<PAGE>


                                   EXHIBIT 13

                       1998 Annual Report to Shareholders

<PAGE>

                               CORPORATE PROFILE

Klamath First Bancorp, Inc. (Nasdaq: KFBI) is a unitary savings and loan holding
company,  headquarterd  in Klamath  Falls,  Oregon.  The  Company's  subsidiary,
Klamath First Federal Savings & Loan Association,  has a 64 year history, dating
back to its beginning in 1934. The Company  provides a diversified  line of loan
and deposit services to individuals,  families,  and samll business owners.  The
Company  recognizes  there is great  value  in  serving  both  large  and  small
communities of Oregon, and will continue to serve these communities  through its
traditional  "hands on"  personal  banking  style  using  conventional  delivery
channels.  The Company will also give customers a choice to use technology  such
as ATMs and  telephone  banking  at  their  convenience  and  their  choice.  At
year-end, Klamath First Bancorp, Inc. was operating in 35 offices in 22 counties
throughout Oregon.

                                1998 HIGHLIGHTS

     Total assets, loans, deposits and earnings reach new Company highs.

     Total assets reached a Company milestone of $1.0 billion.

     Total net loans increased by 21.08% or $116.3 million.

     Earnings reached a new high of $9.6 million, 11.61% increase over 
          prior year.

     Opened new full service branches in Bend and Jacksonville, Oregon.

     Completed 5% stock buy back in May 1998.

     Paid quarterly dividends totaling %.35 per share.

     Added 8 new ATM locations.

     Opened new loan processing center, with state-of-the-art software, 
          allowing for much faster loan closings and tracking, and greatly
          expanded loan processing and servicing growth.

                               TABLE OF CONTENTS

     Directors and Officers...........................4
     Letter to Our Shareholders.......................5
     Executive Officers...............................8
     Financials....................................9-40
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

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

                                                                                                            
                                                                                 At September 30,
                                                          --------------------------------------------------------------
                                                             1998          1997        1996         1995         1994
                                                          ----------   ----------   ----------   ----------   ----------
FINANCIAL CONDITION DATA                                                             (In thousands)

<S>                                                       <C>          <C>          <C>          <C>          <C>       
Assets ................................................   $1,031,302   $  980,078   $  671,969   $  647,840   $  448,939
Cash and cash equivalents .............................       66,985       32,043       16,180      175,994       19,557
Loans receivable, net .................................      668,146      551,825      473,556      403,544      360,122
Investment securities held to maturity ................        2,889       22,937        9,827       42,209       44,564
Investment securities available for sale ..............      203,224      261,846       75,987       12,606       12,224
Mortgage backed & related securities held to maturity .        3,662        5,447        6,783         --           --
Mortgage backed & related securities available for sale       43,336       64,869       74,109         --           --
Stock in FHLB of Seattle, at cost .....................       10,173        7,150        4,774        4,426        4,156
Advances from FHLB of Seattle .........................      167,000      129,000       90,000       20,000         --
Deposit liabilities ...................................      689,541      673,978      399,673      384,380      389,751
Shareholders' equity ..................................      145,081      144,462      153,411      164,685       49,308
</TABLE>


<TABLE>
<CAPTION>
                                                                             Years Ended September 30,
                                                          --------------------------------------------------------------
                                                              1998         1997         1996         1995         1994
                                                          ----------   ----------   ----------   ----------   ----------
SELECTED OPERATING DATA                                                           (In thousands)

<S>                                                       <C>          <C>          <C>          <C>          <C>       
Total interest income .................................   $   69,733   $   54,167   $   45,649   $   35,107   $   32,408
Total interest expense ................................       37,848       29,856       23,286       20,441       16,555
                                                          ----------   ----------   ----------   ----------   ----------
Net interest income ...................................       31,885       24,311       22,363       14,666       15,853
Provision for loan losses .............................          674          370          120          120          150
                                                          ----------   ----------   ----------   ----------   ----------
Net interest income after provision for loan losses ...       31,211       23,941       22,243       14,546       15,703
Non-interest income ...................................        3,202          810          522          381          352
BIF/SAIF Assessment ...................................         --           --          2,473         --           --
Non-interest expense ..................................       19,523       11,764        9,769        6,004        6,034
                                                          ----------   ----------   ----------   ----------   ----------
Earnings before income taxes and cumulative effect
of a change in accounting principle ...................       14,890       12,987       10,523        8,923       10,021
Provision for income tax ..............................        5,339        4,429        4,413        3,349        3,867
                                                          ----------   ----------   ----------   ----------   ----------
Earnings before cumulative effect of a change in
accounting principle ..................................        9,551        8,558        6,110        5,574        6,154
Cumulative effect at October 1, 1993 of a change in
accounting for income taxes ...........................         --           --           --           --            866
                                                          ----------   ----------   ----------   ----------   ----------
Net Earnings ..........................................   $    9,551   $    8,558   $    6,110   $    5,574   $    5,288
                                                          ==========   ==========   ==========   ==========   ==========
Basic earnings per share ..............................        $1.05        $0.91        $0.56          N/A          N/A
                                                          ==========   ==========   ==========   ==========   ==========
</TABLE>

<PAGE>


<TABLE>
<CAPTION>


                                                                        At or For the Years Ended September 30,
                                                             ------------------------------------------------------------
                                                                1998         1997         1996         1995         1994
                                                             --------      -------      -------      -------      ------- 
KEY OPERATING RATIOS                                        
Performance Ratios

Return on average assets
<S>                                                          <C>          <C>          <C>          <C>          <C>  
(net income divided by average assets) ................         0.96%        1.14%        0.99%        1.19%        1.26%

Return on average equity
(net income divided by average equity) ................         6.52%        5.85%        3.69%       10.44%       10.93%

Interest rate spread
(difference between average yield on interest-earning
assets and average cost of interest-bearing liabilities)        2.57%        2.28%        2.22%        2.73%        3.40%

Net interest margin (net interest income as a
percentage of average interest-earning assets) ........         3.36%        3.32%        3.65%        3.24%        3.84%

Average interest-earning assets to average
interest-bearing liabilities ..........................       119.84%      125.58%      137.78%      111.29%      111.13%

Net interest income after provision for loan losses
to total non-interest expenses ........................       159.87%      203.51%      181.69%      242.27%      260.24%

Non-interest expense to average total assets ..........         1.96%        1.57%        1.99%        1.29%        1.43%

Efficiency ratio (non-interest expense divided by
net interest income plus non-interest income)                  55.64%       46.83%       53.49%       39.90%       37.24%

Dividend payout ratio (dividends declared per share
divided by net income per share) ......................        34.50%       34.09%       44.64%        N/A          N/A

Book value per share ..................................       $16.30       $15.64       $14.98         N/A          N/A

Asset Quality Ratios

Allowance for loan losses to total loans at
end of period .........................................         0.28%        0.22%        0.19%        0.19%        0.20%

Non-performing assets to total assets .................         0.05%        0.03%        0.04%        0.12%        0.05%

Non-performing loans to total loans, before net items .         0.07%        0.04%        0.04%        0.18%        0.05%

Capital Ratios

Equity to assets ......................................        14.07%       14.74%       22.83%       25.42%       10.98%

Tangible capital ratio ................................         8.26%       11.06%       19.22%       18.57%       10.98%

Core capital ratio ....................................         8.26%       11.06%       19.22%       18.57%       10.98%

Risk-based capital ratio ..............................        16.13%       23.12%       42.41%       36.87%       22.61%

Other Data

Number of
Real estate loans outstanding .........................        9,155        8,393        7,704        7,110        6,654

Deposit accounts ......................................       82,585       82,032       38,651       38,260       35,205

Full service offices ..................................           34           32            7            7            6
</TABLE>

<PAGE>


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

Bernard Z. Agrons 
Retired; Weyerhaeuser Company Vice President for the Eastern Oregon Region until
1981;  Former State  Representative in the Oregon State Legislature from 1983 to
1991

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

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

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

William C. Dalton
Self employed, and former owner of W. C. Dalton and Company, farming

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

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

Dianne E. Spires, CPA
Partner since 1986 with Rusth,  Spires & Menefee,  LLP, a public accounting firm
located in Klamath Falls and Lakeview, Oregon

KLAMATH FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION AND KLAMATH FIRST
BANCORP, INC. OFFICERS

Gerald V. Brown                
President and Chief Executive Officer

Robert A. Tucker               
Senior Vice President - Chief Lending Officer

Marshall J. Alexander          
Senior Vice President - Chief Financial Officer

Frank X. Hernandez             
Senior Vice President - Chief Operating Officer

Robert L. Salley               
Vice President

Gerald A. Page                 
Vice President

Carol Starkweather             
Assistant Vice President

Craig M. Moore                 
Auditor/Corporate Counsel

Nora L. Boman                  
Treasurer

and all branch managers

<PAGE>


Dear Shareholder,

     In  1934  several  businessmen  decided  Klamath  Falls,  Oregon  needed  a
financial  institution  dedicated to providing  the housing and savings needs of
its  community.  So on August 15, 1934 First  Federal  Savings & Loan of Klamath
Falls was organized.  By December 1934, the board minutes showed total assets of
$5,506.90  with savings  deposits of slightly over  $5,000.00.  Many things have
changed over the last 64 years.  Our name has changed to Klamath First  Bancorp,
Inc. with its sole subsidiary, Klamath First Federal Savings & Loan Association.
We now serve customers  throughout Oregon through our 35 branch offices,  and we
now have assets exceeding $1 billion.  However, many things have also stayed the
same over those  years.  We see a continued  demand for our products and quality
service  through a convenient  branch  network.  People still want to be treated
with respect and courtesy and customers  expect to see  friendly,  knowledgeable
employees  willing to help them with their  banking needs when they enter one of
our branch offices.  Accordingly,  we continue to define customer service not by
the latest technological advance or the newest product we have introduced to our
customers,  but  by  the  one-on-one,  person-to-person  relationships  we  have
developed over the years in our bank lobbies and in the communities we serve.

     Our employees take pride in their customer  relationships and their ability
to provide quality  products and services with reasonable fees or charges.  This
attitude is represented in the Association's mission statement.  "The mission of
Klamath  First  Federal  Savings  & Loan  is to  become  the  best  provider  of
traditional  financial  products and services in communities we serve throughout
Oregon.  We will do this by giving  exceptional  value to the  products  we make
available to our customers in the markets we serve.  This value will be not only
in terms of cost but also in the premier customer service our employees provide.
This will be  accomplished  within an atmosphere of commitment to the welfare of
our employees  and the  communities."  Klamath  First Federal truly  understands
Oregonians and delivers  contemporary  banking services in the style, manner and
locations that they prefer.

     Our retail  franchise  now covers 22 of Oregon's 36 counties,  with 34 full
service branches and one loan production office in Redmond,  Oregon. Part of our
continued  effort to  improve  our  franchise  includes  the  opening of two new
branches towards the end of our fiscal year. 

