Association maintains a credit line that
is a percentage of its total  regulatory  assets,  subject to  collateralization
requirements.  At September  30,  1997,  the credit line was 30 percent of total
assets of the Association. Advances are collateralized in aggregate, as provided
for in the Advances,  Security and Deposit  Agreements with the FHLB of Seattle,
by certain  mortgages or deeds of trust,  securities of the U.S.  Government and
agencies thereof and cash on deposit with the FHLB of Seattle.  At September 30,
1997 the minimum  book value of eligible  collateral  for these  borrowings  was
$136.0 million.

Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>
 
 
                                        September 30, 1997                             September 30, 1996
                            -----------------------------------------      -----------------------------------------
                                             Range of        Weighted                       Range of        Weighted
                                             interest         average                       interest         average
                                  Amount        rates   interest rate            Amount        rates   interest rate
                            ------------  -----------   -------------      ------------  -----------   ------------- 
 
<S>                          <C>          <C>   <C>             <C>         <C>          <C>   <C>             <C>  
Due within one year          $59,000,000  5.57%-6.70%           5.66%       $65,000,000  5.40%-5.64%           5.53%
 
After two but within          70,000,000  5.39%-5.84%           5.59%        25,000,000  5.53%-5.74%           5.66%
five years
                            ------------                                   ------------ 
                            $129,000,000                                    $90,000,000
                            ============                                   ============
</TABLE>
<TABLE>
<CAPTION>
 
                                                              Years ended September 30,
                                                     -------------------------------------------

                                                              1997           1996           1995
                                                     -------------  -------------  -------------
<S>                                                  <C>            <C>            <C>         
Weighted average interest rate at end of year ....           5.62%          5.50%          5.94%
Weighted daily average interest rate .............           5.66%          5.60%          6.21%
during the year
Daily average FHLB advances ......................   $110,736,986   $ 47,986,339   $ 15,304,932
Maximum FHLB advances at any month end ...........    151,000,000     90,000,000     22,000,000
Interest expense during the year .................      6,270,615      2,689,790        949,059

</TABLE>



<PAGE>

(10) Short Term Borrowings

Securities  sold under  agreements to repurchase at September 30, 1997 consisted
of reverse repurchase agreements of $17.1 million.

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

All of the  reverse  repurchase  agreements  are due  within 48 days and will be
renewed subsequent to year end.

Financial data pertaining to the weighted  average cost, the level of securities
sold under  agreements to repurchase,  and the related  interest expense were as
follows:
<TABLE>
<CAPTION>

                                                   Years ended September 30,
                                            ------------------------------------
                                                   1997             1996    1995
                                            -----------      -----------    ----
<S>                                         <C>              <C>             <C>
Weighted average interest rate .......            5.75%            5.65%      --
at end of year

Weighted daily average interest
rate during the year .................            5.82%            5.55%      --

Daily average of securities sold .....      $16,804,520      $ 3,530,795     $--
under agreements to repurchase 

Maximum securities sold under ........       19,117,500       14,904,000      --
agreements to repurchase at any
month end 

Interest expense during the year .....          978,023          196,130      --
</TABLE>

The  Company  has an unused  line of credit  totaling  $15.0  million  with U.S.
National Bank of Oregon at September 30, 1997 and 1996.



<PAGE>

(11) Taxes on Income

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

                                                        Years ended September 30,
                                               ------------------------------------------
                                                      1997           1996            1995
CURRENT TAXES                                  -----------    -----------     -----------
<S>                                            <C>            <C>             <C>        
Federal ...................................    $ 3,076,977    $ 4,384,720     $ 2,154,240
State .....................................        639,503        437,053         447,719
                                               ___________    ___________     ___________
Current tax provision .....................      3,716,480      4,821,773       2,601,959

