SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

     For the Fiscal Year Ended September 30, 1997

                                       OR

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

                         Commission File Number: 0-26556
 
                           KLAMATH FIRST BANCORP, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

As of December 22, 1997, there were issued and outstanding  10,429,534 shares of
the  Registrant's   Common  Stock.  The  Registrant's  voting  stock  is  traded
over-the-counter  and is listed on the Nasdaq  National  Market under the symbol
"KFBI." The aggregate  market value of the voting stock held by nonaffiliates of
the  Registrant,  based on the closing  sales price of the  Registrant's  common
stock as quoted on the Nasdaq  National  Market on December  10, 1996 of $21.50,
was $194,738,959.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Registrant's  Annual Report to Shareholders for the Fiscal Year
     Ended September 30, 1997 
("Annual Report") (Parts I and II).

2.   Portions of  Registrant's  Definitive  Proxy  Statement for the 1998 Annual
     Meeting of Shareholders
(Part III).

3.   Registrant's Current Report on Form 8-K dated August 1, 1997, as amended on
     September 29, 1997 
(Part II, Item 9).
<PAGE>


                                     PART I
Item 1.  Business

General

Klamath First Bancorp, Inc. ("Company"), an Oregon corporation, was organized on
June 16, 1995 for the purpose of becoming the holding  company for Klamath First
Federal  Savings and Loan  Association  ("Association")  upon the  Association's
conversion from a federal mutual to a federal stock savings and loan association
("Conversion").  The  Conversion  was completed on October 4, 1995. At September
30, 1997,  the Company had total  assets of $980.1  million,  total  deposits of
$674.0 million and shareholders' equity of $144.5 million. All references to the
Company herein include the Association where applicable.

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

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

The   Association  is  a  traditional,   community-oriented   savings  and  loan
association  that focuses on customer  service  within its primary  market area.
Accordingly,  the Association is primarily  engaged in attracting  deposits from
the general  public  through  its  offices  and using those and other  available
sources of funds to originate  permanent  residential  one- to four-family  real
estate  loans  within  its  market  area and to a lesser  extent  on  commercial
property  and  multi-family   dwellings.   At  September  30,  1997,   permanent
residential  one- to four-family  real estate loans totaled $498.5  million,  or
86.51% of the total loans.  While the  Association has  historically  emphasized
fixed rate mortgage lending, during the fiscal year ended September 30, 1997, it
began  diversifying  its loan  portfolio by focusing on increasing the number of
originations of commercial real estate loans,  multi-family  residential  loans,
residential  construction loans, small business loans and non-mortgage  consumer
loans.  A  significant  portion of these newer loan  products  carry  adjustable
rates,  higher  yields,  or  shorter  terms  than  the  traditional  fixed  rate
mortgages.  This  lending  strategy  is  designed  to enhance  earnings,  reduce
interest rate risk, and provide a more complete  range of financial  services to
customers and the local communities served by the Association.  At September 30,
1997, the Association's  total loan portfolio consisted of 87.98% fixed rate and
12.02% adjustable rate loans, after loans in process and non-performing loans.

Market Area

As a result of the branch acquisition, the Association's market area expanded to
include 33  locations in 22 of Oregon's 36 counties.  The  Association's  market
area,  which  encompasses  the  state  of  Oregon  and  some  adjacent  areas of
California and Washington,  can be characterized  as a predominantly  rural area
containing  a number of  communities  that are  experiencing  moderate  to rapid
population  growth.  The  favorable   population  growth  in  the  market  area,
particularly  in  Southern  Oregon,  has been  supported  in  large  part by the
favorable  climate,  and by  favorable  real estate  values.  The economy of the
market  area is  still  based  primarily  on  agriculture  and  lumber  and wood
products,   but  is  experiencing   diversification  into  light  manufacturing,
services,  and other sectors.  Tourism is a significant industry in many regions
of the market area including Central Oregon and the southern Oregon coast.


                                        1

<PAGE>


Yields Earned and Rates Paid

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

                                                                           Years Ended
                                                        At                September 30,     
                                             September 30,            ---------------------
                                                      1997             1997    1996    1995
                                                      ----             ----    ----    ----
<S>                                                   <C>              <C>     <C>     <C>  
Weighted average yield:
   Loans receivable .....................             7.82%            7.92%   8.00%   7.89%
   Mortgage backed and related securities             7.09             6.34    6.00     --
   Investment securities ................             6.15             6.10    6.12    7.43
   Federal funds sold ...................             5.23             5.31    7.09    7.32
   Interest-earning deposits ............             5.11             5.32    4.95    4.01
   FHLB stock ...........................             8.00             7.70    7.64    6.86

Combined weighted average yield on ......             7.24             7.40    7.45    7.75
 interest-bearing assets 
                                                      ----             ----    ----    ----

Weighted average rate paid on:
   Tax and insurance reserve ............             2.50             2.97    3.30    3.97
   Passbook and statement savings .......             2.75             3.15    2.87    2.78
   Interest-bearing checking ............             1.92             2.20    2.47    2.44
   Money market .........................             3.92             3.85    3.88    3.95
   Certificates of deposit ..............             5.87             5.76    5.94    5.79
   FHLB advances/Short term borrowings ..             5.64             5.68    5.60    6.21

Combined weighted average rate on .......             4.88             5.12    5.23    5.02
 interest-bearing liabilities 
                                                      ----             ----    ----    ----

Net interest spread .....................             2.36%            2.28%   2.22%   2.73%
                                                      ====             ====    ====    ====

</TABLE>

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

          Reference  is made to the  section  entitled  "Average  Balances,  Net
     Interest  Income and Yields Earned and Rates Paid" on page 12 of the Annual
     Report, which section is incorporated herein by reference.

     Interest Sensitivity Gap Analysis

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

     Rate/Volume Analysis

          Reference is made to the section  entitled  "Rate/Volume  Analysis" on
     page 13 of the  Annual  Report,  which  section is  incorporated  herein by
     reference.

                                        2

<PAGE>

Lending Activities

     General.  As a  federally  chartered  savings  and  loan  association,  the
Association has authority to originate and purchase loans secured by real estate
located  throughout the United States.  Notwithstanding  this nationwide lending
authority,  over 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.  With the  expanded  market area  provided by the
branch  acquisition in 1997, the Association  anticipates  its mortgage  lending
will diversify  throughout the state of Oregon.  It is  management's  intention,
subject to market  conditions,  that the  Association  will remain a traditional
financial  institution  originating  long-term  mortgage loans for the purchase,
construction  or  refinance  of one- to  four-family  residential  real  estate.
However,  to  enhance  interest  income  and  reduce  interest  rate  risk,  the
Association  is placing  increased  emphasis on the  origination  or purchase of
adjustable  rate loans secured by  multi-family  residential and commercial real
estate,  the  majority  of which  are  located  outside  Klamath,  Jackson,  and
Deschutes counties.

     Permanent residential one- to four-family mortgage loans amounted to $498.5
million,  or 86.51%, of the Association's total loan portfolio before net items,
at  September  30,  1997.  The  Association  originates  other loans  secured by
multi-family  residential  and  commercial  real estate,  construction  and land
loans.  Those loans  amounted  to $71.7  million,  or 12.44%,  of the total loan
portfolio, before net items, at September 30, 1997. Approximately 1.05%, or $6.0
million,  of the  Association's  total loan  portfolio,  before net items, as of
September 30, 1997 consisted of non-real estate loans.

     Permissible  loans-to-one borrower by the Association are generally limited
to 15% of unimpaired capital and surplus. The Association's loan-to-one borrower
limitation  was $17.4 million at September 30, 1997. At September 30, 1997,  the
Association had thirteen borrowing  relationships  with outstanding  balances in
excess of $1.0  million,  the  largest of which  amounted  to $3.5  million  and
consisted of ten loans, all of which were secured by multi-family residential or
commercial  real estate.  All of those loans have  performed in accordance  with
their terms since origination.

     The  Association  has  placed a  growing  emphasis  on the  origination  of
adjustable  rate  mortgage  ("ARM") loans in order to increase the interest rate
sensitivity of its loan portfolio.  See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset Liability  Management and
Interest  Rate  Risk" and  "INTEREST  SENSITIVITY  GAP  ANALYSIS"  in the Annual
Report.  At  September  30,  1997,  $67.2  million,  or  12.02%  of loans in the
Association's  total loan portfolio,  after loans in process and  non-performing
loans, consisted of ARM loans.


                                        3
<PAGE>
<TABLE>
<CAPTION>

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


                                                                      At September 30,
                               ---------------------------------------------------------------------------------------------
                                      1997               1996               1995               1994               1993             
                               -----------------  -----------------  -----------------  -----------------  -----------------
                                 Amount  Percent    Amount  Percent    Amount  Percent    Amount  Percent    Amount  Percent
                                                                   (Dollars in Thousands)
                               --------  -------  --------  -------  --------  -------  --------  -------  --------  -------     
<S>                            <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>   
Real estate loans:
  Permanent residential
    1-4 family .............   $498,486   86.51%  $447,004   91.50%  $381,683   91.68%  $337,212   90.06%  $291,317   90.54%
  Multi-family residential .     16,881    2.93      6,555    1.34      7,433    1.79      8,209    2.19      7,797    2.42
  Construction .............     30,596    5.31     14,276    2.92      9,807    2.36     12,625    3.37      8,298    2.58
  Commercial ...............     22,639    3.93     15,645    3.20     13,984    3.36     13,425    3.58     11,227    3.49
  Land .....................      1,586    0.27      1,152    0.24      1,072    0.25      1,180    0.32      1,270    0.39
                               --------  -------  --------  -------  --------  -------  --------  -------  --------  -------     
Total real estate loans ....    570,188   98.95    484,632   99.20    413,979   99.44    372,651   99.52    319,909   99.42
                               --------  -------  --------  -------  --------  -------  --------  -------  --------  -------     

Non-real estate loans:
  Savings accounts .........      1,711    0.30      1,640    0.34      1,966    0.47      1,316    0.35      1,250    0.39
  Home improvement and .....      3,511    0.61      1,977    0.40        --      --         --      --         --      --
    home equity loans
  Other ....................        804    0.14        302    0.06        367    0.09        472    0.13        615    0.19
                               --------  -------  --------  -------  --------  -------  --------  -------  --------  -------     
Total non-real estate loans       6,026    1.05      3,919    0.80      2,333    0.56      1,788    0.48      1,865    0.58
                               --------  -------  --------  -------  --------  -------  --------  -------  --------  -------     
 Total loans ...............    576,214  100.00%   488,551  100.00%   416,312  100.00%   374,439  100.00%   321,774  100.00%
                                         =======            =======            =======            =======            =======     
Less:
Undisbursed portion of loans     17,096              8,622              7,203              9,310              7,148
Deferred loan fees .........      6,358              5,445              4,757              4,252              3,330
Allowance for loan losses ..      1,296                928                808                755                628
Net loans ..................   $551,464           $473,556           $403,544           $360,122           $310,668
                               ========           ========           ========           ========           ========              
</TABLE>

                                        4
<PAGE>

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

<TABLE>
<CAPTION>

                                    At September 30,
                           ----------------   ----------------                    
                                  1997               1996          
                             Amount Percent     Amount Percent
                           -------- -------   -------- -------
                                  (Dollars in thousands)
<S>                        <C>       <C>      <C>       <C>   
Fixed rate ..............  $491,703   87.98%  $428,528   89.32%
Adjustable-rate .........    67,189   12.02     51,250   10.68
                           --------  ------   --------  ------
     Total ..............  $558,892  100.00%  $479,778  100.00%
                           ========  ======   ========  ======
</TABLE>


     Permanent  Residential  One- to  Four-Family  Mortgage  Loans.  The primary
lending activity of the Association is the origination of permanent  residential
one- to  four-family  mortgage  loans.  Management  believes that this policy of
focusing on  single-family  residential  mortgage  loans has been  successful in
contributing  to interest  income while  keeping  delinquencies  and losses to a
minimum.  At September 30, 1997, $498.5 million, or 86.51%, of the Association's
total loan portfolio,  before net items, consisted of permanent residential one-
to  four-family  mortgage  loans.  As of such date,  the average  balance of the
Association's  permanent  residential  one- to  four-family  mortgage  loans was
$65,149.

