Dear Shareholder,

It has been two years since  joining  Klamath  First and  eighteen  months since
initiating  reorganization  of the company from a traditional  thrift,  focusing
upon local markets, into a truly statewide financial institution.  This has been
an exciting  transition  period for us, resulting in many new  opportunities for
staff who wished to accept change and, opportunities provided for others to join
us as the transition  progressed.  We also realigned and expanded our Management
Team,  adding retail and commercial  lending  expertise,  both complemented by a
strong Chief Credit  Officer.  To complete this team,  Nina Drake joined Klamath
First in June 2002 as Human Resource  Manager,  bringing  significant  personnel
management  experience.  In addition to the  Management  changes,  we have added
significant  management strength to our Information Systems Group and Operations
Support Group.  These individuals have been successful in other institutions and
their wide range of experience  is having a positive  affect on both our quality
of customer service and our operational efficiencies.

During this reorganization, the balance sheet restructure was completed. Klamath
First reduced  interest  rate exposure and added $28 million in Trust  Preferred
Offerings to assure adequate  capital cushion for expansion  opportunities.  The
first  expansion was completed in September 2001 with the purchase of 13 Western
Bank/Washington  Mutual  branches  which  complemented  our  existing  branching
structure.  In  addition  to this  purchase,  we  expanded  into seven  Wal-Mart
In-Store Branches in Southeast Washington State, Eastern and Western Oregon with
our full  service,  seven day banking  operations  plus two de novo full service
branches,  one in  Southwest  Medford  and the  other in  Redmond,  Oregon.  Our
agreement with Wal-Mart  currently calls for two more In-Store  Branches,  to be
fully operational by July 2003.

Throughout this period, we have been in a dramatically  declining  interest rate
environment,  which has impacted  our  earnings  due to our large cash  position
brought  about by the earlier  balance sheet  restructure  and the large deposit
base  acquired  through  the branch  acquisition  last year.  While it has had a
dampening effect on earnings,  Klamath First is well positioned for growth, both
internally and through  acquisition.  Our loan  portfolio  quality is strong and
well  reserved,  our deposit base solid and our  infrastructure  now in place to
quickly pursue  opportunities  as they arise.  We currently have 31% of our loan
portfolio in shorter term  commercial  loans and will  complement this portfolio
with  additional  growth in consumer and adjustable rate  residential  mortgages
while continuing to aggressively process and sell fixed rate offerings.

As I travel the state,  visiting  branches  and meeting  current  and  potential
Klamath First  customers,  I am hearing that Klamath  First has really  changed.
"Your branches look great and your staff is excited and interested in us." These
types of comments are great to hear and indicate that we are on the right track.
The expense, time and effort are paying off.

Klamath  First has changed.  We are  delivering a much wider  variety of banking
products to the many  communities we serve and have a motivated staff willing to
address  our  customers'  needs and,  all of us at Klamath  First are focused on
improved bottom line profitability.

Kermit K. Houser
President and Chief Executive Officer

<PAGE>









Year In Review

A Year in Review
In 2002,  we expanded our reach with new banking  offices and enhanced  delivery
channels.  We introduced our business banking division to our corporate business
customers  and  focused on the small  business  market with our  Business  First
Lending Center. Community involvement in the markets we served is evidenced with
increased awareness and exposure in a variety of community and civic projects.

Meeting Our Customers' Needs
This past year our  Company  expanded  our  branch  network,  which  serves as a
cornerstone for our bank. New strategically  located branches have broadened our
geographic presence throughout the state of Oregon and into Southern Washington.

In November 2001, we enhanced our presence in Washington with the opening of our
Richland  office.  This was our second In-Store  location in the Tri-Cities area
and serves as a great  complement  to the  Kennewick  market.  In-Store  offices
feature  expanded  service  delivery with seven days a week banking and Internet
and Voice Response banking access that blend with the Wal-Mart store hours.

In  February  2002,  we opened our second  office in Medford  with a new banking
center on the corner of Stewart  and King  Street on the city's  West Side.  The
Rogue Valley  remains a very vital key to our branch banking  network's  success
and the Stewart  location has provided added  convenience to our Medford banking
customers.

Also,  in  February  2002,  we made our  debut  along  the I-5  corridor  in the
Springfield  market with our fifth In-Store Wal-Mart  location.  Springfield has
been an important link in our branch banking network.

Our sixth In-Store Wal-Mart location was opened in April 2002 in Hermiston. This
is our second banking location in Hermiston and reinforces our commitment to the
community.

In May 2002, we opened our seventh In-Store  location.  This new Eugene Wal-Mart
office  continues  to solidify  our  banking  presence  along the I-5  corridor.
Complementing  the  Springfield  office,  the Eugene  location  has expanded our
service delivery in this expanding and highly competitive marketplace.
<PAGE>

Business First
In April 2002, the Business First Lending Center was developed to complement the
efforts of the  Business  Banking  Group.  Business  First was designed to offer
lending solutions to businesses that borrow up to $250,000.  The strategy of the
Business  First Lending  Center is to provide a quick,  efficient and consistent
underwriting process and increase the return to our shareholders while providing
a  competitive  commercial  lending  product in all of the markets we serve.  In
order to accomplish  this,  Klamath  First's  Business  First Lending Center has
designed a proprietary  underwriting  template that combines  credit scoring and
judgment to provide quick decisions at minimal cost to businesses.

Klamath First has a strong presence in small communities;  however,  our mission
is to become the preferred choice of business customers needing commercial loans
and services in these areas.  Business  Banking  focuses on commercial  business
with loan needs in excess of $250,000.

We now have a dedicated  team of  commercial  banking  professionals  and a wide
range of customized products,  all designed to make your banking faster,  easier
and more flexible.

Klamath First's Business Banking Group will be setting the standard for business
banking in the Pacific Northwest.


Community First
We are committed to making a positive  difference in every  community and region
in which we do business.  This impact is made both through the Company's Pelican
Club  activities (a group of volunteer  employees at Klamath  First) and through
our   support   of   local   businesses,   community   groups,   civic   groups,
investments/donations and other banking and community development services.

Through financial and volunteer efforts, we have made significant investments in
and  contributions  to  charities,  affordable  housing  groups  and  non-profit
organizations  within  the  regions  we  serve.  We have  also  placed a renewed
emphasis  on  qualifying  CRA  (Community   Reinvestment  act)  investments  and
contributions in all of the regions and markets we serve.

At Klamath First Our Communities Come First.
<PAGE>
KLAMATH FIRST FEDERAL  SAVINGS AND LOAN  ASSOCIATION  AND KLAMATH FIRST BANCORP,
INC.

BOARD OF DIRECTORS

Bernard Z. Agrons
Mr.  Agrons  is  currently  retired.  He served as  Weyerhauser  Company's  Vice
President  for  the  Eastern  Oregon  Region  until  1981.  He was  also a State
Representative in the Oregon Legislative Assembly from 1983 to 1991.

Timothy A. Bailey
Mr. Bailey formerly was Senior Vice President with Regence BlueCross  BlueShield
of Oregon. He presently serves as Executive  Director of the KMSB Foundation and
is an active member of the Oregon State Bar.

James D. Bocchi
Mr.  Bocchi is currently  retired.  He was  president of Klamath  First  Federal
Savings & Loan Association from 1984-1994.

Donald N. Bauhofer
Mr.   Bauhofer  is  the  Founder  and  President  of  the   Pennbrook   Company,
headquartered  in Bend,  Oregon.  He is the Founder and CEO of Pennbrook  Homes,
Inc.  and Praxis  Medical  Group,  the  Co-Owner  of Arrowood  Development,  and
Co-Owner and Director of Pacific Education Corporation.

William C. Dalton
Mr. Dalton is currently retired.  He is the former owner of W.C. Dalton Company,
farming.

Kermit K. Houser
Mr.  Houser serves as President and Chief  Executive  Officer of Klamath  First,
positions he has held since November 2000.

Dianne E. Spires, CPA
Ms.  Spires is a Partner in Rusth,  Spires & Menefee,  LLP, a public  accounting
firm located in Klamath Falls and Lakeview, Oregon.

CHAIRMAN OF THE BOARD

Rodney N. Murray

Mr. Murray is the former owner and operator of Klamath  Falls  Creamery & Crater
Lake Dairy Products and owner of Rod Murray Ranch in Klamath Falls, Oregon.

CORPORATE EXECUTIVE OFFICERS
Kermit K. Houser                President/CEO
Marshall J. Alexander           EVP/CFO
Ben A. Gay                      EVP/CCO
Frank X. Hernandez              SVP/COO
Craig M. Moore                  SVP/Chief Auditor/Corporate Counsel/Secretary
James E. Essany                 SVP/Corporate Marketing Director
M. Isabel Castellanos           SVP/Retail Banking
Walt Dodrill                    SVP/Business Banking
Nina Drake                      VP/Human Resource Manager
All Branch Managers

In Memory of J. Gillis Hannigan
Long time board member J. Gillis Hannigan died July 30 of complications  related
to surgery.

"Gil was a member of the Klamath First Board of Directors  since 1987,  and made
an outstanding  contribution to the organization over the years. We are saddened
by his passing,  "said Kermit K. Houser,  President  and CEO.  "Our thoughts and
deepest sympathy are with his wife Jo Ann, and family."

A retired  businessman,  Mr. Hannigan was previously Executive Vice President of
Modoc Lumber,  located in Klamath Falls,  Oregon and Vice President of DiGiorgio
Corporation, headquartered in San Francisco, California.

<PAGE>

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

FINANCIAL CONDITION DATA (In thousands)

  At September 30,                                                    2002         2001         2000         1999         1998
------------------------------------------------------------------------------------------------------------------------------

<S>                                                             <C>          <C>          <C>          <C>          <C>
  Assets ....................................................   $1,513,495   $1,468,572   $  995,575   $1,041,641   $1,031,302
  Cash and cash equivalents .................................       45,791      118,389       29,947       24,523       66,985
  Loans receivable, net .....................................      607,465      679,990      729,037      739,793      668,146
  Investment securities held to maturity ....................           --          135          267          560        2,889
  Investment securities available for sale ..................      119,542      154,676      116,628      158,648      203,224
  Mortgage-backed & related securities
  held to maturity ..........................................           --        1,621        2,160        2,601        3,662
  Mortgage-backed & related securities
  available for sale ........................................      650,796      421,638       75,331       72,695       43,336
  Stock in FHLB of Seattle, at cost .........................       13,510       12,698       11,877       10,957       10,173
  Advances from FHLB of Seattle .............................      205,250      168,000      173,000      197,000      167,000
  Deposit liabilities .......................................    1,142,006    1,152,824      695,381      720,401      689,541
  Shareholders' equity ......................................      119,938      114,141      108,725      109,585      145,081

SELECTED OPERATING DATA (In thousands, except per share data)

  Year Ended September 30,                                            2002         2001         2000         1999         1998
  ----------------------------------------------------------------------------------------------------------------------------

  Total interest income .....................................   $   87,293   $   70,133   $   72,158   $   71,691   $   69,733

  Total interest expense ....................................       39,531       40,751       40,756       38,382       37,848
                                                                ----------   ----------   ----------   ----------   ----------
  Net interest income .......................................       47,762       29,382       31,402       33,309       31,885

  Provision for loan losses .................................          156          387        1,764          932          674
                                                                ----------   ----------   ----------   ----------   ----------
  Net interest income
  after provision for loan losses ...........................       47,606       28,995       29,638       32,377       31,211

  Non-interest income .......................................       12,614       11,013        4,094        3,629        3,202
  Non-interest expense ......................................       50,171       28,720       23,773       21,186       19,523
                                                                ----------   ----------   ----------   ----------   ----------
  Earnings before income taxes ..............................       10,049       11,288        9,959       14,820       14,890

  Provision for income tax ..................................        3,260        3,717        3,533        5,665        5,339
                                                                ----------   ----------   ----------   ----------   ----------
  Net Earnings ..............................................   $    6,789   $    7,571   $    6,426   $    9,155   $    9,551
                                                                ==========   ==========   ==========   ==========   ==========
  Basic earnings per share ..................................   $     1.06   $     1.14   $     0.94   $     1.21   $     1.05
                                                                ==========   ==========   ==========   ==========   ==========
<PAGE>
<CAPTION>

KEY OPERATING RATIOS
  At or for the Year Ended September 30,                              2002         2001         2000         1999         1998
------------------------------------------------------------------------------------------------------------------------------

 Performance Ratios
  Return on average assets
<S>                                                             <C>          <C>          <C>          <C>          <C>
  (net earnings divided by average assets) ..................         0.46%        0.72%        0.62%        0.88%        0.96%
  Return on average equity
  (net earnings divided by average equity) ..................         5.92%        6.64%        5.82%        7.55%        6.52%
  Interest rate spread
  (difference between average yield on
  interest-earning assets and average cost of
  interest-bearing liabilities) .............................         3.04%        2.18%        2.50%        2.73%        2.57%
  Net interest margin
  (net interest income as a percentage of
  average interest-earning assets) ..........................         3.48%        2.93%        3.14%        3.37%        3.36%
  Average interest-earning assets to
  average interest-bearing liabilities ......................       115.18%      118.37%      115.71%      116.47%      119.84%
  Net interest income after provision for loan
  losses to total non-interest expenses .....................        94.89%      100.96%      124.39%      152.82%      159.87%
  Non-interest expense
  to average total assets ...................................         3.37%        2.74%        2.29%        2.05%        1.96%
  Efficiency ratio (non-interest expense
  divided by net interest income plus
  non-interest income) ......................................        83.10%       55.48%       66.97%       57.36%       55.64%
  Dividend payout ratio
  (dividends declared per share
  divided by net earnings per share) ........................        49.06%       45.61%       54.79%       38.98%       34.50%
  Book value per share ......................................   $    18.84   $    17.40   $    16.25   $    15.52   $    16.30

 Asset Quality Ratios

  Allowance for loan losses
  to total loans at end of period ...........................         1.19%        1.13%        0.54%        0.32%        0.28%
  Non-performing assets to total assets .....................         0.12%        0.05%        0.16%        0.46%        0.05%
  Non-performing loans to total loans,
  before net items ..........................................         0.18%        0.04%        0.11%        0.43%        0.07%

 Capital Ratios

  Equity to assets ratio ....................................         7.92%        7.77%       10.92%       10.52%       14.07%
  Tangible capital ratio ....................................         6.55%        5.16%       10.35%        8.91%        8.26%
  Core capital ratio ........................................         6.55%        5.16%       10.35%        8.91%        8.26%
  Risk-based capital ratio ..................................        14.01%       10.36%       20.30%       17.41%       16.13%

 Other Data

  Number of loans outstanding ...............................       11,835       12,624        8,807        9,297        9,155
  Number of deposit accounts ................................      131,001      111,542       85,706       85,112       82,585
  Number of full service offices ............................           57           52           35           34           34
</TABLE>
<PAGE>


Special Note Regarding Forward-Looking Statements
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations   and  other   portions  of  this  Annual  Report   contain   certain
"forward-looking  statements"  concerning the future operations of Klamath First
Bancorp,  Inc.  Management  desires  to  take  advantage  of the  "safe  harbor"
provisions  of the  Private  Securities  Litigation  Reform  Act of 1995  and is
including this statement for the express  purpose of availing the Company of the
protections of such safe harbor with respect to all "forward-looking statements"
contained in the Annual  Report.  We have used  "forward-looking  statements" to
describe  future  plans  and  strategies,  including  our  expectations  of  the
Company's future financial results.  Management's  ability to predict results or
the effect of future plans or strategies is inherently uncertain.  Factors which
could affect actual results include  interest rate trends,  the general economic
climate in the  Company's  market  area and the  country as a whole  which could
affect the collectibility of loan balances, the ability to increase non-interest
income through expansion of new lines of business, the ability of the Company to
control costs and expenses,  competitive products and pricing,  loan delinquency
rates,  and changes in federal and state  regulation.  These  factors  should be
considered in evaluating the  "forward-looking  statements",  and undue reliance
should not be placed on such statements.

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

The Association is a progressive,  community-oriented financial institution that
focuses on customer  service  within its primary market area.  Accordingly,  the
Association is primarily engaged in attracting  deposits from the general public
through  its offices  and using  those and other  available  sources of funds to
originate permanent  residential one- to four-family real estate loans and loans
on commercial real estate, multi-family residential properties, and to consumers
and businesses  within its market area.  While the Association has  historically
emphasized  fixed-rate  mortgage  lending,  it has  been  diversifying  its loan
portfolio by focusing on  increasing  the number of  originations  of commercial
real estate,  multi-family  residential loans,  residential  construction loans,
commercial and industrial loans, 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.  The  acquisition  of 13 branches  from
Washington Mutual Bank, which was completed in September 2001, moved the Company
strongly in this direction.

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

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

The  Association  is a  member  of  the  Federal  Home  Loan  Bank  system.  The
Association  conducts its business through 57 office  facilities,  with the main
office located in Klamath Falls,  Oregon. The Association  considers its primary
market area to be the state of Oregon, particularly the 26 counties in which the
offices are located.  During 2001, the Company expanded into the Tri-Cities area
of Washington state by opening in-store branches in Kennewick and Richland.

Federal Legislation
In Federal  legislation  enacted in 1996,  the reserve  method of accounting for
thrift bad debt reserves (including the percentage of taxable income method) was
repealed for tax years beginning  after December 31, 1995. The resulting  change
in accounting method triggers bad debt reserve recapture for post-1987  reserves
over a six-year  period,  thereby  generating an additional  tax  liability.  At
September 30, 2002 and 2001, the  Association's  post-1987  reserves amounted to
$2.0 million and $2.6 million,  respectively.  Pre-1988  reserves  would only be
subject to recapture if the institution fails to qualify as a thrift.  Recapture
of post-1987  reserves was required to begin during the tax year ended September
30, 1999.

The  Sarbanes-Oxley  Act was  enacted by  Congress  during the summer of 2002 to
enhance corporate  governance  practices.  The Company's management and board of
directors are informed about the requirements of the  Sarbanes-Oxley Act and the
Company is actively  monitoring  regulatory  implementation of the Act. However,
due to the regulated  environment in which financial  institutions operate, many
requirements of the new  legislation are already part of the Company's  internal
control  structure.  Therefore,  the Act is not  expected  to result in material
changes to the Company's corporate governance processes.