DEFERRED TAXES
Federal ...................................        648,092       (372,005)        618,488
State .....................................         64,880        (37,241)        128,478
                                               ___________    ___________     ___________
Deferred tax provision ....................        712,972       (409,246)        746,966
                                               ___________    ___________     ___________
Provision for income taxes ................    $ 4,429,452    $ 4,412,527     $ 3,348,925
                                               ===========    ===========     ===========
</TABLE>

An analysis of income tax expense,  setting  forth the reasons for the variation
from the "expected" federal corporate income tax rate of 34.0% and the effective
rate provided, is as follows:
<TABLE>
<CAPTION>
                                                                    Years ended September 30,
                                                            -----------------------------------------
                                                                  1997           1996            1995
                                                            ----------    -----------     -----------
 
<S>                                                              <C>             <C>            <C>  
Federal income taxes computed at statutory rate .......          34.0%           34.0%          34.0%

Tax effect of:

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

Nondeductible ESOP compensation expense ...............           5.4             4.0           --

Deductible MRDP compensation expense ..................          (2.2)           --             --

Elimination of valuation allowance ....................         (12.6)           --             --

Other .................................................           5.1             1.7            (.9)
                                                            ----------    -----------     -----------
Income tax expense included in the statement of income           34.1%           41.9%          37.5%
</TABLE>


<PAGE>
Deferred  income taxes for the years ended  September  30, 1997 and 1996 reflect
the impact of "temporary  differences" between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws.

The tax  effects  of  temporary  differences  which  give rise to a  significant
portion of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
                                                              September 30,
                                                        ------------------------
DEFERRED TAX ASSETS                                           1997          1996
                                                        ----------    ----------
<S>                                                      <C>           <C>      
Deferred loan fees .................................    $   11,202    $  525,560
Allowance for losses on loans ......................       515,648       369,768
Unrealized loss on securities available for sale ...          --         176,643
Pension liability ..................................       287,220       263,893
SAIF special assessment ............................          --         976,319
Unearned ESOP shares ...............................       235,621       129,076
Core deposit premium ...............................        55,054          --
                                                        __________    __________
Total gross deferred tax assets ....................     1,104,745     2,441,259

DEFERRED TAX LIABILITIES

FHLB stock dividends ...............................       801,204     1,256,630
Tax bad debt reserve in excess of base-year reserve      1,469,444     1,472,206
Unrealized gain on securities held for sale ........       284,522          --
Other ..............................................       461,148       448,019
                                                        __________    __________
Total gross deferred tax liabilities ...............     3,016,318     3,176,855
                                                        __________    __________
Net deferred tax liability .........................    $1,911,573    $  735,596
                                                        ==========    ==========
</TABLE>

At September 30, 1996 the Company  created a valuation  allowance of $648,837 to
offset the deferred tax asset  associated with the realized  capital loss on the
U.S. Federal  securities mutual bond fund because  management was not assured of
being able to realize a capital  gain and the  related tax  benefit.  During the
year ended September 30, 1997, the Company, through sale of certain investments,
realized a capital gain for tax purposes  that  assures  realization  of the tax
benefit and thus reduced the valuation  allowance to zero. There continues to be
no valuation allowance at September 30, 1997.

The Company has  qualified  under  provisions  of the  Internal  Revenue Code to
compute  federal  income  taxes after  deductions  of  additions to the bad debt
reserves.  At September 30, 1997, the Company had a taxable temporary difference
of  approximately  $10,486,000  that arose before 1988  (base-year  amount).  In
accordance  with SFAS No. 109, a deferred tax liability has not been  recognized
for  the  temporary  difference.  Management  does  not  expect  this  temporary
difference to reverse in the foreseeable future.


(12) Shareholders' Equity

During  September 1996, the Board of Directors  approved and the Company engaged
in a stock repurchase  program  resulting in the retirement of 620,655 shares or
5.07% of the common  stock.  During the quarter  ended  December 31,  1996,  the
Company  received  approval  from the OTS to  repurchase  and  retire 10% of its
outstanding  shares.  This repurchase was completed in January  resulting in the
reduction  of shares  outstanding  by  1,161,247  and  reducing  equity by $18.5
million. The shares were repurchased at an average price of $15.91.