     We opened our second  Bend  branch in a rapidly  growing  area of east Bend
across the street from Costco.  Bend is in Deschutes  County,  Oregon's  fastest
growing county. The area is noted for its year-round  outdoor  recreational life
style. Within easy driving distance is the Cascade mountain range which includes
the well known Mount  Bachelor ski area,  as well as majestic Mt.  Jefferson and
the Three  Sisters  wilderness.  Downhill  and cross  country  snow  skiing  and
snowmobiling are popular winter activities,  while popular summertime activities
include hiking,  backpacking,  mountain climbing,  hunting, fishing, white water
rafting, and mountain biking. For the less activity-driven  vacationer, the area
includes  several  destination  resorts  where one can just relax by the pool or
play a round of golf.  This  lifestyle  has  brought  many  new  businesses  and
retirees to Deschutes County.

     We also  opened  a branch  in  Jacksonville,  located  in  Jackson  County,
Oregon's sixth largest county. Jacksonville is located about seven miles west of
Medford,  and fifteen miles north of Ashland,  where we also have branches.  The
town of Jacksonville began in 1851 as a thriving mining camp, the result of gold
rush  fever  in the  Rogue  Valley.  Miners  flocked  to the  area  and  brought
prosperity  in the form of saloons,  hotels and gambling  halls.  The boom years
were short lived,  and by the 1890's,  agriculture  replaced  mining as the main
industry.  Jacksonville  remained relatively  unchanged for the next 70 years as
surrounding   communities  continued  to  grow.  In  1966  the  entire  town  of
Jacksonville  was  designated  a  National  Historic  Landmark  District.  Today
Jacksonville is a thriving  community where several  buildings await to show you
"Living  History."  Activities  include the famous  Peter Britt Music  Festival,
museum tours,  shopping and sightseeing in the historic buildings.  We are happy
to report  that the  branch  has been open for less than 90 days,  and has total
deposits in excess of $4.5 million.
<PAGE>

     Klamath First Bancorp's  branch  franchise is as diverse as the communities
it serves.  The two new branches and areas mentioned above are just a reflection
of that  diversity and how we have been  successful in meeting the banking needs
of Oregon's diverse population.

     We ended the fiscal year with assets  exceeding  the one billion  mark,  at
$1,031.3 million, a 5.22% growth over last year's total of $980.1 million.  With
this growth came record  earnings and earnings per share and improved  return on
equity.  Fiscal  year-end  earnings grew 11.61% over the prior year and stood at
$9.6  million for the year ended  September  30,  1998.  This  resulted in basic
earnings per share increasing by 15.38%, from $0.91 for the fiscal year-end 1997
to $1.05 for fiscal year-end 1998.  Return on average equity improved from 5.85%
for fiscal  year 1997 to 6.52% for fiscal  year 1998.  Considering  growth,  net
profit and improving  shareholder value, this has been a banner year for Klamath
First Bancorp.

     Another highlight of the year was in net loans receivable,  which reached a
new high of $668.1 million from $551.8 million, a significant $116.3 million, or
21.08%,  increase  over last year.  With this  growth  came an  increase  in the
Company's net interest margin from 3.32% to 3.36% for this fiscal year-end. This
improvement  came during an overall lower rate environment and flat yield curve,
i.e.,  little difference in long term and short term interest rates. The Company
continues to experience  strong demand for real estate loans,  both  residential
and  commercial,  and  improving  demand for our  commercial  and consumer  loan
products.  We will  continue to be a traditional  savings and loan,  emphasizing
mortgage  lending.  With  this in  mind,  this  past  year we  opened a new loan
processing  center  across the  street  from our main  office in Klamath  Falls,
Oregon.  We are now using  state-of-the-art  PC-based loan processing  software,
that allows us to close  mortgage loans much faster and track each loan from the
initial  application to final closing. We believe the new processing center will
give  us  greatly  expanded   mortgage  loan  processing  and  servicing  growth
potential.

     The Company  completed a successful 5.0% stock repurchase  during the third
quarter.  Based upon year-end  shareholders' equity of $145.1 million and shares
outstanding of 8,898,972,  book value per share  increased to $16.30 compared to
$15.64 for the previous  fiscal  year-end.  Since going public,  the Company has
completed  a total of 20% in stock  repurchases.  October  5, 1998 was our third
anniversary  as a public  company.  This is  significant  because  the Office of
Thrift  Supervision,   our  primary  regulator,  ceased  to  control  our  share
repurchases. Even with the share repurchases and dividends paid, the Company has
an exceptionally strong capital base that exceeds the amount of capital required
to support the Company's  ongoing  business plan.  After evaluating a variety of
alternatives to utilize this strong capital base more effectively and to attempt
to maximize shareholder value,  management and the Board of Directors determined
that an aggressive  share  repurchase plan is currently the best  alternative to
accomplish these  objectives.  On October 9th the Company  announced it plans to
purchase  up to 20%,  or  1,983,353  shares,  of its common  stock by means of a
"Modified Dutch Auction Tender." The tender offer is subject to SEC approval and
is expected to be completed early in 1999. Our pro forma analysis indicates this
tender will show an  immediate  improvement  in earnings per share and return on
equity.

     Management  continues to look at  opportunities to improve customer service
and franchise value which equates to improved shareholder value. We believe that
there is great worth in the smaller  communities  throughout  the  Northwest and
banking customers still appreciate  face-to-face,  hands on banking, and support
the traditional community banking product delivery channels. We continue to look
for  opportunities  to profitably grow the franchise and look to expand in other
communities, both small and large, around the state and the Northwest.

     We thank our  employees,  shareholders  and customers for their support and
commitment  to our goals.  If you're not already a customer,  drop by one of our
branches to experience first hand our friendly customer service,  and if you are
a satisfied customer, remember to use and recommend Klamath First Federal.
 
/s/ Gerald V. Brown                     /s/ Rodney N. Murray
     Gerald V. Brown, President              Rodney N. Murray, Chairman of
     and Chief Executive Officer             the Board


<PAGE>

CORPORATE EXECUTIVE OFFICERS

Corporate Executive Officer Profiles

Gerald V. Brown has been with Klamath  First  Federal  since 1957. He began as a
teller,  and, in his 41 years with Klamath  First  Federal,  has  progressed up
through  the ranks to his  current  position as  President  and Chief  Executive
Officer.  Mr.  Brown has  served on the Board of  Directors  for  Klamath  First
Federal Savings & Loan Association since 1994.

Robert A. Tucker has been with Klamath First Federal Savings & Loan  Association
since 1973.  He is  currently  Senior Vice  President  - Chief  Lending  Officer
responsible for all lending  functions of the Association.  In his 25 years with
the  Association,  Mr.  Tucker has served in various  positions  including  Loan
Officer,  Branch  Manager,  and  Chief  Operating  Officer  responsible  for the
operations of the Association.

Frank X.  Hernandez  joined  Klamath  First  Federal  in 1991 as Human  Resource
Manager after an 11 year career with Oregon's largest  commercial bank where he
was a District  Operations  Officer and Branch Manager.  He currently  serves as
Chief  Operating  Officer  responsible  for  all of the  Association's  non-loan
operations  including  deposit  acquisition,  information  systems and  investor
relations.

Marshall J.  Alexander has been with Klamath First Federal  Savings & Loan since
1986. He began as the Association's Controller,  was promoted to Chief Financial
Officer in August 1994 and was named Senior Vice  President and Chief  Financial
Officer in November  1998.  Mr.  Alexander  brought  over ten years of financial
management  experience in both regional banks and small community banks prior to
joining the Association.  He is responsible for evaluating strategic shareholder
value  enhancements,  supervising  the accounting  department,  and managing the
investments of the Company.


<PAGE>

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

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

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

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

     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 34 office  facilities  and one loan
production  office,  with the main office located in Klamath Falls,  Oregon. The
Association  considers  its  primary  market  area to be the  state  of  Oregon,
particularly the 22 counties in which the offices are located.

Federal Legislation

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

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

<PAGE>


     In separate  legislation  enacted in 1996, the reserve method of accounting
for thrift and bad debt reserves  (including  the  percentage of taxable  income
method) was  repealed for tax years  beginning  after  December  31,  1995.  The
resulting  change in accounting  method triggers bad debt reserve  recapture for
post-1987 reserves over a six-year period,  thereby generating an additional tax
liability.  At September 30, 1998, the Association's post-1987 reserves amounted
to $3.8  million.  Pre-1988  reserves  would only be subject to recapture if the
institution fails to qualify as a thrift. A special provision suspends recapture
of  post-1987  reserves  for  up to  two  years  if,  during  those  years,  the
institution  satisfies a " residential loan requirement."  Notwithstanding  this
special provision,  however,  recapture would be required to begin no later than
the first taxable year beginning after December 31, 1997.

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
interest  rates.  Credit risk is the risk that  borrowers  will become unable to
repay their debts.  The Company  utilizes no  derivatives to mitigate its credit
risk,  relying instead on strict  underwriting  standards,  loan review,  and an
adequate allowance for loan losses.

     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
simplistically,  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 the 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
and/or  with  the  same  magnitude  as those on  loans,  investments  and  other
interest-earning assets. For example, the Association primarily originates fixed
rate  residential  loans  for  its  portfolio.  Because  fixed  rate  loans,  by
definition,  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 10 years and borrowings  which mature or reprice in three 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.

     Interest rate risk is also expressed  through  changes in the net portfolio
value ("NPV"). 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  decrease  in an
increasing  interest rate  environment.  Assets with  adjustable  rates are less
subject to market value changes due to interest rate fluctuations.

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



<PAGE>

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

     The Association  continues to primarily  originate  fixed rate  residential
loans for its  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.  First, the Company has put greater emphasis on
ARMs for  residential  lending,  which  generally  reprice  in one year.  In the
current  low  interest  rate  environment,  ARMs  have  not been  attractive  to
borrowers so the Company  purchased  participations  in  adjustable  rate multi-
family and  commercial  real estate loans.  Second,  the Company has focused its
non-residential   lending   focusing  on  adjustable  or  floating  rate  and/or
short-term  loans.  Third, the Company has focused its investment  activities on
short- and medium-term  securities,  including  adjustable rate  mortgage-backed
securities.  Fourth,  the Company has  attempted  to maintain  and  increase its
regular savings and  transaction  deposit  accounts,  which are considered to be
relatively  resistant to changes in interest rates.  The branch  acquisition and
new deposit product offerings  provided  significant  progress in attaining this
goal. Fifth, the Company has utilized long-term borrowings and deposit marketing
programs to lengthen the term to repricing of its liabilities.  The Company will
continue to explore opportunities in these areas.