Market Risk and Asset/Liability Management
The  Company's  financial  performance  is  affected  by the  success of the fee
generating products it offers to its customers,  the credit quality of its loans
and securities,  and the extent to which its earnings are affected by changes in
<PAGE>

interest  rates.  Credit risk is the risk that  borrowers  will become unable to
repay  their  debts as they  become  due.  The  Company  relies on high  quality
underwriting  standards,  loan review, and an adequate allowance for loan losses
to mitigate its credit risk.

Interest  rate risk is the risk of loss in  principal  value and risk of earning
less net interest income due to changes in interest rates.  Put simply,  savings
institutions solicit deposits and lend the funds they receive to borrowers.  The
difference  between the rate paid on deposits and the rate  received on loans is
the interest rate spread. If the rates paid on deposits change, or reprice, with
the same timing and  magnitude  as the rates  change on loans,  there is perfect
matching of interest  rate changes and thus,  no change in interest  rate spread
and no interest rate risk. In  actuality,  interest  rates on deposits and other
liabilities  do not reprice at the same time or with the same magnitude as those
on  loans,   investments  and  other   interest-earning   assets.  For  example,
historically the Company primarily originated  fixed-rate  residential loans for
its portfolio.  Because fixed-rate loans do not reprice until payoff and because
the  majority of  residential  loans have terms of 15 to 30 years  (with  actual
expected lives of seven to ten years), the interest rate  characteristics of the
loan portfolio do not exactly match the Company's liabilities,  which consist of
deposits with maturities  ranging up to ten years and borrowings which mature or
reprice in five years or less. When interest rates change, this mismatch creates
changes in interest rate spread that influence net interest income and result in
interest rate risk.

Changes  in  interest  rates  also  impact  the  fair  value of the  assets  and
liabilities  on the  Company's  balance  sheet,  expressed as changes in the net
portfolio value ("NPV"). NPV represents the market value of portfolio equity and
is equal to the market  value of assets  minus the market  value of  liabilities
plus or minus the estimated market value of off-balance sheet  instruments.  For
example,  the market  value of  investment  securities  and loans is impacted by
changes  in  interest  rates.  Fixed-rate  loans  and  investments  held  in the
Company's  portfolio  increase  in  market  value  if  interest  rates  decline.
Conversely,  the market value of  fixed-rate  portfolio  assets  decreases in an
increasing  interest rate environment.  It is generally assumed that assets with
adjustable  rates are less subject to market value  changes due to interest rate
fluctuations based on the premise that their rates will adjust with the market.

The OTS Thrift  Bulletin 13a ("TB 13a") contains the prevailing  guidance on the
management  of  interest  rate  risk  and  provides  a  description  of how  the
"Sensitivity  to Market Risk" rating is to be determined.  Sensitivity to Market
Risk  represents  the  "S"  component  of the  CAMELS  rating  which  is used by
regulators  in  their  evaluation  of  financial   institutions.   The  OTS  has
established  detailed  minimum  guidelines  for two areas of interest  rate risk
management.   These  guidelines  establish  minimum  expectations  for  (1)  the
establishment  and  maintenance  of  board-approved   risk  limits  and  (2)  an
institution's  ability to measure  interest  rate risk  exposure.  Each thrift's
board  of  directors  is  responsible  for  establishing  risk  limits  for  the
institution. The interest rate risk limits are expected to include limits on the
change in NPV as well as limits on earnings sensitivity.

NPV limits include  minimums for the NPV ratio,  which is calculated by dividing
the NPV by the  present  value  of the  institution's  assets  for a given  rate
scenario.  The board of  directors  has  specified  the  minimum NPV ratio it is
willing to allow under  interest  rate shifts of 100 and 200 basis points up and
down. Both the NPV limits and the actual NPV forecast  calculations  play a role
in determining a thrift's Sensitivity to Market Risk. The prudence of the limits
and the compliance with board-prescribed limits are factors in the determination
of whether or not the institution's risk management is sufficient.  In addition,
the NPV ratio permitted by the institution's policies under an adverse 200 basis
point rate shift scenario is combined with the  institution's  current  interest
rate sensitivity to determine the  institution's  "Level of Interest Rate Risk".
The  Level  of  Interest  Rate  Risk is then  utilized  in  conjunction  with an
assessment  of the "Quality of Risk  Management  Practices" to determine the "S"
component of the CAMELS rating.

The Company's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors  and the 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
NPV,  the NPV  ratio,  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 the NPV ratio.  If  potential  changes to NPV and the NPV ratio
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.

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.

The Company has historically  originated primarily fixed-rate residential loans.
Many of these loans have been sold to the Federal National Mortgage  Association
("FNMA") with servicing retained, and currently loans are sold to other entities
with servicing released, while few are held in the Company's portfolio. In order
to reduce the exposure to interest rate fluctuations,  the Company has developed
strategies  to manage  its  liquidity,  shorten  the  effective  maturities  and
increase the  repricing  of certain  interest-earning  assets,  and increase the
effective  maturities  of certain  interest-bearing  liabilities.  During recent
years, the Company undertook  significant projects to manage and reduce interest
<PAGE>

rate  risk.  In  February  2001,  the  Company  securitized  $190.3  million  in
fixed-rate  single  family  mortgage  loans.  The  loans  were sold to FNMA with
servicing  retained and the resulting FNMA  mortgage-backed  securities  ("MBS")
were  recorded  as  available  for  sale  securities  on  the  Company's  books.
Subsequently,  the MBS were sold with the  two-fold  benefit of  producing  $5.4
million in gain on sale of investments and reducing long term fixed-rate  assets
from the interest  rate risk profile.  The second  significant  event  impacting
interest rate risk was the  acquisition  of 13 branches from  Washington  Mutual
Bank in September  2001.  These were  commercial  bank branches  which  included
$118.8 million of commercial loans and $50.7 million of consumer loans.  Most of
these  loans are  adjustable  rate  shorter  term  loans.  Cash  obtained in the
transaction  was  primarily   invested  in  MBS  and   collateralized   mortgage
obligations  ("CMO's")  having  shorter  terms than  conventional  single-family
mortgage  loans.  All these events serve to improve the Company's  interest rate
risk position.

The  Company's  Board of  Directors  has  established  risk limits  which are in
compliance with TB 13a. NPV values for the Association are regularly  calculated
by the OTS based on  regulatory  guidelines.  The following  table  presents the
Association's  projected  change in NPV and the NPV ratio for the  various  rate
shock  levels  as  of  September  30,  2002  and  2001,   using  the  regulatory
calculations.  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.
<TABLE>
<CAPTION>

PROJECTED CHANGES IN NET PORTFOLIO VALUE:
 At September 30,                        2002                      2001
------------------------------------------------------------------------------
                                         Sensitivity               Sensitivity
                                   NPV       Measure         NPV       Measure
 Change in Interest Rates        Ratio(Basis Points)       Ratio(Basis Points)
<S>                                <C>           <C>         <C>         <C>
 200 basis point rise .......      6.67%         (126)       5.22%       (208)
 100 basis point rise .......      7.79%          (14)       6.53%        (77)
 Base Rate Scenario .........      7.93%           --        7.30%         --
 100 basis point decline ....      7.11%          (82)       7.12%        (19)
 200 basis point decline ....       N/A           N/A        6.68%        (62)
</TABLE>

The  improvement  noted in the  sensitivity  measure is an ongoing result of the
actions taken as noted above,  including  the sale of  fixed-rate  single family
mortgage  loans and the  branch  acquisition,  which  provided  a  portfolio  of
primarily  adjustable-rate and shorter term loans. In addition,  fiscal 2002 saw
significant  prepayments on fixed-rate mortgage loans,  reducing the balances of
such long term assets.  Proceeds from loan repayments were reinvested in shorter
term, less than five years, mortgage-backed assets. Also, new single family loan
production  is being sold in the secondary  market,  again acting to reduce such
long term asset balances.

The  preceding  table  indicates  that at September  30, 2002, in the event of a
sudden  and  sustained   increase  in  prevailing  market  interest  rates,  the
Association's  NPV and NPV  ratio  would be  expected  to  decrease,  but  would
decrease to a lesser extent than under previous asset/liability mixes.

Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation of NPV. Actual values may differ from those  projections  presented,
if 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.

A conventional  measure of interest rate sensitivity for savings institutions is
the   calculation  of  interest  rate  "gap".  This  measure  of  interest  rate
sensitivity is a measure of the difference  between amounts of  interest-earning
assets and interest-bearing  liabilities which either reprice or mature within a
given period of time.  The  difference,  or the interest rate  repricing  "gap",
provides an  indication  of the extent to which an  institution's  interest rate
spread  will be  affected  by changes in  interest  rates.  A gap is  considered
positive when the amount of interest-rate  sensitive assets exceed the amount of
interest-rate sensitive liabilities,  and is considered negative when the amount
of  interest-rate  sensitive  liabilities  exceeds  the amount of  interest-rate
sensitive  assets.  Generally,  during a period  of  rising  interest  rates,  a
negative  gap  within  shorter  maturities  would  result in a  decrease  in net
interest  income.  Conversely,  during a period of  falling  interest  rates,  a
negative  gap within  shorter  maturities  would  result in an  increase  in net
interest income.

At September 30, 2002, the Association's  one-year cumulative gap was a negative
20.61%  of total  assets  compared  to a  negative  15.13%  of total  assets  at
September 30, 2001. The increased  negative balance is a result of balances held
in cash and short term investments on September 30, 2001 being reinvested during
2002 in investments and MBS with stated maturities greater than one year.

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

 At September 30,                          2002        2001       2000
----------------------------------------------------------------------
                                                (In thousands)
 Earning assets maturing
<S>                                    <C>         <C>        <C>
 or repricing within one year.....     $221,598    $318,777   $209,072
 Interest-bearing liabilities
 maturing or repricing within
 one year.........................      533,486     541,016    291,681
 Deficiency of earning assets
 over interest-bearing liabilities
 as a percent of total assets.....     (20.61%)    (15.13%)    (8.31%)
 Percent of assets to liabilities
 maturing or repricing within
 one year.........................      41.54%      58.92%     71.68%
</TABLE>
<PAGE>

The   following   table   presents   the   difference   between  the   Company's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at September 30, 2002. This table does not  necessarily  indicate the
impact of general  interest rate movements on the Company's net interest  income
because  the  repricing  of  certain  assets  and   liabilities  is  subject  to
competitive and other limitations.  As a result,  certain assets and liabilities
indicated as maturing or otherwise  repricing within a stated period may in fact
mature   or   reprice   at   different   times   and   at   different   volumes.
<TABLE>
<CAPTION>


                                3 Months   > 3 Months  > 6 Months  > 1 to 3  > 3 to 5  > 5 to 10  > 10 to 20      > 20
                                 or Less  to 6 Months   to 1 Year     Years     Years      Years       Years     Years       TOTAL
                                --------  -----------  ----------  --------  --------  ---------  ----------  --------  ----------
<S>                             <C>        <C>         <C>        <C>       <C>        <C>         <C>        <C>       <C>

ASSETS                                                   (In thousands)
 Permanent 1-4 Mortgages:
----------------------------------------------------------------------------------------------------------------------------------
  Adjustable-rate............     $2,123       $4,452     $12,541    $4,539    $4,717        $--         $--        $--    $28,372
  Fixed-rate.................        312           92         449       308     1,318     13,828      52,436    242,684    311,427
 Other Mortgage Loans:
  Adjustable-rate............     10,976       11,460      10,560    48,888    23,388        237          --         --    105,509
  Fixed-rate.................        219          191         199     1,309     3,207     11,361       5,397      5,627     27,510
  Mortgage-Backed Securities.     25,287        1,291       1,576    46,341    85,819    163,176     170,356    146,458    640,304
 Non-Real Estate Loans:
  Adjustable-rate............     60,455        2,137       1,965     5,834     3,117         20          49         --     73,577
  Fixed-rate.................      2,081          631         904     7,636    11,608     15,462      32,575        665     71,562
  Investment Securities......     40,792       16,813      14,092    30,108        --        790      35,735      2,468    140,798
  Other Interest-Bearing Assets       --           --          --        --        --        457          --         --        457
----------------------------------------------------------------------------------------------------------------------------------
  Total Rate Sensitive Assets   $142,245      $37,067     $42,286  $144,963  $133,174   $205,331    $296,548   $397,902 $1,399,516
                                ========      =======     =======  ========  ========   ========    ========   ======== ==========
LIABILITIES
----------------------------------------------------------------------------------------------------------------------------------
  Deposits - Fixed Maturity..    $93,539      $77,690    $104,467  $114,477   $34,047    $32,081        $318       $100   $456,719
  Deposits - Interest Bearing
  Checking...................      5,145        5,145      10,290    13,153    11,227     36,313      28,496     16,098    125,867
  Deposits - Money Market....     17,144       17,144      34,288    81,901    54,424     52,639      72,544        562    330,646
  Deposits - Passbook and
  Statement Savings..........      2,182        2,182       4,365     7,379     9,778     20,537      18,344     21,234     86,001
  Other Interest Bearing
     Liabilities.............    115,905       20,000      24,000    43,000     8,000         --          --         --    210,905
----------------------------------------------------------------------------------------------------------------------------------
  Total Rate Sensitive
     Liabilities.............   $233,915     $122,161    $177,410  $259,910  $117,476   $141,570    $119,702    $37,994 $1,210,138
                                ========     ========    ========  ========  ========   ========    ========    ======= ==========
  Interest Rate Sensitivity
     Gap.....................   ($91,670)    ($85,094)  ($135,124)($114,947)  $15,698    $63,761    $176,846   $359,908   $189,378
  Cumulative Interest Rate
  Sensitivity Gap............   ($91,670)   ($176,764)  ($311,888)($426,835)($411,137) ($347,376)  ($170,530)  $189,378         --
  Sensitivity Gap to Total
     Assets..................     (6.06%)      (5.62%)     (8.93%)   (7.59%)    1.04%      4.21%      11.68%     23.78%         --
  Cumulative Interest Rate
  Sensitivity Gap to Total
     Assets..................     (6.06%)     (11.68%)    (20.61%)  (28.20%)  (27.16%)   (22.95%)    (11.27%)    12.51%         --
</TABLE>

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

The  Association is required under  applicable  federal  regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. government,
federal agency and other  investments  having  maturities of five years or less.
Current OTS  regulations  require  that a savings  association  maintain  liquid
assets of not less than 4.00% of its average daily  balance of net  withdrawable
deposit  accounts and  borrowings  payable in one year or less. At September 30,
2002, the  Association's  liquidity,  as measured for regulatory  purposes,  was
10.3%. The Company has borrowing agreements with banks that can be used if funds
are needed. (See Notes 10 and 11 to the Consolidated Financial Statements.)

OTS capital  regulations  require the Association to have: (i) tangible  capital
equal to 1.5% of  adjusted  total  assets,  (ii) core  capital  equal to 4.0% of
adjusted  total  assets,  and (iii) total  risk-based  capital  equal to 8.0% of
risk-weighted  assets.  At September 30, 2002, the Association was in compliance
with  all  regulatory  capital  requirements  effective  as of such  date,  with
tangible,  core and risk-based  capital of 6.6%,  6.6% and 14.0%,  respectively.
(See Note 20 to the Consolidated Financial Statements.)
<PAGE>

Changes in Financial Condition
At  September  30, 2002,  the  consolidated  assets of the Company  totaled $1.5
billion, consistent with $1.5 billion at September 30, 2001.

Total cash and cash equivalents  decreased $72.6 million, or 61.32%, from $118.4
million at  September  30, 2001 to $45.8  million at  September  30,  2002.  The
decrease  is  primarily  the  result of the cash from the branch  purchase  from
Washington  Mutual  Bank in  September  2001  being  held in  federal  funds  at
September  30,  2001  while  other  appropriate  investment   alternatives  were
researched.  During  2002,  the excess  cash was  invested as  reflected  in the
increase in mortgage-backed securities.

Net loans receivable decreased by $72.5 million, or 10.67%, to $607.5 million at
September  30,  2002,  compared to $680.0  million at September  30,  2001.  The
decrease is the result of increased  prepayments  on loans  coupled with sale of
new one- to four- family loan production.

Investment securities decreased $35.3 million, or 22.78%, from $154.8 million at
September 30, 2001 to $119.5  million at September  30, 2002.  This decrease was
the result of $41.9  million in purchases  offset by $15.1  million in scheduled
maturities and the sale of $62.0 million of investment  securities available for
sale.  During the year ended  September  30, 2002,  $109.5  million of principal
payments were received on  mortgage-backed  and related  securities  ("MBS") and
$87.1 million were sold,  thus  reducing the balance of MBS. This  reduction was
more than offset by the  purchase of $419.4  million in MBS,  resulting in a net
increase  in total MBS from  $423.3  million  at  September  30,  2001 to $650.8
million at September 30, 2002.  The purchases of investment  securities  and MBS
were  funded  by  cash  obtained  in  the  branch  acquisition,   maturities  of
securities, funds generated by loan repayments, and borrowings.

Real estate owned and  repossessed  assets  increased from $445,855 at September
30, 2001 to $758,663 at September  30, 2002.  The balance at September  30, 2001
consists  of single  family  residences.  The  balance  at  September  30,  2002
consisted  primarily  of  four  single  family  residences  and  one  commercial
property.

Other assets  decreased  $5.6 million from $9.3 million at September 30, 2001 to
$3.7 million at September 30, 2002.  The majority of the decrease  resulted from
payment of a $4.1  million  receivable  from  Washington  Mutual  Bank  ("WAMU")
related to the final settlement for the branch  acquisition,  which was included
in the balance at September 30, 2001 and collected in October 2001.

Deposit  liabilities  decreased  $10.8 million,  or 0.94%,  from $1.2 billion at
September  30, 2001 to $1.1  billion at  September  30,  2002.  The  decrease is
primarily  due to a  reduction  in time  deposits  as a result of a strategy  to
reduce interest expense.