On April 9, 1997 the vested portion of awarded MRDP shares were  released.  Many
of the  recipients  of this award had the  Company  withhold  and retire some of
their shares to pay the  associated  taxes.  This further  reduced the number of
shares outstanding by 21,689 shares and reduced equity by $377,000.

At the time of conversion,  the Association established a liquidation account in
an amount  equal to its retained  earnings as of June 30, 1995,  the date of the
latest statement of financial condition used in the final conversion prospectus.
The  liquidation  account  will  be  maintained  for  the  benefit  of  eligible
withdrawable  account holders who have maintained  their deposit accounts in the
Association  after  conversion.  In the event of a complete  liquidation  of the
Association (and only in such an event),  eligible depositors who have continued
to  maintain  accounts  will be  entitled  to  receive a  distribution  from the
liquidation  account before any  liquidation  may be made with respect to common
stock.  The  Association  may not  declare or pay cash  dividends  if the effect
thereof would reduce its  regulatory  capital below the amount  required for the
liquidation account.

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

(13) Employee Benefit Plans

Employee Retirement Plan
The Company is a member of a  multiple-employer  trusteed  pension plan ("Plan")
covering  all  employees  working  1,000 or more hours per year with one year of
service and pays direct pensions to certain retired  employees.  Pension expense
of  $170,613,  $198,000,  and  $185,000  was  incurred  during  the years  ended
September 30, 1997, 1996, and 1995, respectively. Separate actuarial valuations,
including  computed value of vested benefits,  are not made with respect to each
contributing employer, nor are the Plan assets so segregated by the trustee. The
Plan had an over- funded accumulated benefit of approximately  $517.2 million at
June 30, 1997.

Director Deferred Compensation Plan
The Company also has an unfunded  supplemental  benefits plan to provide members
of the Board of Directors with supplemental  retirement  benefits.  Supplemental
benefits are based on monthly fees approved by the Compensation Committee of the
Board.  Pension costs  recognized for the years ended September 30, 1997,  1996,
and 1995 were $71,052, $71,053, and $70,020 respectively.  At September 30, 1997
and  1996,  the  projected  benefit  obligation  was  $727,140,   and  $668,088,
respectively.

Management Recognition and Development Plan
In  February  1996,  the Board of  Directors  approved a MRDP for the benefit of
officers  and non-  employee  directors  which  authorizes  the grant of 489,325
common stock  shares.  The MRDP was approved by the  Company's  shareholders  on
April 9, 1996.  Those eligible to receive benefits under the MRDP are determined
by members of a committee  appointed  by the Board of  Directors of the Company.
MRDP awards  vest over a five-year  period in equal  installments  beginning  on
April 9, 1997 (the first  anniversary of the effective date of the MRDP) or upon
the  participant's  death or disability.  On April 9, 1996,  391,459 shares were
awarded to officers and  directors.  In  accordance  with the vesting  schedule,
78,293 shares were released to those  individuals  on April 9, 1997. The Company
recognizes  compensation  expense  in the amount of the fair value of the common
stock in  accordance  with the  vesting  schedule  during the years in which the
shares are payable.  Compensation  expense for the year ended September 30, 1997
was $1.1 million.  There was no compensation expense recorded for the year ended
September 30, 1996 because no shares were vested under the plan.

Stock Option Plan
In February  1996,  the Board of  Directors  adopted a Stock Option Plan ("Stock
Plan") for the benefit of certain  employees and  directors.  The Stock Plan was
approved by the Company's  shareholders  on April 9, 1996. The maximum number of
common shares which may be issued under the Stock Plan is 1,223,313  shares with
a maximum term of ten years for each option from the date of grant.  The initial
awards  were  granted on April 9, 1996 at the fair value of the common  stock on
that date ($13.125).  All initial awards vest in equal  installments over a five
year period from the grant date and expire during April 2006.  Unvested  options
become immediately exercisable in the event of death or disability.