     Interest  rate  sensitivity  analysis  is used  to  measure  the  Company's
interest rate risk by computing  estimated changes in NPV of its cash flows from
assets  and  liabilities  in the event of a range of  assumed  changes in market
interest rates. NPV represents the market value of portfolio equity and is equal
to the  market  value of assets  minus the  market  value of  liabilities.  This
analysis  assesses the risk of loss in market rate sensitive  instruments in the
event of sudden and sustained  increases and decreases in market  interest rates
ranging from one hundred to two hundred  basis points.  The  Company's  Board of
Directors  has adopted an interest  rate risk policy which  establishes  maximum
decreases  in the  NPV  ranging  from  10% to 95% in the  event  of  sudden  and
sustained increases and decreases in market interest rates. The following tables
present the  Association's  projected  change in NPV and net interest income for
the various rate shock levels as of September 30, 1998 and 1997.  NPV values and
impact on net interest income for the Association only are regularly  calculated
by the OTS and internally  based on regulatory  recommendations.  The assets and
liabilities at the parent company level are not considered in the analysis.  The
exclusion of holding company assets and liabilities  does not have a significant



<PAGE>

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>

 CHANGES IN NET PORTFOLIO VALUE as of September 30, 1998
 (Dollars in thousands)
--------------------------------------------------------------------------------------------
   Change in                        Market Value of        Actual           Actual Percent
 Interest Rates                     Portfolio Equity  Increase(Decrease)  Increase(Decrease)
----------------------------------  ----------------  ------------------  ------------------   
<S>                                   <C>             <C>                        <C>  
200 basis point rise ..............   $      63,220   ($     52,597)             (45%)
100 basis point rise ..............          92,401         (23,416)             (20%)
Base Rate Scenario ................         115,817              --               --
100 basis point decline ...........         122,858           7,040                6%
200 basis point decline ...........         128,121          12,304               11%
<CAPTION>

CHANGES IN NET INTEREST INCOME as of September 30, 1998
(Dollars in thousands)
--------------------------------------------------------------------------------------------
    Change in                          Net Interest        Actual           Actual Percent
 Interest Rates                           Income      Increase(Decrease)  Increase(Decrease)
-----------------------------------   -------------   ------------------  ------------------
<S>                                   <C>                   <C>                  <C>  
200 basis point rise ..............   $      23,335         ($4,097)             (15%)
100 basis point rise ..............          25,604          (1,820)              (7%)
Base Rate Scenario ................          27,432              --               --
100 basis point decline ...........          28,018             586                2%
200 basis point decline ...........          27,948             516                2%

<CAPTION>

CHANGES IN NET PORTFOLIO VALUE as of September 30, 1997
(Dollars in thousands)
---------------------------------------------------------------------------------------------
    Change in                         Market Value of       Actual           Actual Percent
  Interest Rates                      Portfolio Equity  Increase(Decrease) Increase(Decrease)
-----------------------------------   ----------------  ------------------ ------------------
<S>                                   <C>             <C>                        <C>  
200 basis point rise ..............   $      82,490   ($     37,576)             (31%)
100 basis point rise ..............         102,883         (17,183)             (14%)
Base Rate Scenario ................         120,066              --               --
100 basis point decline ...........         127,433           7,368                6%
200 basis point decline ...........         127,243           7,177                6%


<PAGE>

<CAPTION>
CHANGES IN NET INTEREST INCOME as of September 30, 1997
(Dollars in thousands)
---------------------------------------------------------------------------------------------
      Change in                        Net Interest          Actual        Actual Percent
   Interest Rates                         Income       Increase(Decrease)  Increase(Decrease)
-----------------------------------   -------------    ------------------  ------------------
<S>                                   <C>                   <C>                  <C>  
200 basis point rise ..............   $      23,518         ($3,852)             (14%)
100 basis point rise ..............          25,609          (1,761)              (6%)
Base Rate Scenario ................          27,370              --               --
100 basis point decline ...........          28,428           1,058                4%
200 basis point decline ...........          28,925           1,556                6%
</TABLE>


     The preceding  table  indicates that at September 30, 1998 and 1997, in the
event of a sudden and sustained  increase in prevailing  market  interest rates,
the Association's NPV and net interest income would be expected to decrease.  At
September 30, 1998 and 1997,  the  Association's  estimated  changes in NPV were
within the targets established by the Board of Directors.

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

     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, 1998,  the  Association's  one-year  cumulative  gap was a
negative 32.19% of total assets compared to a negative 33.22% of total assets at
September 30, 1997. See table on page 12.



<PAGE>


     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,
                                      ----------------------------------------------
                                           1998           1997             1996
                                      -------------    ------------    -------------
                                                  (In thousands)
Earning assets maturing
<S>                                   <C>             <C>              <C>          
or repricing within one year ......   $     220,952   $     199,320    $     174,921

Interest-bearing liabilities
maturing or repricing
within one year ...................         529,929         524,942          348,852

Deficiency of earning assets
over interest-bearing liabilities
as a percent of total assets ......          (32.19%)        (33.22%)         (25.88%)

Percent of assets to liabilities
maturing or repricing
within one year ...................           39.96%          37.97%           50.14%
</TABLE>



<PAGE>


INTEREST SENSITIVITY GAP ANALYSIS

The   following   table   presents   the   difference   between  the   Company's
interest-earning  assets  and  interest-bearing   liabilities  within  specified
maturities at September 30, 1998. 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
                         --------   -----------  ----------  --------     --------    ---------   ----------   --------   ----------
ASSETS

Permanent 1-4 Mortgages
<S>                      <C>         <C>         <C>        <C>         <C>         <C>           <C>          <C>         <C>     
  Adjustable Rate ....   $ 14,208    $  2,137    $ 12,409    $  1,400         $--         $--          $--          $--    $ 30,154
  Fixed Rate .........      4,750       4,227       6,883         341       3,723      21,094       93,982      438,824     573,824

Other Mortgage Loans
  Adjustable Rate ....      4,231       4,813      14,065       8,410       1,773          --           --           --      33,292
  Fixed Rate .........      1,180         126       2,836       2,692       5,881       4,879        9,298          829      27,721

Mortgage Backed and ..     33,161       1,274       1,194       3,111          --       4,045           --        3,619      46,404
Related Securities
 
Non-Real Estate Loans
  Adjustable Rate ....      4,677         387       1,301         147          --          --           --           --       6,512
  Fixed Rate .........      1,347         519         595         719         624         548        1,215           --       5,567

Investment Securities      83,347          --      21,285      91,755      40,751       1,987       11,494        3,034     253,653
                         --------    --------    --------    --------    --------    --------     --------     --------    --------
     Total Rate Sensitive
     Assets              $146,901    $ 13,483    $ 60,568    $108,575    $ 52,752    $ 32,553     $115,989     $446,306    $977,127
                         ========    ========    ========    ========    ========    ========     ========     ========    ========
LIABILITIES

Deposits - Fixed Maturity$ 94,892    $ 94,311    $ 88,867    $ 68,208    $ 30,039    $ 19,033          $--          $--    $395,350
Deposits - Interest Bearing
Checking .............      5,292       5,292      10,584      24,697      24,696          --           --           --      70,561
Deposits - Money Market    29,814      30,960      30,960      22,934          --          --           --           --     114,668
Deposits - Passbook and
Statement Savings ....      4,606       4,606       9,212      21,495      21,495          --           --           --      61,414
Other Interest Bearing
Liabilities ..........     91,533      10,000      42,000      45,000          --          --           --           --     188,533
                         --------    --------    --------    --------    --------    --------     --------     --------    --------
     Total Rate Sensitive
     Liabilities .....   $226,137    $145,169    $181,623    $182,334    $ 76,230    $ 19,033          $--          $--    $830,526
                         ========    ========    ========    ========    ========    ========     ========     ========    ========
Interest Rate Sensitivity
Gap                      ($79,236)  ($131,686)  ($121,055)   ($73,759)   ($23,478)   $ 13,520     $115,989     $446,306    $146,601

Cumulative Interest Rate
Sensitivity Gap ......   ($79,236)  ($210,922)  ($331,977)  ($405,736)  ($429,214)  ($415,694)   ($299,705)    $146,601          --

Sensitivity Gap to Total 
Assets                      -7.68%     -12.77%     -11.74%      -7.15%      -2.28%       1.31%       11.25%       43.28%         --

Cumulative Interest Rate 
Sensitivity Gap
to Total Assets ......      -7.68%      -20.45%     -32.19%    -39.34%     -41.62%     -40.31%      -29.06%       14.22%         --

</TABLE>

<PAGE>

Liquidity and Capital Resources

     The Company  generates cash through  operating  activities,  primarily as a
result of net  income.  The  adjustments  to  reconcile  net  income to net cash
provided by operations during the periods presented  consisted  primarily of the
provision for loan losses,  depreciation and amortization  expense,  stock-based
compensation expense,  amortization of deferred loan origination fees, increases
or decreases  in various  escrow  accounts  and  increases or decreases in other
assets and  liabilities.  During the fiscal year ended September 30, 1997, there
was a major  one-time  adjustment to cash  resulting from the Wells Fargo branch
acquisition which contributed  approximately $220.9 million in cash. The primary
investing  activity of the  Association  is  lending,  which is funded with cash
provided  from  operations  and financing  activities,  as well as proceeds from
amortization  and  prepayments on existing loans and mortgage backed and related
securities.   For  additional  information  about  cash  flows  from  operating,
financing,  and investing  activities,  see the Consolidated  Statements of Cash
Flows included in the Consolidated Financial Statements.

     The  Association  is  required  under  applicable  federal  regulations  to
maintain  specified  levels of "liquid"  investments in qualifying types of U.S.
government, federal agency and other investments having maturities of five years
or less.  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, 1998,  the  Association's  regulatory  liquidity,  as measured for
regulatory purposes, was 28.38%.

     Under  capital  standards  mandated by the  Financial  Institution  Reform,
Recovery,  and Enforcement  Act, the Association must have: (i) tangible capital
equal to 1.5% of  adjusted  total  assets,  (ii) core  capital  equal to 3.0% of
adjusted total assets, and (iii) total risk-based capital equal to 8.0% of risk-
weighted  assets.  At September 30, 1998, the Association was in compliance with
all regulatory  capital  requirements  effective as of such date, with tangible,
core and risk-based capital of 8.26%, 8.26% and 16.13%, respectively.  (See Note
17 to Consolidated Financial Statements.)

Year 2000 Readiness

     As with other  organizations,  some of the data processing programs used by
the Company were originally  designed to recognize  calendar years by their last
two digits.  Calculations  performed using these  truncated  fields may not work
properly with dates beyond 1999. Correct processing of date oriented information
is critical to the  operation of all  financial  institutions  because  computer
systems track deposit account and loan balances,  record transaction activity in
accounts,  and calculate  interest amounts,  among other activities.  Failure of
these  processes  could severely  hinder the ability to continue  operations and
provide  customer  service.  Because of the  critical  nature of the issue,  the
Company established a committee early in 1997 to address "Year 2000" issues. The
committee, consisting of executive management,  technical staff, and a full time
project  manager,  has chosen to use the Office of Thrift  Supervision Year 2000
Checklist as a guide for Year 2000  preparation.  The  committee is also using a
Year 2000  Testing  Guide and  Contingency  Guide  provided by Alex  Information
Systems, Inc. to complement the OTS checklist.



<PAGE>

     The Federal Financial  Institutions  Examination Council ("FFIEC") has also
issued  guidelines for Year 2000 project  management by financial  institutions,
which are being followed by the Company. These guidelines identify the following
five steps for Year 2000 conversion programs:

     Awareness  Phase - Define the Year 2000  problem and  establish a Year 2000
     program team and overall  strategy.  This step was completed by the Company
     as of September 30, 1997.