Advances from the FHLB of Seattle increased from $168.0 million at September 30,
2001 to $205.3 million at September 30, 2002.

Total  shareholders'  equity  increased  $5.8  million  from  $114.1  million at
September 30, 2001 to $119.9  million at September 30, 2002. The increase is the
combined  effect of $4.8 million paid for stock  repurchases and $3.3 million in
dividends  paid on common  shares offset by net earnings for the year and a $4.7
million increase in net unrealized gain on securities available for sale.

Asset Quality
Non-Performing Assets
At September 30, 2002, the ratio of non-performing  assets (including nonaccrual
loans,  accruing loans greater than 90 days  delinquent,  real estate owned, and
other  repossessed  assets)  to total  assets was  0.12%,  compared  to 0.05% at
September  30,  2001.  The  increase  is due to an  increase  in the  balance of
nonaccrual  loans from $271,000 at September 30, 2001 to $1,091,000 at September
30, 2002 and a $312,808  increase in real estate owned and  repossessed  assets.
The  Association  intends to maintain  asset quality by continuing  its focus on
conscientious underwriting.  With the expansion of other lending options such as
commercial and  multi-family  real estate loans,  equity lines of credit,  other
consumer loan products,  and commercial loans, the Association has evaluated the
trade off  associated  with  planned  loan  growth and the  greater  credit risk
associated with such forms of lending.

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

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

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

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

 At or For the Year Ended September 30,      2002        2001         2000
--------------------------------------------------------------------------
                                                    (In thousands)
<S>                                        <C>         <C>          <C>
 General loan loss allowance...........    $7,376      $7,951       $4,062
 Specific loss allowance...............        --          --           20
 Charge-offs...........................       747          90          607
 Recoveries............................        16          42          441
</TABLE>
<PAGE>
Comparison of Operating Results for the Years Ended September 30, 2002 and 2001
General
The purchase of 13 branches from  Washington  Mutual Bank in September  2001 had
significant  impact on the  operations of the Company  during  fiscal 2002.  The
transaction  contributed  significantly to loan and deposit  balances,  added 13
locations,  and introduced 124 employees to the Klamath First family at year end
2001. Therefore,  the income and expenses related to this significant change had
little  effect on fiscal 2001,  but had a dominant  impact on fiscal  2002.  The
influence  of this change is evident in all  categories  of income and  expenses
during the current fiscal year.

During  fiscal  2002,  the  Company  operated  in an  economy  that  experienced
declining  interest  rates  and  a  relatively  normal  yield  curve.  Strategic
decisions to revise  interest rates paid on deposits to lower  interest  expense
resulted in  improvement  in both  interest rate spread and interest rate margin
over the previous year. Net earnings  decreased by $782,226,  or 10.3% from $7.6
million for the year ended September 30, 2001 to $6.8 million for the year ended
September  30, 2002.  Net earnings  for the year ended  September  30, 2001 were
enhanced by gains on sale of  securities  totaling  $5.4 million  which were not
repeated to that extent for 2002.

Interest Income
Interest income  increased $17.2 million,  or 24.5%,  from $70.1 million for the
year ended  September 30, 2001 to $87.3 million for the year ended September 30,
2002.  The  general  interest  rate  environment  during the year had  declining
interest rates but the branch acquisition in September 2001 included significant
commercial and consumer loan balances,  increasing the earning assets,  and also
providing  loans with slightly  higher yields.  Rates on short term  investments
such as federal funds and  interest-earning  deposits decreased sharply over the
year. The combined  result of these changes is reflected in the average yield on
interest earning assets, which decreased from 6.99% for the year ended September
30, 2001 to 6.35% for the year ended September 30, 2002.

Average  loans  receivable  increased  $49.2  million  and the  yield  on  loans
increased  4 basis  points,  resulting  in a $4.1  million  increase in interest
income  on  loans.  Purchases  of MBS  boosted  interest  income on MBS by $14.8
million.  The average balance of investment  securities increased $22.6 million,
or 17.5%, however the average rate decreased by 92 basis points,  resulting in a
$131,061 decrease in interest income on investment  securities compared with the
same period in 2001.

Interest Expense
Average  deposits  increased by $349.7 million for the year ended  September 30,
2002 compared to the year ended September 30, 2001, due to the deposit  balances
acquired in the WAMU branch  transaction in September 2001. The average interest
paid on interest-bearing  deposits decreased  significantly,  from 4.52% for the
year ended  September  30, 2001 to 2.92% for the year ended  September 30, 2002.
During the year ended  September 30, 2002,  the Company  reduced  interest rates
paid on deposit  accounts as part of a strategic plan to improve  profitability.
This strategic  move is evidenced by the decrease in interest  expense which was
coupled with a 52.1% increase in average deposit balances. As a result, interest
expense decreased $1.2 million, or 3.0%,  comparing the year ended September 30,
2002 to 2001. Interest expense on deposits decreased $521,672 from $30.3 million
for the year  ended  September  30,  2001 to $29.8  million  for the year  ended
September 30, 2002.

Interest expense on FHLB borrowings  decreased $457,332 due to decreased average
borrowings  of $3.7  million  which was  partially  offset  by a 26 basis  point
increase in the average rate paid.

As noted previously,  the general interest rate environment  during the year was
represented by declining rates. The impact of this environment is evident in the
decrease in interest  rates on  interest-earning  assets from 6.99% for the year
ended  September  30,  2001 to 6.35%  for the year  ended  September  30,  2002.
Decreases were noted in yields for most  categories of assets.  However,  due to
the  strategic  moves made by the Company in deposit  pricing,  overall rates on
interest-bearing  liabilities decreased 150 basis points from 4.81% for the year
ended  September  30, 2001 to 3.31% for the year ended  September 30, 2002. As a
result,  interest rate spread  increased from 2.18% for the year ended September
30, 2001 to 3.04% for the year ended  September  30, 2002.  Net interest  margin
(net  interest  income as a percent of  average  interest-earning  assets)  also
improved significantly,  from 2.93% for the fiscal year ended September 30, 2001
to 3.48% for the year ended September 30, 2002.

Provision for Loan Losses
The provision for loan losses was $156,000,  recoveries were $16,224, and charge
offs were  $747,092  during the year ended  September  30,  2002  compared  to a
provision for loan losses of $387,000,  with $42,406 of  recoveries,  and charge
offs of $90,173 during the year ended September 30, 2001. Charge offs during the
year ended September 30, 2002 related  primarily to a land  development loan and
various  consumer  loans.  Charge offs during the year ended  September 30, 2001
related  primarily to construction  loans from one borrower and various consumer
loans.

The  provision  for loan losses for the year ended  September  30, 2002 was less
than for the previous year because the strategy to sell newly originated one- to
four-family  loans in the secondary  market meant that fewer loans were added to
the loan  portfolio.  The loans added in the branch  acquisition  were allocated
allowance  as part of the  purchase  accounting  and thus did not  significantly
impact the provision for fiscal years 2002 and 2001.

The  composition  of  the  loan  portfolio  is  monitored  on a  regular  basis.
Significant  increases in commercial and consumer loans, which are considered to
have more  associated  credit risk than the Company's  traditional  portfolio of
one- to four-family  residential mortgages,  are considered in the determination
of the  appropriate  level of allowance  for loan losses.  As part of the branch
acquisition,  a loan loss  allowance  was  allocated to the acquired  loans.  At
<PAGE>

September  30,  2001,  the  allowance  for loan  losses was equal to 1,108.9% of
non-performing  assets compared to 398.7% at September 30, 2002. The decrease in
the  coverage  ratio  at  year  end  2002  was  the  result  of an  increase  in
non-performing assets.

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

  Year Ended September 30,                   2002                             2001                              2000
-------------------------------------------------------------------------------------------------------------------------------
                               Average                Yield/    Average                 Yield/    Average                Yield/
                               Balance   Interest       Rate    Balance   Interest        Rate    Balance   Interest       Rate
 INTEREST-EARNING ASSETS    (In thousands)
<S>                         <C>           <C>          <C>   <C>           <C>           <C>   <C>           <C>          <C>
  Loans receivable........... $660,246    $52,179      7.90%   $611,095    $48,051       7.86%   $747,842    $57,134      7.64%
  Mortgage backed and
  related securities.........  508,712     26,369      5.18%    192,976     11,611       6.02%     85,874      5,036      5.86%
  Investment securities......  151,749      7,159      4.72%    129,171      7,282       5.64%    145,504      8,737      6.00%
  Federal funds sold.........   21,092        440      2.09%     38,686      1,599       4.13%      3,224        180      5.59%
  Interest earning deposits..   19,027        333      1.75%     18,930        768       4.06%      5,552        312      5.63%
  FHLB stock.................   13,013        813      6.25%     12,175        822       6.75%     11,345        759      6.69%
                             ---------    -------             ---------    -------                -------    -------
  Total interest-earning
     assets..................1,373,839     87,293      6.35%  1,003,033     70,133       6.99%    999,341     72,158      7.22%
  Non-interest-earning
     assets..................  114,405                           44,817                            40,566
                             ---------    -------             ---------    -------                -------    -------
  Total Assets..............$1,488,244                       $1,047,850                        $1,039,907
                            ==========                       ==========                        ==========
 INTEREST-BEARING LIABILITIES
  Tax and insurance reserve..   $2,316        $66      2.85%     $2,952       $114       3.85%     $4,401       $ 89      2.02%
  Passbook and statement
     savings.................   82,358        930      1.13%     47,278      1,067       2.26%     53,890        959      1.78%
  Interest-bearing checking..  122,610        907      0.74%     75,070        812       1.08%     69,831        779      1.12%
  Money market...............  319,336      6,377      2.00%    164,523      6,332       3.85%    149,088      6,218      4.17%
  Certificates of deposit....  496,070     21,569      4.35%    383,796     22,093       5.76%    377,934     20,408      5.40%
  FHLB advances/
  Short term borrowings......  170,037      9,682      5.69%    173,786     10,333       5.95%    208,508     12,303      5.90%
                             ---------     ------               -------     ------                -------     ------
  Total interest-bearing
     liabilities.............1,192,727     39,531      3.31%    847,405     40,751       4.81%    863,652     40,756      4.72%
  Non-interest-bearing
     liabilities.............  180,765                           86,406                            65,762
                             ---------    -------             ---------    -------                -------    -------
  Total liabilities..........1,373,492                          933,811                           929,414
  Shareholders' equity.......  114,752                          114,039                           110,493
                            ----------                       ----------                        ----------
  Total Liabilities and
  Shareholders' Equity......$1,488,244                       $1,047,850                        $1,039,907
                            ==========                       ==========                        ==========
  Net interest income........             $47,762                          $29,382                           $31,402
                                          =======                          =======                           =======
  Interest rate spread.......                          3.04%                             2.18%                            2.50%
                                                       ====                              ====                             ====
  Net interest margin........                          3.48%                             2.93%                            3.14%
                                                       ====                              ====                             ====
  Average interest-earning
     assets to average
     interest-bearing
     liabilities.............                        115.18%                           118.37%                          115.71%
                                                     ======                            ======                           ======
</TABLE>

Non-Interest Income
Non-interest  income increased $1.6 million,  or 14.5%, to $12.6 million for the
year ended  September 30, 2002 from $11.0  million for the year ended  September
30, 2001.  During the year ended  September 30, 2001, the Company  realized $5.4
million  in  gains  on sales of  investments  when it sold  MBS  resulting  from
securitization of single family mortgage loans. This is compared to $1.7 million
in  gain  on  sale  of  securities  for  the  year  ended  September  30,  2002.
Disregarding  the gains on sale of investments,  non-interest  income  increased
93.4%,  from $5.6 million for the year ended September 30, 2001 to $10.9 million
for the year ended  September 30, 2002.  The increase is the result of continued
improvement  in fees and service  charges due to more accounts and a revised fee
structure and a $502,860  increase in gain on sale of mortgage loans.  Growth in
the activity in the Association's investment subsidiary, Klamath First Financial
Services, increased commission income by over $1.0 million.

Non-Interest Expense
Non-interest  expense  increased $21.5 million,  or 74.7%, from a total of $28.7
million  for the prior year to $50.2  million for the year ended  September  30,
2002.  The  increase is  primarily  attributed  to the  expansion  of the branch
network through the branch acquisition in September 2001 and addition of de novo
branches.  Compensation,  employee benefits,  and related expense increased $7.7
million,  or 53.1%,  from $14.4 million for the year ended September 30, 2001 to
$22.1  million for the same period of 2002.  Increases in  compensation  expense
arose from the addition of 124 employees as part of the WAMU branch  acquisition
<PAGE>

and other back office personnel added to handle the increased activity resulting
from a 48%  increase in  accounts,  as well as  personnel  added at five de novo
branches  opened  during  the year  ended  September  30,  2002.  Other  expense
increased $5.8 million, or 71.4%, from $8.2 million for the year ended September
30, 2001 to $14.0 million for the current year. Increases were noted as a result
of the branch acquisition,  the opening of the second Medford, Oregon branch and
the opening of four new  in-store  branches.  For  example,  postage and courier
expense increased $629,632,  and supplies expense increased  $411,765.  Checking
department  expense  increased  by $1.2  million  and ATM expense  increased  by
$274,301,  both due to the increase in number of locations and deposit accounts.
Advertising  expense  increased  $294,808  due to the  expansion  of the  branch
network.  Professional  service fees  increased  $131,468 with items relating to
recruitment of executives, training enhancements, and the hiring of a consulting
firm for a commercial loan project. The ratio of non-interest expense to average
total assets was 3.4% and 2.7% for the years ended  September 30, 2002 and 2001,
respectively.

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

  For the Year Ended September 30                       2001 vs. 2002                               2000 vs. 2001
-------------------------------------------------------------------------------------------------------------------------------
                                                 Increase (Decrease) Due To                  Increase (Decrease) Due To
                                                                      Net Increase                                 Net Increase
                                             Rate     Volume   Rate/Vol (Decrease)        Rate     Volume   Rate/Vol (Decrease)
-------------------------------------------------------------------------------------------------------------------------------

 INTEREST-EARNING ASSETS (in thousands)
<S>                                      <C>         <C>       <C>        <C>           <C>     <C>           <C>      <C>
  Loans.................................    $ 242     $3,864        $20     $4,126      $1,670  ($10,447)     ($306)   ($9,083)
  Mortgage-backed and related securities  (1,608)     18,997    (2,631)     14,758         131      6,281        163      6,575
  Investment securities.................  (1,187)      1,273      (208)      (122)       (534)      (981)         60    (1,455)
  Federal funds sold....................    (791)      (727)        360    (1,158)        (47)      1,982      (516)      1,419
  Interest-bearing deposits.............    (437)          4        (2)      (435)        (87)        752      (209)        456
  FHLB stock............................     (61)         57        (4)        (8)           7         56         --         63
                                         --------------------------------------------------------------------------------------
  Total Interest-Earning Assets......... ($3,842)    $23,468   ($2,465)    $17,161      $1,140   ($2,357)     ($808)   ($2,025)
                                         =======     =======    ======     =======      ======    ======       ====     ======

 INTEREST-BEARING LIABILITIES
  Tax and insurance reserves............    ($29)      ($24)         $6      ($47)         $81      ($29)      ($27)        $25
  Savings...............................    (532)        791      (395)      (136)         257      (118)       (31)        108
  Interest-bearing checking.............    (257)        514      (163)         94        (27)         59          1         33
  Money market..........................  (3,047)      5,959    (2,867)         45       (479)        644       (51)        114
  Certificates of deposit...............  (5,406)      6,463    (1,581)      (524)       1,347        317         21      1,685
  FHLB advances/Short term borrowings...    (437)      (223)          9      (651)          96    (2,049)       (17)    (1,970)
                                          -------------------------------------------------------------------------------------
  Total Interest-Bearing Liabilities.... ($9,708)    $13,480   ($4,991)   ($1,219)      $1,275   ($1,176)     ($104)       ($5)
                                          ======     =======    ======     ======       ======    ======       ====         ==
Increase (Decrease) in Net Interest
   Income...............................                                  $18,380                                      ($2,020)
                                                                          =======                                       ======
</TABLE>

Income Taxes
The provision for income taxes was $3.3 million for the year ended September 30,
2002, representing an effective tax rate of 32.4% compared with $3.7 million for
the year ended  September 30, 2001  representing an effective tax rate of 32.9%.
The decrease in effective  tax rate for 2002 is primarily  due to an increase in
income on  tax-exempt  municipal  securities.  (See Note 12 to the  Consolidated
Financial Statements.)
<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
General
Significant  transactions  marked  the year ended  September  30,  2001,  as the
Company  positioned itself for growth in the future.  Strategic  decisions had a
mixed  impact on  earnings.  The sale and  securitization  of $190.3  million in
fixed-rate  single family  mortgages left the Company holding the resulting MBS.
The timing of the  securitization  provided the opportunity to sell the MBS at a
gain totaling  $5.4 million  before tax.  Ultimately,  the  transaction  removed
$190.3  million  in long term  fixed-rate  assets  from the  interest  rate risk
profile and provided significant  earnings.  The other transaction that impacted
most aspects of the Company was the WAMU branch acquisition. As discussed above,
the transaction contributed significantly to loan and deposit balances, added 13
locations, and introduced 124 employees to the Klamath First family.

During  fiscal  2001,  the  Company  operated  in an  economy  that  experienced
declining  interest rates and a gradual return to a more normal yield curve,  in
contrast to the inverted  yield curve at the end of the prior year wherein short
term rates were higher than long term rates. However, with the rapidly declining
rates  and  strategic  decisions  to  make  the  balance  sheet  less  liability
sensitive, interest rate spread continued to be squeezed. Net earnings increased
by $1.1  million,  or 17.8% from $6.4 million for the year ended  September  30,
2000 to $7.6  million for the year ended  September  30,  2001,  primarily  as a
result of the gain on sale of securities.