Option activity under the Stock Plan is as follows:
<TABLE>
<CAPTION>

                                                                        Weighted
                                                                         Average
                                                         Number of      Exercise
                                                            Shares         Price 
                                                        ----------    ----------
<S>                                                        <C>        <C>       
Outstanding, September 30, 1995 ....................          --            --
Granted ............................................       971,308    $   13.125
Exercised ..........................................          --            --
Canceled ...........................................          --            --
                                                        __________    __________
Outstanding, September 30, 1996
(no shares exercisable) ............................       971,308    $   13.125
Granted ............................................          --            --
Exercised ..........................................          --            --
Canceled ...........................................          --            --
                                                        __________    __________
Outstanding, September 30, 1997
(194,262 exercisable at a weighted
average price of $13.125) ..........................       971,308    $   13.125
                                                        ==========    ==========
</TABLE>
Outstanding options of 971,308 have a weighted average fair value of $4.12 and a
weighted average remaining  contractual  maturity of 8.5 years. At September 30,
1997, 252,005 shares were available for future grants under the Stock Plan.

Additional Stock Plan Information
As  discussed in Note 1, the Company  continues  to account for its  stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board  No.  25,  Accounting  for  Stock  Issued  to  Employees  and its  related
interpretations.  Accordingly no compensation expense has been recognized in the
financial statements for employee stock arrangements.

Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation  (SFAS 123)  requires  the  disclosure  of pro forma net income and
earnings  per share had the  Company  adopted  the fair  value  method as of the
beginning of fiscal 1996.  Under SFAS 123, the fair value of stock-based  awards
to employees is calculated through the use of option pricing models, even though
such models were  developed  to estimate  fair value of freely  tradable,  fully
transferable  options without vesting  restrictions,  which significantly differ
from the Company's  stock option  awards.  These models also require  subjective
assumptions,  including  future  stock price  volatility  and  expected  time to
exercise, which greatly affect the calculated values. The Company's calculations
were made  using the  Black-Scholes  option  pricing  model  with the  following
weighted  average  assumptions:  expected  life,  78  months  following  initial
vesting;  stock volatility,  19.63% in 1996; risk free interest rates,  6.33% in
1996;  and  dividend  yield,  1.75%  during the  expected  term.  The  Company's
calculations are based on a multiple option  valuation  approach and forfeitures
are recognized as they occur. If the computed fair values of the 1996 awards had
been amortized to expense over the vesting  period of the awards,  pro forma net
income would have been $5.9  million ($0.53 per share) in 1996 and $8.1 million
($0.83 per share) in 1997.

(14) Employee Stock Ownership Plan

As part of the stock  conversion  consummated  on October 4, 1995,  the  Company
established  an ESOP  for  all  employees  that  are age 21 or  older  and  have
completed two years of service with the Company.  The ESOP  borrowed  $9,786,500
from the  Company and used the funds to  purchase  978,650  shares of the common
stock  of the  Company  issued  in the  conversion.  The  loan  will  be  repaid
principally  from the Company's  discretionary  contributions to the ESOP over a
period of ten years.  The loan had an  outstanding  balance of $7.8  million and
$8.8 million at September 30, 1997 and 1996, respectively,  and an interest rate
of 8.75%.  The loan obligation of the ESOP is considered  unearned  compensation
and, as such,  recorded as a reduction of the  Company's  shareholders'  equity.
Both the loan obligation and the unearned compensation are reduced by the amount
of loan repayments made by the ESOP. Shares purchased with the loan proceeds are
held in a suspense  account for  allocation  among  participants  as the loan is
repaid.  Contributions to the ESOP and shares released from the suspense account
are allocated  among  participants  on the basis of  compensation in the year of
allocation.  Benefits are fully vested at all times under the ESOP.  Forfeitures
are  reallocated  to remaining  plan  participants  and may reduce the Company's
contributions.  Benefits may be payable on  retirement,  death,  disability,  or
separation  from  service.   Since  the  Company's  annual   contributions   are
discretionary, benefits payable under the ESOP cannot be estimated. Compensation
expense is recognized to the extent of the fair value of shares  committed to be
released.  The  Company  recorded  compensation  expense  under the ESOP of $1.7
million  and $1.4  million  for the years  ended  September  30,  1997 and 1996,
respectively  and 97,865 shares were allocated among the participants in each of
those years.