     Assessment Phase - Assess the size and complexity of the problem and detail
     the  magnitude of effort  necessary to address Year 2000 issues,  including
     hardware, software, networks, automated teller machines, etc. This step was
     approximately 94% complete by September 30, 1998 and assessment is ongoing.

     Renovation  Phase - This phase  includes  hardware and  software  upgrades,
     system  replacements,  vendor  certification and associated  changes.  This
     phase encompasses  discussions with and monitoring of outside servicers and
     third-party  software  providers.  This step is approximately  95% complete
     with full completion expected by December 31, 1998.

     Validation/Testing  Phase - This process  includes  testing of hardware and
     software  components.  Testing is completed by performing  extensive  tests
     with the computer  dates changed to January 1,2, and 3, 2000.  Such testing
     will  continue  through June 30,  1999,  with the most  critical  functions
     tested  first.  This  allows time to correct  any  discovered  deficiencies
     before the end of 1999.  In-house systems are 100% tested, many third party
     vendors  have been  tested and  others  are  scheduled  for  testing  soon.
     Overall, this phase is approximately 88% complete as of September 30, 1998.
 
     Implementation  Phase - Systems  successfully  tested will be  certified as
     Year  2000  compliant.  For any  system  failing  validation  testing,  the
     business impact must be assessed and a contingency plan  implemented.  This
     phase is scheduled for completion by June 30, 1999.

     All personal computers ("PCs") and related software  throughout the Company
have been inventoried and tested for Year 2000 capability.  The company is using
two  testing  methods,  BIOS and off  line,  for PC  certification  of Year 2000
compatibility. PCs must pass both tests to be considered ready for Year 2000. As
of  September  30,  1998,  all of the  Company's  PCs and software are Year 2000
compatible. The Company's Wide Area Network and various Local Area Networks have
also been upgraded, tested, and determined to be Year 2000 prepared.

     Data processing for the Company is provided by Fiserv, the nation's largest
third party service bureau  serving  financial  institutions.  Fiserv has stated
that all their  processing  was Year 2000 ready of as June 30, 1998. The Company
has scheduled test procedures for critical  service bureau processes in December
1998.

     Software purchased from a Fiserv affiliate is used for applications such as
accounts  payable,  fixed  assets,  and  investment  portfolio  accounting.  The
investment portfolio accounting software is Year 2000 compatible as of September
30, 1998. The Company currently uses DOS-based


<PAGE>

versions of the application software for accounts payable and fixed assets which
are not Year 2000 capable.  The Fiserv affiliate has Year 2000 ready versions of
these applications  available as of September 30, 1998. The Company will convert
the  accounts  payable  and fixed  asset  applications  to the Year  2000  ready
software in January 1999.  Appropriate  testing  procedures will be performed at
that time.

     Other   third  party   vendors   identified   by  the  Company   were  sent
questionnaires in May 1998 regarding their preparations for Year 2000. Responses
have been  received  and further  updates  will be requested in order to monitor
vendors' status.

     Critical data processing applications, in addition to those provided by the
service  bureau,  have  been  identified.  These  include  applications  such as
electronic  processing  through the  Federal  Reserve  Bank and ATM  processing.
Testing  procedures for these  applications  are in the process of  development.
Contingency  plans are also being developed by each department.  The contingency
plans address actions to be taken to continue  operations in the event of system
failure  due to areas  that  cannot  be  tested  in  advance,  such as power and
telephone service, which are vital to business continuation.

     To assist customers in understanding Year 2000 issues and to inform them of
the Company's  actions to prepare,  brochures  regarding Year 2000  preparedness
have been  distributed to all customers.  Another mailing is anticipated  during
the fiscal year ending September 30, 1999.

     The  Company  believes  that the Year 2000 issue will not pose  significant
operational  problems  and is not  anticipated  to be material to its  financial
position or results of  operations  in any given year. As of September 30, 1998,
the Company estimated that total Year 2000 implementation  costs will not exceed
$200,000 and are expected to be expensed  over a period of 18 months,  affecting
fiscal  years  1998,  1999,  and 2000.  This  estimate  is based on  information
available at September 30, 1998,  and may be revised as  additional  information
and actual costs become  available.  During the year ended  September  30, 1998,
$89,000 of Year 2000 expenses were incurred and expensed.

Asset Quality

Non-Performing Assets

     At  September  30,  1998,  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 .05%. The Association
intends to maintain asset quality by continuing its focus on one- to four-family
lending.  With the  introduction of other lending options such as commercial and
multi-family  real estate  loans,  equity lines of credit,  other  consumer loan
products,  and commercial  loans,  the  Association  has evaluated the trade off
associated  with planned loan growth and the greater credit risk associated with
such forms of lending.

Classified Assets

     The Association has established a  Classification  of Assets Committee that
meets at least  quarterly  to approve  and develop  action  plans to resolve the
problems  associated with the assets.  They also review  recommendations for new
classifications  and make 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,  and as  appropriate,  its  assets as  "special


<PAGE>

mention,"  "substandard,"  "doubtful,"  and  "loss."  All  nonaccrual  loans and
non-performing assets are included in classified assets.

     The  following  table  sets  forth at the dates  indicated  the  amounts of
classified assets:

<TABLE>

<CAPTION>
                                                      At September 30,
                                      ----------------------------------------------
                                           1998            1997             1996
                                      -------------   -------------    -------------
                                                      (In thousands)

<S>                                   <C>             <C>              <C>          
Loss ..............................   $           3   $          --    $          --
Doubtful ..........................              --              --               --
Substandard .......................             521             304              281
Special Mention ...................           2,452             843              645
                                      _____________   _____________    _____________
                                      $       2,976   $       1,147    $         926
                                      =============   =============    =============
</TABLE>

Allowance for Loan Losses

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

     The  following  table  sets  forth at the  dates  indicated  the loan  loss
allowance and charge-offs:

<TABLE>
<CAPTION>
                                                          At September 30,
                                      -----------------------------------------------
                                           1998            1997             1996
                                      --------------  -------------    --------------
                                                         (In thousands)

<S>                                   <C>             <C>              <C>          
General loan loss allowance .......   $       1,947   $       1,296    $         928
Specific loss allowance ...........               3              --               --
Charge-offs .......................              20               2               --

</TABLE>



<PAGE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30,
1998 AND 1997

General

     The  acquisition  of 25 branches  from Wells Fargo Bank,  N.A.  late in the
fiscal year ended  September 30, 1997 (the  "Acquisition")  has had  significant
positive impact on the operations of the Company.  The overnight  expansion from
eight branches to thirty-three and the resultant increase in deposits and number
of employees is reflected  in  increases in  non-interest  income and  expenses.
Additionally,  two branches  were opened this year,  including a branch that the
Company  constructed in Bend and a branch the Company purchased from Key Bank in
Jacksonville.  The Company ended fiscal year 1998 with 34 full service  branches
in operation, and one loan production office.

     With the last year's Acquisition and other activities throughout this year,
net earnings  increased $1.0 million,  or 11.6%,  from $8.6 million for the year
ended September 30, 1997, to $9.6 million for the year ended September 30, 1998.
Net interest  income  increased $7.6 million or 31.2% from $24.3 million for the
year ended  September 30, 1997 to $31.9 million for the year ended September 30,
1998.  This increase was primarily  attributable to an increase in total average
interest-earning assets from $732.3 at September 30, 1997 to $950.1 at September
30, 1998.  The increase in net interest  income was  augmented by a  significant
increase in  non-interest  income from $0.8 million for the year ended September
30, 1997 to $3.2 million for the year ended September 30, 1998. This increase is
primarily  attributable to an increase in service fee income due to the addition
of  the  25  acquired  branches  which  contributed  42,000  additional  deposit
accounts.
 
Interest Income

     The $217.8 million increase in average interest earning assets  contributed
to an increase in interest  income of $15.6  million or 28.7% from $54.1 million
for the year  ended  September  30,  1997 to $69.7  million  for the year  ended
September  30,  1998.  A   significant   portion  of  the  increase  in  average
interest-earning  assets was the result of  converting  the cash obtained in the
Acquisition into investment securities. This in turn increased the proportion of
investment  securities to total earning  assets and decreased the  proportion of
loans.   In  most  cases,   loans  will  generate  higher  average  yields  than
investments. As a result, although total interest income increased for the year,
the average yield on interest earning assets  decreased  slightly from 7.40% for
the year ended  September  30,  1997 to 7.34% for the year ended  September  30,
1998.

     Of  the  $15.6  million  increase  in  interest  income,  $8.7  million  is
attributable to additional  loan income due to an increase in loans  receivable.
The  increase in loans  receivable  was  primarily  a result of the  purchase of
participation  loans and loan  originations  exceeding loan  refinancing,  which
resulted in greater net loan growth for 1998.

     The remaining  increase in interest  income of $6.9 million was a result of
investing  the proceeds of the  Acquisition  in fixed rate U.S.  Government  and
agency securities with maturities of less than five years,  fixed and adjustable
rate  corporate   securities  and  overnight   funds.  The  average  balance  of
investments  and  mortgage-backed  and related  securities  increased  by $108.0
million,  or 57.9%,  for the year ended  September  30, 1998  compared  with the
comparable period in 1997.

Interest Expense

     Interest  expense  increased  $8.0  million  due to  increases  in interest
expense on deposits and borrowings.  Interest expense on deposits increased $6.5


<PAGE>

million or 28.8% from $22.4  million  for the year ended  September  30, 1997 to
$28.9 million for the year ended September 30, 1998.

     Average  deposits  increased by $180.3 million for the year ended September
30, 1998 compared to the year ended September 30, 1997, but the average interest
paid on  interest-bearing  deposits decreased 40 basis points from 4.98% for the
year ended  September  30, 1997 to 4.58% for the year ended  September 30, 1998.
This  decrease  was a result  of the  lower  cost of  deposits  obtained  in the
Acquisition and overall lower rates in 1998 over 1997. These lower cost deposits
were outstanding for the entire year ended September 30, 1998 but only two and a
half months during the prior year,  thus having a greater  impact on the current
year.  Interest  expense on borrowings  increased  $1.5 million due to increased
average borrowings of $29.3 million.

     The general interest rate environment  during the year was one of low rates
and a flat yield  curve.  Analysts  report  that the  largest 50 public  banking
companies  experienced a  20-basis-point  compression in net interest margin for
the year ended  September  30, 1998. In spite of this  environment,  the Company
improved its net interest  margin (net  interest  income as a percent of average
interest-earning assets) from 3.32% for the fiscal year ended September 30, 1997
to 3.36% for the year ended September 30, 1998.  This  improvement is related to
the Company's  success in converting  proceeds from  investment  securities into
loans  which  yield  a  higher  return  than  investment  securities  as well as
improving the mix of loans originated to include more higher yielding loans than
in the past.  Interest  rate spread (the  difference  between  average  yield on
interest-earning  assets and average cost of interest-bearing  liabilities) also
improved,  from 2.28% for the year  ended  September  30,  1997 to 2.57% for the
current  year.  This  improvement  was  primarily  the  result of the lower cost
transaction   accounts   obtained   with  the   Acquisition.   The  addition  of
non-interest-bearing  checking  deposits through the Acquisition had the further
positive impact of reducing overall cost of funds.