Interest Income
Interest  income  decreased from $72.2 million for the year ended  September 30,
2000 to $70.1  million  for the year  ended  September  30,  2001.  The  general
interest rate environment  during the year showed  declining  interest rates but
movement toward a more normal yield curve.  Rates on short term investments such
as federal funds and interest-earning  deposits decreased sharply over the year.
Of course,  interest  income was  negatively  impacted by the  reduction in loan
balances with the  securitization  of loans in February 2001. The acquisition of
loans with the WAMU branches  boosted the loan balances but only  contributed to
interest income for part of one month. The combined result of these movements is
reflected in the average yield on interest  earning assets which  decreased from
7.22%  for the  year  ended  September  30,  2000 to 6.99%  for the  year  ended
September 30, 2001.

While average loans  receivable  decreased  $136.7  million,  the yield on loans
increased 22 basis  points,  resulting  in a $9.1  million  decrease in interest
income  on  loans.  Purchases  of MBS  boosted  interest  income  on MBS by $6.6
million.  This increase was offset by a $1.4 million decrease in interest income
on investment securities.  The average balance of investments decreased by $16.3
million,  or 11.2%, for the year ended September 30, 2001 compared with the same
period in 2000.

Interest Expense
Interest  expense  remained  constant  at $40.8  million.  Interest  expense  on
deposits  increased $1.9 million from $28.4 million for the year ended September
30, 2000 to $30.3 million for the year ended September 30, 2001.

Average  deposits  decreased by $19.9  million for the year ended  September 30,
2001 compared to the year ended  September  30, 2000 while the average  interest
paid on  interest-bearing  deposits  increased  slightly from 4.34% for the year
ended  September  30,  2000 to 4.52%  for the year  ended  September  30,  2000.
Interest  expense on FHLB  borrowings  decreased  $2.1  million due to decreased
average borrowings of $34.7 million.

As noted  previously,  the general interest rate environment  during fiscal 2001
was  represented by a normalizing  yield curve with much lower rates  throughout
the  curve and  especially  lower on the short  maturities.  The  impact of this
environment  is evident in the  decrease in interest  rate spread from 2.50% for
the year ended  September  30,  2000 to 2.18% for the year ended  September  30,
2001.  While  yields on assets  decreased by 23 basis  points,  cost of interest
bearing  liabilities  increased by 18 basis points,  resulting in a lower spread
for the current year. Net interest  margin (net interest  income as a percent of
average  interest-earning  assets) also decreased from 3.14% for the fiscal year
ended September 30, 2000 to 2.93% for the year ended September 30, 2001.

Provision for Loan Losses
The provision for loan losses was $387,000,  recoveries were $42,406, and charge
offs were  $90,173  during the year  ended  September  30,  2001  compared  to a
provision for loan losses of $1.8  million,  with  $441,639 of  recoveries,  and
charge offs of $606,999  during the year ended  September 30, 2000.  Charge offs
during the year ended September 30, 2001 related primarily to construction loans
from one borrower and various consumer loans.  Charge offs during the year ended
September 30, 2000 primarily related to write downs on commercial real estate.

The  provision  for loan losses for the year ended  September 30, 2001 was lower
than for the previous year because the strategy to sell newly originated one- to
four-family loans in the secondary market meant that few loans were added to the
loan  portfolio.  The  loans  added in the  branch  acquisition  were  allocated
allowance  as part of the  purchase  accounting  and  thus  did not  impact  the
provision for the year.

During the year ended  September 30, 2001, the composition of the loan portfolio
changed  dramatically,  with  significant  increases in commercial  and consumer
loans,  which  are  considered  to have  more  associated  credit  risk than the
Company's traditional portfolio of one- to four-family residential mortgages. As
part of the branch acquisition, an appropriate loan loss allowance was allocated
to the acquired  loans. At September 30, 2000, the allowance for loan losses was
equal to 251.5% of  non-performing  assets compared to 1,108.9% at September 30,
2001.  The increase in the  coverage  ratio at year end 2001 was the result of a
decrease in non-performing  assets and a higher allowance which incorporates the
risk factors associated with the significant increase in commercial and consumer
loans.
<PAGE>

Non-Interest Income
Non-interest  income increased $6.9 million, or 169.0%, to $11.0 million for the
year ended September 30, 2001 from $4.1 million for the year ended September 30,
2000. The Company realized $5.4 million in gains on sales of investments when it
sold MBS resulting from securitization of single family mortgage loans. However,
disregarding  the gain on sale of  investments,  there  remained a $1.6  million
increase in  non-interest  income from $4.1 million for the year ended September
30, 2000 to $5.6 million for the year ended September 30, 2001. The increase was
the result of continued  improvement in fees and service  charges and a $487,000
increase in gain on sales of mortgage loans.

Non-Interest Expense
Non-interest  expense  increased $4.9 million,  or 20.8%,  from a total of $23.8
million  for the prior year to $28.7  million for the year ended  September  30,
2001.  Compensation,  employee  benefits,  and related  expense  increased  $2.6
million,  or 21.4%,  from $11.9 million for the year ended September 30, 2000 to
$14.4 million for the same period of 2001. Of this increase, $388,000 relates to
early retirement accruals associated with the termination of the defined-benefit
pension plan and retirement of five of the Company's long-time employees.  Other
increases in  compensation  expense  arose from the addition of 124 employees as
part of the WAMU branch  acquisition  and other back office  personnel  added to
handle the increased activity  resulting from a 48% increase in accounts.  Other
expense  increased $1.5 million,  or 21.7%, from $6.7 million for the year ended
September 30, 2000 to $8.2 million for the current year. Increases were noted as
a result of the branch  acquisition,  opening of the Redmond,  Oregon branch and
opening of four new in-store branches. For example,  postage and courier expense
increased  $247,803,  and  supplies  expense  increased  $114,937.  Professional
service fees increased $118,174 with items relating to recruitment of executives
and training  enhancements.  Expense  related to loan pools sold to FNMA totaled
$419,289 and is a new cost associated with the securitization of mortgage loans.
The ratio of non-interest  expense to average total assets was 2.7% and 2.3% for
the years ended September 30, 2001 and 2000, respectively.

Income Taxes
The provision for income taxes was $3.7 million for the year ended September 30,
2001, representing an effective tax rate of 32.9% compared with $3.5 million for
the year ended  September 30, 2000  representing an effective tax rate of 35.5%.
The decrease in effective  tax rate for 2001 was primarily due to an increase in
income on  tax-exempt  municipal  securities  and the effect of  $270,000 in tax
refunds  received  during this fiscal year  related to amended tax returns for a
prior year. (See Note 12 to the Consolidated Financial Statements.)

COMMON STOCK INFORMATION
Since October 4, 1995, the Company's common stock has traded on The Nasdaq Stock
Market,  Inc.  under the symbol  "KFBI".  As of September  30, 2002,  there were
approximately  1,256  shareholders  of record.  This total does not  reflect the
number of persons or entities who hold stock in nominee or "street" name through
various brokerage firms.
<TABLE>
<CAPTION>

The high and low common stock prices by quarter were as follows:

 Year Ended September 30,                     2002                2001
---------------------------------------------------------------------------
                                        High        Low      High       Low
---------------------------------------------------------------------------
<S>                                   <C>        <C>       <C>       <C>
 First quarter...............         $13.28     $12.40    $12.88    $11.50
 Second quarter..............          13.62      13.01     14.00     12.13
 Third quarter...............          16.65      13.13     14.89     12.95
 Fourth quarter..............          16.19      14.00     15.20     12.70
</TABLE>

<TABLE>
<CAPTION>
The per share cash dividends declared by quarter were as follows:

 Year Ended September 30,                     2002               2001
---------------------------------------------------------------------------
<S>                                         <C>                <C>
 First quarter...............               $0.130             $0.130
 Second quarter..............                0.130              0.130
 Third quarter...............                0.130              0.130
 Fourth quarter..............                0.130              0.130
</TABLE>

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

Board of Directors
Klamath First Bancorp, Inc.
Klamath Falls, Oregon
We have audited the  accompanying  consolidated  balance sheets of Klamath First
Bancorp, Inc.and Subsidiaries (the "Company") as of September 30, 2002 and 2001,
and the related consolidated  statements of earnings,  shareholders' equity, and
cash flows for each of the three years in the period ended  September  30, 2002.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We  conducted  our audits in  accordance  with
auditing  standards  generally  accepted in the United States of America.  Those
standards  require  that we plan and  perform  the  audit to  obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits  provide a reasonable  basis for our opinion.  In our
opinion, such consolidated  financial statements present fairly, in all material
respects, the financial position of Klamath First Bancorp, Inc. and Subsidiaries
as of September 30, 2002 and 2001 and the results of their  operations and their
cash flows for each of the three years in the period ended  September  30, 2002,
in conformity with accounting principles generally accepted in the United States
of America.

/s/ Deloitte & Touche LLP
Portland, Oregon
November 1, 2002
<TABLE>
<CAPTION>
<PAGE>


   Consolidated Balance Sheets                                                  Sept. 30, 2002     Sept. 30, 2001
-----------------------------------------------------------------------------------------------------------------

 ASSETS
<S>                                                                            <C>                <C>
   Cash and due from banks .................................................   $    38,444,500    $    40,446,042
   Interest bearing deposits with banks ....................................         5,762,373          3,791,252
   Federal funds sold and securities purchased
      under agreements to resell ...........................................         1,584,540         74,151,272
                                                                               ---------------    ---------------
   Total cash and cash equivalents .........................................        45,791,413        118,388,566

   Investment securities available for sale, at fair value
   (amortized cost: $119,940,845 and $154,190,612) .........................       119,542,052        154,675,760
   Investment securities held to maturity, at amortized cost
   (fair value: $-- and $137,429) ...........................................               --            135,388
   Mortgage-backed and related securities available for sale, at fair value
   (amortized cost: $640,304,722 and $419,639,650) .........................       650,796,164        421,637,670
   Mortgage-backed and related securities held to maturity, at amortized cost
   (fair value: $-- and $1,642,174) .........................................               --          1,620,612
   Loans receivable, net ...................................................       607,464,660        679,990,308
   Real estate owned and repossessed assets ................................           758,663            445,855
   Premises and equipment, net .............................................        23,410,847         16,911,912
   Stock in Federal Home Loan Bank of Seattle, at cost .....................        13,510,400         12,698,000
   Accrued interest receivable .............................................         8,177,014          8,657,586
   Core deposit intangible and other intangible assets .....................        40,298,989         44,088,926
   Other assets ............................................................         3,745,151          9,321,227
                                                                                --------------     --------------
   Total assets ............................................................    $1,513,495,353     $1,468,571,810
                                                                                ==============     ==============
 Liabilities and Shareholders' Equity

 Liabilities
   Deposit liabilities .....................................................    $1,142,005,997     $1,152,824,144
   Accrued interest on deposit liabilities .................................           721,810          1,574,606
   Advances from borrowers for taxes and insurance .........................         5,105,955          6,637,994
   Advances from Federal Home Loan Bank of Seattle .........................       205,250,000        168,000,000
   Short term borrowings ...................................................         1,700,000          1,700,000
   Accrued interest on borrowings ..........................................           820,975            801,743
   Pension liabilities .....................................................           842,272            942,148
   Deferred federal and state income taxes .................................         1,466,556            597,345
   Other liabilities .......................................................         8,438,245          6,799,241
                                                                                --------------     --------------
   Total liabilities .......................................................     1,366,351,810      1,339,877,221
                                                                                --------------     --------------
   Mandatorily redeemable preferred securities .............................        27,205,507         14,553,684
                                                                                --------------     --------------

   Commitments and contingent liabilities

 Shareholders' Equity

   Preferred stock, $.01 par value, 500,000 shares authorized; none issued.                 --                 --
   Common stock, $.01 par value, 35,000,000 shares authorized,
   September 30, 2002 - 6,744,040 issued, 6,366,546 outstanding
   September 30, 2001 - 7,060,667 issued, 6,561,461 outstanding ............            67,440             70,607
   Additional paid-in capital ..............................................        30,282,059         33,926,796
   Retained earnings-substantially restricted ..............................        87,265,334         83,816,307
   Unearned shares issued to ESOP ..........................................        (2,935,130)        (3,913,510)
   Unearned shares issued to MRDP ..........................................          (999,111)        (1,298,859)
   Accumulated other comprehensive income ..................................         6,257,444          1,539,564
                                                                                ---------------    --------------
   Total shareholders' equity ..............................................       119,938,036        114,140,905
                                                                                ---------------    --------------
   Total liabilities and shareholders' equity ..............................    $1,513,495,353     $1,468,571,810
                                                                                ==============     ==============
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

   Consolidated Statements of Earnings - Year Ended Sept. 30                    2002           2001          2000
-----------------------------------------------------------------------------------------------------------------

 Interest income
<S>                                                                       <C>           <C>           <C>
   Loans receivable ...................................................   $52,178,747   $48,051,228   $57,133,422
   Mortgage-backed and related securities .............................    26,368,930    11,611,184     5,035,957
   Investment securities ..............................................     7,972,257     8,103,318     9,495,804
   Federal funds sold and securities
   purchased under agreements to resell ...............................       440,220     1,598,662       180,253
   Interest bearing deposits ..........................................       333,019       768,192       312,293
                                                                          -----------    ----------    ----------
   Total interest income ..............................................    87,293,173    70,132,584    72,157,729
                                                                          -----------    ----------    ----------
 Interest expense

   Deposit liabilities ................................................    29,782,599    30,304,271    28,363,916
   Advances from FHLB of Seattle ......................................     9,608,659    10,065,991    12,184,341
   Other ..............................................................       139,857       380,579       207,963
                                                                           ----------    ----------    ----------
   Total interest expense .............................................    39,531,115    40,750,841    40,756,220
                                                                           ----------    ----------    ----------
   Net interest income ................................................    47,762,058    29,381,743    31,401,509

   Provision for loan losses ..........................................       156,000       387,000     1,764,000
                                                                           ----------    ----------    ----------
   Net interest income after provision for loan losses ................    47,606,058    28,994,743    29,637,509
                                                                          ----------    ----------    ----------

 Non-interest income
   Fees and service charges ...........................................     7,876,902     4,293,983     3,212,434
   Gain on sale of investments ........................................     1,707,172     5,374,723         6,836
   Gain on sale of real estate owned ..................................        25,852        86,927       154,661
   Gain on sale of loans ..............................................     1,076,745       573,885        86,826
   Brokerage and annuity commissions ..................................     1,368,057       362,387       164,025
   Other income .......................................................       559,103       321,758       469,892
                                                                           ----------    ----------    ----------
   Total non-interest income ..........................................    12,613,831    11,013,663     4,094,674
                                                                           ----------    ----------    ----------
Non-interest expense

   Compensation, employee benefits and related expense.................    22,125,329    14,448,997    11,898,041
   Occupancy expense ..................................................     4,811,472     2,858,504     2,413,316
   Data processing expense ............................................     1,499,490     1,007,040       913,531
   Insurance premium expense ..........................................       181,449       133,407       186,557
   Loss on sale of investments ........................................       628,823        30,632            --
   Loss on sale of real estate owned ..................................           771        39,911         7,863
   Amortization of core deposit intangible ............................     5,520,680     1,794,330     1,652,677
   Mandatorily redeemable preferred securities expense ................     1,423,774       252,367            --
   Other expense ......................................................    13,979,591     8,154,956     6,700,888
                                                                          ----------    ----------    ----------
   Total non-interest expense .........................................    50,171,379    28,720,144    23,772,873
                                                                          ----------    ----------    ----------
   Earnings before income taxes .......................................    10,048,510    11,288,262     9,959,310
   Provision for income taxes .........................................     3,259,734     3,717,260     3,533,158
                                                                           ----------    ----------    ----------
   Net earnings .......................................................   $ 6,788,776   $ 7,571,002   $ 6,426,152
                                                                          ===========   ===========   ===========