<PAGE>

(15) Fair Value of Financial Instruments

Financial  instruments  have been construed to generally mean cash or a contract
that implies an  obligation to deliver cash or another  financial  instrument to
another entity.

The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>

 
                                           September 30, 1997          September 30, 1996
                                      -------------------------   -------------------------
                                         Carrying          Fair      Carrying          Fair
                                           amount         value        amount         value
FINANCIAL ASSETS                      -----------   -----------   -----------   -----------
 
<S>                                   <C>           <C>           <C>           <C>        
Cash and due from banks ...........   $24,503,768   $24,503,768   $ 6,981,732   $ 6,981,732
Interest earning deposits .........     1,431,087     1,431,087     3,078,688     3,078,688
with banks
Federal funds sold and ............     6,108,341     6,108,341     6,119,213     6,119,213
securities purchased under
agreements to resell
Investment securities .............   261,846,320   261,846,320    75,986,611    75,986,611
available for sale
Investment securities held ........    22,937,314    22,968,997     9,827,193     9,860,165
to maturity
Mortgage backed and related .......    64,868,633    64,868,633    74,109,321    74,109,321
securities available for sale
Mortgage backed and related .......     5,446,957     5,518,648     6,783,001     6,736,007
securities held to maturity
Loans receivable, net .............   551,463,590   567,736,594   473,555,988   467,682,131
FHLB stock ........................     7,150,400     7,150,400     4,773,800     4,773,800

FINANCIAL LIABILITIES

Deposit liabilities ...............   673,977,901   676,182,990   399,673,180   402,769,799
FHLB advances .....................   129,000,000   128,358,966    90,000,000    89,974,165
Short term borrowings .............    17,077,500    17,077,500    14,904,400    14,904,400

</TABLE>

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

Financial Assets

The estimated fair value  approximates the book value of cash,  interest earning
cash accounts,  and federal funds sold and securities purchased under agreements
to resell. For securities,  the fair value is based on quoted market prices. The
fair value of loans is estimated by discounting  future cash flows using current
rates at  which  similar  loans  would be  made.  The fair  value of FHLB  stock
approximates the book value.

Financial Liabilities

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

Off-Balance Sheet Financial Instruments

Off-balance sheet financial  instruments are limited to commitments to originate
mortgage and consumer loans.  The carrying  amount of loan  commitments of $11.5
million  approximates  fair  value.  See note 17 to the  consolidated  financial
statements.

The Company did not hold any derivative financial  instruments in its investment
portfolio at or during the years ended September 30, 1997, 1996, or 1995.


<PAGE>

(16) Regulatory Capital Requirements

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital  to  risk-weighted  assets,  of Tier I capital  to total  assets,  and
tangible  capital to tangible assets (set forth in the table below).  Management
believes that the Association  meets all capital adequacy  requirements to which
it is subject as of September 30, 1997.