<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                            Years Ended
                                                                           September 30,
                         -----------------------------------------------------------------------------------------------------------
                                      1998                                      1997                            1996
                         ---------------------------------    --------------------------------     ---------------------------------
                          Average                   Yield/    Average                   Yield/     Average                    Yield/
                          Balance    Interest        Rate     Balance    Interest        Rate      Balance     Interest        Rate
                         ---------------------------------    --------------------------------     ---------------------------------
INTEREST-EARNING ASSETS

<S>                      <C>         <C>           <C>       <C>         <C>           <C>        <C>          <C>           <C>  
Loans receivable .....   $614,457    $ 49,508        8.06%   $515,555    $ 40,851        7.92%    $440,510     $ 35,262        8.00%
Mortgage backed and
related securities ...     61,000       3,680        6.03%     74,349       4,716        6.34%      52,275        3,137        6.00%
Investment securities     233,715      14,149        6.05%    112,319       6,847        6.10%      87,929        5,382        6.12%
Federal funds sold ...     16,820         917        5.45%     17,533         931        5.31%       6,521          462        7.09%
Interest earning deposits  16,108         862        5.35%      6,132         327        5.32%      21,372        1,059        4.95%
FHLB stock ...........      7,983         617        7.73%      6,431         495        7.70%       4,552          348        7.64%
                         --------    --------                --------    --------                 --------     --------
Total interest-earning
assets                    950,083      69,733        7.34%    732,319      54,167        7.40%     613,159       45,650        7.45%
Non-interest-earning 
assets                     48,202                              16,527                                2,130 
                         --------                            --------                              -------
Total Assets .........   $998,285                            $748,846                              615,289
                         ========                            ========                              =======
INTEREST-BEARING LIABILITIES

Tax and insurance 
reserve                  $  5,895    $    145        2.47%   $  4,614    $    137        2.97%    $  4,490     $    148        3.30%
Passbook and
statement savings ....     62,333       1,683        2.70%     40,281       1,271        3.15%      34,198          983        2.87%
Interest-bearing checking  73,806       1,089        1.48%     35,892         791        2.20%      22,064          546        2.47%
Money market .........    110,650       4,275        3.86%     62,171       2,391        3.85%      50,308        1,950        3.88%
Certificates of deposit   384,400      21,885        5.69%    312,511      18,012        5.76%     282,446       16,772        5.94%
FHLB advances/Short term
borrowings ...........    155,712       8,771        5.63%    127,659       7,254        5.68%      51,517        2,888        5.60%
                         --------    --------                --------    --------                 --------     --------
Total interest-bearing
liabilities ..........    792,796      37,848        4.77%    583,128      29,856        5.12%     445,023       23,287        5.23%
Non-interest-bearing
liabilities ..........     59,037                              19,417                                4,892         
                         --------    --------                --------    --------                 --------     --------
Total liabilities ....    851,833                             602,545                              449,915                         
Shareholders' equity .    146,452                             146,301                              165,374
                         --------                            --------                             --------
Total Liabilities and
Shareholders' Equity .   $998,285                            $748,846                             $615,289                          
                         ========                            ========                             ========
Net interest income ..              $ 31,885                             $ 24,311                               $22,363 
                                    ========                             ========                              ========
Interest rate spread .                               2.57%                               2.28%                                 2.22%
                                                  ========                            ========                              ========
Net interest margin ..                               3.36%                               3.32%                                 3.65%
                                                  ========                            ========                              ========
Average interest-earning
assets to average
interest-bearing
liabilities ..........                             119.84%                             125.58%                               137.78%
                                                   =======                            ========                              ========
</TABLE>
<PAGE>

<TABLE>
<CAPTION>


                                       For the Years Ended September 30,                For the Years Ended September 30,
                               ------------------------------------------------  ----------------------------------------------
                                    1997 VS 1998 Increase (Decrease) Due To          1996 VS 1997 Increase (Decrease) Due To
                               ------------------------------------------------  ----------------------------------------------
                                                                  Net Increase                                    Net Increase
                                  Rate       Volume    Rate/Vol    (Decrease)      Rate      Volume    Rate/Vol    (Decrease)
                                -------    --------    --------   ------------   -------   --------    --------   -------------
INTEREST EARNING ASSETS
 
<S>                            <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>     
Loans ......................   $    688    $  7,837    $    132    $  8,657    ($   357)   $  6,007    ($    61)   $  5,589
Mortgage backed and
related securities .........       (231)       (848)         43      (1,036)        179       1,324          76       1,579
Investment securities ......        (47)      7,400         (51)      7,302         (22)      1,493          (6)      1,465
Federal funds sold .........         25         (37)         (2)        (14)       (116)        781        (196)        469
Interest bearing deposits ..          1         533           1         535          79        (754)        (57)       (732)
FHLB stock .................          2         120        --           122           2         144           1         147
                               --------    --------    --------    --------    --------    --------    --------    --------
Total Interest-Earning
Assets .....................   $    438    $ 15,005    $    123    $ 15,566    ($   235)   $  8,995    ($   243)   $  8,517
                               ========    ========    ========    ========    ========    ========    ========    ========

INTEREST BEARING LIABILITIES

Tax and insurance reserves .   ($    24)   $     38    ($     6)   $      8    ($    15)   $      4         $--    ($    11)
Passbook and statement
savings ....................       (183)        696        (101)        412          96         175          17         288
Interest bearing checking ..       (261)        836        (277)        298         (60)        342         (37)        245
Money market ...............         11       1,864           9       1,884         (15)        460          (4)        441
Certificates of deposit ....       (220)      4,143         (50)      3,873        (493)      1,785         (52)      1,240
FHLB advances/Short term
borrowings .................        (63)      1,593         (13)      1,517          40       4,267          59       4,366
                               --------    --------    --------    --------    --------    --------    --------    --------
Total Interest-Bearing
Liabilities ................   ($   740)   $  9,170    ($   438)   $  7,992    ($   447)   $  7,033    ($    17)   $  6,569
                               ========    ========    ========    ========    ========    ========    ========    ========
Increase in Net
Interest Income ............                                       $  7,574                                        $  1,948
                                                                   ========                                        ========
</TABLE>





<PAGE>

Provision for Loan Losses

     The  provision  for loan losses was  $674,000,  recoveries  were zero,  and
charge offs were $20,774 during the year ended  September 30, 1998 compared to a
provision of $370,000 with no  recoveries  and charges offs of $1,369 during the
year ended  September 30, 1997. The increase in the provision is a reflection of
the Company's  conservative approach of increasing the provision as loan volumes
increase.  At September  30, 1998,  the  allowance  for loan losses was equal to
372.1% of  non-performing  assets  compared to 510.2% at September 30, 1997. The
decrease in the coverage ratio at year end 1998 was the result of an increase in
non-performing  assets as a result of foreclosure  proceedings initiated against
five  one- to  four-family  properties.  The  loan  balances  related  to  these
properties  totaled  $289,737 at September  30, 1998  compared to fair values of
$565,830.

Non-Interest Income

     Non-interest  income  increased $2.4 million or 295.1 % to $3.2 million for
the year ended September 30, 1998 from $811,000 for the year ended September 30,
1997. The increase was  attributable  to increases in fees and services  charges
and other  income,  principally  as a result of the  increase  in the  number of
deposit accounts subject to service charges obtained in the Acquisition.

Non-Interest Expense

     Non-interest  expense increased $7.7 million,  or 65.9%, for the year ended
September  30, 1998,  from a total of $11.8  million for the prior year to $19.5
million for the year ended September 30, 1998. The increase in branches with the
Acquisition  as  well  as the  addition  of two new  branches  impacted  several
categories of non-interest  expense. An increase in number of employees from 100
to 244 produced the $2.5 million increase in compensation and employee benefits.
Occupancy  expense  increased  $1.2  million,  or 127.4%,  as expected  with the
increase from seven branches to 34. Other items  correlated to increased  volume
and number of  locations  also  increased  as  expected.  For  example,  postage
increased by $400,759,  or 221.3%;  telephone increased by $171,570,  or 147.7%;
check processing  increased by $506,181,  or 281.00%;  and ATM expense increased
$218,004, or 145.1%.

     The  recording  of  core  deposit  intangible  related  to the  Acquisition
resulted in $1.7 million in  amortization  expense for the year ended  September
30,  1998  compared to $302,991  for the prior year.  The ratio of  non-interest
expense  to  average  total  assets  was 1.96%  and  1.57%  for the years  ended
September 30, 1998 and 1997, respectively.

Income Taxes

     The  provision  for  income  taxes  was $5.3  million  for the  year  ended
September 30, 1998,  representing  an effective tax rate of 35.9%  compared with
$4.4 million for the year ended September 30, 1997 representing an effective tax
rate of 34.1%.  The  effective  rate for 1998  reflects the impact of a one year
reduction in the state tax rate for Oregon.  The effective tax rate for 1997 was
lower than 1998  because  the  Company  was able to  recognize  the tax  benefit
related to the capital loss on sale of the U.S. Federal  securities  mutual bond
fund, thereby reducing tax expense for the year. At September 30, 1996, when the
capital loss was recognized for book purposes, a valuation allowance was created
to offset the  deferred  tax asset  because the Company was not assured of being
able to realize a capital  gain and the  related  tax  benefit.  During the year
ended September 30, 1997, the Company,  through the sale of certain investments,
realized a capital gain for tax purposes  that  assures  realization  of the tax
benefit and thus  reduced the  valuation  allowance to zero.  See  "Consolidated
Financial Statements - Note 11: Taxes on Income."


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

General

     The most significant event for the Company was the July 1997 acquisition of
25 former  First  Interstate  Bank  branches  from Wells  Fargo Bank,  N.A.  The
branches are located in rural  Oregon  communities,  complementing  the existing


<PAGE>

branch  network and expanding the Company's  delivery of its "hands-on  banking"
style to customers throughout the state of Oregon.

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

     The $119.2 million increase in average interest earning assets  contributed
to an increase in interest  income of $8.5  million or 18.7% from $45.6  million
for the year  ended  September  30,  1996 to $54.2  million  for the year  ended
September  30, 1997. A significant  portion of the increase in average  interest
earning assets was the result of converting the cash obtained in the Acquisition
into investment securities.  This in turn increased the proportion of investment
securities to total earning  assets and  decreased the  proportion of loans.  In
most  cases,   loans  will  generate   higher  average  yields  than  investment
securities.  As a result, the average yield on interest earning assets decreased
slightly from 7.45% for the year ended  September 30, 1996 to 7.40% for the year
ended September 30, 1997.

     Of  the  $8.5  million  increase  in  interest  income,   $5.6  million  is
attributable to additional  loan income due to an increase in loans  receivable.
The increase in loans  receivable  was  primarily a result of new purchase  loan
originations  exceeding loan  refinancing  and purchase of  participation  loans
which resulted in greater net loan growth for 1997.