     The Association presently originates both fixed-rate mortgage loans and ARM
loans secured by one- to  four-family  properties  with terms of 15 to 30 years.
Historically,  most of the loans  originated by the Association  have been fixed
rate loans  secured by one- to  four-family  properties.  At September 30, 1997,
$471.3  million,  or  84.32% of the  total  loans  after  loans in  process  and
non-performing  loans  were  fixed  rate  one- to  four-family  loans  and $39.1
million,  or  7.00%,  were ARM  loans.  Borrower  demand  for ARM  loans  versus
fixed-rate  mortgage  loans is a function  of the level of interest  rates,  the
expectations  of  changes  in the level of  interest  rates  and the  difference
between the initial  interest  rates and fees charged for each type of loan. The
relative  amount  of  fixed-rate  mortgage  loans  and  ARM  loans  that  can be
originated  at any  time is  largely  determined  by the  demand  for  each in a
competitive environment.

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

     The  loan  fees  charged,  interest  rates  and  other  provisions  of  the
Association's  ARM loans are  determined by the  Association on the basis of its
own pricing criteria and competitive market  conditions.  At September 30, 1997,
the Association charged 1.75% origination fees on its ARM loans.

     The Association has placed greater emphasis on the origination of ARM loans
for permanent  one- to  four-family  residences.  In an attempt to increase this
type of business,  the  Association  uses below market  "teaser" rates which are
competitive with other institutions  originating  mortgages in the Association's
primary market area.  Initially,  ARM loans are priced at the competitive teaser
rate and after one year  reprice at 2.875% over the One-Year  Constant  Maturity
Treasury  Bill  Index,  with a maximum  increase or decrease of 2.00% in any one
year and 6.00% over the life of the loan.

     The retention of ARM loans in the Association's loan portfolio helps reduce
the  Association's  exposure to changes in interest rates.  There are,  however,
unquantifiable  credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer. It is possible that, during periods
of rising  interest  rates,  the risk of default on ARM loans may  increase as a
result of repricing with increased costs to the borrower.  Furthermore,  the ARM
loans originated by the Association generally provide, as a marketing incentive,
for initial rates of interest below

                                        5

<PAGE>

the rates which would apply were the adjustment index used for pricing initially
(discounting).  These  loans  are  subject  to  increased  risks of  default  or
delinquency  because of this.  Another  consideration is that although ARM loans
allow the  Association to increase the  sensitivity of its asset base to changes
in the interest rates, the extent of this interest sensitivity is limited by the
periodic  and  lifetime  interest  rate  adjustment  limits.  Because  of  these
considerations,  the  Association has no assurance that yields on ARM loans will
be sufficient to offset increases in the Association's cost of funds.

     The loan-to-value ratio, maturity and other provisions of the loans made by
the  Association  generally  have  reflected  the policy of making less than the
maximum loan permissible under applicable regulations,  in accordance with sound
lending practices,  market conditions and underwriting  standards established by
the Association.  The  Association's  lending policies on permanent  residential
one- to four-family  mortgage loans  generally  limit the maximum  loan-to-value
ratio to 90% of the  lesser  of the  appraised  value or  purchase  price of the
property and generally all permanent  residential  one- to four-family  mortgage
loans  in  excess  of  an  80%  loan-to-value  ratio  require  private  mortgage
insurance.  Programs  for 95% and 97%  loan-to-value  are  available  for  owner
occupied purchase transactions.

     The Association also has a limited amount of  non-owner-occupied  permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten  using  generally  the same  criteria as  owner-occupied  permanent
residential  one-  to  four-family  mortgage  loans,  except  that  the  maximum
loan-to-value  ratio is generally  75% of the lesser of the  appraised  value or
purchase  price of the  property  and such loans are  generally  provided  at an
interest rate higher than owner-occupied loans.

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

     Historically,  the  Association has not originated  significant  amounts of
mortgage loans on second residences. However, with the branch office in Bend and
the loan center in Redmond, near popular ski areas and other outdoor activities,
and the addition of branches along the southern  Oregon coast,  an  increasingly
popular  resort and vacation  area,  the  Association  believes that there is an
opportunity  to engage in such  lending  within the  parameters  of its  current
underwriting  policies.  At September 30, 1997,  $3.2 million,  or 0.55%, of the
Association's loan portfolio consisted of loans on second homes.

     Commercial  and  Multi-Family   Real  Estate  Loans.  The  Association  has
historically  engaged in a limited amount of  multi-family  and commercial  real
estate lending.  During 1997, the Association purchased  participations in loans
secured by  multi-family  and  commercial  real estate in order to increase  the
balance of adjustable  rate loans in the portfolio.  See "-- Loan  Originations,
Purchases,  and Sales." At September 30, 1997,  $16.9 million,  or 2.93%, of the
Association's total loan portfolio, before net items, consisted of loans secured
by existing multi-family residential real estate and $22.6 million, or 3.93%, of
the  Association's  total loan portfolio,  before net items,  consisted of loans
secured by existing  commercial real estate.  The  Association's  commercial and
multi-family  real  estate  loans  include  primarily  loans  secured  by office
buildings,  small  shopping  centers,  churches,   mini-storage  warehouses  and
apartment buildings.  All of the Association's  commercial and multi-family real
estate  loans are  secured by  properties  located  in the state of Oregon.  The
average outstanding balance of commercial and multi-family real estate loans was
$215,201 at  September  30,  1997,  the largest of which was a $1.3 million land
development  loan secured by land and  improvements.  The loan has  performed in
accordance  with its terms since  origination.  Originations  of commercial real
estate and multi-family  residential  real estate amounted to 4.87%,  2.58%, and
1.35% of the  Association's  total loan  originations  in the fiscal  year ended
September 30, 1997, 1996, and 1995, respectively. The Association also purchased
$9.3 million in multi-family residential loan participations and $6.4 million in
commercial real estate participations during the year ended September 30, 1997.


                                        6

<PAGE>

The Association's commercial and multi-family loans have terms which range up to
25 years  and  loan-to-value  ratios  of up to 75%.  The  Association  currently
originates  fixed and adjustable  rate commercial and  multi-family  real estate
loans.  Commercial real estate and multi-family adjustable rate loans are priced
to be competitive  with other  commercial  lenders in the  Association's  market
area.  A  variety  of  terms  are  available  to meet  specific  commercial  and
multi-family  residential  financing  needs.  As of September  30,  1997,  $24.0
million,  or 4.30%,  after loans in process and  non-performing  loans, of other
mortgage loans,  including  commercial and multi-family  residential real estate
loans, had adjustable rates of interest.

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

     Construction  Loans. The Association makes  construction loans primarily to
individuals  for  the  construction  of  their  single-family  residences.   The
Association  also makes loans to builders for the  construction of single-family
residences  which  are not  presold  at the  time of  origination  ("speculative
loans"). The Association generally limits loans to builders to not more than two
residences  under  construction at a given time. With the exception of a limited
number of 18-month  speculative  loans,  construction  loans  generally begin to
amortize as permanent  residential one- to four-family mortgage loans within one
year of origination unless extended.  At September 30, 1997,  construction loans
amounted to $30.6 million  (including  $14.1 million of speculative  loans),  or
5.31%, of the Association's total loan portfolio before net items.  Construction
loans have rates and terms which generally match the non-construction loans then
offered by the  Association,  except that  during the  construction  phase,  the
borrower pays only interest on the loan.  The  Association's  construction  loan
agreements  generally  provide that loan proceeds are disbursed in increments as
construction  progresses.  The Association  periodically reviews the progress of
the  underlying  construction  project.   Construction  loans  are  underwritten
pursuant to the same general  guidelines used for originating  permanent one- to
four-family   loans.   Construction   lending  is   generally   limited  to  the
Association's primary market area.

     Construction  financing is generally  considered to involve a higher degree
of risk of loss than financing on improved,  owner-occupied  real estate because
of the  uncertainties  of  construction,  including  the  possibility  of  costs
exceeding the initial estimates and, in the case of speculative  loans, the need
to  obtain a  purchaser.  The  Association  has  sought  to  minimize  the risks
associated with permanent construction lending by limiting construction loans to
qualified  owner-occupied  borrowers  with  construction  performed by qualified
state licensed  builders  located  primarily in the  Association's  market area.
During  1997,  the  Association  began  originating  construction  loans  in the
Portland,  Oregon  metropolitan area through mortgage  brokers.  These loans are
underwritten using the same standards as loans from the branch locations.

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

     Loan proceeds are disbursed only as construction progresses and inspections
warrant.  These loans are  underwritten  to the same  standards  and to the same
terms and requirements as one- to four-family  purchase  mortgage loans,  except
the loans provide for  disbursement of funds during a construction  period of up
to one year.  During this  period,  the  borrower  is  required to make  monthly
payments of accrued  interest on the  outstanding  loan  balance.  Disbursements
during  the  construction  period  are  limited  to no more than the  percent of
completion.  Up to 95%  loan-to-value  upon  completion of  construction  may be
disbursed if private mortgage insurance above 80% loan-to-value is in place.

                                        7

<PAGE>

     Land Loans.  The Association  makes loans to individuals for the purpose of
acquiring land to build a permanent residence.  These loans generally have terms
not exceeding 15 years and maximum  loan-to-value ratios of 75%. As of September
30, 1997,  $1.6 million,  or 0.27%,  of the  Association's  total loan portfolio
consisted of land loans.

     Non-Real  Estate Loans.  Non-real estate lending has  traditionally  been a
small  part  of  the  Association's  business.   During  1997,  the  Association
introduced  several new business  and consumer  loan  products,  including  home
equity lines of credit,  automobile and recreational vehicle loans, and personal
and business lines of credit, among others. Non-real estate loans generally have
shorter  terms to  maturity or  repricing  and higher  interest  rates than real
estate  loans.  As of  September  30,  1997,  $6.0  million,  or  1.05%,  of the
Association's  total loan portfolio  consisted of non-real  estate loans.  As of
that  date,  $1.7  million,  or .30%,  of such  loans  were  secured  by savings
accounts.  At September 30, 1997,  $2.1 million,  or 0.36%,  of non-real  estate
loans consisted of Title I home improvement loans insured by the Federal Housing
Administration and most are secured by liens on the real property.

     Loan  Maturity  and  Repricing.  The  following  table sets  forth  certain
information  at September  30, 1997  regarding the dollar amount of total loans,
after loans in process and non-performing  loans,  maturing in the Association's
portfolio,  based on the  contractual  terms to maturity.  Demand  loans,  loans
having no stated schedule of repayments and no stated  maturity,  and overdrafts
are reported as due in one year or less.
<TABLE>
<CAPTION>


                                                            After One Year
                                          Within One Year  Through 5 Years    After 5 Years            Total
                                          ---------------  ---------------    -------------         --------
                                                                      (In thousands)
<S>                                               <C>              <C>             <C>              <C>     
Permanent residential
   1-4 family:
  Adjustable rate ......................          $37,603          $ 1,495         $   --           $ 39,098
  Fixed rate ...........................            8,252            2,150          460,880          471,282
Other mortgage loans:
  Adjustable rate ......................           16,402            7,605             --             24,007
  Fixed rate ...........................              705            5,736           12,057           18,498
Non-real estate loans:
   Adjustable rate .....................            1,112              979            1,993            4,084
   Fixed rate ..........................            1,762              161             --              1,923
                                                  -------          -------         --------         --------
    Total loans ........................          $65,836          $18,126         $474,930         $558,892
                                                  =======          =======         ========         ========

</TABLE>

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

     The dollar amount of all loans, net of loans in process and  non-performing
loans,  due one year after  September 30, 1997,  which have fixed interest rates
and have adjustable rates, was $481.0 million and $12.1 million, respectively.

     Loan  Commitments.   The  Association  issues  commitments  for  fixed  and
adjustable rate loans  conditioned  upon the occurrence of certain events.  Such
commitments are made on specified terms and conditions and are honored for up to
60 days from  commitment.  The Association had outstanding  loan  commitments of
approximately  $11.5 million at September 30, 1997 consisting of $4.2 million of
variable  rate loans and $7.3 million of fixed rate loans.  See Note 17 of Notes
to the Consolidated Financial Statements.