   Earnings per common share - basic ..................................   $      1.06   $      1.14   $      0.94
   Earnings per common share - fully diluted ..........................   $      1.05   $      1.13   $      0.94
   Weighted average common shares outstanding - basic..................     6,411,351     6,627,200     6,822,025
   Weighted average common shares outstanding -  with dilution.........     6,495,498     6,702,045     6,822,025
See notes to consolidated financial statements
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                                        Consolidated Statements of Shareholders' Equity
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                Unearned     Unearned     Accumulated
                                  Common   Common   Additional                    shares       shares           Other          Total
                                   stock    stock      paid-in     Retained       issued       issued   comprehensive  shareholders'
                                  shares   amount      capital     earnings      to ESOP      to MRDP   income (loss)         equity
                               ---------- -------  -----------  -----------  ------------  ------------  ------------  -------------
<S>                            <C>        <C>      <C>          <C>          <C>           <C>           <C>           <C>
  Balance at
  October 1, 1999              7,062,092  $79,084  $43,794,535  $76,866,452  ($5,871,900)  ($3,519,296)  ($1,763,412)  $109,585,463
  Cash dividends                      --       --           --   (3,579,349)          --            --            --     (3,579,349)
  Stock repurchased
     and retired                (542,151)  (5,422)  (6,249,273)          --           --            --            --     (6,254,695)
  ESOP contribution               97,865       --      142,826           --      978,650            --            --      1,121,476
  MRDP contribution               74,622       --       13,708           --           --     1,020,918            --      1,034,626
-----------------------------------------------------------------------------------------------------------------------------------
                               6,692,428   73,662   37,701,796   73,287,103   (4,893,250)   (2,498,378)   (1,763,412)   101,907,521
-----------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income
   Net earnings                                                   6,426,152                                               6,426,152
   Other comprehensive
   income:
    Unrealized gain on
    securities, net of tax
    and reclassification
    adjustment1                                                                                              390,888        390,888
-----------------------------------------------------------------------------------------------------------------------------------
  Total comprehensive income                                                                                              6,817,040
-----------------------------------------------------------------------------------------------------------------------------------
  Balance at
  September 30, 2000           6,692,428   73,662   37,701,796   79,713,255   (4,893,250)   (2,498,378)   (1,372,524)   108,724,561
-----------------------------------------------------------------------------------------------------------------------------------
  Cash dividends                      --       --           --   (3,467,950)          --            --            --     (3,467,950)
  Stock repurchased and
     retired                    (550,221)  (5,502)  (7,393,921)          --           --            --            --     (7,399,423)
  ESOP contribution               97,974       --      396,471           --      979,740            --            --      1,376,211
  MRDP contribution               76,618       --       13,708           --           --     1,199,519            --      1,213,227
  Exercise of stock options      244,662    2,447    3,208,742           --           --            --            --      3,211,189
-----------------------------------------------------------------------------------------------------------------------------------
                               6,561,461   70,607   33,926,796   76,245,305   (3,913,510)   (1,298,859)   (1,372,524)   103,657,815
-----------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income
   Net earnings                                                   7,571,002                                               7,571,002
   Other comprehensive
   income:
    Unrealized gain on
    securities, net of tax
    and reclassification
    adjustment2                                                                                            2,912,088      2,912,088
-----------------------------------------------------------------------------------------------------------------------------------
  Total comprehensive income                                                                                             10,483,090
-----------------------------------------------------------------------------------------------------------------------------------
  Balance at
  September 30, 2001           6,561,461   70,607   33,926,796   83,816,307   (3,913,510)   (1,298,859)    1,539,564    114,140,905
-----------------------------------------------------------------------------------------------------------------------------------
  Cash dividends                      --       --           --   (3,339,749)          --            --           --      (3,339,749)
  Stock repurchased and
     retired                    (345,986)  (3,460)  (4,747,387)          --           --            --           --      (4,750,847)
  ESOP contribution               97,865       --      410,593           --      978,380            --           --       1,388,973
  MRDP contribution               23,847       --       11,511           --           --       299,748           --         311,259
  Exercise of stock options       29,359      293      369,295           --           --            --           --         369,588
  Tax benefit of stock options       --        --      311,251           --           --            --           --         311,251
-----------------------------------------------------------------------------------------------------------------------------------
                               6,366,546   67,440   30,282,059   80,476,558   (2,935,130)    ( 999,111)   1,539,564     108,431,380
-----------------------------------------------------------------------------------------------------------------------------------
  Comprehensive income
  Net earnings                                                    6,788,776                                               6,788,776
  Other comprehensive income:
    Unrealized gain on
    securities, net of tax
    and reclassification
    adjustment3                                                                                           4,717,880       4,717,880
-----------------------------------------------------------------------------------------------------------------------------------
  Total comprehensive income                                                                                             11,506,656
-----------------------------------------------------------------------------------------------------------------------------------
  Balance at
  September 30, 2002           6,366,546  $67,440  $30,282,059  $87,265,334  ($2,935,130)    ($999,111)  $6,257,444    $119,938,036
                               =========  =======  ===========  ===========   ==========      ========   ==========    ============
<FN>

1Net unrealized holding gain on securities of $440,870 (net of $270,211 tax expense) less reclassification adjustment for net gains
included in net earnings of $49,982 (net of $30,634 tax expense).
2Net unrealized holding gain on securities of $2,893,883 (net of $1,773,670 tax expense) less reclassification adjustment for net
losses included in net earnings of $18,205 (net of $11,158 tax benefit).
3Net unrealized holding gain on securities of $5,095,497 (net of $3,123,389 tax expense) less reclassification adjustment for net
gains included in net earnings of $377,617 (net of $231,443 tax expense).
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

 Consolidated Statements of Cash Flows - Year Ended Sept. 30,   2002                2001            2000
-----------------------------------------------------------------------------------------------------------------------------------

 Cash flows from operating activities
<S>                                                      <C>                 <C>            <C>
   Net earnings                                            $6,788,776          $7,571,002     $6,426,152
   Adjustments to reconcile net earnings to net cash
   provided by (used in) operating activities:
   Depreciation and amortization                            7,715,652           3,161,017      2,927,853
   Deferred income taxes                                   (2,022,392)           (956,590)    (1,050,197)
   Provision for loan losses                                  156,000             387,000      1,764,000
   Provision for losses on real estate owned                       --                  --        120,000
   Compensation expense related to ESOP benefit             1,388,973           1,376,211      1,121,476
   Compensation expense related to MRDP Trust                 311,259           1,213,227      1,034,626
   Tax benefit associated with stock options                  311,251                 --              --
   Net amortization of premiums paid on investment
   and mortgage-backed and related securities               3,930,135             249,371        266,018
   Decrease in deferred loan fees, net of  amortization      (688,264)         (2,848,812)      (547,429)
   Net (gain) loss on sale of real estate owned and
   premises and equipment                                     (25,081)             39,452       (177,493)
   Net gain on sale of investment and mortgage-backed
   and related securities                                  (1,078,350)         (5,344,091)        (6,836)
   FHLB stock dividend                                       (812,400)           (821,500)      (758,300)
   Changes in assets and liabilities:
   Accrued interest receivable                                480,572          (2,225,513)       721,745
   Other assets                                             3,685,333          (7,456,909)      (329,286)
   Accrued interest on deposit liabilities                   (852,796)            389,530            605
   Accrued interest on borrowings                              19,232             (55,420)       822,679
   Pension liabilities                                        (99,876)             54,252         54,252
   Other liabilities                                        1,916,542           3,194,579        984,855
-----------------------------------------------------------------------------------------------------------------------------------
   Net cash provided by (used in) operating activities     21,124,566          (2,073,194)    13,374,720
-----------------------------------------------------------------------------------------------------------------------------------
 CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from maturity of investment securities
   held to maturity                                           135,000             130,000        290,000
   Proceeds from maturity of investment securities
   available for sale                                      15,000,000          33,425,000     33,360,000
   Principal repayments received on mortgage-backed
   and related securities held to maturity                  1,238,278             531,435        434,252
   Principal repayments received on mortgage-backed
   and related securities available for sale              108,276,166          46,429,807     26,859,810
   Principal repayments received on loans                 286,803,701         145,496,311     99,031,327
   Loan originations                                     (281,665,175)       (136,492,447)   (97,246,615)
   Loans purchased                                         (1,683,363)                 --       (507,600)
   Loans sold                                              68,661,105          30,708,858      6,315,261
   Purchase of investment securities available for sale   (41,854,162)        (78,456,931)    (1,110,000)
   Purchase of mortgage-backed and related securities
   available for sale                                    (419,414,542)       (383,198,597)   (29,396,069)
   Purchase of FHLB stock                                          --                  --       (160,900)
   Proceeds from sale of investment securities
   available for sale                                      61,977,158          10,367,746     10,051,563
   Proceeds from sale of mortgage-backed
   and related securities available for sale               87,131,357         187,991,361             --
<PAGE>

<CAPTION>

   Consolidated Statements of Cash Flows  - Year Ended Sept. 30  2002                2001           2000
-----------------------------------------------------------------------------------------------------------------------------------

 CASH FLOWS FROM INVESTING ACTIVITIES (cont.)
<S>                                                      <C>                 <C>            <C>
   Proceeds from sale of real estate owned and
   premises and equipment                                    $653,574          $1,261,175     $2,722,397
   Investment in real estate owned                                 --             (86,742)            --
   Purchases of premises and equipment                     (8,533,907)         (5,392,241)    (2,271,628)
   Acquisitions, net of cash acquired                              --         206,548,213             --
-----------------------------------------------------------------------------------------------------------------------------------
   Net cash provided by (used in) investing activities   (123,274,810)         59,262,948     48,371,798
                                                         ------------         -----------     ----------
 CASH FLOWS FROM FINANCING ACTIVITIES

   Net increase (decrease) in deposit liabilities         (10,818,147)         33,986,127    (25,020,241)
   Proceeds from FHLB advances                             99,950,000           2,000,000    614,650,000
   Repayments of FHLB advances                            (62,700,000)         (7,000,000)  (638,650,000)
   Proceeds from short term borrowings                        200,000           3,400,000      3,700,000
   Repayments of short term borrowings                       (200,000)         (4,700,000)      (700,000)
   Issuance of mandatorily redeemable preferred
      securities                                           12,651,823          14,553,684             --
   Stock repurchase and retirement                         (4,750,847)         (7,399,423)    (6,254,695)
   Proceeds from exercise of stock options                    369,588           3,211,189             --
   Advances from borrowers for taxes and insurance         (1,532,039)         (3,015,382)      (105,251)
   Dividends paid                                          (3,617,287)         (3,783,983)    (3,942,320)
-----------------------------------------------------------------------------------------------------------------------------------
   Net cash provided by (used in) financing activities     29,553,091          31,252,212    (56,322,507)
                                                         ------------         -----------     ----------
   Net (decrease) increase in cash and cash equivalents   (72,597,153)         88,441,966      5,424,011
   Cash and cash equivalents at beginning of year         118,388,566          29,946,600     24,522,589
-----------------------------------------------------------------------------------------------------------------------------------
   Cash and cash equivalents at end of year               $45,791,413        $118,388,566    $29,946,600
                                                         ============         ===========     ==========
   Supplemental schedule of interest and income taxes paid
   Interest paid                                          $40,364,979         $42,020,217    $39,932,938
   Income taxes paid                                        2,795,000           3,930,000      4,745,000

   Supplemental schedule of noncash investing
   and financing activities
   Net unrealized gain on securities available for sale    $4,717,880          $2,912,088       $390,888
   Dividends declared and accrued in other liabilities        883,136             934,233        957,609
   Loans transferred to real estate owned                     949,830             870,128      2,291,059
   Write down of real estate owned                                 --                  --        343,450
   Loans securitized and recorded as mortgage-backed
   securities available for sale                                   --         190,300,518             --
   Mortgaged-backed securities held to maturity
   transferred to available for sale, at fair value           376,335                  --             --
</TABLE>
<PAGE>


[1] Summary of Significant Accounting Policies
Principles of Consolidation
The  consolidated  financial  statements  include the accounts of Klamath  First
Bancorp, Inc. (the "Company") and its wholly-owned subsidiaries, Klamath Capital
Trust I, Klamath  Capital Trust II and Klamath  First  Federal  Savings and Loan
Association  (the  "Association"),  including  the  Association's  subsidiaries,
Klamath First Financial Services, Inc. and Pacific Cascades Financial,  Inc. All
intercompany accounts and transactions have been eliminated in consolidation.

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

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

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

Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, the Company considers
cash and due from  banks,  interest-bearing  deposits  held at  domestic  banks,
federal  funds  sold,  and  security  resale  agreements  to be  cash  and  cash
equivalents, all of which mature within 90 days.

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

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

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

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

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

Delinquent  interest  on  loans  past due 90 days or more is  charged  off or an
allowance  established  by a charge to income equal to all  interest  previously
accrued.  Interest is  subsequently  recognized only to the extent cash payments
are  received  until  delinquent  interest is paid in full and, in  management's
judgment,  the  borrower's  ability  to make  periodic  interest  and  principal
payments  is back to  normal,  in which  case the loan is  returned  to  accrual
status.
<PAGE>

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

Premises and Equipment
Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation is generally computed on the straight-line basis over the estimated
useful  lives of the various  classes of assets from their  respective  dates of
acquisition.  Estimated  useful lives range up to 30 years for buildings,  up to
the lease term for  leasehold  improvements,  three years for  automobiles,  and
three to 15 years for furniture and equipment.

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

The Company  accounts for mortgage  servicing  rights ("MSR") in accordance with
SFAS No. 140,  Accounting  for Transfers  and Servicing of Financial  Assets and
Extinguishment of Liabilities. SFAS No. 140 requires the Company to allocate the
total cost of all mortgage loans sold, whether  originated or purchased,  to the
MSR and the loans  (without  MSR) based on their  relative  fair values if it is
practicable to estimate those fair values.

MSR  are  capitalized  at  their  allocated  carrying  value  and  amortized  in
proportion to, and over the period of, estimated future net servicing income.

The  Company  assesses  impairment  of the MSR based on the fair  value of those
rights.  For purposes of measuring  impairment,  the MSR are stratified based on
interest rate characteristics  (fixed-rate and  adjustable-rate),  as well as by
coupon rate. In order to determine the fair value of the MSR, the Company uses a
model  that  estimates  the  present  value  of  expected   future  cash  flows.
Assumptions  used in the model include  market  discount  rates and  anticipated
prepayment  speeds.  In  addition,  the  Company  uses  market  comparables  for
estimates of the cost of servicing,  inflation  rates and ancillary  income.  An
impairment  allowance  of  $180,739  was  recorded at  September  30,  2002.  No
impairment  allowance was  considered  necessary at September  30, 2001.  Future
interest rate decreases could have a negative impact on the recorded MSR.

Intangible Assets
In conjunction  with branch  acquisitions,  the Company has recorded  intangible
assets,  including core deposit  intangible and other  intangible  assets.  Core
deposit  intangibles are amortized over the estimated  average remaining life of
the deposit base acquired.  Other intangible  assets are amortized over a period
no greater than the estimated  remaining life of the long term assets  acquired.
At September 30, 2002, core deposit  intangibles totaled $17.4 million and other
intangible assets totaled $22.9 million.

Because other  intangible  assets were recorded in conjunction with the purchase
of branches,  they were accounted for in accordance with SFAS No. 72, Accounting
for Certain Acquisitions of Bank and Thrift  Institutions.  In October 2002, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 147,  Acquisitions
of Certain Financial  Institutions,  which requires such intangible assets to be
accounted for under the provisions of SFAS No. 141, Business  Combinations,  and
SFAS No. 142, Goodwill and Other Intangible Assets.  Under this guidance,  other
intangible  assets  will be  evaluated  for  impairment  but will no  longer  be
amortized. The Company plans to adopt SFAS No. 147 as of October 1, 2002.

Income Taxes
The Company  accounts for income taxes using the asset and  liability  method of
accounting  for  income  taxes.  Under  this  method,  deferred  tax  assets and
liabilities  are  recognized  for the future tax  consequences  attributable  to
differences  between the financial statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered or settled.

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

Management Recognition and Development Plan
The Company sponsors a Management Recognition and Development Plan ("MRDP"). The
MRDP  is  accounted  for  in  accordance  with  SFAS  No.  123,  Accounting  for
Stock-Based  Compensation.  The MRDP authorizes the grant of common stock shares
to certain  officers and directors,  which vest over a five-year period in equal
installments.  The Company recognizes  compensation expense in the amount of the
fair value of the common stock in accordance  with the vesting  schedule  during
the years in which the shares are payable.  When the MRDP awards are  allocated,
the common stock shares become common stock  equivalents  for earnings per share
calculations.  Compensation expense for the years ended September 30, 2002, 2001
and 2000 was $311,259, $1.2 million and $1.0 million, respectively.
<PAGE>
Stock Based  Compensation
The Company accounts for stock option grants using the intrinsic value method as
prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to  Employees,  and related  interpretations.  Under the  intrinsic
value  based  method,  compensation  cost for stock  options is  measured as the
excess,  if any,  of the  quoted  market  price of stock at grant  date over the
amount an employee must pay to acquire the stock.  Stock options  granted by the
Company have no intrinsic  value at the grant date and,  under APB No. 25, there
is no compensation expense to be recorded.

SFAS No. 123, Accounting for Stock-Based Compensation,  encourages, but does not
require,   companies  to  record  compensation  cost  for  stock-based  employee
compensation plans at fair value. The fair value approach measures  compensation
costs based on factors such as the term of the option, the market price at grant
date, and the option  exercise price,  with expense  recognized over the vesting
period.  See Note 17 for the pro forma  effect on net  earnings and earnings per
share as if the fair value method had been used.

Recently Issued Accounting Pronouncements

In June 2001,  the FASB  issued  SFAS No.  142,  Goodwill  and Other  Intangible
Assets,  which is  effective  October 1, 2002.  SFAS No. 142 will  require  that
goodwill no longer be amortized  and instead be tested for  impairment  at least
annually.  In addition,  the standard includes provisions for the accounting and
reporting of certain existing recognized intangibles and goodwill. Management is
currently  evaluating the impact that SFAS No. 142 may have on its  consolidated
financial statements.

In August 2001,  the FASB issued SFAS No. 144,  Accounting for the Impairment of
Disposal  of  Long-Lived  Assets,  which is  effective  October  1,  2002.  This
statement supersedes SFAS No. 121 and the accounting and reporting provisions of
Accounting  Principles  Board  Opinion No. 30 for the disposal of a segment of a
business.  The Company is currently  evaluating the impact that adoption of SFAS
No. 144 may have on the consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.  The standard requires companies to recognize costs
associated  with exit or disposal  activities when they are incurred rather than
at the date of a commitment to an exit or disposal  plan.  SFAS No. 146 replaces
previous  accounting  guidance  which  was  provided  by EITF  Issue  No.  94-3,
Liability  Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring).  SFAS
No. 146 is effective for exit or disposal  activities  initiated  after December
31, 2002.

In October 2002, the Financial  Accounting  Standards Board ("FASB") issued SFAS
No. 147, Acquisitions of Certain Financial Institutions,  which requires certain
intangible  assets to be  accounted  for under the  provisions  of SFAS No. 141,
Business  Combinations,  and SFAS No. 142, Goodwill and Other Intangible Assets.
Under this guidance,  other  intangible  assets will be evaluated for impairment
but will no longer be  amortized.  The Company plans to adopt SFAS No. 147 as of
October 1, 2002.  Expense related to amortization of other  intangibles  totaled
$1.1 million for the year ended  September 30, 2002. A similar  expense will not
be recorded in fiscal year 2003.

(2)  Acquisition

On September 7, 2001, the Company  completed the acquisition of 13 branches from
Washington  Mutual.  These  branches  are located  along the Oregon coast and in
northeastern  Oregon,  complementing  and expanding the existing branch network.
The  transaction,  which was accounted for as a purchase in accordance with SFAS
No. 72,  Accounting for Certain  Acquisitions  of Bank and Thrift  Institutions,
included acquisition of $179.3 million in loans and assumption of $423.5 million
in deposit  liabilities.  The  balance  sheet at  September  30,  2001  reflects
inclusion of all assets and liabilities  related to the transaction.  Income and
expense  related to the transaction and operation of the branches for the period
from  September 7, 2001 to September  30, 2001 are reflected in the statement of
earnings.  As a result of this  transaction,  the Company  recorded core deposit
intangible of $15.0 million which will be amortized  over the estimated  life of
the deposit base.  The Company also recorded  other  intangible  assets of $24.1
million related to the transaction.