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

Interest Expense

     Interest  expense  increased  $6.6  million  due to  increases  in interest
expense on deposits and borrowings.  Interest expense on deposits increased $2.2
million or 10.9% from $20.3  million  for the year ended  September  30, 1996 to
$22.5 million for the year ended September 30, 1997. Total deposits increased by
$274.3  million  from  September  30,  1996  to  September  30,  1997,   arising
principally from the acquisition of the 25 former First Interstate Bank branches
from  Wells  Fargo  Bank,   N.A.   However,   the  average   interest   paid  on
interest-bearing  deposits  decreased  23 basis  points  from 5.21% for the year
ended  September 30, 1996 to 4.98% for the year ended  September 30, 1997.  This
decrease  was a result of the lower  cost of  deposits  acquired  in the  branch
acquisition.  Interest  expense on  borrowings  increased  $4.4 million due to a
147.8%  increase in average  borrowings,  from $51.5  million for the year ended
September 30, 1996 to $127.7 million for the year ended September 30, 1997.

Provision for Loan Losses

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

<PAGE>

to four-family loans traditionally made by the Association.

Non-Interest Income

     Non-interest  income increased  $288,950 or 55.4 % to $810,608 for the year
ended  September 30, 1997 from  $521,658 for the year ended  September 30, 1996.
The increase  was  attributable  to  increases in fees and services  charges and
other income,  principally  as a result of the increase in the number of deposit
accounts subject to service charges obtained in the branch acquisition.

Non-Interest Expense

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

Income Taxes

     The  provision  for  income  taxes  was $4.4  million  for the  year  ended
September  30, 1997  representing  an  effective  tax rate of 34.1%  compared to
provision of $4.4 million for the year ended September 30, 1996  representing an
effective tax rate of 41.9%.  Although earnings for the year ended September 30,
1997 were  higher  than for the same  period of 1996,  the  Company  was able to
recognize  the tax  benefit  related  to the  capital  loss on sale of the  U.S.
Federal securities mutual bond fund, thereby reducing the effective rate for the
year.  At September  30, 1996,  when the capital  loss was  recognized  for book
purposes,  a valuation  allowance  was created to offset the  deferred tax asset
because the Company was not assured of being able to realize a capital  gain and
the related tax benefit.  During the year ended September 30, 1997, the Company,
through  the  sale of  certain  investments,  realized  a  capital  gain for tax
purposes  that  assures  realization  of the tax  benefit  and thus  reduced the
valuation allowance to zero.
<PAGE>

<TABLE>
<CAPTION>
Historical Stock Price Graph
          Date           Stock Price                   Date       Stock Price
        ---------        -----------                ---------     -----------
        Fiscal Year 1996
<S>     <C>               <C>                       <C>               <C>    
        05-Oct-95         12.5000                   05-Apr-96         13.2500
        10-Oct-95         12.8750                   10-Apr-96         13.2500
        15-Oct-95         13.1250                   15-Apr-96         13.6870
        20-Oct-95         13.1250                   20-Apr-96         13.6250
        25-Oct-95         12.8750                   25-Apr-96         13.8125
        30-Oct-95         12.7500                   30-Apr-96         13.7500
        05-Nov-95         12.8750                   05-May-96         13.6250
        10-Nov-95         13.1250                   10-May-96         13.2500
        15-Nov-95         12.8750                   15-May-96         13.6250
        20-Nov-95         12.8125                   20-May-96         13.7500
        25-Nov-95         13.0000                   25-May-96         14.0000
        30-Nov-95         13.2813                   30-May-96         13.8750
        05-Dec-95         13.1875                   05-Jun-96         14.1250
        10-Dec-95         13.3750                   10-Jun-96         14.0620
        15-Dec-95         13.3750                   15-Jun-96         14.1250
        20-Dec-95         13.1250                   20-Jun-96         13.9370
        25-Dec-95         13.6250                   25-Jun-96         14.0000
        30-Dec-95         13.7500                   30-Jun-96         14.5000
        05-Jan-96         13.1870                   05-Jul-96         14.1250
        10-Jan-96         13.1250                   10-Jul-96         13.8750
        15-Jan-96         12.9375                   15-Jul-96         13.7500
        20-Jan-96         13.2500                   20-Jul-96         14.0000
        25-Jan-96         13.1250                   25-Jul-96         13.3750
        30-Jan-96         13.2500                   30-Jul-96         13.3750
        05-Feb-96         13.2500                   05-Aug-96         13.5620
        10-Feb-96         13.5000                   10-Aug-96         13.6870
        15-Feb-96         13.5000                   15-Aug-96         14.0000
        20-Feb-96         13.1250                   20-Aug-96         13.7500
        25-Feb-96         12.8750                   25-Aug-96         14.0620
        29-Feb-96         13.1250                   30-Aug-96         14.1250
        05-Mar-96         12.6250                   05-Sep-96         14.1870
        10-Mar-96         12.8750                   10-Sep-96         14.3750
        15-Mar-96         12.8750                   15-Sep-96         14.3120
        20-Mar-96         12.7500                   20-Sep-96         14.2500
        25-Mar-96         13.0000                   25-Sep-96         14.2500
        30-Mar-96         13.3800                   30-Sep-96         14.2500
(continued)
<PAGE>
<CAPTION>
Historical Stock Price Graph (continued)
          Date           Stock Price                   Date       Stock Price
        ---------        -----------                ---------     -----------
        Fiscal Year 1997
<S>     <C>               <C>                       <C>               <C>    
        05-Oct-96         14.5000                   05-Apr-97         16.8120
        10-Oct-96         14.3750                   10-Apr-97         17.3750
        15-Oct-96         14.3750                   15-Apr-97         16.6563
        20-Oct-96         14.3750                   20-Apr-97         17.0000
        25-Oct-96         14.1250                   25-Apr-97         17.2500
        30-Oct-96         14.0625                   30-Apr-97         17.7500
        05-Nov-96         14.0000                   05-May-97         18.0000
        10-Nov-96         14.5000                   10-May-97         18.3750
        15-Nov-96         14.6250                   15-May-97         18.1250
        20-Nov-96         14.5620                   20-May-97         18.1250
        25-Nov-96         14.0620                   25-May-97         18.3120
        30-Nov-96         14.7500                   30-May-97         18.5000
        05-Dec-96         15.0620                   05-Jun-97         18.8750
        10-Dec-96         15.0000                   10-Jun-97         18.9370
        15-Dec-96         14.8750                   15-Jun-97         19.0000
        20-Dec-96         15.7500                   20-Jun-97         18.7500
        25-Dec-96         15.7500                   25-Jun-97         18.7500
        30-Dec-96         15.6250                   30-Jun-97         19.1250
        05-Jan-97         15.8750                   05-Jul-97         18.8750
        10-Jan-97         15.6250                   10-Jul-97         20.1250
        15-Jan-97         16.1250                   15-Jul-97         19.5000
        20-Jan-97         16.0000                   20-Jul-97         18.8750
        25-Jan-97         15.8750                   25-Jul-97         18.7500
        30-Jan-97         15.5000                   30-Jul-97         19.2500
        05-Feb-97         15.0000                   05-Aug-97         19.0000
        10-Feb-97         15.3750                   10-Aug-97         19.2500
        15-Feb-97         15.2500                   15-Aug-97         19.3125
        20-Feb-97         15.4370                   20-Aug-97         19.1250
        25-Feb-97         15.6250                   25-Aug-97         19.1250
        28-Feb-97         15.5000                   30-Aug-97         19.6250
        05-Mar-97         16.5000                   05-Sep-97         20.1250
        10-Mar-97         18.6250                   10-Sep-97         20.5000
        15-Mar-97         18.1250                   15-Sep-97         20.1250
        20-Mar-97         18.0000                   20-Sep-97         20.5000
        25-Mar-97         17.6250                   25-Sep-97         22.3750
        30-Mar-97         17.6250                   30-Sep-97         22.1250
(continued)

<PAGE>
<CAPTION>
Historical Stock Price Graph (continued)
          Date           Stock Price                   Date       Stock Price
        ---------        -----------                ---------     -----------
        Fiscal year 1998
<S>     <C>               <C>                       <C>               <C>    
        05-Oct-97         24.2500                   05-Apr-98         22.8750
        10-Oct-97         23.0000                   10-Apr-98         21.7500
        15-Oct-97         23.0000                   15-Apr-98         21.6250
        20-Oct-97         22.8750                   20-Apr-98         21.0000
        25-Oct-97         22.8750                   25-Apr-98         21.1875
        30-Oct-97         22.3750                   30-Apr-98         21.3750
        05-Nov-97         21.0000                   05-May-98         21.4375
        10-Nov-97         21.1250                   10-May-98         21.3750
        15-Nov-97         20.5000                   15-May-98         21.3750
        20-Nov-97         20.5000                   20-May-98         21.5000
        25-Nov-97         20.7500                   25-May-98         19.9375
        30-Nov-97         21.8750                   30-May-98         19.8125
        05-Dec-97         22.3125                   05-Jun-98         19.3750
        10-Dec-97         21.8750                   10-Jun-98         19.3750
        15-Dec-97         21.6563                   15-Jun-98         18.7500
        20-Dec-97         20.8750                   20-Jun-98         18.6250
        25-Dec-97         21.1250                   25-Jun-98         19.3750
        30-Dec-97         21.5000                   30-Jun-98         19.0625
        05-Jan-98         21.3750                   05-Jul-98         19.5000
        10-Jan-98         19.5000                   10-Jul-98         19.0625
        15-Jan-98         21.6250                   15-Jul-98         19.8125
        20-Jan-98         21.7500                   20-Jul-98         19.7500
        25-Jan-98         20.8125                   25-Jul-98         19.4375
        30-Jan-98         22.2500                   30-Jul-98         18.0000
        05-Feb-98         22.0000                   05-Aug-98         17.6250
        10-Feb-98         23.0000                   10-Aug-98         17.7500
        15-Feb-98         23.0000                   15-Aug-98         17.4375
        20-Feb-98         22.5625                   20-Aug-98         17.1250
        25-Feb-98         22.3125                   25-Aug-98         17.1250
        28-Feb-98         22.5000                   30-Aug-98         15.5000
        05-Mar-98         21.8750                   05-Sep-98         14.0000
        10-Mar-98         22.1250                   10-Sep-98         15.0000
        15-Mar-98         22.6875                   15-Sep-98         16.1250
        20-Mar-98         23.0000                   20-Sep-98         17.0000
        25-Mar-98         22.8750                   25-Sep-98         16.5000
        30-Mar-98         23.0000                   30-Sep-98         17.3750

</TABLE>
 
<PAGE>

COMMON STOCK INFORMATION

     Since October 4, 1995,  Klamath First Bancorp's  common stock has traded on
the National  Association of Security Dealers  Automated  Quotations  ("Nasdaq")
National  Market under the symbol  "KFBI." As of September 28, 1998,  there were
approximately  4,042  shareholders  of record or through  nominee or street name
accounts with brokers.