                                        8
<PAGE>

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

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

     Loan  Originations,  Purchases and Sales.  The  Association  has originated
substantially  all of the loans in its portfolio and generally  holds them until
maturity.  During the year ended September 30, 1997, the Association  originated
$120.1 million in total loans,  compared to $135.6 million in the same period of
1996. The decrease in loan  originations  was  attributable  to a return to more
normal origination rates which are at a slower rate than that experienced in the
prior year.

     Between 1989 and 1992, the Association purchased permanent residential one-
to four-family  jumbo mortgage loans (i.e.,  loans with principal  balances over
$203,150) on detached residences from various localities  throughout the Western
United States, primarily Oregon, Washington, California and Arizona. At one time
the  aggregate  balance  of such  loans  was  approximately  $64.6  million.  At
September 30, 1997, the balance was $4.8 million.  These loans were underwritten
on the same basis as permanent residential one- to four-family real estate loans
originated by the Association.

     During 1997, the  Association  purchased  multi-family  and commercial real
estate  mortgage loans secured by properties  within the  Association's  primary
market area. At September 30, 1997, the balance of such loans was $15.6 million.
These loans were  underwritten on the same basis as similar loans  originated by
the Association.

                                        9
<PAGE>

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

                                                     Years Ended September 30,     
                                               ---------------------------------
                                                    1997        1996        1995
                                               ---------   ---------   ---------
                                                          (In thousands)

<S>                                            <C>         <C>         <C>      
Total net loans at beginning of period ......  $ 473,556   $ 403,544   $ 360,122
Loans originated:
 Real estate loans originated (1) ...........    116,502     133,814      83,344
 Real estate loans purchased ................     15,648        --          --
 Non-real estate loans originated ...........      3,571       1,753       1,370
                                               ---------   ---------   ---------
   Total loans originated ...................    135,721     135,567      84,714
                                               ---------   ---------   ---------

Loan reductions:
 Principal paydowns .........................    (56,518)    (64,530)    (40,408)
 Loans sold .................................       --          --          --
 Other reductions (2) .......................     (1,295)     (1,025)       (884)
                                               ---------   ---------   ---------
    Total loan reductions ...................    (57,813)    (65,555)    (41,292)
                                               ---------   ---------   ---------

Total net loans at end of period ............  $ 551,464   $ 473,556   $ 403,544
                                               =========   =========   =========
<FN>

(1)  Includes  decreases/increases  from  loans-in-process.

(2)  Includes  net  reductions  due to  deferred  loans fees,  discounts  net of
     amortization, provision for loan loss and transfers to real estate owned.
</FN>
</TABLE>
     Loan  Origination  and Other Fees. In addition to interest earned on loans,
the  Association  receives  loan  origination  fees or "points" for  originating
loans.  Loan points are a percentage of the principal  amount of the real estate
loan and are charged to the borrower in connection  with the  origination of the
loan.  The  amount  of  points  charged  by the  Association  varies,  though it
generally amounts to 1.75% on permanent loans and 2.00% on construction loans.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
91, which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, the Association's loan origination fees and
certain related direct loan origination costs are offset,  and the resulting net
amount is deferred  and  amortized  as income over the  contractual  life of the
related loans as an adjustment to the yield of such loans,  or until the loan is
paid in full. At September  30, 1997,  the  Association  had $6.4 million of net
loan fees which had been  deferred and are being  recognized  as income over the
contractual maturities of the related loans.



                                       10
<PAGE>

Asset Quality

     Delinquent  Loans.  The following table sets forth  information  concerning
delinquent  loans at September 30, 1997, in dollar amount and as a percentage of
the  Association's  total loan portfolio.  The amounts  presented  represent the
total  outstanding  principal  balances  of the related  loans,  rather than the
actual payment amounts which are past due.
<TABLE>
<CAPTION>

                                               Permanent
                                               residential                     Non-real
                                               1-4 family                      Estate Loans                      Total              
                                           --------------------            ----------------------          --------------------
                                           Amount    Percentage            Amount    Percentage            Amount    Percentage
                                           ------    ----------            ------    ----------            ------    ----------  
                                                              (Dollars in Thousands)

Loans delinquent
<S>                                          <C>           <C>                  <C>          <C>             <C>           <C>
 for 90 days and more.............           $245          0.04%                $9            --%            $254          0.04%
</TABLE>

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

     For real estate loans, in the event a loan is past due for 45 days or more,
the Association will attempt to arrange an in-person interview with the borrower
to  determine  the  nature of the  delinquency;  based  upon the  results of the
interview  and its review of the loan status,  the  Association  may negotiate a
repayment program with the borrower.  If a loan remains past due at 60 days, the
Association performs an in-depth review of the loan status, the condition of the
property and the circumstances of the borrower.  If appropriate,  an alternative
payment  plan is  established.  At 90 days past due,  a letter  prepared  by the
Association's  legal counsel is sent to the borrower  describing the steps to be
taken to collect the loan, including  acceptance of a voluntary  deed-in-lieu of
foreclosure,  and of the initiation of foreclosure proceedings. A decision as to
whether  and  when  to  initiate  foreclosure  proceedings  is  made  by  senior
management,  with the assistance of legal counsel, at the direction of the Board
of  Directors,  based on such factors as the amount of the  outstanding  loan in
relation to the value of the property  securing the original  indebtedness,  the
extent  of the  delinquency  and  the  borrower's  ability  and  willingness  to
cooperate in curing the delinquency.

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

     Non-Performing  Assets. The Association's  non-performing assets consist of
non-accrual loans,  accruing loans greater than 90 days delinquent,  real estate
owned and other  repossessed  assets.  All loans are reviewed on a regular basis
and are placed on a non-accrual  status when, in the opinion of management,  the
collection  of additional  interest is deemed  insufficient  to warrant  further
accrual.  Generally, the Association places all loans more than 90 days past due
on  non-accrual  status.  Uncollectible  interest on loans is  charged-off or an
allowance  for  losses  is  established  by a charge  to  earnings  equal to all
interest previously accrued and interest is subsequently  recognized only to the
extent cash payments are received until delinquent interest is paid in full and,
in management's  judgment,  the borrower's ability to make periodic interest and
principal  payments  is back to normal  in which  case the loan is  returned  to
accrual status.
                                       11
<PAGE>

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

     As of September 30, 1997,  the  Association's  total  non-performing  loans
amounted to $254,000, or 0.04% of total loans, before net items, consistent with
$191,000, or 0.04% of total loans, before net items, at September 30, 1996.

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

                                                         At September 30,                        
                                             --------------------------------------
                                               1997    1996    1995    1994    1993
                                             ------  ------  ------  ------  ------
                                                      (Dollars in thousands)

<S>                                          <C>     <C>     <C>     <C>     <C>    
Non-accruing loans (1) ..................   $   254    $191    $734    $183    $198
Accruing loans greater than 90 ..........      --       --      --      --      --
  days delinquent
                                             ------  ------  ------  ------  ------
    Total non-performing loans ..........       254     191     734     183     198

Real estate owned .......................      --        69      24      59      84
Other repossessed assets ................      --       --      --      --       16
                                             ------  ------  ------  ------  ------
    Total repossessed assets ............      --        69      24      59     100
                                             ------  ------  ------  ------  ------
    Total non-performing assets .........   $   254    $260    $758    $242    $298
                                             ======  ======  ======  ======  ======

Total non-performing assets as a ........      0.03%   0.04%   0.12%   0.05%   0.07%
  percentage of total assets 
                                             ======  ======  ======  ======  ======

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

Allowance for loan losses as a ..........    510.38% 356.92% 106.80% 311.98% 210.74%
  percentage of total non-performing
  assets 
                                             ======  ======  ======  ======  ======

Allowance for loan losses as a percentage    510.38% 485.86% 110.08% 412.57% 317.19%
  of total non-performing loans 
                                             ======  ======  ======  ======  ======


<FN>
                    
(1)  Consists of permanent  residential  one- to four-family  mortgage loans and
     loans on commercial real estate.
</FN>
</TABLE>

     For the year ended  September  30,  1997,  the amount of gross  income that
would have been  recorded  in the period  then  ended if  non-accrual  loans and
troubled debt restructurings had been current according to their original terms,
and the amount of interest  income on such loans that was included in net income
for each of such periods,  were, in both cases,  less than 1% of total  interest
income.
                                       12
<PAGE>

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

     As of September  30, 1997,  total  classified  assets  amounted to 0.12% of
total  assets.  At September  30, 1997 and 1996,  the  aggregate  amounts of the
Association's  classified assets, exclusive of amounts classified loss and which
have been fully reserved, were as follows:
<TABLE>
<CAPTION>

                                            At September 30,       
                                     -----------------------------
                                      1997                    1996
                                     -----                   -----
                                             (In thousands)

<S>                                  <C>                     <C>
Loss.........................        $  --                   $  --
Doubtful.....................           --                      --
Substandard assets...........          304                     281
Special mention..............          843                     645


General loss allowances......        1,296                     928
Specific loss allowances.....           --                      --
Charge offs..................            2                      --
</TABLE>

     Allowance for Loan Losses. The allowance for loan losses is maintained at a
level  considered  adequate by management to provide for anticipated loan losses
based  on  management's   assessment  of  various  factors  affecting  the  loan
portfolio, including a review of all loans for which full collectibility may not
be reasonably  assured,  an overall  evaluation of the quality of the underlying
collateral,  economic  conditions,  historical  loan loss  experience  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.  While management believes it uses the best information  available to
determine the  allowance for loan losses,  unforeseen  market  conditions  could
result in adjustments to the allowance for loan losses and net earnings could be
significantly   affected,   if  circumstances   differ  substantially  from  the
assumptions used in making the final  determination.  At September 30, 1997, the
Association had an allowance for loan losses of $1.3 million, which was equal to
510.4% of non-performing assets and 0.22% of total loans.

     Provisions  for loan  losses  are  charged to  earnings  to bring the total
allowance for loan losses to a level deemed  appropriate by management  based on
historical loan loss experience, the volume and type of lending conducted by the
Association,  industry standards,  the amount of non-performing  assets, general
economic  conditions  (particularly as they relate to the  Association's  market
area),  and other  factors,  which  exist at the time the  determination  of the
adequacy  of  the  provision  is  made,  related  to the  collectibility  of the
Association's  loan  portfolio.  The provisions for loan losses charged  against
income for the years ended  September  30,  1997,  1996 and 1995 were  $370,000,
$120,000  and  $120,000,  respectively.  Management  believes  that  the  amount
maintained in the allowance  will be adequate to absorb  possible  losses in the
portfolio.