(3) Cash and Due from Banks

The Company is required to maintain an average  reserve balance with the Federal
Reserve Bank, or maintain such reserve  balance in the form of cash.  The amount
of this required  reserve balance was  approximately  $4,024,000 and $766,000 at
September  30,  2002 and 2001,  respectively,  and was met by  holding  cash and
maintaining an average  balance with the Federal  Reserve Bank in excess of this
amount.

(4) Investments and Mortgage-backed Securities

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

<TABLE>
<CAPTION>

INVESTMENT SECURITIES AVAILABLE-FOR-SALE
                                         Amortized         Gross  Unrealized            Fair
 September 30, 2002                           Cost        Gains        Losses          Value
--------------------------------------------------------------------------------------------
  State and municipal obligations
<S>                                   <C>            <C>          <C>           <C>
    Maturing within one year..........$    100,000   $      565   $        --   $    100,565
    Maturing after one year through
     five years ......................     485,300       12,929            --        498,229
    Maturing after five years through
     ten years .......................     790,110       56,682            --        846,792
    Maturing after ten years .........  38,202,338    2,381,961         4,044     40,580,255

  Corporate obligations
    Maturing within one year .........  17,890,090           --        55,225     17,834,865
    Maturing after one year through
     five years ......................  23,922,805      489,819        14,498     24,398,126
    Maturing after ten years .........  19,834,958           --     2,644,508     17,190,450

  Federal agency preferred stock
     Maturing after ten years ........  18,715,244           --        622,474    18,092,770
                                      ------------   ----------   ------------   ------------
                                      $119,940,845   $2,941,956   $  3,340,749  $119,542,052
                                      ============   ==========   ============  ============
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

INVESTMENT SECURITIES AVAILABLE-FOR-SALE
                                         Amortized        Gross  Unrealized           Fair
 September 30, 2001                           Cost        Gains      Losses          Value
-------------------------------------------------------------------------------------------
<S>                                   <C>            <C>         <C>          <C>
 U.S. Government obligations
 Maturing within one year              $15,003,079     $435,049         $--    $15,438,128
 through five years                     15,200,000      251,500          --     15,451,500
 Maturing after five years
 and through ten years                   9,916,677       45,223          --      9,961,900

 State and municipal obligations
 Maturing after one year
 through five years                        585,530       12,993          --        598,523
 Maturing after five years
 through ten years                         397,962        7,610          --        405,572

 Maturing after ten years               31,967,069      746,540      77,519     32,636,090
 Corporate obligations
 Maturing within one year               10,011,936      185,414          --     10,197,350
 Maturing after one year
 through five years                     35,562,330      942,817          --     36,505,147
 Maturing after ten years               19,830,093           --   1,814,343     18,015,750

 Federal agency preferred stock
 Maturing after ten years               15,715,936           --     250,136     15,465,800
-------------------------------------------------------------------------------------------
                                      $154,190,612   $2,627,146  $2,141,998   $154,675,760
                                      ============   ==========  ==========   =============
<CAPTION>

INVESTMENT SECURITIES HELD-TO-MATURITY
                                         Amortized        Gross  Unrealized           Fair
 September 30, 2001                           Cost        Gains      Losses          Value
 State and municipal obligations
-------------------------------------------------------------------------------------------
<S>                                   <C>            <C>         <C>          <C>
 Maturing within one year                 $135,388       $2,041  $       --       $137,429
                                      ============   ==========  ==========   =============
<CAPTION>
MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
                                         Amortized        Gross  Unrealized           Fair
 September 30, 2001                           Cost        Gains      Losses          Value
-------------------------------------------------------------------------------------------
<S>                                  <C>           <C>           <C>          <C>
 FNMA maturing after one year
 through five years                     $2,944,195      $26,810  $       --     $2,971,005

 CMO's maturing after one year
 through five years                     11,520,162      237,265          --     11,757,427

 FHLMC maturing after one year
 through five years                     12,634,495      231,613          --     12,866,108

 FNMA maturing after five years
 through ten years                     133,151,422    4,006,978          --    137,158,400

 CMO's maturing after five years
 through ten years                       7,182,143       83,445          --      7,265,588

 FNMA maturing after ten years         116,232,557    1,134,165          --    117,366,722

 FHLMC maturing after ten years         37,902,266      425,289       2,515     38,325,040

 GNMA maturing after ten years          24,346,010      247,888         346     24,593,552

 CMO's  maturing after ten years       294,391,472    4,108,891       8,041    298,492,322
-------------------------------------------------------------------------------------------
                                      $640,304,722  $10,502,344     $10,902   $650,796,164
                                      ============  ===========   =========   =============
<CAPTION>

MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE
                                         Amortized        Gross  Unrealized           Fair
 September 30, 2001                           Cost        Gains      Losses          Value
-------------------------------------------------------------------------------------------
<S>                                   <C>            <C>         <C>          <C>
 FNMA maturing after one year
 through five years                     $1,315,698      $27,973  $       --     $1,343,671

 CMO's maturing after one year
 through five years                     25,958,997      174,744          --     26,133,741

 FHLMC maturing after one year
 through five years                     10,057,380      104,104          --     10,161,484

 FNMA maturing after five years
 through ten years                      10,057,489      165,138          --     10,222,627

 CMO's maturing after five years
 through  ten years                     90,827,507       67,227     608,387     90,286,347

 FNMA maturing after ten years          45,459,792      200,295      32,745     45,627,342

 FHLMC maturing after ten years          9,480,629      155,121         197      9,635,553

 GNMA maturing after ten years           6,816,570      160,234          --      6,976,804

 CMO's maturing after ten years        219,665,588    1,693,975     109,462    221,250,101
-------------------------------------------------------------------------------------------
                                      $419,639,650   $2,748,811    $750,791   $421,637,670
                                      ============   ==========   =========   =============
<CAPTION>

MORTGAGE-BACKED AND RELATED SECURITIES HELD-TO-MATURITY
                                         Amortized        Gross  Unrealized           Fair
 September 30, 2001                           Cost        Gains      Losses          Value
-------------------------------------------------------------------------------------------
<S>                                   <C>            <C>         <C>          <C>
 GNMA maturing after ten years          $1,620,612      $21,562  $       --     $1,642,174
                                      ============   ==========   =========   =============
</TABLE>

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

At September 30, 2002 and 2001, the Company  pledged  securities  totaling $40.5
million and $42.0 million,  respectively,  to secure certain public deposits and
for other purposes as required or permitted by law.

The Company has also pledged securities of zero and $1.5 million to secure short
term borrowings at September 30, 2002 and 2001, respectively. (See Note 11.)

[5] Loans receivable
<TABLE>
<CAPTION>

 September 30,                               2002           2001
-----------------------------------------------------------------
 Real estate loans
<S>                                  <C>            <C>
 Permanent residential 1-4 family    $339,403,368   $421,499,010
 Multi-family residential              21,595,322     23,257,194
 Construction                          15,223,441     21,673,519
 Agricultural                           4,888,861      4,218,263
 Commercial                            91,703,262     99,318,389
 Land                                   4,164,394      3,696,487
-----------------------------------------------------------------
 Total real estate loans              476,978,648    573,662,862
                                      -----------    -----------
 Non-real estate loans
 Savings account                        1,261,448      2,090,840
 Home improvement and home equity      65,092,250     50,464,521
 Other consumer                        16,926,304     18,696,626
 Commercial                            62,102,347     56,098,520
-----------------------------------------------------------------
 Total non-real estate loans          145,382,349    127,350,507
                                      -----------    -----------
 Total loans                          622,360,997    701,013,369
 Less
 Undisbursed portion of loans          3,609,164       8,472,757
 Deferred loan fees                     3,911,361      4,599,624
 Allowance for loan losses              7,375,812      7,950,680
-----------------------------------------------------------------
                                     $607,464,660   $679,990,308
                                     ============   =============

</TABLE>
<PAGE>

The weighted  average  interest rate on loans at September 30, 2002 and 2001 was
7.36% and 7.92%, respectively.

Included in loans receivable are $9.5 million and $77,500 of loans held for sale
at  September  30,  2002 and 2001,  respectively.  All  these  loans are one- to
four-family  mortgage  loans.  In the  aggregate  there  was no lower of cost or
market adjustment required; fair value approximates cost.

Aggregate loans to officers and directors, all of which were current, consist of
the following (in thousands):
<TABLE>
<CAPTION>

 Year Ended September 30,           2002         2001        2000
------------------------------------------------------------------
<S>                               <C>          <C>         <C>
 Beginning balance                $2,990       $2,089      $2,380
 Originations                      1,018        1,227          83
 Principal repayments               (788)        (326)       (374)
------------------------------------------------------------------
 Ending balance                   $3,220       $2,990      $2,089
                                  ======       ======      ======
</TABLE>

Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>

 Year Ended September 30,            2002         2001        2000
-------------------------------------------------------------------
<S>                            <C>          <C>         <C>
 Balance, beginning of year    $7,950,680   $4,082,265  $2,483,625
 Charge offs                     (747,092)     (90,173)   (606,999)
 Recoveries                        16,224       42,406     441,639
 Additions                        156,000      387,000   1,764,000
 Acquisitions                          --    3,761,024          --
 Allowance reclassified with
 loan securitization                   --     (231,842)         --
-------------------------------------------------------------------
 Balance, end of year          $7,375,812   $7,950,680  $4,082,265
                               ==========   ==========  ===========
</TABLE>

At  September  30, 2002 and 2001,  impaired  loans  totalled  $200,000 and zero,
respectively. There were no specifically allocated loan loss reserves related to
these  loans.  The  average  investment  in  impaired  loans for the years ended
September 30, 2002 and 2001 was $43,590 and $33,226, respectively.

[6] Premises and Equipment
Premises and equipment consist of the following:
<TABLE>
<CAPTION>

 September 30,                               2002            2001
------------------------------------------------------------------
<S>                                   <C>             <C>
 Land                                 $ 4,872,673     $ 2,828,648
 Office buildings and construction
 in progress                           17,766,655      13,022,085
 Furniture, fixtures and equipment      9,559,681       8,021,564
 Automobiles                               20,928          38,856
 Less accumulated depreciation         (8,809,090)     (6,999,241)
------------------------------------------------------------------

                                      $23,410,847     $16,911,912
                                      ===========     ===========
<FN>

Depreciation  expense was $2.0 million,  $1.2 million,  and $1.1 million for the
years ended September 30, 2002, 2001, and 2000, respectively.
</FN>
</TABLE>

[7] Accrued Interest Receivable
The following is a summary of accrued interest receivable:
<TABLE>

 September 30,                               2002            2001
------------------------------------------------------------------
<S>                                   <C>             <C>
 Loans receivable                     $ 3,578,678     $ 4,557,093
 Mortgage-backed and
 related securities                     3,028,121       2,212,276
 Investment securities                  1,570,154       1,881,592
 Federal funds sold and securities
 purchased under agreements
 to resell                                     61           6,625
------------------------------------------------------------------
                                      $ 8,177,014     $ 8,657,586
                                      ===========     ===========
</TABLE>

[8] Mortgage Servicing Rights
Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  balance  sheets.  The unpaid  principal  balance of mortgage loans
serviced for others was $140.3  million and $186.4 million at September 30, 2002
and 2001,  respectively.  The  mortgage  servicing  rights are included in other
assets in the consolidated balance sheets.

During the quarter  ended March 31,  2001,  the Company  sold $190.3  million in
seasoned  fixed-rate  single-family loans to FNMA. The mortgages were aggregated
into 14 pools and  securitized  with the  resulting  MBS being  retained  by the
Company and classified as available for sale. The loans were sold with servicing
retained by the Company.

The fair value of MSR was determined  using a discounted cash flow model,  which
incorporates  the  expected  life of the loans,  estimated  costs to service the
loans,  servicing  fees to be received,  and other factors.  Mortgage  servicing
rights for the loans securitized  through FNMA were valued at $1.7 million.  The
key  assumptions  used to initially  value the MSR  recorded in 2001  included a
constant  prepayment  rate  ("CPR") of 20%,  an average  life of 6.3 years and a
discount  rate of 10%. The Company  pays a guarantee  fee to FNMA as part of the
securitization  and servicing of the loans, thus transferring all credit risk to
FNMA. The final resulting  basis in the MBS recorded was $185.9  million.  As of
September 30, 2001, all the resulting MBS were sold with a gain of $5.4 million.

The balance of the Company's  originated MSR as of September 30, 2002,  2001 and
2000, and changes during the years then ended, were as follows:
<TABLE>
<CAPTION>

 Year Ended September 30,                     2002         2001        2000
----------------------------------------------------------------------------
<S>                                     <C>          <C>            <C>
 Balance, beginning of year             $1,596,930      $95,420     $52,432
 Additions for loans securitized                --    1,653,830          --
 Additions for other loans sold                 --       54,693      59,868
 Amortization of servicing rights
 for loans securitized                    (327,542)    (167,857)         --
 Amortization of servicing rights
 for other loans sold                      (52,989)     (39,156)    (16,880)
 Valuation allowance                      (180,739)          --          --
----------------------------------------------------------------------------
 Balance, end of year                   $1,035,660   $1,596,930     $95,420
                                        ==========   ==========     =======
</TABLE>
<PAGE>

The changes in the Company's  valuation  allowance for  impairment of MSR are as
follows for the years indicated:
<TABLE>
<CAPTION>

 Year Ended September 30,                     2002        2001        2000
--------------------------------------------------------------------------
<S>                                      <C>           <C>         <C>
 Balance, beginning of year               $      0     $    --     $    --
 Additions for impairment                 (180,739)         --          --
--------------------------------------------------------------------------
 Balance, end of year                    ($180,739)    $    --     $    --
                                         ==========    =======     =======
</TABLE>

The  Company  evaluates  MSR for  impairment  by  stratifying  MSR  based on the
predominant  risk   characteristics  of  the  underlying  financial  assets.  At
September  30,  2002  and  2001,  the  fair  values  of the  Company's  MSR were
$1,045,964 and $1,678,344,  respectively,  which were estimated using a discount
rate of 8.5% and Public Securities  Association  prepayment  assumptions ("PSA")
ranging from 217 to 679 and 175 to 437, respectively.

At September 30, 2002, the key economic  assumptions  and the sensitivity of the
current  value for  purchased  MSR to immediate  10% and 20% adverse  changes in
those assumptions were as follows:
<TABLE>
<CAPTION>

 At September 30,                                        2002
--------------------------------------------------------------
<S>                                                <C>
 Fair value of capitalized MSR                     $1,045,964
 PSA                                               217 to 679
 Impact on fair value of
 10% adverse change                                  (55,655)
 Impact on fair value of
 20% adverse change                                 (105,232)
 Discount rate                                           8.5%
 Impact on fair value of
 10% adverse change                                  (22,103)
 Impact on fair value of
 20% adverse change                                  (43,263)
</TABLE>

These  sensitivities  are hypothetical  and should be used with caution.  As the
amounts  indicate,  changes  in fair  value  based  on a change  in  assumptions
generally  cannot be  extrapolated  because  the  relationship  of the change in
assumptions to the change in fair value may not be linear.  Also, in this table,
the effect of a variation  in a particular  assumption  on the fair value of the
retained  interest is  calculated  without  changing  any other  assumption.  In
reality,  however, changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities.

[9] Deposit Liabilities
The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>

 September 30,                                      2002                       2001
-------------------------------------------------------------------------------------------
                                              Amount    Percent           Amount   Percent
-------------------------------------------------------------------------------------------
<S>                                    <C>               <C>      <C>               <C>
 Checking accounts, non-interest
 bearing                                 $142,772,746     12.5%     $130,649,571     11.3%
                                       --------------    ------   --------------    ------
 Interest-bearing checking                125,866,951     11.0       116,755,784     10.1
                                       --------------    ------   --------------    ------
 Passbook and statement savings            86,000,755      7.5        77,646,048      6.7
                                       --------------    ------   --------------    ------
 Money market deposits                    330,646,410     29.0       283,893,020     24.6
                                       --------------    ------   --------------    ------
 Certificates of deposit
 Less than 4%                             241,617,671     21.1       136,034,530     11.8
 4.00% to 5.99%                           110,380,428      9.7       209,800,703     18.2
 6.00% to 7.99%                           104,395,224      9.1       197,755,646     17.2
 8.00% to 9.99%                               325,812      0.1           288,842      0.1
-------------------------------------------------------------------------------------------
                                          456,719,135     40.0       543,879,721     47.3
-------------------------------------------------------------------------------------------
                                       $1,142,005,997    100.0%   $1,152,824,144    100.0%
                                       ==============    ======   ==============    ======
</TABLE>

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

 Year Ended September 30,                         2002         2001         2000
---------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>
 Interest-bearing checking                   $ 906,544    $ 812,210    $ 779,335
 Passbook and statement savings                930,450    1,066,607      958,558
 Money market                                6,376,625    6,332,507    6,217,783
 Certificates of deposit                    21,691,878   22,199,640   20,575,944
---------------------------------------------------------------------------------
                                            29,905,497   30,410,964   28,531,620
 Less early withdrawal penalties               122,898      106,693      167,704
---------------------------------------------------------------------------------
 Net interest on deposits                  $29,782,599  $30,304,271  $28,363,916
                                           ===========  ===========  ===========
</TABLE>
<TABLE>
<CAPTION>


 At September 30, 2002 maturities of certificates of deposits were as follows:
<S>                                              <C>
 Within 1 year                                   $275,696,478
 1 year to 3 years                                114,476,601
 3 years to 5 years                                34,046,546
 Thereafter                                        32,499,510
--------------------------------------------------------------
                                                 $456,719,135
                                                 ============
</TABLE>
<TABLE>
<CAPTION>


 Weighted average interest rates at September 30 were as follows:     2002        2001
---------------------------------------------------------------------------------------
<S>                                                                   <C>         <C>
 Interest-bearing checking                                            0.44%       1.37%
 Passbook and statement savings                                       0.75%       2.05%
 Money market                                                         1.44%       3.21%
 Certificates of deposit                                              4.00%       5.32%
 Weighted average rate
 for all deposits                                                     2.42%       4.03%
</TABLE>


Deposits  in excess of $100,000  totaled  $297.8  million and $280.9  million at
September  30,  2002 and  2001,  respectively.  Customer  deposits  in excess of
$100,000 are not insured by the Federal Deposit Insurance Corporation ("FDIC").