The high and low common stock prices by quarter were as follows:
<TABLE>
<CAPTION>
 
                           Years Ended September 30,
                   ---------------------------------------
                          1998                  1997
                   -----------------     -----------------
                    High        Low       High        Low
                   ------     ------     ------     ------
<S>                <C>        <C>        <C>        <C>   
First quarter      $24.25     $20.50     $16.13     $13.94
Second quarter      23.06      19.50      18.63      15.00
Third quarter       23.00      18.63      19.13      16.50
Fourth quarter      20.00      14.00      22.50      18.63

</TABLE>



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

                Years Ended September 30,
                -------------------------
                    1998       1997
                ---------   ------------
<S>              <C>        <C>     
First quarter    $  0.080   $  0.070
Second quarter      0.085      0.075
Third quarter       0.090      0.075
Fourth quarter      0.090      0.080
</TABLE>

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


<PAGE>



                          Independent Auditors' Report



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


     We have audited the  accompanying  consolidated  balance  sheets of Klamath
First Bancorp,  Inc. and Subsidiary (the "Company") as of September 30, 1998 and
1997, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three  years in the period  ended  September  30,
1998. 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  generally  accepted  auditing
standards.  This 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 the Company as of September 30,
1998 and 1997 and the results of its  operations  and its cash flows for each of
the three years in the period ended  September  30,  1998,  in  conformity  with
generally accepted accounting principles.



/s/ Deloitte & Touche LLP
Portland, Oregon
October 30, 1998

<PAGE>

KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 



                                                                                September 30,
                                                                  ---------------------------------------
                                                                            1998               1997
ASSETS                                                            ------------------   ------------------

<S>                                                                  <C>                <C>            
Cash and due from banks ..........................................   $    25,644,460    $    24,503,768
Interest bearing deposits with banks .............................        11,496,026          1,431,087
Federal funds sold and securities
purchased under agreements to resell .............................        29,844,783          6,108,341
                                                                     ---------------    ---------------
   Total cash and cash equivalents ...............................        66,985,269         32,043,196

Investment securities available for sale, at fair value ..........       203,224,184        261,846,320
(amortized cost: $199,251,123 and $261,869,234)
Investment securities held to maturity, at amortized cost
(fair value: $2,928,324 and $22,968,997) .........................         2,888,759         22,937,314
Mortgage backed and related securities available for sale,
at fair value (amortized cost: $42,741,863 and $64,097,246) ......        43,335,857         64,868,633
Mortgage backed and related securities held to maturity,
at amortized cost (fair value: $3,696,444 and $5,518,648) ........         3,661,683          5,446,957
Loans receivable, net ............................................       668,146,380        551,825,440
Real estate owned ................................................              --                 --
Premises and equipment, net ......................................        12,347,467         11,671,124
Stock in Federal Home Loan Bank of Seattle, at cost ..............        10,172,900          7,150,400
Accrued interest receivable ......................................         7,471,717          7,626,164
Core deposit intangible ..........................................        11,431,018         13,083,695
Other assets .....................................................         1,637,164          1,578,805
                                                                     ---------------    ---------------
   Total assets ..................................................   $ 1,031,302,398    $   980,078,048
                                                                     ===============    ===============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
  Deposit liabilities ............................................   $   689,541,345    $   673,977,901
  Accrued interest on deposit liabilities ........................         1,291,784          1,215,745
  Advances from borrowers for taxes and insurance ................         9,420,791          8,915,486
  Advances from Federal Home Loan Bank of Seattle ................       167,000,000        129,000,000
  Short term borrowings ..........................................        12,112,500         17,077,500
  Accrued interest on borrowings .................................           213,957            512,716
  Pension liabilities ............................................           779,392            727,140
  Deferred federal and state income taxes ........................         3,655,944          1,911,573
  Other liabilities ..............................................         2,205,730          2,277,544
                                                                     ---------------    ---------------
    Total liabilities ............................................       886,221,443        835,615,605
                                                                     ---------------    ---------------

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, 1998 - 9,916,766 issued, 8,898,972 outstanding
   September 30, 1997 - 10,429,534 issued, 9,235,582 outstanding .            99,168            104,295
  Additional paid-in capital .....................................        82,486,183         92,601,639
  Retained earnings-substantially restricted .....................        71,051,445         64,744,995
  Unearned shares issued to ESOP .................................        (6,850,550)        (7,829,200)
  Unearned shares issued to MRDP .................................        (4,536,865)        (5,623,340)
  Net unrealized gain on securities available for sale, net of tax         2,831,574            464,054
                                                                     ---------------    ---------------
    Total shareholders' equity ...................................       145,080,955        144,462,443
                                                                     ---------------    ---------------
    Total liabilities and shareholders' equity ...................   $ 1,031,302,398    $   980,078,048
                                                                     ===============    ===============

      See notes to consolidated financial statements.
</TABLE>

<PAGE>

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


                                                                                            
                                                                            Years Ended September 30,
                                                              ---------------------------------------------------         
                                                                     1998             1997              1996
                                                              ---------------   ---------------   ---------------
INTEREST INCOME
<S>                                                           <C>               <C>               <C>            
  Loans receivable ........................................   $    49,508,126   $    40,850,478   $    35,261,655
  Mortgage backed and related securities ..................         3,679,740         4,716,184         3,137,046
  Investment securities ...................................        14,766,471         7,342,604         5,730,296
  Federal funds sold and securities purchased under
     agreements to resell .................................           916,847           930,980           462,140
  Interest bearing deposits ...............................           862,086           326,521         1,058,286
                                                              ---------------   ---------------   ---------------
    Total interest income .................................        69,733,270        54,166,767        45,649,423
                                                              ---------------   ---------------   ---------------
INTEREST EXPENSE
  Deposit liabilities .....................................        28,931,749        22,464,345        20,251,039
  Advances from FHLB of Seattle ...........................         7,921,570         6,270,615         2,689,790
  Other ...................................................           995,032         1,120,858           345,698
                                                              ---------------   ---------------   ---------------
    Total interest expense ................................        37,848,351        29,855,818        23,286,527
                                                              ---------------   ---------------   ---------------
    Net interest income ...................................        31,884,919        24,310,949        22,362,896

Provision for loan losses .................................           674,000           370,000           120,000

                                                              ---------------   ---------------   ---------------

    Net interest income after provision for
      loan losses .........................................        31,210,919        23,940,949        22,242,896
                                                              ---------------   ---------------   ---------------

NON-INTEREST INCOME
  Fees and service charges ................................         2,410,239           668,779           260,320
  Gain on sale of investments .............................           440,750             2,144              --
  Gain on sale of real estate owned .......................              --              27,946            22,233
  Other income ............................................           351,365           111,739           239,105
                                                              ---------------   ---------------   ---------------
    Total non-interest income .............................         3,202,354           810,608           521,658
                                                              ---------------   ---------------   ---------------
NON-INTEREST EXPENSE
  Compensation, employee benefits and related expense .....         9,616,323         7,143,516         4,476,052
  Occupancy expense .......................................         2,091,830           919,880           694,912
  Data processing expense .................................           963,475           480,889           343,319
  Insurance premium expense ...............................           289,592           376,029         3,380,779
  Loss on sale of investments .............................              --              14,531         1,642,625
  Loss on sale of real estate owned .......................              --                --               6,271
   Amortization of core deposit intangible ................         1,652,677           302,991              --
  Other expense ...........................................         4,908,907         2,526,519         1,698,272
                                                              ---------------   ---------------   ---------------
    Total non-interest expense ............................        19,522,804        11,764,355        12,242,230
                                                              ---------------   ---------------   ---------------
Earnings before income taxes ..............................        14,890,469        12,987,202        10,522,324

Provision for income tax ..................................         5,339,432         4,429,452         4,412,527
                                                              ---------------   ---------------   ---------------

Net earnings ..............................................   $     9,551,037   $     8,557,750   $     6,109,797
                                                              ===============   ===============   ===============

Earnings per common share - basic .........................   $          1.05   $          0.91   $          0.56
Earnings per common share - fully diluted .................   $          1.00   $          0.88   $          0.55
Weighted average common shares outstanding - basic ........         9,066,471         9,438,915        11,004,939
Weighted average common shares outstanding -  with dilution         9,520,717         9,762,459        11,082,361

     See notes to consolidated financial statements.
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Unearned     Unearned           Net          
                         Common     Common      Additional                          shares       shares    unrealized          Total
                          Stock      Stock         paid-in      Retained            issued       issued    gain (loss) shareholders'
                         Shares     Amount         capital      earnings           to ESOP      to MRDP    securities         equity
                       ----------  ---------   ------------   -----------    -------------  -----------   -----------   ------------
Balance at 
<S>                    <C>          <C>        <C>            <C>            <C>            <C>            <C>         <C>         
October 1, 1995 ....   11,254,475   $122,331   $119,230,653   $55,811,362    $(9,786,500)           $--    $(692,781)  $164,685,065

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


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

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

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

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

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

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

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

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

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

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

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

Cash dividends .....       --          --             --       (3,244,587)          --             --           --       (3,244,587)

Unrealized gain on
securities available
for sale ...........       --          --             --             --             --             --      2,367,520      2,367,520

Stock repurchased
and retired ........   (544,085)     (5,440)   (11,556,044)          --             --             --           --      (11,561,484)

ESOP contribution ..     97,865        --        1,029,866           --          978,650           --           --        2,008,516

MRDP contribution ..     78,293        --             --             --             --        1,086,475         --        1,086,475

Exercise of stock
options ............     31,317         313        410,722           --             --             --           --          411,035

Net earnings .......       --          --             --        9,551,037           --             --           --        9,551,037
                       --------     -------    -----------    -----------    -----------    -----------    ---------    ------------
Balance at
September 30, 1998 .   8,898,972    $99,168    $82,486,183    $71,051,445    $(6,850,550)   $(4,536,865)   $2,831,574  $145,080,955
                       =========    =======    ===========    ===========    ============   ============   ==========  =============
</TABLE>

      See notes to consolidated financial statements.