                                       13


<PAGE>

     The  following  table  sets  forth for the  periods  indicated  information
regarding  changes  in  the  Association's   allowance  for  loan  losses.   All
information is before net items.
<TABLE>
<CAPTION>


                                                                 Years Ended September 30,                
                                            ----------------------------------------------------------------
                                                 1997          1996         1995          1994          1993
                                            ---------     ---------   ----------    ----------     ---------
                                                                   (Dollars in thousands)

<S>                                         <C>           <C>          <C>           <C>           <C>      
Total loans outstanding .................   $ 576,214     $ 488,551    $ 416,312     $ 374,439     $ 321,774
                                            =========     =========   ==========    ==========     =========

Average loans outstanding ...............   $ 515,555     $ 440,510    $ 381,689     $ 338,679     $ 298,481
                                            =========     =========   ==========    ==========     =========

Allowance at beginning of period ........   $     928     $     808    $     755     $     628     $     572

Charge-offs .............................          (2)         --            (67)          (23)          (64)

Recoveries ..............................        --            --           --            --            --

Provision for loan losses ...............         370           120          120           150           120
                                            ---------     ---------   ----------    ----------     ---------

Allowance at end of period ..............   $   1,296     $     928    $     808     $     755     $     628
                                            =========     =========   ==========    ==========     =========

Allowance for loan losses as a percentage        0.22%         0.19%        0.19%         0.20%         0.20%
 of total loans outstanding 
                                            =========     =========   ==========    ==========     =========

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

                                       14
<PAGE>


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

<TABLE>
<CAPTION>
                                                                 At September 30,            
                  -------------------------------------------------------------------------------------------------------------
                                  1997                                 1996                                 1995            
                  -----------------------------------  -----------------------------------  -----------------------------------
                              Percent of                           Percent of                           Percent of
                     Amount    Allowance   Percent of     Amount    Allowance   Percent of     Amount    Allowance   Percent of 
                         of  Category to  Total Loans         of  Category to  Total Loans         of  Category to  Total Loans 
                  Allowance  Total Loans  by Category  Allowance  Total Loans  by Category  Allowance  Total Loans  by Category
                  ---------  -----------  -----------  ---------  -----------  -----------  ---------  -----------  -----------
                                                             (Dollars in thousands)

Permanent 
  residential 
<S>                  <C>           <C>        <C>           <C>         <C>        <C>           <C>         <C>        <C>     
  1-4 family ..      $  887        0.15%       86.51%       $925        0.19%       91.50%       $807        0.19%       91.68% 
Multi-family ..         121        0.02         2.93          --          --         1.34          --          --         1.79  
residential
Construction ..          --          --         5.31          --          --         2.92          --          --         2.36  
Commercial ....         250        0.04         3.93          --          --         3.20          --          --         3.36  
Land ..........          12          --         0.27          --          --         0.24          --          --         0.25  
Non-real estate          26         .01         1.05           3          --         0.80           1          --         0.56  

   Total ......      $1,296        0.22%      100.00%       $928        0.19%      100.00%       $808        0.19%      100.00% 
</TABLE>
<TABLE>
<CAPTION>

                                               At September 30,                                                                  
                  ------------------------------------------------------------------------
                                  1994                                 1993               
                  -----------------------------------  -----------------------------------
                              Percent of                           Percent of             
                     Amount    Allowance   Percent of     Amount    Allowance   Percent of
                         of  Category to  Total Loans         of  Category to  Total Loans 
                  Allowance  Total Loans  by Category  Allowance  Total Loans  by Category
                  ---------  -----------  -----------  ---------  -----------  -----------
                                            (Dollars in thousands)

Permanent 
  residential 
<S>                  <C>           <C>        <C>           <C>         <C>        <C>    
  1-4 family ..        $713        0.19%      90.06%        $599        0.19%       90.54%
Multi-family ..          --          --        2.19           --         --          2.42
residential
Construction ..          --          --        3.37           --         --          2.58
Commercial ....          41        0.01        3.58           28        0.01         3.49
Land ..........          --          --        0.32           --         --          0.39
Non-real estate           1          --        0.48            1         --          0.58


   Total ......      $1,296        0.22%     100.00%        $928        0.19%      100.00%

</TABLE>
                                       15
<PAGE>


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

Investment Activities

     Federally  chartered  savings  institutions have the authority to invest in
securities of various federal agencies,  certain insured certificates of deposit
of banks and savings  institutions,  certain  bankers'  acceptances,  repurchase
agreements  and  federal  funds.  Subject  to  various  restrictions,  federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally  chartered savings  institution is otherwise
authorized to make directly.  OTS regulations  restrict investments in corporate
debt  securities  of any  one  issuer  in  excess  of  15% of the  Association's
unimpaired capital and unimpaired  surplus,  as defined by federal  regulations,
which totaled  $115.7  million at September 30, 1997,  plus an additional 10% if
the  investments  are  fully  secured  by  readily  marketable  collateral.  See
"REGULATION   --  Loans  to  One   Borrower"  for  a  discussion  of  additional
restrictions on the Association's investment activities.

     The investment securities portfolio is managed in accordance with a written
investment  policy  adopted by the Board of Directors  and  administered  by the
Investment  Committee,  which  consists of the President and four Board members.
Generally,  the investment policy is to invest funds among various categories of
investments  and maturities  based upon the need for  liquidity,  to achieve the
proper balance  between its desire to minimize risk and maximize  yield,  and to
fulfill the  asset/liability  management  policy.  The  President  and the Chief
Financial  Officer  may  independently  invest  up to 1% of total  assets of the
Company  within  the  parameters  set  forth  in the  Investment  Policy,  to be
subsequently  reviewed  with the  Investment  Committee at their next  scheduled
meeting.  Transactions  or investments  in any one security  determined by type,
maturity  and  coupon  in  excess of $10.0  million  or 1.0% of  assets  are not
permitted.

     Investment securities held to maturity are carried at cost and adjusted for
amortization  of premiums and accretion of discounts.  As of September 30, 1997,
the  investment  securities  portfolio  held to  maturity  had $1.0  million  in
tax-exempt  securities issued by states and  municipalities and $21.9 million in
investment  grade  corporate  obligations.  Securities to be held for indefinite
periods  of time and not  intended  to be held to  maturity  are  classified  as
available  for sale and carried at fair  value.  Securities  available  for sale
include securities that management intends to use as part of its asset/liability
management strategy that may be sold in response to changes in interest rates or
significant  prepayments  risks or both. As of September 30, 1997, the portfolio
of  securities  available  for sale  consisted of $185.9  million in  securities
issued by the U.S. Treasury and other federal government agencies,  $8.9 million
in tax exempt securities issued by states and municipalities,  and $67.1 million
in investment grade corporate investments.

     On November 15, 1995, the Financial  Accounting  Standards  Board published
implementation  guidance on SFAS No. 115, "Accounting for Certain Investments in
Debt  and  Equity  Securities",  that  allows  a  corporation  to  reassess  the
appropriateness  of the  classification  of its debt securities  under a special
transition  provision.  Debt  securities  classified  as "held to maturity"  are
reported in financial  statements  at amortized  cost while those  classified as
"available for sale" are reported at fair value and unrealized  gains and losses
on such  securities  are  reported  as a net amount in a separate  component  of
shareholders'  equity. The net unrealized gain or loss on securities  classified
as available for sale  fluctuates  based on several  factors,  including  market
interest  rates,  prepayment  rates  and the  portfolio  amount.  Subsequent  to
September 30, 1995, the Association  reclassified and transferred  $27.2 million
of  its  debt   securities   from   the   held-to-maturity   portfolio   to  the
available-for-sale portfolio.

                                       16
<PAGE>

     During the years  ended  September  30,  1997,  1996 and 1995,  neither the
Company nor the Association  held any  off-balance  sheet  derivative  financial
instruments in their  investment  portfolios to which the provisions of SFAS No.
119,  "Disclosure  about  Derivative  Financial  Instruments  and Fair  Value of
Financial Instruments," would apply.

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


                                                                  At September 30,                                            
                                     -----------------------------------------------------------------------
                                               1997                      1996                     1995      
                                     ---------------------     --------------------     --------------------        
                                     Amortized        Fair     Amortized       Fair     Amortized       Fair
                                          Cost       Value          Cost      Value          Cost      Value
                                     ---------    --------     ---------   --------     ---------   --------
                                                                   (In thousands)
Held to maturity:
<S>                                    <C>        <C>           <C>        <C>           <C>        <C>     
  U.S. Government obligations ...      $   --     $   --        $   --     $   --        $ 28,961   $ 28,873
  State and municipal obligations         1,042      1,069         1,227      1,249           512        552
  Corporate obligations .........        21,895     21,900         8,600      8,611        12,736     12,753

Available for sale:
  U.S. Federal securities........          --         --          12,080     12,080        12,606     12,606
   mutual bond fund 
  U.S. Government obligations ...       185,861    185,601        59,717     58,624          --         --
  State and municipal obligations         8,861      9,087           250        251          --         --
  Corporate obligations .........        67,147     67,158         5,024      5,032          --         --
                                       --------   --------      --------   --------      --------   --------
    Total .......................      $284,806   $284,815      $ 86,898   $ 85,847      $ 54,815   $ 54,784
                                       ========   ========      ========   ========      ========   ========
</TABLE>





                                       17

<PAGE>
<TABLE>
<CAPTION>

                                                                           At September 30,                                       
                                       --------------------------------------------------------------------------------------
                                                 1997                          1996                           1995           
                                       ------------------------       ------------------------       ------------------------   
                                       Amortized     Percent of       Amortized     Percent of       Amortized     Percent of
                                            Cost      Portfolio            Cost      Portfolio            Cost      Portfolio
                                                                       (Dollars in Thousands)
Held to maturity:                      ---------     ----------       ---------     ----------       ---------     ----------
<S>                                    <C>               <C>          <C>               <C>          <C>               <C>    
  U.S. Government obligations ...      $    --             0.00%      $    --             0.00%      $  28,961          52.84%
  State and municipal obligations          1,042           0.36           1,227           1.41             512           0.93
  Corporate obligations .........         21,895           7.69           8,600           9.90          12,736          23.23

Available for sale:
  U.S. Federal securities .......           --             0.00          12,080          13.90          12,606          23.00
   mutual bond fund 
  U.S. Government obligations ...        185,861          65.26          59,717          68.72            --             --
  State and municipal obligations          8,861           3.11             250           0.29            --             --
  Corporate obligations .........         67,147          23.58           5,024           5.78            --             --
                                       ---------     ----------       ---------     ----------       ---------     ----------
    Total .......................      $ 284,806         100.00%      $  86,898         100.00%      $  54,815         100.00%
                                       =========     ==========       =========     ==========       =========     ==========  
</TABLE>




     The following  table sets forth the maturities and weighted  average yields
of the debt securities in the investment
portfolio at September 30, 1997.
<TABLE>
<CAPTION>

                                Less Than            One to               Five to             Over Ten
                                One Year            Five Years           Ten Years              Years          
                          -----------------    -----------------    -----------------      ---------------
                            Amount    Yield      Amount    Yield      Amount    Yield      Amount    Yield     Totals
                          --------    -----    --------    -----    --------    -----      ------    -----   --------
                                                        (Dollars in thousands)

Held to maturity:
<S>                       <C>          <C>     <C>          <C>     <C>          <C>       <C>       <C>     <C>      
  State and municipal .   $    151     6.29%   $    891     6.60%   $   --       --          --       --     $  1,042
     obligations 
  Corporate obligations     19,895     5.57%      2,000     5.95%       --       --          --       --       21,895

Available for sale:
  U.S. Government .....     13,966     6.11%    162,907     6.11%      8,988     6.83%       --       --      185,861
   obligations 
  State and municipal .       --       --           794     6.61%        100     6.38       7,967     8.00      8,861
   obligations 
  Corporate obligations     18,220     5.87      48,927     6.22%       --       --          --       --       67,147
                          --------             --------             --------               ------            --------
    Total .............   $ 52,232             $215,519             $  9,088               $7,967            $284,806
                          ========             ========             ========               ======            ========
</TABLE>

At September 30, 1997 the  Association did not hold any securities from a single
issuer, other than the U.S. Government, whose aggregate book value was in excess
of 10% of stockholders' equity, or $14.4 million.


Mortgage Backed and Related Securities

     At  September  30, 1997,  the  Company's  net  mortgage  backed and related
securities totaled $70.4 million at fair value ($69.5 million at amortized cost)
and had a weighted  average yield of 7.09%.  At September  30, 1997,  all of the
mortgage backed and related securities were adjustable rate securities.

                                       18
<PAGE>


     Mortgage  backed and related  securities  (which also are known as mortgage
participation  certificates or pass- through certificates) typically represent a
participation interest in a pool of single-family or multi-family mortgages. The
principal and interest  payments on these mortgages are passed from the mortgage
originators,  through  intermediaries  (generally U.S.  Government  agencies and
government  sponsored  enterprises)  that  pool  and  resell  the  participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government  sponsored  enterprises,  which guarantee the
payment of principal  and interest to investors,  primarily  include the Federal
Home Loan  Mortgage  Corporation  ("FHLMC"),  Fannie Mae ("FNMA")  (formerly the
Federal  National  Mortgage  Association),   the  Government  National  Mortgage
Association  ("GNMA")  and  the  U.S.  Small  Business  Administration  ("SBA").
Mortgage  backed  and  related  securities  typically  are  issued  with  stated
principal amounts, and the securities are backed by pools of mortgages that have
loans with  interest  rates that fall within a specific  range and have  varying
maturities. Mortgage backed and related securities generally yield less than the
loans that underlie such  securities  because of the cost of payment  guarantees
and credit enhancements. In addition, mortgage backed and related securities are
usually  more  liquid  than  individual  mortgage  loans  and  may  be  used  to
collateralize certain liabilities and obligations of the Company. These types of
securities  also permit the  Association  to  optimize  its  regulatory  capital
because they have low risk weighting.