As of September 30, 1997, the most recent  notification from the OTS categorized
the Association as "well capitalized" under the regulatory  framework for prompt
corrective action. To be categorized as "well-capitalized," the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

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

At periodic  intervals,  the OTS and FDIC routinely  examine the  Association as
part of their  legally  prescribed  oversight of the thrift  industry.  Based on
these examinations,  the regulators can direct that the Association's  financial
statements be adjusted in accordance with their findings.  A future  examination
by the OTS or the FDIC could include a review of certain  transactions  or other
amounts reported in the Association's 1997 financial statements.  In view of the
uncertain  regulatory  environment in which the  Association  now operates,  the
extent,  if any, to which a forthcoming  regulatory  examination  may ultimately
result in  adjustments  to the 1997  financial  statements  cannot be  presently
determined.

On September 30, 1996, the United Sates Congress passed and the President signed
into law the  omnibus  appropriations  package,  including  the  Bank  Insurance
Fund/Savings  Association  Insurance Fund  ("BIF/SAIF")  and  regulatory  Burden
Relief packages. Included in this legislation was a requirement for SAIF-insured
institutions to recapitalize  the SAIF insurance fund through a one-time special
assessment amount which was 65.7 basis points of the March 31, 1995 SAIF deposit
assessment base. As the Association is insured by SAIF, this assessment resulted
in a pre-tax charge to non-interest expense for the quarter ending September 30,
1996 of $2.5  million  based on the March 31, 1995 SAIF  deposit  base of $376.4
million.

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

                                                                                     Categorized as "Well
                                                                                         Capitalized" Under
                                                                 For Capital            Prompt Corrective
                                             Actual           Adequacy Purposes          Action Provision
                                 -----------------------   -----------------------   -----------------------
                                       Amount      Ratio         Amount      Ratio         Amount      Ratio
                                 ------------      -----   ------------      -----   ------------      -----
As of September 30, 1997:
<S>                              <C>               <C>     <C>                <C>    <C>               <C>  
 Total Capital: ..............   $103,325,941      23.1%   $ 35,755,744       8.0%   $ 44,694,680      10.0%
  (To Risk Weighted Assets)
 Tier I Capital: .............    102,029,490      22.8%            N/A       N/A      26,816,808       6.0%
  (To Risk Weighted Assets)
 Tier I Capital: .............    102,029,490      11.1%     27,643,595       3.0%     46,072,658       5.0%
  (To Total Assets)
 Tangible Capital: ...........    102,029,490      11.1%     13,821,797       1.5%            N/A       N/A
  (To Tangible Assets)

As of September 30, 1996:
 Total Capital: ..............   $121,036,745      42.4%   $ 22,832,496       8.0%   $ 28,540,620      10.0%
  (To Risk Weighted Assets)
 Tier I Capital: .............    120,108,925      42.1%            N/A       N/A      17,124,372       6.0%
  (To Risk Weighted Assets)
 Tier I Capital: .............    120,108,925      19.2%     18,746,701       3.0%     31,244,502       5.0%
  (To Total Assets)
 Tangible Capital: ...........    120,108,925      19.2%      9,373,351       1.5%            N/A       N/A
  (To Tangible Assets)

</TABLE>

 
The following table is a reconciliation of the Association's capital, calculated
according to generally accepted  accounting  principles,  to regulatory tangible
and risk-based capital:
 
<TABLE>
<CAPTION>
 
                                               September 30, 1997      September 30, 1996
                                                    -------------           -------------
<S>                                                 <C>                     <C>          
Association's equity .....................          $ 115,678,187           $ 119,820,720
Unrealized securities (gains) losses .....               (565,002)                288,205
Core deposit intangible ..................            (13,083,695)                   --
                                                    -------------           -------------
Tangible capital .........................            102,029,490             120,108,925
General valuation allowances .............              1,296,451                 927,820
                                                    -------------           -------------
Total capital ............................          $ 103,325,941           $ 121,036,745
                                                    =============           =============
</TABLE>