[10] Advances from FHLB
As a member of the FHLB of Seattle, the Association maintains a credit line that
is a percentage of its total  regulatory  assets,  subject to  collateralization
requirements.  At September  30,  2002,  the credit line was 30 percent of total
assets of the  Association.  Advances are  collateralized  in the aggregate,  as
provided for in the Advances,  Security and Deposit  Agreements with the FHLB of
Seattle,  by certain  mortgages or deeds of trust,  and  securities  of the U.S.
Government and agencies thereof. At September 30, 2002 the minimum book value of
eligible collateral for these borrowings was $232.7 million.

Scheduled maturities of advances from the FHLB were as follows:
<TABLE>
<CAPTION>

                                            September 30,  2002                                September 30, 2001
                                         Range of         Weighted                          Range of        Weighted
                                         interest          average                          interest         average
                            Amount          rates    interest rate             Amount          rates   interest rate
--------------------------------------------------------------------------------------------------------------------
<S>                   <C>           <C>                      <C>         <C>           <C>                     <C>
 Due within one year   $31,250,000  1.91% - 2.20%            2.09%        $10,000,000          3.60%           3.60%
 After one but within
 five years             16,000,000  2.48% - 3.58%            3.06%                 --            --              --
 After five but within
 ten years             158,000,000  4.77% - 7.05%            5.86%        158,000,000  4.77% - 7.05%           5.86%
--------------------------------------------------------------------------------------------------------------------
                      $205,250,000                                       $168,000,000
                      ============                                       ============
</TABLE>
<PAGE>


Financial  data  pertaining  to the  weighted  average  cost,  the level of FHLB
advances and the related interest expense are as follows:
<TABLE>
<CAPTION>

 Year Ended September 30,                     2002         2001          2000
------------------------------------------------------------------------------
<S>                                  <C>           <C>           <C>
 Weighted average interest rate
 at end of year                              5.07%         5.73%         5.90%
 Weighted daily average
 interest rate during the year               5.71%         5.90%         5.88%
 Daily average FHLB advances         $168,332,740  $170,520,548  $207,218,306
 Maximum FHLB advances
 at any month end                     205,250,000   173,000,000   230,000,000
 Interest expense during the year       9,608,659    10,065,991    12,184,341
</TABLE>


[11] Short Term Borrowings
The  Company  had short term  borrowings  of $1.7  million  and $1.7  million at
September 30, 2002 and 2001, respectively. At September 30, 2002, the borrowings
consisted  of one  unsecured  line of  credit  with  Key  Bank  that  was  fully
disbursed.  The interest rate of this line is the prime rate, which was 4.75% at
September  30, 2002.  At September  30, 2001,  the  borrowings  consisted of one
secured line of credit with Key Bank that was fully disbursed. This line carried
interest based on one-month  LIBOR plus 1.95%,  which was 5.58% at September 30,
2001. The Company also had an unused line of credit  totaling $15.0 million with
U.S.  National Bank of Oregon at September 30, 2002 and 2001.  The Company is in
compliance with all debt covenants imposed by the lenders.

Financial data pertaining to the weighted  average cost, the level of short term
borrowings and the related interest expense are as follows:
<TABLE>
<CAPTION>

 Year Ended September 30,                    2002         2001        2000
---------------------------------------------------------------------------
<S>                                   <C>          <C>         <C>

 Weighted average interest rate
 at end of year                             4.75%        5.58%       9.01%
 Weighted daily average
 interest rate during the year              4.32%        8.22%       9.34%
 Daily average of
 short term borrowings                $1,704,521   $3,265,205  $1,289,617
 Maximum short term borrowings
 at any month end                      1,700,000    6,400,000   3,000,000
 Interest expense during the year         73,690      268,447     120,413

[12] Taxes on Income
The following is a summary of income tax expense (benefit):
</TABLE>
<TABLE>
<CAPTION>
 Year Ended September 30,                    2002         2001        2000
---------------------------------------------------------------------------
 Current Taxes
<S>                                    <C>          <C>         <C>
 Federal                               $4,306,047   $3,560,966  $3,735,797
 State                                    978,105      835,250     847,558
---------------------------------------------------------------------------
 Current tax provision                  5,284,152    4,396,216   4,583,355
---------------------------------------------------------------------------

 Deferred Taxes
 Federal                               (1,684,353)    (564,904)   (873,784)
 State                                   (340,065)    (114,052)   (176,413)
---------------------------------------------------------------------------
 Deferred tax benefit                  (2,024,418)    (678,956) (1,050,197)
---------------------------------------------------------------------------

 Provision for income taxes            $3,259,734   $3,717,260  $3,533,158
                                       ==========   ==========  ==========
</TABLE>

An analysis of income tax expense,  setting  forth the reasons for the variation
from the  "expected"  federal  corporate  income tax rate and the effective rate
provided, is as follows:
<TABLE>
<CAPTION>
 Year Ended September 30,                    2002         2001        2000
---------------------------------------------------------------------------
 Federal income taxes computed
<S>                                          <C>          <C>         <C>
 at statutory rate                           35.0%        35.0%       35.0%
 Tax effect of:
 State income taxes, net of
 Federal income tax benefit                   4.2          4.2         4.4
 Nondeductible ESOP
 compensation expense                         1.8          1.1         0.5
 Deductible MRDP
 compensation expense                         --           --          1.6
 Interest income on
 municipal securities                        (5.7)        (4.1)       (4.1)
 Other                                       (2.9)        (3.3)       (1.9)
---------------------------------------------------------------------------
 Income tax expense included
 in the statement of earnings                32.4%        32.9%       35.5%
                                             =====        =====       =====
</TABLE>

Deferred  income  taxes at  September  30,  2002 and 2001  reflect the impact of
"temporary  differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws.

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

 September 30,                               2002        2001
--------------------------------------------------------------
 Deferred Tax Assets
--------------------------------------------------------------
<S>                                   <C>          <C>
 Allowance for losses on loans         $1,679,909  $1,908,133
 Pension liability                        330,929     370,170
 Unearned ESOP shares                     353,036     392,295
 Core deposit premium                   2,264,290   1,255,293
 Basis difference in fixed assets         788,381     587,537
 Other                                         --      25,870
--------------------------------------------------------------
 Total gross deferred
 tax assets                             5,416,545   4,539,298
--------------------------------------------------------------

 Deferred Tax Liabilities
--------------------------------------------------------------
 FHLB stock dividends                   1,834,035   1,514,843
 Capitalized loan servicing income        360,498     627,434
 Capitalized conversion costs                  --     306,687
 Unrealized gain on securities
 available for sale                     3,135,399     647,859
 Deferred loan fees                       485,179     900,473
 Branch acquisition costs                 241,928          --
 Tax bad debt reserve
 in excess of base- year reserve          475,116     723,698
 Other                                    350,946     415,649
--------------------------------------------------------------
 Total gross deferred tax liabilities   6,883,101   5,136,643
--------------------------------------------------------------
 Net deferred tax liability           ($1,466,556)  ($597,345)
                                      ============  ==========
</TABLE>

The Company has  qualified  under  provisions  of the  Internal  Revenue Code to
compute  federal  income  taxes after  deductions  of  additions to the bad debt
reserves.  At September 30, 2002, the Company had a taxable temporary difference
of  approximately  $10.5 million that arose before 1988 (base-year  amount).  In
accordance  with SFAS No.  109,  Accounting  for Income  Taxes,  a deferred  tax
liability has not been recognized for the temporary difference.  Management does
not expect this temporary difference to reverse in the foreseeable future.
<PAGE>

[13] Mandatorily Redeemable Preferred Securities
In July 2001, the Company issued $15 million of mandatorily redeemable preferred
securities  through a subsidiary grantor trust. The Trust holds debt instruments
of the parent company  purchased  with the proceeds of the securities  issuance.
The capital  qualifying  securities  bear interest at a floating rate indexed to
six-month  LIBOR and mature in July 2031.  At September  30, 2002 and 2001,  the
interest  rate was 5.61% and 7.57%,  respectively.  The Company has the right to
redeem the securities after five years at a premium, and after ten years at par.
Certain changes in tax law or Office of Thrift Supervision regulations regarding
the  treatment of the capital  securities  as core capital could result in early
redemption, at par, or a shortening in the maturity of the securities.

In April  2002,  the  Company  issued  $13  million  of  mandatorily  redeemable
preferred  securities  through a subsidiary  grantor trust. The Trust holds debt
instruments of the parent company  purchased with the proceeds of the securities
issuance.  The capital  qualifying  securities  bear interest at a floating rate
indexed to six-month  LIBOR and mature in April 2032. At September 30, 2002, the
interest rate was 6.02%. The Company has the right to redeem the securities at a
premium  up to five years from  issuance,  and after five years at par.  Certain
changes in tax law or Office of Thrift  Supervision  regulations  regarding  the
treatment  of the  capital  securities  as core  capital  could  result in early
redemption, at par, or a shortening in the maturity of the securities.

(14)  Commitments and Contingencies
In the  ordinary  course  of  business,  the  Company  has  various  outstanding
commitments  and  contingencies  that  are  not  reflected  in the  accompanying
consolidated  financial statements.  In addition,  the Company is a defendant in
certain claims and legal actions arising in the ordinary course of business.  In
the opinion of management,  after consultation with legal counsel,  the ultimate
disposition  of these matters is not expected to have a material  adverse effect
on the consolidated financial condition,  results of operations, or liquidity of
the Company.

The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments  generally  include  commitments  to originate  mortgage,
commercial and consumer loans.  Those instruments  involve,  to varying degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the balance sheet. The Company's maximum exposure to credit loss in the event of
nonperformance by the borrower is represented by the contractual amount of those
instruments.  The Company uses the same credit policies in making commitments as
it does for  on-balance  sheet  instruments.  Commitments  to extend  credit are
conditional  45 day  agreements  to lend to a customer  subject to the Company's
usual terms and conditions.

At September 30, 2002, loan commitments  amounted to approximately $33.0 million
comprised of $12.9  million in variable  rate loans ranging from 3.38% to 14.25%
and $20.1 million in fixed rate loans ranging from 3.75% to 10.75%. At September
30, 2002, the Company had $18.3 million in commitments to sell loans..

The Company  originates  residential  real estate loans secured by  residential,
multi-family  and  commercial  properties  as well as  consumer  and  commercial
business loans.  Substantially all of the Company's lending portfolio resides in
the state of Oregon.  An  economic  downturn  in this area would  likely  have a
negative impact on the Company's results of operations depending on the severity
of the downturn.

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

[16] Earnings Per Share
Earnings per share ("EPS") is computed in accordance with SFAS No. 128, Earnings
per Share.  Shares held by the Company's ESOP that are committed for release are
considered  contingently  issuable shares and are included in the computation of
basic EPS.  Diluted EPS is computed  using the  treasury  stock  method,  giving
effect to potential  additional  common shares that were outstanding  during the
period. Potential dilutive common shares include shares awarded but not released
under the Company's MRDP, and stock options granted under the Stock Option Plan.
Following is a summary of the effect of dilutive  securities on weighted average
number of shares (denominator) for the basic and diluted EPS calculations. There
are no resulting adjustments to net earnings.

<TABLE>
<CAPTION>

 For the Year Ended  September 30,                         2002         2001        2000
-----------------------------------------------------------------------------------------
<S>                                                   <C>          <C>         <C>
 Weighted average common
 shares outstanding - basic                           6,411,351    6,627,200   6,822,025
-----------------------------------------------------------------------------------------
 Effect of Dilutive Securities on Number of Shares:
 MRDP shares                                              8,108        9,252          --
 Stock options                                           76,039       65,593          --
-----------------------------------------------------------------------------------------
 Total Dilutive Securities                               84,147       74,845          --
-----------------------------------------------------------------------------------------
 Weighted average common shares
 outstanding - with dilution                          6,495,498    6,702,045   6,822,025
                                                      =========    =========   =========
</TABLE>

[17] Employee  Benefit Plans Employee  Retirement Plan As of September 30, 2001,
the Company terminated its participation in a multiple-employer trusteed pension
plan ("Plan") covering all employees with at least one year of service and which
paid direct pensions to certain retired employees.  Benefits were based on years
of service with the Company and salary excluding bonuses, fees, and commissions.
Participants  were vested in their accrued benefits after five years of service.
Pension  expense of $452,592 and  $367,916  was incurred  during the years ended
September  30,  2001 and  2000,  respectively.  Separate  actuarial  valuations,
including computed value of vested benefits,  were not made with respect to each
contributing employer, nor were the plan assets so segregated by the trustee. As
part of the  termination  of the plan,  early  retirement was offered to certain
long-time employees of the Company.  The Company recorded expense of $378,887 in
the year ended September 30, 2001 related to these retirements.
<PAGE>

Effective  October  1,  2001,  the  Company  implemented  a 401(k)  plan for all
employees.  The Company  will match 50% of the  employee  contributions  up to a
maximum of 6% of the employee's  compensation.  Expense of $451,649 was recorded
in the year ended September 30, 2002 related to this plan.

Postretirement Benefit Plan
The Company has an unfunded postretirement benefit plan for certain retirees and
all  currently  active  employees who retire with at least ten years of service.
The plan  provides  for payment of all or a portion of the  Medicare  Supplement
premium  for  qualified  retirees  and  their  spouses.  This  plan was  revised
effective  October  1,  2001 to limit  benefits  to those  already  retired  and
discontinue  the benefit for current  employees.  The table below  reflects  the
result of this change on the actuarial valuation of the plan.

Information  related to the years ended  September  30,  2002,  2001 and 2000 is
presented below.
<TABLE>
<CAPTION>

 Year Ended September 30,                      2002         2001        2000
-----------------------------------------------------------------------------
<S>                                        <C>          <C>         <C>
 Change in benefit obligation
 at beginning of year                      $401,461     $324,279    $193,861
 Service cost                                    --       27,386      24,276
 Interest cost                               13,121       25,852      23,937
 Actuarial changes                         (166,365)      35,109      92,453
 Benefits paid                              (10,818)     (11,165)    (10,248)
-----------------------------------------------------------------------------
 Benefit obligation at end of year         $237,399     $401,461    $324,279
                                           ========     ========    ========
 Components of
 net periodic benefit cost
-----------------------------------------------------------------------------
 Service cost                              $     --      $27,386     $24,276
 Interest cost                               13,121       25,852      23,937
 Recognition of changes in
 actuarial assumptions, prior
 service cost,  benefit changes,
 and actuarial  gains and losses                 --        9,475       9,475
-----------------------------------------------------------------------------
 Net periodic benefit cost                  $13,121      $62,713     $57,688
                                           ========     ========    ========
</TABLE>


For measurement of the net periodic cost of the post retirement  benefit plan, a
5.0% annual  increase in the medical  care trend rate was  assumed.  The assumed
discount rate was 6.0% for 2002 and 7.5% for 2001 and 2000.

If the assumed  medical trend rates were increased by 1%, the September 30, 2002
benefit obligation would increase from $237,399 to $268,479 and the net periodic
benefit cost for the year ended  September 30, 2002 would  increase from $13,121
to $31,080.

Director Deferred Compensation Plan
The Company also has an unfunded  supplemental  benefits plan to provide members
of the Board of Directors with supplemental  retirement  benefits.  Supplemental
benefits are based on monthly fees approved by the Compensation Committee of the
Board.  Pension costs  recognized for the years ended September 30, 2002,  2001,
and 2000 were zero, $71,052 and $71,052, respectively. At September 30, 2002 and
2001, the projected benefit obligation was $516,170 and $942,148,  respectively.
An actuarial  valuation completed for the year ended September 30, 2002 showed a
lower projected  benefit  obligation due to fewer covered  directors and shorter
expected  benefit  periods due to the  increasing  age of the directors  covered
under the plan. The difference  between the projected benefit obligation and the
amount  recorded is being taken to income over five years which is the  expected
remaining average service life of the participants.

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

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

                   Weighted Number of Shares   Average Exercise Price
----------------------------------------------------------------------
<S>                                 <C>                       <C>
 Outstanding, October 1, 1999        916,258                  $13.314
----------------------------------------------------------------------
 Granted                                  --                       --
 Exercised                                --                       --
 Canceled                                 --                       --
----------------------------------------------------------------------
 Outstanding, September 30, 2000     916,258                  $13.314
----------------------------------------------------------------------
 Granted                             207,500                  $12.412
 Exercised                          (244,662)                 $13.125
 Canceled                                 --                       --
----------------------------------------------------------------------
 Outstanding, September 30, 2001     879,096                  $13.154
----------------------------------------------------------------------
 Granted                              40,000                  $12.900
 Exercised                           (19,572)                 $13.125
 Canceled                            (19,573)                 $13.125
----------------------------------------------------------------------
 Outstanding, September 30, 2002     879,951                  $13.144
                                     =======                  =======
</TABLE>

At September 30, 2002,  18,024 shares were available for future grants under the
Stock Plan.
<TABLE>
<CAPTION>

Additional information regarding options outstanding as of September 30, 2002 is
as follows:
                Range of      Options        Options    Weighted Av. Remaining
          Exercise Prices  Outstanding   Exercisable          Contractual Life
-------------------------------------------------------------------------------
          <C>                  <C>            <C>                          <C>
          $11.625-$13.144      207,500        77,500                       8.3
          $12.700-$13.100       40,000        10,000                       9.3
                  $13.125      609,208       589,635                       3.5
                  $20.577       23,243        18,594                       5.1
-------------------------------------------------------------------------------
                               879,951       695,729
                               =======       =======
</TABLE>
<PAGE>

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

SFAS No. 123, Accounting for Stock-Based  Compensation,  requires the disclosure
of pro forma net income and earnings per share had the Company  adopted the fair
value method as of the  beginning  of fiscal 1996.  Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate fair value of
freely tradable, fully transferable options without vesting restrictions,  which
significantly  differ from the Company's stock option awards.  These models also
require  subjective  assumptions,  including  future stock price  volatility and
expected time to exercise, which greatly affect the calculated values.