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

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

                                       19
<PAGE>

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

                                                   At September 30,                
                      ---------------------------------------------------------------------
                                1997                   1996                    1995              
                      ---------------------   ---------------------   ---------------------                                   
                      Amortized        Fair   Amortized        Fair   Amortized        Fair
                           Cost       Value        Cost       Value        Cost       Value
                      ---------   ---------   ---------   ---------   ---------   ---------                                       
                                              (Dollars in thousands)

Held to maturity:
<S>                   <C>         <C>         <C>         <C>              <C>          <C>
  GNMA ............   $   5,447   $   5,518   $   6,783   $   6,736        $--          $--

Available for sale:

  FNMA ............      12,775      12,897      15,905      15,959         --           --
  FHLMC ...........      25,881      26,574      39,205      39,179         --           --
  GNMA ............       9,709       9,808        --          --           --           --
  SBA .............      15,732      15,590      19,139      18,971         --           --
                      ---------   ---------   ---------   ---------   ---------   ---------                                
    Total .........   $  69,544   $  70,387   $  81,032   $  80,845        $--          $--
                      ---------   ---------   ---------   ---------   ---------   ---------                                     
</TABLE>
<TABLE>
<CAPTION>

                                                   At September 30,                
                      ---------------------------------------------------------------------
                                1997                   1996                    1995              
                      ---------------------   ---------------------   ---------------------                                     
                      Amortized  Percent of   Amortized  Percent of   Amortized  Percent of
                           Cost   Portfolio        Cost   Portfolio        Cost   Portfolio
                      ---------  ----------   ---------  ----------   ---------  ----------
                                              (Dollars in Thousands)
Held to maturity:
<S>                   <C>            <C>      <C>            <C>            <C>        <C>   
  GNMA ............   $   5,447        7.83%  $   6,783        8.37%        $--         --%

Available for sale:

  FNMA ............      12,775       18.37      15,905       19.63          --         --
  FHLMC ...........      25,881       37.22      39,205       48.38          --         --
  GNMA ............       9,709       13.96        --          --            --         --
  SBA .............      15,732       22.62      19,139       23.62          --         --
                      ---------  ----------   ---------  ----------   ---------  ----------
    Total .........   $  69,544      100.00%  $  81,032      100.00%        $--         --%
                      =========  ==========   =========  ==========   =========  ==========
</TABLE>

 

Interest-Earning Deposits

     The  Company  also had  interest-earning  deposits  in the FHLB of  Seattle
amounting  to $1.4  million  and $3.1  million at  September  30, 1997 and 1996,
respectively.
                                       20
<PAGE>

Deposit Activities and Other Sources of Funds

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

     Deposits.  The Association's deposits are attracted principally from within
the Association's  primary market area through the offering of a broad selection
of deposit instruments,  including checking accounts, NOW accounts, money market
deposit accounts,  passbook and statement savings accounts,  and certificates of
deposit. Included among these deposit products are individual retirement account
("IRA")  certificates  of  approximately  $86.4  million at September  30, 1997.
Deposit  account terms vary,  with the principal  differences  being the minimum
balance  required,  the time  period  the funds must  remain on deposit  and the
interest rate.

     Beginning in 1996, the Association  began  accepting  deposits from outside
its primary market area through both private placements and brokered deposits if
the terms of the deposits fit the Association's specific needs and are at a rate
lower than the rates on similar maturity borrowings through the FHLB of Seattle.
At September 30, 1997, these deposits  totaled $10.0 million,  or 1.49% of total
deposits.

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

     In July 1997,  the  Association  acquired 25 Wells  Fargo Bank  branches in
Oregon,  adding $241.3 million in deposit accounts.  In addition to the increase
from the  acquisition,  the  Association  experienced a net increase in deposits
(before  interest  credited) of $14.1  million for the year ended  September 30,
1997 as customers  deposited funds and new customers were added. To augment this
deposit inflow, the Association has relied on increased borrowings from the FHLB
of  Seattle.   See  "--  Borrowings."  The  acquired  deposit  base  included  a
significant  proportion  of  non-interest  bearing  checking  accounts,  thereby
reducing the cost of deposits and  contributing  to the  Association's  interest
rate spread increasing from 2.22% for the year ended September 30, 1996 to 2.28%
for the year ended  September 30, 1997.  Concurrent  with the  acquisition,  the
Association's  deposit product  offerings were expanded,  allowing  customers to
choose the accounts best suited to their needs,  whether their focus is low cost
or additional services.

     At September 30, 1997, certificate accounts maturing during the year ending
September 30, 1998 totaled $242.2 million. Based on historical  experience,  the
Association  expects  that  a  significant  amount  will  be  renewed  with  the
Association at maturity.  In the event a significant amount of such accounts are
not renewed at maturity,  the Association  would not expect a resultant  adverse
impact on  operations  and  liquidity  because  of the  Association's  borrowing
capacity. See "-- Borrowings."

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

                                       21
<PAGE>


     The  following  table  indicates  the amount of  certificate  accounts with
balances of $100,000 or greater by time remaining until maturity as of September
30, 1997.
<TABLE>
<CAPTION>

 
                                                              Certificate
Maturity Period                                                  Accounts
                                                                 --------
                                                              (In thousands)
<S>                                                               <C>    
Three months or less...................................           $12,502
Over three through six months..........................            10,452
Over six through twelve months.........................            15,362
Over twelve months.....................................            32,407
                                                                 --------
    Total..............................................           $70,723
                                                                 ========
</TABLE>

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


                                                                             At September 30,                                    
                                    ----------------------------------------------------------------------------------------
                                                 1997                              1996                          1995       
                                    -------------------------------  --------------------------------   --------------------     
                                                Percent                           Percent                            Percent
                                                     of    Increase                    of    Increase                     of
                                      Amount      Total   (Decrease)    Amount      Total   (Decrease)     Amount      Total
                                    --------    -------    --------   --------    -------    --------    --------    -------
                                                                           (Dollars in thousands)
<S>                                 <C>          <C>       <C>        <C>          <C>       <C>         <C>          <C>    
Certificates of deposit .........   $375,603      55.73%   $ 86,415   $289,188      72.36%   $ 12,093    $277,095      72.09%

Transaction accounts:

Non-interest checking ...........     52,578       7.80      52,417        161       0.04         161        --         --
Interest-bearing checking .......     75,044      11.14      50,762     24,282       6.08       2,245      22,037       5.73
Passbook and statement savings ..     63,179       9.37      29,468     33,711       8.43      (3,526)     37,237       9.69
Money market deposits ...........    107,574      15.96      55,243     52,331      13.09       4,320      48,011      12.49
                                    --------    -------    --------   --------    -------    --------    --------    -------
Total transaction accounts ......    298,375      44.27     187,890    110,485      27.64       3,200     107,285      27.91
                                    --------    -------    --------   --------    -------    --------    --------    -------
Total deposits ..................   $673,978     100.00%   $274,305   $399,673     100.00%   $ 15,293    $384,380     100.00%
                                    ========    =======    ========   ========    =======    ========    ========    =======
</TABLE>

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

                                                   Years Ended September 30,      
                                              ---------------------------------
                                                   1997        1996        1995
                                              ---------   ---------   ---------
                                                        (In thousands)

<S>                                           <C>         <C>         <C>      
Beginning balance .........................   $ 399,673   $ 384,380   $ 389,751
Increase due to acquired deposits .........     241,272
Net inflow (outflow) of deposits before ...      14,077      (2,364)    (21,109)
 interest credited 
Interest credited .........................      18,956      17,657      15,738
                                              ---------   ---------   ---------
Net increase (decrease) in deposits .......     274,305      15,293      (5,371)
                                              ---------   ---------   ---------
Ending balance ............................   $ 673,978   $ 399,673   $ 384,380
                                              =========   =========   =========
</TABLE>
                                       22
<PAGE>

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

     The FHLB of Seattle  functions as a central  reserve bank providing  credit
for  savings  and  loan   associations   and  certain  other  member   financial
institutions.  As a member,  the Association is required to own capital stock in
the FHLB of Seattle and is  authorized  to apply for advances on the security of
certain of its mortgage loans and other assets (principally securities which are
obligations  of,  or  guaranteed  by,  the  U.S.  Government)  provided  certain
creditworthiness  standards have been met. Advances are made pursuant to several
different  credit  programs.  Each credit  program has its own interest rate and
range of  maturities.  Depending  on the program,  limitations  on the amount of
advances are based on the financial  condition of the member institution and the
adequacy of  collateral  pledged to secure the credit.  As a member of the FHLB,
the  Association  maintains a credit line that is a percentage of its regulatory
assets,  subject to collateral  requirements.  At September 30, 1997, the credit
line was 30% of total assets of the Association.  Advances are collateralized in
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB,  by certain  mortgages  or deeds of trust and  securities  of the U.S.
Government and agencies thereof.

     During the year ended September 30, 1997 the Company sold under  agreements
to repurchase  specific  securities of the U.S.  Government and its agencies and
other approved investments to a broker-dealer.  The securities  underlying these
repurchase  agreements  were  delivered  to the  broker-dealer  who arranged the
transaction.  Securities delivered to the broker-dealer may be loaned out in the
ordinary  course of  operations.  All of the reverse  repurchase  agreements  at
September  30,  1997 were due within 48 days and will be renewed  subsequent  to
year end.

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

                                         At September 30,
                                         ----------------   
                                          1997      1996
                                          ----      ----
Weighted average rate paid on:
<S>                                       <C>       <C>  
  FHLB advances ...................       5.62%     5.50%
  Reverse repurchase agreements ...       5.75      5.65
</TABLE>
<TABLE>
<CAPTION>

                                                    Years Ended
                                                   September 30,
                                                --------------------   
                                                    1997        1996
                                                --------    --------
                                               (Dollars in thousands)
Maximum amount outstanding 
at any month end:
<S>                                             <C>         <C>     
  FHLB advances .............................   $151,000    $ 90,000
  Reverse repurchase agreements .............     19,118      14,904

Approximate average balance:
  FHLB advances .............................    110,737      47,986
  Reverse repurchase agreements .............     16,804       3,531

Approximate weighted average rate paid on:
  FHLB advances .............................       5.66%       5.60%
  Reverse repurchase agreements .............       5.82        5.55
</TABLE>

     The  Association  also has an  uncommitted  line of credit of $15.0 million
with a commercial bank. At September 30, 1997, the Association had no borrowings
outstanding under this credit facility.

                                       23
<PAGE>

                          REGULATION OF THE ASSOCIATION

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

Federal Regulation of Savings Associations

     Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury.  The
OTS   generally   possesses   the   supervisory   and   regulatory   duties  and
responsibilities  formerly  vested in the Federal  Home Loan Bank  Board.  Among
other functions,  the OTS issues and enforces  regulations  affecting  federally
insured savings associations and regularly examines these institutions.

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

     The Association, as a member of the FHLB of Seattle, is required to acquire
and hold  shares of capital  stock in the FHLB of Seattle in an amount  equal to
the  greater  of (i)  1.0% of the  aggregate  outstanding  principal  amount  of
residential  mortgage loans, home purchase contracts and similar  obligations at
the beginning of each year, or (ii) 1/20 of its advances  (borrowings)  from the
FHLB of Seattle.  The Association is in compliance with this requirement with an
investment in FHLB of Seattle stock of $7.2 million at September 30, 1997.

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

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


                                       24
<PAGE>

     The  majority  of the  Association's  accounts  are  insured  by the  SAIF,
however,  the $241.3 million of deposits  acquired in July 1997 from Wells Fargo
Bank, N.A., a BIF-insured institution,  will continue to be BIF-insured deposits
and will be assessed  premiums based on the lower BIF rates.  These deposits are
known  as  Oakar  deposits,   indicating  that  they  are  deposits  held  by  a
SAIF-insured  institution,  but insured by the BIF. The FDIC insures deposits at
the  Association  to the  maximum  extent  permitted  by  law.  The  Association
currently  pays  deposit  insurance  premiums to the FDIC based on a  risk-based
assessment  system  established  by the FDIC for all  SAIF-member  institutions.
Under applicable regulations,  institutions are assigned to one of three capital
groups that are based solely on the level of an  institution's  capital -- "well
capitalized",  "adequately  capitalized",  and  "undercapitalized"  -- which are
defined in the same manner as the regulations establishing the prompt corrective
action  system,  as  discussed  below.  These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern,  from those
which are  considered  to be  healthy  to those  which are  considered  to be of
substantial   supervisory  concern.  The  matrix  so  created  results  in  nine
assessment risk classifications, with rates currently ranging from .23% for well
capitalized,  financially sound institutions with only a few minor weaknesses to
 .31% for  undercapitalized  institutions that pose a substantial risk of loss to
the SAIF unless effective  corrective action is taken. The FDIC is authorized to
raise  assessment   rates  under  certain   circumstances.   The   Association's
assessments expensed for the year ended September 30, 1997, totaled $376,029.