<PAGE>

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

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

At September 30, 1997, loan commitments amounted to approximately $11.5 million,
comprised  of $4.2 million in variable  rate loans  ranging from 5.50% to 14.50%
and $7.3 million in fixed rate loans ranging from 7.13% to 11.88%.  At September
30, 1996, loan commitments amounted to approximately $10.8 million, comprised of
a  $146,000  variable  rate loan at 6.00% and $10.7  million in fixed rate loans
ranging  from 7.00% to 10.88% 

The Company  originates  residential  real estate loans and, to a lesser extent,
commercial  and  multi-family  real estate and consumer  loans.  Over 93% of the
mortgage loans in the Association's  portfolio are secured by properties located
in Klamath,  Jackson,  and Deschutes counties in Southern and Central Oregon. An
economic  downturn  in these areas  would  likely have a negative  impact on the
Companys results of operations depending on the severity of the downturn.



<PAGE>

(18) Parent Company Financial Information

Condensed  financial  information as of September 30, 1997 and 1996, for Klamath
First  Bancorp,  Inc. is presented  and should be read in  conjunction  with the
consolidated financial statements and the notes thereto:
<TABLE>
<CAPTION>

BALANCE SHEETS
                                                             September 30,
                                                     ----------------------------
                                                              1997           1996
                                                     -------------   ------------
ASSETS
<S>                                                  <C>             <C>         
Cash and cash equivalents ........................   $  10,736,534   $  4,819,110
Investment and mortgage backed securities ........      34,996,109     43,726,942
Investment in wholly-owned subsidiary ............     115,678,183    119,820,720
Other assets .....................................       1,033,966      1,038,320
                                                     -------------   ------------
Total assets .....................................   $ 162,444,792   $169,405,092
                                                     =============   ============  

LIABILITIES
 
Short-term borrowings ............................   $  17,077,500   $ 14,904,400
Other liabilities ................................         904,849      1,089,718
                                                     -------------   ------------
Total liabilities ................................      17,982,349     15,994,118

SHAREHOLDERS' EQUITY
 
Common stock .....................................         104,295        116,124
Additional paid-in capital .......................      92,601,639    110,762,677
Retained earnings ................................      65,209,049     58,034,493
Unearned ESOP shares at cost .....................      (7,829,200)    (8,807,850)
Unearned MRDP shares at cost .....................      (5,623,340)    (6,694,470)
                                                     -------------   ------------
Total shareholders' equity .......................     144,462,443    153,410,974
                                                     -------------   ------------
Total liabilities and shareholders' equity .......   $ 162,444,792   $169,405,092
                                                     =============   ============
<CAPTION>

 
STATEMENTS OF EARNINGS
                                                For the Years Ended September 30,
                                                     ----------------------------
                                                              1997           1996
                                                     -------------   ------------
<S>                                                  <C>             <C>         
Equity in undistributed income of subsidiary .....   $   7,984,527   $  4,045,267
Total interest income ............................       2,602,017      3,115,776
Total interest expense ...........................         978,023        196,130
Non-interest income ..............................         795,743        857,843
Non-interest expense .............................       1,681,062        484,778
                                                     -------------   ------------
Earnings before income taxes .....................       8,723,202      7,337,978
Provision for income tax .........................         165,452      1,228,181
                                                     -------------   ------------
Net earnings .....................................   $   8,557,750   $  6,109,797
                                                     =============   ============
</TABLE>


<TABLE>
<CAPTION>
 
STATEMENTS OF CASH FLOWS
                                                For the Years Ended September 30,
                                                     ----------------------------
                                                              1997           1996
                                                     -------------   ------------
<S>                                                  <C>             <C>         
Net cash flows from operating activities .........   $  16,064,112   $   (552,188)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary .........................        (250,299)      (176,157)
Maturity of investment and mortgage ..............       5,311,184     27,734,452
backed securities
(Purchase) sale of investment and mortgage .......       3,985,625    (72,168,427)
backed securities
                                                     -------------   ------------
Net cash flows from investing activities .........       9,046,510    (44,610,132)
                                                     -------------   ------------
<PAGE>
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
Proceeds from stock over subscription ............            --      (65,685,300)