The weighted  average  grant-date  fair value of options  granted  during fiscal
years  2002,  2001,  1998  and  1996  were  $1.63,   $2.03,   $6.65  and  $4.12,
respectively.  The  Company's  calculations  are  based  on  a  multiple  option
valuation   approach  and  forfeitures   are  recognized  as  they  occur.   Had
compensation  cost for these  awards been  determined  under SFAS No.  123,  the
Company's  net  earnings  and  earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>


 Year ended September 30,                      2002         2001        2000
-----------------------------------------------------------------------------
 Net earnings:
-----------------------------------------------------------------------------
<S>                                      <C>          <C>         <C>
 As reported                             $6,788,776   $7,571,002  $6,426,152
-----------------------------------------------------------------------------
 Pro forma                                6,662,157    7,457,552   5,885,826

 Earnings per common share - basic:
-----------------------------------------------------------------------------
 As reported                                  $1.06        $1.14       $0.94
-----------------------------------------------------------------------------
 Pro forma                                    $1.04        $1.13       $0.86

 Earnings per common share - fully diluted:
-----------------------------------------------------------------------------
 As reported                                  $1.05        $1.13       $0.94
-----------------------------------------------------------------------------
 Pro forma                                    $1.03        $1.11       $0.86
-----------------------------------------------------------------------------
</TABLE>


The Company's  calculations  were made using the  Black-Scholes  option  pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>

                             2002 Grant   2001 Grant   1998 Grant   1996 Grant
-------------------------------------------------------------------------------
<S>                             <C>           <C>          <C>          <C>
 Risk free interest rates         3.69%        5.09%        5.79%        6.33%
 Expected dividend                4.03%        4.33%        1.75%        1.75%
 Expected lives, in years         3.5          3.3          7.5          7.5
 Expected volatility            20.29%        28.73%       23.24%       19.63%
</TABLE>

[18] Employee Stock Ownership Plan
As part of the stock  conversion  consummated  on October 4, 1995,  the  Company
established  an ESOP  for  all  employees  that  are age 21 or  older  and  have
completed two years of service with the Company.  The ESOP  borrowed  $9,786,500
from the  Company and used the funds to  purchase  978,650  shares of the common
stock of the Company issued in the conversion  which would be distributed over a
ten year  period.  The  loan  will be  repaid  principally  from  the  Company's
discretionary contributions to the ESOP over a period of ten years. The loan had
an  outstanding  balance of $2.9 million and $3.9 million at September  30, 2002
and 2001,  respectively,  and an interest rate of 8.75%.  The loan obligation of
the  ESOP is  considered  unearned  compensation  and,  as such,  recorded  as a
reduction of the Company's  shareholders'  equity.  Both the loan obligation and
the unearned  compensation  are reduced by the amount of loan repayments made by
the ESOP. Shares purchased with the loan proceeds are held in a suspense account
for allocation among participants as the loan is repaid.

Contributions  to the ESOP and shares  released  from the  suspense  account are
allocated  among  participants  on the  basis  of  compensation  in the  year of
allocation.  Benefits are fully vested at all times under the ESOP.  Forfeitures
are  reallocated  to remaining  plan  participants  and may reduce the Company's
contributions.  Benefits may be payable on  retirement,  death,  disability,  or
separation  from  service.   Since  the  Company's  annual   contributions   are
discretionary, benefits payable under the ESOP cannot be estimated. Compensation
expense is recognized to the extent of the fair value of shares  committed to be
released.  The  Company  recorded  compensation  expense  under the ESOP of $1.4
million,  $1.4 million, and $1.1 million for the years ended September 30, 2002,
2001 and 2000,  respectively,  and  approximately  98,000 shares were  allocated
among the participants in each of those years.

[19] Fair Value of Financial Instruments
Financial  instruments  have been construed to generally mean cash or a contract
that implies an  obligation to deliver cash or another  financial  instrument to
another entity.
<TABLE>
<CAPTION>

                                              September 30, 2002            September 30, 2001
                                           Carrying           Fair      Carrying            Fair
                                             amount          value        amount           value
 Financial Assets:
-------------------------------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>            <C>
 Cash and due from banks                $38,444,500    $38,444,500   $40,446,042     $40,446,042
 Interest earning deposits
 with banks                               5,762,373      5,762,373     3,791,252       3,791,252
 Federal funds sold and securities
 purchased under agreements
 to resell                                1,584,540      1,584,540    74,151,272      74,151,272
 Investment securities available
 for sale                               119,542,052    119,542,052   154,675,760     154,675,760
 Investment securities
 held to maturity                                --             --       135,388         137,429
 Mortgage-backed and related
 securities available for sale          650,796,164    650,796,164   421,637,670     421,637,670
 Mortgage-backed and related
 securities held to maturity                     --             --     1,620,612       1,642,174
 Loans receivable, net                  607,464,660    649,490,130   679,990,308     708,259,917
 FHLB stock                              13,510,400     13,510,400    12,698,000      12,698,000
 Mortgage servicing rights                1,035,660      1,045,964     1,596,931       1,678,344

 Financial Liabilities:
 Deposit liabilities                  1,142,005,997  1,155,611,434  1,152,824,144  1,170,696,536
 FHLB advances                          205,250,000    218,125,349    168,000,000    172,328,142
 Short term borrowings                    1,700,000      1,700,000      1,700,000      1,700,000
 Mandatorily redeemable
 preferred securities                    27,205,507     27,205,507     14,553,684     14,553,684
</TABLE>
<PAGE>

Fair value estimates, methods, and assumptions are set forth below:

Investments  and  Mortgage-Backed  Securities - Fair values were based on quoted
market rates and dealer quotes.

Loans  Receivable - Loans were priced using a discounted  cash flow method.  The
discount rate was the rate currently offered on similar products.

No adjustment was made to the  entry-value  interest rates for changes in credit
of performing  loans for which there are not known credit  concerns.  Management
believes that the risk factor embedded in the entry-value  interest rates, along
with the general  reserves  applicable to the loan portfolio for which there are
no  known  credit  concerns,  result  in a fair  valuation  of such  loans on an
entry-value basis.

Mortgage  Servicing  Rights - The fair value of MSRs is determined by estimating
the present value of expected  future cash flows,  using a discount rate that is
considered  commensurate with the risks involved.  The amounts and timing of the
cash flows are estimated after  considering  various economic factors  including
prepayment speeds, delinquency and default assumptions.

Deposits  - The  fair  value  of  deposits  with  no  stated  maturity  such  as
non-interest-bearing  demand  deposits,  savings,  NOW accounts and money market
accounts  was equal to the  amount  payable  on  demand.  The fair value of time
deposits with stated  maturity was based on the discounted  value of contractual
cash flows.  The discount rate was estimated using rates currently  available in
the local market.

Federal Home Loan Bank  Advances - The fair value of FHLB  advances was based on
the  discounted  cash flow method.  The discount rate was estimated  using rates
currently available from FHLB.

Other - The carrying value of other financial instruments was determined to be a
reasonable estimate of their fair value.

Limitations - The fair value estimates  presented herein were based on pertinent
information  available to management as of September 30, 2002 and 2001. Although
management  was not aware of any  factors  that would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  for  purposes  of  these  financial  statements  on those  dates  and,
therefore,  current  estimates of fair value may differ  significantly  from the
amounts presented herein.

Fair  value  estimates  were based on  existing  financial  instruments  without
attempting to estimate the value of anticipated future business.  The fair value
has not been  estimated  for assets  and  liabilities  that were not  considered
financial instruments.

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital  to  risk-weighted  assets,  of Tier I capital  to total  assets,  and
tangible  capital to tangible assets (set forth in the table below).  Management
believes that the Association  meets all capital adequacy  requirements to which
it is subject as of September 30, 2002.

As of September 30, 2002, the most recent  notification from the OTS categorized
the Association as "well capitalized" under the regulatory  framework for prompt
corrective action. To be categorized as "well-capitalized", the Association must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

At periodic intervals, the OTS routinely examines the Association as part of its
legally   prescribed   oversight  of  the  thrift   industry.   Based  on  these
examinations,  the  regulators  can  direct  that  the  Association's  financial
statements be adjusted in accordance with their findings.  A future  examination
by the OTS could  include  a review of  certain  transactions  or other  amounts
reported  in  the  Association's  2002  financial  statements.  In  view  of the
uncertain  regulatory  environment in which the  Association  now operates,  the
extent,  if any, to which a forthcoming  regulatory  examination  may ultimately
result in  adjustments  to the 2002  financial  statements  cannot be  presently
determined.
<PAGE>

The  Association's  actual and required  minimum capital ratios are presented in
the following table:
<TABLE>
<CAPTION>
                                                                                                            Categorized as "Well
                                                                                                             Capitalized" Under
                                                                                For Capital                   Prompt Corrective
                                                 Actual                       Adequacy Purposes                Action Provision
                                      ---------------------------         -------------------------    -----------------------------
                                         Amount             Ratio            Amount          Ratio         Amount            Ratio
                                      -----------          ------         ------------       ------    ------------          -------
 As of September 30, 2002
<S>                                  <C>                    <C>            <C>                 <C>      <C>                    <C>
 Total Capital:                      $102,759,108           14.0%          $58,696,528         8.0%     $73,370,660            10.0%
 (To Risk Weighted Assets)
 Tier I Capital:                       95,497,095           13.0%                  N/A          N/A      44,022,396             6.0%
 (To Risk Weighted Assets)
 Tier I Capital:                       95,497,095            6.6%           58,297,476         4.0%      72,871,846             5.0%
 (To Total Assets)
 Tangible Capital:                     95,497,095            6.6%           21,861,554         1.5%             N/A             N/A
 (To Tangible Assets)

 As of September 30, 2001
------------------------------------------------------------------------------------------------------------------------------------
 Total Capital:                       $81,046,601           10.4%          $62,600,992         8.0%     $78,251,240            10.0%
 (To Risk Weighted Assets)
 Tier I Capital:                       73,162,799            9.3%                  N/A          N/A      46,950,744             6.0%
 (To Risk Weighted Assets)
 Tier I Capital:                       73,162,799            5.2%           56,671,203         4.0%      70,839,004             5.0%
 (To Total Assets)
 Tangible Capital:                     73,162,799            5.2%           21,251,701         1.5%             N/A             N/A
 (To Tangible Assets)
</TABLE>

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

 At September 30,                            2002            2001
------------------------------------------------------------------
<S>                                 <C>             <C>
 Association's equity               $ 142,052,659   $ 118,772,559
 Unrealized securities losses          (6,256,575)     (1,520,834)
 Core deposit intangible              (40,298,989)    (44,088,926)
------------------------------------------------------------------
 Tangible capital                      95,497,095      73,162,799
 General valuation allowances           7,262,013       7,883,802
------------------------------------------------------------------
 Total capital                       $102,759,108     $81,046,601
                                     ============     ===========
</TABLE>

[21] Parent Company Financial Information
Condensed  financial  information as of September 30, 2002 and 2001 and for each
of the three years in the period ended  September  30, 2002,  for Klamath  First
Bancorp,  Inc.  is  presented  and  should  be  read  in  conjunction  with  the
consolidated financial statements and the notes thereto:

BALANCE SHEETS
<TABLE>
<CAPTION>

  At September 30,                              2002          2001
 Assets:
-------------------------------------------------------------------
<S>                                     <C>           <C>
 Cash and cash equivalents                $5,608,620    $5,637,989
 Investment and mortgage-backed
 securities                                  149,077     1,500,584
 Investment in wholly-owned
 subsidiary                              142,052,659   118,772,559
 Deferred tax asset                          310,718            --
 Other assets                              2,157,987     5,269,368
-------------------------------------------------------------------
 Total assets                           $150,279,061  $131,180,500
                                        ============  ============
 Liabilities:
-------------------------------------------------------------------
 Short-term borrowings                    $1,700,000    $1,700,000
 Other liabilities                         1,435,518       785,911
-------------------------------------------------------------------
 Total liabilities                         3,135,518     2,485,911
-------------------------------------------------------------------
 Mandatorily redeemable
 preferred securities                     27,205,507    14,553,684
-------------------------------------------------------------------
 Shareholders' equity:
 Common stock                                 67,440        70,607
 Additional paid-in capital               30,282,059    33,926,796
 Retained earnings                        93,522,778    85,355,871
 Unearned ESOP shares at cost             (2,935,130)   (3,913,510)
 Unearned MRDP shares at cost               (999,111)   (1,298,859)
-------------------------------------------------------------------
 Total shareholders' equity              119,938,036   114,140,905
-------------------------------------------------------------------
 Total liabilities and
 shareholders' equity                   $150,279,061  $131,180,500
                                        ============  ============
</TABLE>
<PAGE>

STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>

 Year Ended September 30,                     2002         2001        2000
----------------------------------------------------------------------------
<S>                                     <C>          <C>         <C>
 Equity in undistributed
 income of subsidiary                   $7,868,854   $8,271,234  $7,065,690
 Total interest income                     560,127      730,727     789,684
 Total interest expense                     74,650      268,185     120,412
 Non-interest income                        11,972           --         203
 Non-interest expense                    2,315,762    1,641,346   1,746,138
----------------------------------------------------------------------------
 Earnings before income taxes            6,050,541    7,092,430   5,989,027
 Provision for income taxes               (738,235)    (478,572)   (437,125)
----------------------------------------------------------------------------
 Net earnings                           $6,788,776   $7,571,002  $6,426,152
                                        ==========   ==========  ==========
</TABLE>

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

 Year Ended September 30,                      2002           2001        2000
-------------------------------------------------------------------------------
 Net cash flows from
<S>                                     <C>           <C>            <C>
 operating activities                    $3,200,786     $8,229,769    $721,914
-------------------------------------------------------------------------------
 Cash flows from investing activities:
 Investment in subsidiary               (10,264,911)  (10,306,546)   (278,916)
 Maturity of investment and
 mortgage- backed securities                533,743       683,893     610,081
 Purchase of investment and
 mortgage-backed securities                 782,597            --          --
-------------------------------------------------------------------------------
 Net cash flows provided by
 (used in) investing activities          (8,948,571)   (9,622,653)    331,165
                                         ----------    ----------    --------
 Cash flows from financing activities:
 Cost of ESOP shares released               978,380       979,740     978,650
 Proceeds from
 short-term borrowings                    1,900,000     3,400,000   3,700,000
 Repayments of
 short-term borrowings                   (1,900,000)   (4,700,000)   (700,000)
 Issuance of mandatorily
 redeemable preferred securities         12,651,823    14,553,684          --
 Stock repurchase and retirement         (4,750,847)   (7,399,423) (6,254,695)
 Stock options exercised                    369,588     3,211,189          --
 Dividends paid                          (3,530,528)   (3,746,304) (3,889,202)
-------------------------------------------------------------------------------
 Net cash flows provided by
 (used in) financing activities           5,718,416     6,298,886  (6,165,247)
-------------------------------------------------------------------------------
 Net increase (decrease) in cash
 and cash equivalents                       (29,369)    4,906,002  (5,112,168)
 Cash and cash equivalents
 beginning of year                        5,637,989       731,987   5,844,155
-------------------------------------------------------------------------------
 Cash and cash equivalents
 end of year                             $5,608,620    $5,637,989    $731,987
                                         ==========    ==========    ========
</TABLE>

Consolidated Supplemental Data
Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>

 Year Ended September 30, 2002            December        March        June   September
----------------------------------------------------------------------------------------
                                              (In thousands, except per share data)
<S>                                        <C>          <C>         <C>         <C>
 Total interest income                     $22,995      $21,922     $21,530     $20,846
 Total interest expense                     11,719        9,897       9,208       8,707
----------------------------------------------------------------------------------------
 Net interest income                        11,276       12,025      12,322      12,139
 Provision for loan losses                     153            3          --          --
----------------------------------------------------------------------------------------
 Net interest income after provision        11,123       12,022      12,322      12,139
 Non-interest income                         2,282        2,921       3,054       4,356
 Non-interest expense                       12,129       12,396      12,404      13,241
----------------------------------------------------------------------------------------
 Earnings before income taxes                1,276        2,547       2,972       3,254
 Provision for income tax                      454          876       1,044         886
----------------------------------------------------------------------------------------
 Net earnings                              $   822      $ 1,671     $ 1,928     $ 2,368
                                           =======      =======     =======     =======
 Net earnings
 per share - basic                         $  0.13      $  0.26     $  0.30     $  0.37
                                           =======      =======     =======     =======
 Net earnings
 per share - fully diluted                 $  0.13      $  0.26     $  0.30     $  0.36
                                           =======      =======     =======     =======

</TABLE>
<TABLE>
<CAPTION>
 Year Ended September 30, 2001            December        March        June   September
----------------------------------------------------------------------------------------
                                              (In thousands, except per share data)
<S>                                        <C>          <C>         <C>         <C>
 Total interest income                     $17,816      $17,450     $16,782     $18,085
 Total interest expense                     10,338       10,153       9,916      10,344
----------------------------------------------------------------------------------------
 Net interest income                         7,478        7,297       6,866       7,741
 Provision for loan losses                     228          153           3           3
                                           -------      -------     -------     -------
 Net interest income after provision         7,250        7,144       6,863       7,738
 Non-interest income                         1,114        3,708       3,200       2,991
 Non-interest expense                        5,783        6,209       6,862       9,866
----------------------------------------------------------------------------------------
 Earnings before income taxes                2,581        4,643       3,201         863
 Provision for income tax                      896        1,688       1,085          48
----------------------------------------------------------------------------------------
 Net earnings                               $1,685       $2,955      $2,116        $815
                                            ======       ======      ======        ====
 Net earnings
 per share - basic                           $0.25        $0.45       $0.32       $0.12
                                            ======       ======      ======       =====
 Net earnings
 per share - fully diluted                   $0.25        $0.45       $0.31       $0.12
                                            ======       ======      ======       =====
</TABLE>
<PAGE>