     Until the  second  half of 1995,  the same  matrix  applied  to  BIF-member
institutions.  As a result of the BIF  having  reached  its  designated  reserve
ratio,  effective  January  1,  1996,  the FDIC  substantially  reduced  deposit
insurance premiums for  well-capitalized,  well-managed  financial  institutions
that are  members  of the BIF.  Under the new  assessment  schedule,  rates were
reduced  to a range  of 0 to 27  basis  points,  with  approximately  92% of BIF
members paying the statutory minimum annual assessment rate of $2,000.  Pursuant
to the Deposit  Insurance  Fund Act ("DIF Act"),  which was enacted on September
30, 1996,  the FDIC imposed a special  one-time  assessment  on each  depository
institution  with  SAIF-assessable  deposits  so that the SAIF may  achieve  its
designated reserve ratio. The Association's  assessment amounted to $2.5 million
and was assessed during the quarter ended September 30, 1996.  Beginning January
1, 1997, the  assessment  schedule for SAIF members will be the same as that for
BIF members.  In addition,  beginning January 1, 1997, SAIF members were charged
an  assessment of 0.064% of  SAIF-assessable  deposits for the purpose of paying
interest on the obligations issued by the Financing  Corporation ("FICO") in the
1980s to help fund the thrift industry cleanup.  BIF-assessable deposits will be
charged  an  assessment  to help pay  interest  on the  FICO  bonds at a rate of
approximately  0.013%  until the earlier of  December  31, 1999 or the date upon
which  the last  savings  association  ceases  to exist,  after  which  time the
assessment will be the same for all insured deposits.

     The DIF Act  provides  for the  merger  of the BIF and the  SAIF  into  the
Deposit  Insurance  Fund on January 1, 1999,  but only if no insured  depository
institution  is a savings  association on that date.  The DIF  contemplates  the
development  of  a  common  charter  for  all  federally  chartered   depository
institutions  and the  abolition of separate  charters  for  national  banks and
federal savings  associations.  It is not known what form the common charter may
take and what effect,  if any,  the adoption of a new charter  would have on the
operation of the Association.

     The FDIC may  terminate  the deposit  insurance  of any insured  depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance  temporarily during the hearing process for the permanent  termination
of  insurance,  if the  institution  has no tangible  capital.  If  insurance of
accounts  is  terminated,  the  accounts  at  the  institution  at the  time  of
termination,  less  subsequent  withdrawals,  shall continue to be insured for a
period of six months to two years,  as  determined  by the FDIC.  Management  is
aware of no  existing  circumstances  that could  result in  termination  of the
deposit insurance of the Association.

                                       25
<PAGE>

     Liquidity Requirements.  Under OTS regulations, each savings institution is
required to maintain an average daily  balance of liquid  assets (cash,  certain
time deposits and savings  accounts,  bankers'  acceptances,  and specified U.S.
Government,  state or federal agency  obligations and certain other investments)
equal to a monthly  average of not less than a  specified  percentage  (5.0% for
regulations  in effect at September 30, 1997) of its net  withdrawable  accounts
plus  short-term   borrowings.   OTS  regulations   also  require  each  savings
institution  to maintain an average daily balance of short term liquid assets at
a specified percentage (1.0% for regulations in effect at September 30, 1997) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less.  Monetary  penalties may be imposed for failure to meet  liquidity
requirements.  The  Association's  short- and long-term monthly liquidity ratios
were 3.71% and 31.56%,  respectively,  at September 30, 1997. Effective November
24, 1997, the OTS has revised the liquid asset  requirement from 5.00% to 4.00%,
and eliminated the short term cash liquidity requirement of 1.00%.

     Prompt  Corrective  Action.  Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it  regulates.  The federal  banking  agencies  have  promulgated  substantially
similar regulations to implement this system of prompt corrective action.  Under
the regulations,  an institution shall be deemed to be (i) "well capitalized" if
it  has a  total  risk-based  capital  ratio  of  10.0%  or  more,  has a Tier I
risk-based  capital ratio of 6.0% or more,  has a leverage ratio of 5.0% or more
and is not subject to  specified  requirements  to meet and  maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a
total  risk-based  capital  ratio of 8.0% or more, a Tier I  risk-based  capital
ratio of 4.0% or more and a leverage  ratio of 4.0% or more (3.0% under  certain
circumstances)  and does not meet the  definition of "well  capitalized;"  (iii)
"undercapitalized"  if it has a total risk-based capital ratio that is less than
8.0%,  a Tier I  risk-based  capital  ratio that is less than 4.0% or a leverage
ratio  that  is  less  than  4.0%  (3.0%  under  certain  circumstances);   (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically  undercapitalized" if
it has a ratio of tangible  equity to total assets that is equal to or less than
2.0%.

     A federal  banking  agency  may,  after  notice  and an  opportunity  for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may  require  an  adequately  capitalized  institution  or  an  undercapitalized
institution to comply with  supervisory  actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination,  and has not corrected, a less than satisfactory
rating for asset quality,  management,  earnings or liquidity. (The OTS may not,
however, reclassify a significantly  undercapitalized  institution as critically
undercapitalized.)

     An institution  generally must file a written capital restoration plan that
meets specified requirements,  as well as a performance guaranty by each company
that controls the  institution,  with the  appropriate  federal  banking  agency
within 45 days of the date that the institution  receives notice or is deemed to
have  notice  that it is  undercapitalized,  significantly  undercapitalized  or
critically  undercapitalized.  Immediately  upon becoming  undercapitalized,  an
institution   shall  become  subject  to  various  mandatory  and  discretionary
restrictions on its operations.

     At  September  30,  1997,  the   Association   was   categorized  as  "well
capitalized" under the prompt corrective action regulations of the OTS.

     Standards for Safety and Soundness.  The FDIA requires the federal  banking
regulatory  agencies to  prescribe,  by  regulation,  standards  for all insured
depository institutions relating to: (i) internal controls,  information systems
and internal audit systems; (ii) loan documentation;  (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation,  fees
and benefits.  The federal banking agencies adopted  regulations and Interagency
Guidelines  Prescribing  Standards  for Safety and Soundness  ("Guidelines")  to
implement  safety and soundness  standards  required by the FDIA. The Guidelines
set forth the safety and soundness  standards that the federal banking  agencies
use to identify and address problems at insured depository  institutions  before
capital becomes impaired.  The agencies also proposed asset quality and earnings
standards  which,  if  adopted,  would be added  to the  Guidelines.  If the OTS
determines  that the  Association  fails to meet any standard  prescribed by the
Guidelines,  the agency may require the  Association  to submit to the agency an
acceptable  plan to achieve  compliance  with the  standard,  as required by the
FDIA. OTS regulations  establish deadlines for the submission and review of such
safety and soundness compliance plans.


                                       26
<PAGE>

     Qualified Thrift Lender Test. All savings associations are required to meet
a qualified  thrift lender ("QTL") test to avoid certain  restrictions  on their
operations.  A savings  institution  that  fails to become or remain a QTL shall
either become a national bank or be subject to the following restrictions on its
operations:  (i) the  association  may not make any new  investment or engage in
activities  that  would  not  be  permissible  for  national  banks;   (ii)  the
association  may not  establish  any new branch  office  where a  national  bank
located in the savings institution's home state would not be able to establish a
branch office;  (iii) the association shall be ineligible to obtain new advances
from any FHLB;  and (iv) the payment of  dividends by the  association  shall be
subject  to  the  rules   regarding  the  statutory  and   regulatory   dividend
restrictions applicable to national banks. Also, beginning three years after the
date  on  which  the  savings  institution  ceases  to  be a  QTL,  the  savings
institution would be prohibited from retaining any investment or engaging in any
activity not  permissible for a national bank and would be required to repay any
outstanding  advances to any FHLB.  In addition,  within one year of the date on
which a savings  association  controlled  by a company  ceases to be a QTL,  the
company must register as a bank holding  company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.

     Currently,  the QTL test requires that 65% of an  institution's  "portfolio
assets" (as defined) consist of certain housing and consumer-related assets on a
monthly  average  basis  in nine out of every 12  months.  Assets  that  qualify
without  limit for  inclusion as part of the 65%  requirement  are loans made to
purchase,  refinance,  construct, improve or repair domestic residential housing
and manufactured  housing;  home equity loans; mortgage backed securities (where
the  mortgages  are  secured by  domestic  residential  housing or  manufactured
housing);  FHLB  stock;  and  direct or  indirect  obligations  of the FDIC.  In
addition,  the following  assets,  among others,  may be included in meeting the
test subject to an overall limit of 20% of the savings  institution's  portfolio
assets: 50% of residential  mortgage loans originated and sold within 90 days of
origination;  100% of consumer and  educational  loans  (limited to 10% of total
portfolio assets); and stock issued by the FHLMC or Fannie Mae. Portfolio assets
consist  of total  assets  minus the sum of (i)  goodwill  and other  intangible
assets,  (ii) property used by the savings  institution to conduct its business,
and  (iii)  liquid  assets  up to 20%  of the  institution's  total  assets.  At
September 30, 1997, the qualified  thrift  investments of the  Association  were
approximately 81.13% of its portfolio assets.

     Capital  Requirements.  Financial  institutions  are graded or evaluated by
regulatory   authorities  based  on  their  capital  adequacy,   asset  quality,
management quality, earnings, liquidity, and sensitivity to market risk ("CAMELS
rating").  A  major  component  of the  CAMELS  rating  is  capital.  Under  OTS
regulations  a  savings   association   must  satisfy   three  minimum   capital
requirements:  core capital,  tangible capital and risk-based  capital.  Savings
associations  must meet all of the standards in order to comply with the capital
requirements.

     OTS  capital  regulations  establish a 3% core  capital or  leverage  ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined  to  include  common  shareholders'  equity,   noncumulative   perpetual
preferred  stock and any  related  surplus,  and  minority  interests  in equity
accounts of consolidated  subsidiaries,  less (i) any intangible assets,  except
for certain  qualifying  intangible  assets;  (ii)  certain  mortgage  servicing
rights;  and (iii)  equity and debt  investments  in  subsidiaries  that are not
"includable  subsidiaries,"  which are defined as subsidiaries engaged solely in
activities  not  impermissible  for  a  national  bank,  engaged  in  activities
impermissible  for a national  bank but only as an agent for its  customers,  or
engaged solely in  mortgage-banking  activities.  In calculating  adjusted total
assets,  adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account  appropriately for the investments in
and assets of both includable and nonincludable subsidiaries.  Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital  plan that  details the steps they will take to reach  compliance.  In
addition,  the OTS's prompt corrective action regulation provides that a savings
institution  that  has a  leverage  ratio of less  than 4% (3% for  institutions
receiving  the  highest  CAMELS  examination   rating)  will  be  deemed  to  be
"undercapitalized"  and may be subject to certain restrictions.  See "-- Federal
Regulation of Savings Associations -- Prompt Corrective Action."

                                       27
<PAGE>

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

     Savings  associations also must maintain  "tangible  capital" not less than
1.5% of the Association's adjusted total assets.  "Tangible capital" is defined,
generally,  as core capital minus any  "intangible  assets" other than purchased
mortgage servicing rights.

     Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted  assets.  Total risk-based capital consists of the sum
of core and supplementary  capital,  provided that supplementary  capital cannot
exceed core capital, as previously defined.  Supplementary  capital includes (i)
permanent  capital  instruments  such as cumulative  perpetual  preferred stock,
perpetual  subordinated debt and mandatory  convertible  subordinated debt, (ii)
maturing  capital  instruments  such  as  subordinated  debt,  intermediate-term
preferred  stock and  mandatory  convertible  subordinated  debt,  subject to an
amortization   schedule,  and  (iii)  general  valuation  loan  and  lease  loss
allowances up to 1.25% of risk-weighted assets.