Proceeds from ESOP loan repayment ................         705,260        653,601
Proceeds from short-term borrowings ..............      84,750,150     21,938,300
Repayments of short-term borrowings ..............     (82,577,050)    (7,033,900)
Purchase of stock for MRDP Trust .................            --       (6,694,470)
Stock retirement .................................     (18,878,128)    (8,891,834)
Dividends paid ...................................      (3,193,430)    (2,025,807)
                                                     -------------   ------------
Net cash flows from financing activities .........     (19,193,198)   (67,739,410)
                                                     -------------   ------------
Net increase/(decrease) in cash and cash .........       5,917,424   (112,901,730)
 equivalents
Cash and cash equivalents beginning of year ......       4,819,110    117,720,840
                                                     -------------   ------------
Cash and cash equivalents end of year ............   $  10,736,534   $  4,819,110
                                                     =============   ============
</TABLE>



<PAGE>

(19) Selected Quarterly Financial Data

(unaudited)
<TABLE>
<CAPTION>

                                                    Fiscal Years Ended September 30,1997
                                                  ---------------------------------------
                                                 December     March      June   September
                                                  -------   -------   -------   ---------
                                                              (In thousands)
<S>                                               <C>       <C>       <C>       <C>    
Total interest income .........................   $12,603   $12,409   $13,081     $16,074
Total interest expense ........................     6,916     6,798     7,304       8,838
                                                  -------   -------   -------   ---------
Net interest income ...........................     5,687     5,611     5,777       7,236
Provision for loan losses .....................        30       240        45          55
                                                  -------   -------   -------   ---------
Net interest income after provision ...........     5,657     5,371     5,732       7,181
Non-interest income ...........................       112       102       103         493
Non-interest expense ..........................     2,604     2,442     2,443       4,275
                                                  -------   -------   -------   ---------
Earnings before income taxes ..................     3,165     3,031     3,392       3,399
Provision for income tax ......................     1,252       550     1,342       1,285
                                                  -------   -------   -------   ---------
Net earnings ..................................   $ 1,913   $ 2,481   $ 2,050     $ 2,114
                                                  =======   =======   =======   =========
Net earnings per share ........................   $  0.19   $  0.27   $  0.22     $  0.22
</TABLE>

As described in Note 2, results of  operations  for the fourth  quarter  reflect
increased  income and expenses  related to the  Association's  acquisition of 25
branches from Wells Fargo Bank, N.A.
<TABLE>
<CAPTION>

                                                    Fiscal Year Ended September 30,1997
                                                  ---------------------------------------
                                                 December     March      June   September
                                                  -------   -------   -------   ---------
                                                              (In thousands)
<S>                                               <C>       <C>       <C>       <C>    
 
Total interest income .........................   $10,919   $11,138   $11,444     $12,149
Total interest expense ........................     5,567     5,626     5,781       6,314
                                                  -------   -------   -------   ---------
Net interest income ...........................     5,352     5,512     5,663       5,835
Provision for loan losses .....................        30        30        30          30
                                                  -------   -------   -------   ---------
Net interest income after provision ...........     5,322     5,482     5,633       5,805
Non-interest income ...........................        79        98        95         249
Non-interest expense ..........................     1,840     1,928     1,879       6,595
                                                  -------   -------   -------   ---------
Earnings/(loss) before income taxes ...........     3,561     3,652     3,849        (541)
Provision for income tax ......................     1,320     1,245     1,438         409
                                                  -------   -------   -------   ---------
Net earnings/(loss) ...........................   $ 2,241   $ 2,407   $ 2,411     $  (950)
                                                  =======   =======   =======   =========
Net earnings per share ........................   $  0.20   $  0.21   $  0.22     $ (0.09)
</TABLE>

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