     The risk-based  capital regulation assigns each balance sheet asset held by
a savings  institution  to one of four risk  categories  based on the  amount of
credit risk associated with that particular class of assets. Assets not included
for  purposes  of   calculating   capital  are  not   included  in   calculating
risk-weighted  assets. The categories range from 0% for cash and securities that
are  backed by the full  faith and  credit  of the U.S.  Government  to 100% for
repossessed assets or assets more than 90 days past due. Qualifying  residential
mortgage loans (including  multi-family  mortgage loans) are assigned a 50% risk
weight.  Consumer,  commercial,  home equity, land and residential  construction
loans are  assigned a 100% risk weight,  as are  nonqualifying  residential  and
multi-family  mortgage loans and  nonresidential  construction  loans.  The book
value of assets in each category is multiplied by the weighting  factor (from 0%
to 100%) assigned to that category. These products are then totaled to arrive at
total   risk-weighted   assets.   Off-balance   sheet  items  are   included  in
risk-weighted  assets by converting them to an approximate balance sheet "credit
equivalent  amount"  based on a conversion  schedule.  These  credit  equivalent
amounts are then assigned to risk categories in the same manner as balance sheet
assets and included in risk-weighted assets.

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

                                       28
<PAGE>

     The following table presents the Association's  capital levels at 
     September 30, 1997.
<TABLE>
<CAPTION>
 
                                                                                                             To Be
                                                                                                    Categorized as "Well
                                                                                                     Capitalized" Under
                                                                      For Capital                     Prompt Corrective
                                          Actual                   Adequacy Purposes                  Action Provision       
                                 ----------------------          ---------------------             ----------------------
                                       Amount     Ratio               Amount     Ratio                  Amount      Ratio
                                 ------------     -----          -----------     -----             -----------      -----
<S>                              <C>               <C>           <C>               <C>             <C>               <C>  
Total Capital ................   $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                 --          --              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                    --           --
 (To Tangible Assets)
</TABLE>

     Limitations  on  Capital  Distributions.  OTS  regulations  impose  uniform
limitations  on the  ability of all  savings  associations  to engage in various
distributions  of capital  such as  dividends,  stock  repurchases  and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS 30
days' advance notice of any proposed capital distributions,  and the OTS has the
authority  under its supervisory  powers to prohibit the capital  distributions.
The regulation utilizes a three-tiered  approach which permits various levels of
distributions based primarily upon a savings association's capital level.

     A Tier 1 savings  association  has capital in excess of its fully phased-in
capital  requirement (both before and after the proposed capital  distribution).
Tier 1 savings  associations may make (without application but upon prior notice
to, and no objection made by, the OTS) capital  distributions  during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus  capital  ratio (i.e.,  the amount of capital in excess of its fully
phased-in  requirement)  at the  beginning  of the  calendar  year or the amount
authorized for a Tier 2  association.  Capital  distributions  in excess of such
amount  require  advance  notice to the OTS.  A Tier 2 savings  association  has
capital equal to or in excess of its minimum  capital  requirement but below its
fully phased-in capital  requirement (both before and after the proposed capital
distribution).  Such an  association  may  make  (without  application)  capital
distributions up to an amount equal to 75% of its net income during the previous
four  quarters  depending on how close the  association  is to meeting its fully
phased-in  capital  requirement.  Capital  distributions  exceeding  this amount
require prior OTS approval.  Tier 3 associations are savings  associations  with
capital  below  the  minimum  capital  requirement  (either  before or after the
proposed  capital  distribution).  Tier 3 associations  may not make any capital
distributions without prior approval from the OTS.

     The Association is currently meeting the criteria to be designated a Tier 1
association and,  consequently,  could at its option (after prior notice to, and
no objection  made by, the OTS)  distribute  up to 100% of its net income during
the calendar year plus 50% of its surplus  capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.

     Loans to One Borrower.  Under the HOLA, savings  institutions are generally
subject to the national  bank limit on loans to one  borrower.  Generally,  this
limit  is 15% of the  Association's  unimpaired  capital  and  surplus,  plus an
additional  10% of  unimpaired  capital and surplus,  if such loan is secured by
readily-marketable  collateral,  which is defined to include  certain  financial
instruments  and  bullion.  The OTS by  regulation  has amended the loans to one
borrower  rule to permit  savings  associations  meeting  certain  requirements,
including  capital  requirements,  to extend loans to one borrower in additional
amounts under circumstances  limited essentially to loans to develop or complete
residential  housing units.  At September 30, 1997, the  Association's  limit on
loans  to  one  borrower  was  $17.4   million.   At  September  30,  1997,  the
Association's  largest  aggregate  amount  of  loans  to one  borrower  was $3.5
million, which were performing according to their terms.


                                       29
<PAGE>

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

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

     Transactions  with  Affiliates.   Savings  associations  must  comply  with
Sections  23A  and 23B of the  Federal  Reserve  Act  ("Sections  23A and  23B")
relative  to  transactions  with  affiliates  in the same manner and to the same
extent as if the savings  association  were a Federal  Reserve  member  bank.  A
savings and loan holding  company,  its subsidiaries and any other company under
common control are considered  affiliates of the subsidiary savings  association
under the HOLA.  Generally,  Sections 23A and 23B: (i) limit the extent to which
the  insured  association  or its  subsidiaries  may engage in  certain  covered
transactions  with an affiliate to an amount equal to 10% of such  institution's
capital and surplus and place an aggregate limit on all such  transactions  with
affiliates  to an amount  equal to 20% of such  capital  and  surplus,  and (ii)
require that all such  transactions  be on terms  substantially  the same, or at
least as favorable to the  institution  or  subsidiary,  as those  provided to a
non-affiliate.  The term "covered transaction" includes the making of loans, the
purchase  of  assets,   the  issuance  of  a  guarantee  and  similar  types  of
transactions.

     Three  additional  rules  apply  to  savings  associations:  (i) a  savings
association  may not make any loan or other  extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies;  (ii) a savings  association may not purchase or invest in securities
issued by an affiliate  (other than  securities of a subsidiary);  and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on  savings  associations  but may not  exempt  transactions  from or  otherwise
abridge  Section 23A or 23B.  Exemptions  from Section 23A or 23B may be granted
only by the Federal  Reserve Board, as is currently the case with respect to all
FDIC-insured  banks. The Association has not been significantly  affected by the
rules regarding transactions with affiliates.

     The  Association's  authority  to  extend  credit  to  executive  officers,
directors and 10% shareholders,  as well as entities controlled by such persons,
is currently  governed by Sections  22(g) and 22(h) of the Federal  Reserve Act,
and Regulation O thereunder.  Among other things, these regulations require that
such  loans  be made on terms  and  conditions  substantially  the same as those
offered to unaffiliated  individuals  (unless the loan or extension of credit is
made under a benefit program generally available to all other employees and does
not give preference to any insider over any other employee) and not involve more
than the normal  risk of  repayment.  Regulation  O also places  individual  and
aggregate limits on the amount of loans the Association may make to such persons
based, in part, on the  Association's  capital  position,  and requires  certain
board  approval  procedures to be followed.  The OTS  regulations,  with certain
minor variances, apply Regulation O to savings institutions.

                            REGULATION OF THE COMPANY

General

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

Company Acquisitions

     The HOLA and OTS regulations issued thereunder generally prohibit a savings
and loan holding company,  without prior OTS approval,  from acquiring more than
5% of the voting  stock of any other  savings  association  or savings  and loan
holding  company or controlling the assets  thereof.  They also prohibit,  among
other things, any director or officer of a savings and loan holding company,  or
any  individual  who owns or controls more than 25% of the voting shares of such
holding  company,  from  acquiring  control  of any  savings  association  not a
subsidiary of such savings and loan holding  company,  unless the acquisition is
approved by the OTS.
                                       30
<PAGE>

Holding Company Activities

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

Affiliate Restrictions

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

Qualified Thrift Lender Test

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

                                       31
<PAGE>

                                    TAXATION

Federal Taxation

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

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

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

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


                                       32
<PAGE>

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

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

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

Oregon Taxation

     The Company and the Association are subject to an Oregon  corporate  excise
tax at a statutory  rate of 6.6% (3.3% for the fiscal year ended  September  30,
1996) of income.  Neither the Company's nor the  Association's  state income tax
returns have been audited during the past five years.

Competition

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

Personnel

     As of  September  30,  1997,  the  Association  had  183  full-time  and 72
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining unit. The Association believes its relationship with its employees is
good.


                                       33
<PAGE>

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

Name                         Age(1)      Position
----                         ------      --------
<S>                              <C>     <C>                                  
Gerald V. Brown ..............   61      President and Chief Executive Officer

Robert A. Tucker .............   49      Senior Vice President and Chief Operating Officer

George L. Hall ...............   46      Senior Vice President and Chief Lending Officer/Secretary

Marshall J. Alexander ........   47      Vice President and Chief Financial Officer
<FN>

______________
(1)  At September 30, 1997.
</FN>
</TABLE>

     Gerald V. Brown has been  employed by the  Association  since 1957.  He was
appointed  a  director  and the  President  of the  Association  in June 1994 to
succeed the retiring President, James Bocchi. From 1982 until his appointment as
President, Mr. Brown served as Senior Vice President and Secretary,  supervising
all loan activities of the Association.

     Robert A. Tucker has been  employed by the  Association  since 1973. He has
served as Senior Vice  President  since  November  1989.  He has served as Chief
Operating Officer since March 1997.

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

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

                                       34
<PAGE>

Item 2. Properties

     The following  table sets forth the location of the  Association's  offices
and  other  facilities  used  in  operations  as  well  as  certain   additional
information relating to these offices and facilities as of September 30, 1997.

<TABLE>
<CAPTION>

                                                 Year                         Square
Description/Address                            Opened      Leased/Owned      Footage
-------------------                            ------      ------------      -------  
Main Office

<S>                                              <C>             <C>          <C>   
540 Main Street ..............................   1939             Owned       25,660
Klamath Falls, Oregon

Branch Offices

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

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

512 Walker Avenue ............................   1977             Owned        4,216
Ashland, Oregon

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

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

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

721 Chetco Avenue ............................   1997             Owned        5,409
Brookings, Oregon

293 North Broadway ...........................   1997             Owned        5,087
Burns, Oregon

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

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

259 North Adams ..............................   1997             Owned        5,803
Coquille, Oregon

106 Southwest 1st Street .....................   1997             Owned        4,700
Enterprise, Oregon

555 1st Street ...............................   1997             Owned        1,844
Fossil, Oregon

                                       35
<PAGE>

<CAPTION>

                                                 Year                         Square
Description/Address                            Opened      Leased/Owned      Footage
-------------------                            ------      ------------      -------  
<C>                                              <C>             <C>          <C>   
708 Garibaldi Avenue .........................   1997             Owned        1,400
Garibaldi, Oregon

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

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

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

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

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

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

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

217 Main Street ..............................   1997             Owned        6,067
Nyssa, Oregon

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

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

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

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

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

38770 North Main Street ......................   1997             Owned        2,997
Scio, Oregon

508 Main Street ..............................   1997             Owned        2,282
Moro, Oregon

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



                                       36
<PAGE>

<CAPTION>

                                                 Year                         Square
Description/Address                            Opened      Leased/Owned      Footage
-------------------                            ------      ------------      -------  
<C>                                              <C>             <C>          <C>   
165 North Maple Street .......................   1997             Owned        2,192
Yamhill, Oregon

Loan Center

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

     The net book value of the  Association's  investment in office,  properties
and equipment  totaled  $11.7  million at September 30, 1997.  See Note 5 of the
Notes to the Consolidated Financial Statements in the Annual Report.

     Data  processing  for the  Company is  provided  by a third  party  service
bureau.  Software  purchased  from  a  service  bureau  affiliate  is  used  for
applications   such  as  accounts  payable  and  fixed  assets.  As  with  other
organizations,   the  data  processing  programs  were  originally  designed  to
recognize calendar years by their last two digits.  Calculations performed using
these  truncated  fields will not work  properly  with dates  beyond  1999.  The
Company has  established  a committee to address  "Year 2000" issues  related to
data processing. The service bureau has stated that all their processing will be
Year 2000 compliant by the end of 1998,  including the application software used
for fixed  assets and  accounts  payable.  All  personal  computers  ("PCs") and
related software  throughout the Company have been inventoried and non-compliant
PC's have been identified.  As of September 30, 1997,  approximately  90% of the
Company's PCs and software are Year 2000  compliant.  The Company  believes that
the Year 2000 problem will not pose significant  operational problems and is not
anticipated to be material to its financial position or results of operations in
any given year.

Item 3. Legal Proceedings

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

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended September 30, 1997.

                                     PART II

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

     The  information  contained  under  the  section  captioned  "Common  Stock
Information"  on  page  16 of  the  Annual  Report  is  incorporated  herein  by
reference.

Item 6. Selected Financial Data

     The   information   contained   under  the  section   captioned   "Selected
Consolidated  Financial  Data" on page 4 of the  Annual  Report is  incorporated
herein by reference.

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

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

                                       37
<PAGE>

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

     The Company's  financial  performance  is impacted by, among other factors,
interest  rate risk and credit  risk.  The Company  utilizes no  derivatives  to
mitigate its credit risk, relying instead on strict underwriting standards, loan
review, and an adequate loan loss reserve.  See  "--Management's  Discussion and
Analysis of Financial Condition and Results of Operations."

     Interest  rate risk is the risk of loss in value due to changes in interest
rates.  This risk is  addressed  by the  Company's  Asset  Liability  Management
Committee ("ALCO"), which includes senior management  representatives.  The ALCO
monitors and  considers  methods of managing  interest  rate risk by  monitoring
changes in net  portfolio  value  ("NPV") and net interest  income under various
interest rate scenarios.  The ALCO attempts to manage the various  components of
the  Company's  balance  sheet to  minimize  the impact of sudden and  sustained
changes in interest rates on NPV and net interest income.

     The  Company's  exposure  to  interest  rate risk is reviewed on at least a
quarterly  basis by the  Board of  Directors  and the ALCO.  Interest  rate risk
exposure is measured using interest rate  sensitivity  analysis to determine the
Company's change in NPV in the event of hypothetical  changes in interest rates.
If potential  changes to NPV and net interest income resulting from hypothetical
interest  rate swings are not within the limits  established  by the Board,  the
Board may  direct  management  to adjust  its asset and  liability  mix to bring
interest rate risk within Board-approved limits.

     In order to reduce the exposure to interest rate fluctuations,  the Company
has  developed  strategies  to  manage  its  liquidity,  shorten  the  effective
maturities  of certain  interest-earning  assets,  and  increase  the  effective
maturities of certain interest-bearing  liabilities.  First, the Company has put
greater emphasis on ARMs for residential lending, which generally reprice in one
year. This strategy includes  purchasing high quality adjustable rate loans real
estate  loans  for  the   portfolio.   Second,   the  Company  has  focused  its
non-residential  lending on adjustable or floating rate and/or short-term loans.
Third,  the  Company  has  focused  its  investment  activities  on  short-  and
medium-term  securities.  Fourth,  the Company  has  attempted  to maintain  and
increase  its  regular  savings  and  transaction  deposit  accounts,  which are
considered to be relatively  resistant to changes in interest rates.  The branch
acquisition and new deposit product offerings provided  significant  progress on
this aspect of interest rate risk  management.  Fifth,  the Company has utilized
long-term  borrowings  and  deposit  marketing  programs  to adjust  the term to
repricing of its liabilities.

     Interest  rate  sensitivity  analysis  is used  to  measure  the  Company's
interest rate risk by computing  estimated changes in NPV of its cash flows from
assets  and  liabilities  in the event of a range of  assumed  changes in market
interest rates. NPV represents the market value of portfolio equity and is equal
to the  market  value of assets  minus the  market  value of  liabilities.  This
analysis  assesses the risk of loss in market rate sensitive  instruments in the
event of sudden and sustained  increases and decreases in market  interest rates
ranging from one hundred to four hundred  basis points.  The Company's  Board of
Directors  has adopted an interest  rate risk policy which  establishes  maximum
decreases  in the  NPV  ranging  from  10% to 95% in the  event  of  sudden  and
sustained increases and decreases in market interest rates. The following tables
present the  Association's  projected  change in NPV and net interest income for
the  various  rate  shock  levels  as of  September  30,  1997  and the  Board's
established  limitations relating thereto. NPV values and impact on net interest
income  for  the  Association  only  are  regularly  calculated  by the  OTS and
internally per  regulatory  recommendations.  The assets and  liabilities at the
parent  company  level are not  considered  in the  analysis.  The  exclusion of
holding company assets and liabilities does not have a significant effect on the
analysis of NPV sensitivity.  All market rate sensitive instruments presented in
these tables are  classified  as either held to maturity or available  for sale.
The Association has no trading securities.


                                       38
<PAGE>
<TABLE>
<CAPTION>


CHANGES IN NET PORTFOLIO VALUE

Change in                         Market Value of         Actual   Percent Change          Board
Interest Rates                   Portfolio Equity         Change           Actual          Limit
--------------                   ----------------   ------------   --------------          -----
<S>                                  <C>            <C>                    <C>              <C>  
400 basis point rise .........       $ 41,406,000   $(78,660,000)          (65.5%)          (95%)
300 basis point rise .........         62,156,000    (57,909,000)          (48.2%)          (75%)
200 basis point rise .........         82,490,000    (37,576,000)          (31.3%)          (45%)
100 basis point rise .........        102,883,000    (17,183,000)          (14.3%)          (25%)
Base Rate Scenario ...........        120,066,000           --               --              --
100 basis point decline ......        127,433,000      7,368,000             6.1%           (10%)
200 basis point decline ......        127,243,000      7,177,000             6.0%           (10%)
300 basis point decline ......        129,062,000      8,996,000             7.5%           (10%)
400 basis point decline ......        132,813,000     12,747,000            10.6%           (10%)
<CAPTION>

CHANGES IN NET INTEREST INCOME

Change in                            Net Interest         Actual   Percent Change          Board
Interest Rates                             Income         Change           Actual          Limit
--------------                       ------------   ------------   --------------          -----
<C>                                  <C>            <C>                    <C>              <C>  
400 basis point rise .........       $ 18,967,000   $ (8,403,000)          (30.7%)          (35%)
300 basis point rise .........         21,272,000     (6,098,000)          (22.3%)          (25%)
200 basis point rise .........         23,518,000     (3,852,000)          (14.1%)          (15%)
100 basis point rise .........         25,609,000     (1,761,000)           (6.4%)          (10%)
Base Rate Scenario ...........         27,370,000           --               --              --
100 basis point decline ......         28,428,000      1,058,000             3.9%           (10%)
200 basis point decline ......         28,925,000      1,556,000             5.7%           (10%)
300 basis point decline ......         29,605,000      2,235,000             8.2%           (10%)
400 basis point decline ......         30,294,000      2,924,000            10.7%           (10%)
</TABLE>

     The preceding table indicates that at September 30, 1997, in the event of a
sudden  and  sustained   increase  in  prevailing  market  interest  rates,  the
Association's  NPV and net interest  income  would be expected to  decrease.  At
September 30, 1997, the  Association's  estimated changes in NPV were within the
targets established by the Board of Directors.

     NPV is calculated  based on the net present  value of estimated  cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources.

     Computation of forecasted effects of hypothetical interest rate changes are
based on numerous  assumptions,  including  relative  levels of market  interest
rates,  loan  prepayments,  and deposit decay,  and should not be relied upon as
indicative  of  actual  future  results.   Further,   the  computations  do  not
contemplate  any  actions  the ALCO could  undertake  in  response to changes in
interest rates.

     Certain  shortcomings  are inherent in the method of analysis  presented in
the  computation  of NPV.  Actual  values  may  differ  from  those  projections
presented,   should  market   conditions  vary  from  assumptions  used  in  the
calculation of NPV. Certain assets, such as adjustable rate loans, have features
which restrict changes in interest rates on a short-term basis and over the life
of the assets.  In addition,  the  proportion  of  adjustable  rate loans in the
Association's  portfolio  could  decrease in future  periods if market  interest
rates remain at or decrease  below  current  levels due to  refinance  activity.
Further,  in the  event of a change  in  interest  rates,  prepayment  and early
withdrawal levels would likely deviate  significantly  from those assumed in the
NPV.  Finally,  the ability of many  borrowers  to repay their  adjustable  rate
mortgage loans may decrease in the event of interest rate increases.

                                       39
<PAGE>


Item 8. Financial Statements and Supplementary Data

     (a)  Financial  Statements   Independent  Auditors'  Reports*  Consolidated
          Balance  Sheets  as of  September  30,  1997  and  1996*  Consolidated
          Statements of Earnings for the Years Ended  September  30, 1997,  1996
          and 1995*  Consolidated  Statements  of  Shareholders'  Equity for the
          Years Ended September 30, 1997, 1996 and 1995* Consolidated Statements
          of Cash Flows for the Years Ended  September 30, 1997,  1996 and 1995*
          Notes to the Consolidated Financial Statements*

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

     (b) Supplementary Data

     The  information  contained  in  Note  19  to  the  Consolidated  Financial
Statements included in the Annual Report is incorporated herein by reference.

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

     There  have  been  no  changes  in or  disagreements  with  Accountants  on
accounting and financial disclosure during the year ended September 30, 1997.


                                    PART III

Item 10. Directors and Executive Officers of the Registrant

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

Item 11. Executive Compensation

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

     (a) Security Ownership of Certain Beneficial Owners

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

                                       40
<PAGE>

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

     (c) Changes in Control

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

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

Item 13. Certain Relationships and Related Transactions

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


                                     PART IV

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

     (a) Exhibits

         3(a)        Articles of Incorporation of the Registrant*
         3(b)        Bylaws of the Registrant*
         10(a)       Employment Agreement with Gerald V. Brown***
         10(b)       Employment Agreement with Marshall J. Alexander***
         10(c)       Employment Agreement with George L. Hall***
         10(d)       Employment Agreement with Robert A. Tucker***
         10(e)       1996 Stock Option Plan**
         10(f)       1996 Management Recognition and Development Plan**
         13          Annual Report to Shareholders
         21          Subsidiaries of the Registrant
         23.1        Consent of Deloitte & Touche LLP with respect to  financial
                     statements of the Registrant
         23.2        Consent  of  KPMG  Peat  Marwick  with respect to financial
                     statements of the Registrant
         27          Financial Data Schedule
___________________
*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-1, filed on June 19, 1995.
**   Incorporated by reference to the  Registrant's  Definitive  Proxy Statement
     for the 1996 Annual Meeting of Shareholders.
***  Incorporated  by reference to the  Registrant's  Annual Report on Form 10-K
     for the year ended September 30, 1995.

     (b) Reports on Form 8-K

     Reference is made to the Company's  Current Report on Form 8-K dated August
1, 1997,  as amended on September  29 ,1997,  which are  incorporated  herein by
reference:

 

                                       41
<PAGE>

                                   SIGNATURES

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

                                          KLAMATH FIRST BANCORP, INC.


Date:  December 29, 1997                  By:   /s/ Gerald V. Brown            
                                          Gerald V. Brown
                                          President and Chief Executive Officer

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

SIGNATURES                           TITLE                     DATE

/s/ Gerald V. Brown                  President, Chief          December 29, 1997
Gerald V. Brown                      Executive Officer and
                                     Director (Principal
                                     Executive Officer)

/s/ Marshall J. Alexander            Vice President and        December 29, 1997
Marshall J. Alexander                Chief Financial Officer
                                     (Principal Financial
                                      and Accounting Officer)

/s/ Rodney N. Murray                 Chairman of the Board     December 29, 1997
Rodney N. Murray                     of Directors


/s/ Bernard Z. Agrons                Director                  December 29, 1997
Bernard Z. Agrons


/s/ Timothy A. Bailey                Director                  December 29, 1997
Timothy A. Bailey


/s/ James D. Bocchi                  Director                  December 29, 1997
James D. Bocchi

/s/ William C. Dalton                Director                  December 29, 1997
William C. Dalton

/s/ J. Gillis Hannigan               Director                  December 29, 1997
J. Gillis Hannigan

/s/ Dianne E. Spires                 Director                  December 29, 1997
Dianne E. Spires

                                       42
<PAGE>