<PAGE>

KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                           Years Ended September 30,
                                                              ---------------------------------------------------
                                                                    1998              1997             1996
                                                              ---------------   ---------------   ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                           <C>               <C>               <C>            
    Net earnings ..........................................   $     9,551,037   $     8,557,750   $     6,109,797

ADJUSTMENTS TO RECONCILE NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
    Depreciation and amortization .........................         2,815,615           772,204           403,074
    Provision for loan losses .............................           674,000           370,000           120,000
    Compensation expense related to ESOP benefit ..........         2,008,515         1,683,910         1,396,302
    Compensation expense related to MRDP Trust ............         1,086,475         1,071,130              --
    Net amortization of premiums (discounts)  paid on
      investment and mortgage backed and related securities            21,994           102,626           210,599
    Increase in deferred loan fees, net of amortization ...         1,258,655           912,445           703,055
    Accretion of discounts on purchased loans .............             3,762              (325)          (14,683)
    Net (gain) loss on sale of real estate owned and
      premises and equipment ..............................             3,196            (3,514)           (5,209)
    Net (gain) loss on sale of investment and mortgage
      backed and related securities .......................          (440,750)           12,387              --
    FHLB stock dividend ...................................          (617,000)         (495,000)         (347,900)
    Increase in core deposit intangible ...................              --         (13,386,686)             --
    Realized loss on sale of U.S. Federal securities
      mutual bond fund ....................................              --                --           1,642,625      
CHANGES IN ASSETS AND LIABILITIES
    Accrued interest receivable ...........................           154,447        (2,583,032)       (1,605,691)
    Other assets ..........................................          (218,359)       (1,625,538)         (310,160)
    Accrued interest on deposit liabilities ...............            76,039           503,337          (316,358)
    Accrued interest on borrowings ........................          (298,759)          189,553           323,163
    Pension liabilities ...................................            52,252            59,052            52,053
    Deferred federal and state income taxes ...............           293,310           714,915          (409,246)
    Other liabilities .....................................           131,343        (1,134,717)          315,996
                                                              ---------------   ---------------   ---------------
Net cash provided by operating activities .................        16,555,772        (4,279,503)        8,267,417
                                                              ---------------   ---------------   ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from maturity of investment securities
      held to maturity ....................................        20,150,000        48,680,000        69,552,392
    Proceeds from maturity of investment securities
      available for sale ..................................       104,180,000        19,009,324              --
    Principal repayments received on mortgage
       backed and related securities held to maturity .....         1,755,918         1,313,309              --
    Principal repayments received on mortgage
       backed and related securities available for sale ...        24,664,174        18,923,262        12,083,872
    Principal repayments received on loans ................       122,009,359        56,879,728        64,529,602
    Loan originations .....................................      (232,474,655)     (120,072,487)     (135,566,747)
    Loans purchased .......................................        (7,792,061)      (15,648,275)             --
    Purchase of investment securities held
      to maturity .........................................              --         (61,722,409)      (42,971,553)
    Purchase of investment securities available
      for sale ............................................       (60,366,913)     (219,697,100)      (60,969,781)
    Purchase of mortgage backed and related
      securities held to maturity .........................              --                --          (7,423,182)
    Purchase of mortgage backed and related
      securities available for sale .......................       (13,202,490)      (14,850,705)      (84,123,187)
    Purchase of FHLB stock ................................        (2,405,500)       (4,307,500)             --
    Proceeds from sale of FHLB stock ......................              --           2,425,900              --
    Proceeds from sale of investment securities
      available for sale ..................................        19,388,451        16,066,044              --
    Proceeds from sale of mortgage backed and related
      securities available for sale .......................         9,656,938         5,743,267              --
    Proceeds from sale of real estate owned and
      premises and equipment ..............................              --              86,159           177,595
    Purchases of premises and equipment ...................        (1,682,477)       (7,176,075)         (136,406)
                                                                  ------------     -------------     -------------
 Net cash used in investing activities                            (16,119,256)     (274,347,558)     (184,847,395)  
</TABLE>
(continued)

<PAGE>

KLAMATH FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>


                                                                           Years Ended September 30,
                                                                    1998              1997              1996
                                                             ________________   _______________   ______________________

CASH FLOWS FROM FINANCING ACTIVITIES

    Increase/(decrease) in deposit liabilities                                                                                    
<S>                                                           <C>               <C>               <C>            
     deposits, net of withdrawals .........................   $    15,563,444   $   274,304,721   $    15,293,649
    Proceeds from FHLB advances ...........................       179,000,000       184,000,000       105,000,000
    Repayments of FHLB advances ...........................      (141,000,000)     (145,000,000)      (35,000,000)
    Proceeds from short term borrowings ...................        88,343,199        84,750,150        21,938,300
    Repayments of short term borrowings ...................       (93,308,199)      (82,577,050)       (7,033,900)
    Repayment of stock oversubscription ...................              --                --         (65,685,300)
    Purchase of stock for MRDP ............................              --                --          (6,694,470)
    Stock repurchase and retirement .......................       (11,561,483)      (18,878,128)       (8,891,834)
    Proceeds from exercise of stock options ...............           411,035              --                --
    Advances from borrowers for tax and insurance .........           505,305         1,084,359          (135,297)
    Dividends paid ........................................        (3,447,744)       (3,193,428)       (2,025,807)
                                                              ---------------   ---------------   ---------------
Net cash provided by financing activities .................        34,505,557       294,490,624        16,765,341
                                                                                ---------------   ---------------
Net (decrease) increase in cash and cash
  equivalents .............................................        34,942,073        15,863,563      (159,814,637)

Cash and cash equivalents at beginning
  of year .................................................        32,043,196        16,179,633       175,994,270
                                                              ---------------   ---------------   ---------------
Cash and cash equivalents at end of quarter ...............   $    66,985,269   $    32,043,196   $    16,179,633
                                                              ===============   ===============   ===============
SUPPLEMENTAL SCHEDULE OF INTEREST AND
INCOME
  TAXES PAID
    Interest paid .........................................   $    38,071,070   $    29,162,927   $    23,483,212
    Income taxes paid .....................................         5,808,299         3,373,457         4,555,053

SUPPLEMENTAL SCHEDULE OF NONCASH
  INVESTING ACTIVITIES

    Transfer of investment securities from held to maturity to
     available for sale at estimated fair value ...........               $--               $--   $    27,171,074
    Transfer of mortgage backed and related securities from held
      to maturity to available for sale at estimated fair value            --                --         1,717,890
    Net unrealized gain (loss) on securities
      available for sale ..................................         2,367,520         1,512,041          (355,206)
    Dividends declared and accrued in other ...............           892,509           834,363           812,873


</TABLE>











    See notes to consolidated financial statements


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Principles of Consolidation

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

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

Nature of Operations

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

Use of Estimates in the Presentation of the Financial Statements

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

Cash Equivalents

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

Investment Securities

     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 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.

     During   December  1995,  the  Association   reclassified   $27,171,074  of
investment  securities and $1,717,890 of mortgage backed and related  securities
from held to maturity to  available  for sale at fair  values,  with  unrealized
gains and losses of $200,508 and $100,421,  respectively.  The  reclassification
was  made  in  accordance  with  the Financial Accounting Standards Board (FASB)

<PAGE>

special report,  "A Guide to  Implementation  of Statement 115 on Accounting for
Certain  Investments in Debt and Equity  Securities,"  that permitted a one-time
reassessment  of the  appropriateness  of the held to  maturity  classification,
without  affecting  the  classification  of the  remaining  securities  held  to
maturity.  Unrealized  gains and  losses on  securities  available  for sale are
excluded  from  earnings  and  reported  net of tax as a separate  component  of
shareholders' equity until realized.

Stock Investments

     The Company  holds stock in the Federal Home Loan Bank.  At  September  30,
1996 the Company also held stock in a U.S. Federal  securities mutual bond fund.
These investments are carried at the lower of cost or fair value.

Loans

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

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

Allowance for Loan Losses

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

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

Real Estate Owned

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

Premises and Equipment

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

Mortgage Servicing

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

     The  Association  records its  mortgage  servicing  rights at fair value in
accordance  with SFAS No.  125,  "Accounting  for  Transfers  and  Servicing  of
Financial Assets and Extinguishment of Liabilities," which amended SFAS Nos. 65,
"Accounting for Certain Mortgage Banking  Activities," and 122,  "Accounting for
Mortgage  Servicing  Rights." SFAS No. 125 requires the  Association to allocate
the total cost of all mortgage loans sold, whether  originated or purchased,  to
the mortgage  servicing rights and the loans (without mortgage servicing rights)
based on their  relative fair values if it is practicable to estimate those fair
values. As of September 30, 1998 the Company has no servicing assets.

Core Deposit Intangible

     On July 18, 1997 the Company  assumed $241.3 million of deposits from Wells
Fargo Bank,  N.A. for a core deposit  premium of $16.4  million.  In conjunction
with the  assumption  of these  deposits  the  Company  also  acquired 25 branch
facilities (24 owned and one leased) located  throughout  Oregon.  In accordance
with generally accepted  accounting  principles for purchase  transactions,  the
property  acquired  was  recorded at fair value and the  recorded  core  deposit
intangible was reduced by the market value adjustment  between the fair value of
the property  acquired  less the purchase  price.  The recorded net core deposit
intangible  of $13.4  million is being  amortized to  non-interest  expense on a
straight-line basis over 8.1 years.
<PAGE>

Income Taxes

     The Company  accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," which requires the use of the asset
and liability method of accounting for income taxes. Under this method, deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and liabilities  and their  respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.

Pension Cost

     It is the Company's  policy to fund  retirement  costs as they are accrued.
All such costs are computed on the basis of accepted actuarial methods.

Employee Stock Option Plan

     The Company sponsors an Employee Stock Ownership Plan ("ESOP"). The ESOP is
accounted  for in  accordance  with the American  Institute of Certified  Public
Accountants  ("AICPA")  Statement of Position 93-6,  "Employer's  Accounting for
Employee Stock Ownership  Plans."  Accordingly,  the shares held by the ESOP are
reported as unearned  shares issued to the employee stock  ownership plan in the
statement of financial condition. The plan authorizes release of the shares over
a ten-year  period,  of which seven 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," and a modification of FASB Interpretation No. 28,
"Accounting  for Stock  Appreciation  Rights and Other  Variable Stock Option or
Award  Plans." The plan  authorizes  the grant of common stock shares to certain
officers  and   directors,   which  vest  over  a  five-year   period  in  equal
installments.  The Company will recognize  compensation expense in the amount of
the cost of the common stock in accordance with the vesting  schedule during the
years in which the shares are payable.  When the MRDP awards are allocated,  the
common  stock shares  become  common  stock  equivalents  for earnings per share
calculations.

Stock Based Compensation

     The Company  accounts  for stock  compensation  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.
<PAGE>
     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 14 for pro forma effect on net income and earnings per share as
if the fair value method had been used.

Recently Issued Accounting Pronouncements

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting  Comprehensive  Income." SFAS No. 130  establishes  requirements  for
disclosure of  comprehensive  income and becomes  effective for years  beginning
after December 15, 1997.  Reclassification  of earlier financial  statements for
comparative purposes is required.

     In June  1997,  the FASB  also  issued  SFAS No.  131,  "Disclosures  about
Segments of an Enterprise and Related  Information."  SFAS No. 131 redefines how
operating  segments are determined and requires  disclosure of certain financial
and  descriptive  information  about  the  Company's  operating  segments.  This
statement  supercedes SFAS No. 14, "Financial Reporting for Segments of Business
Enterprises."  The new standard  becomes  effective  for years  beginning  after
December  15, 1997,  and  requires  that  comparative  information  from earlier
periods be  restated  to  conform  to the  requirements  of this  standard.  The
adoption of these statements is not expected to be material to the Company.

     In February 1998, SFAS No. 132, "Employers'  Disclosures about Pensions and
Other  Postretirement  Benefits,"  was issued.  SFAS No. 132 revises  employers'
disclosures about pensions and other  postretirement  benefit plans. It does not
change the  measurement  or  recognition  of those plans.  It  standardizes  the
disclosure  requirements for pensions and other  postretirement  benefits to the
extent practicable,  requires  additional  information on changes in the benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis,  and eliminates  certain  disclosures that are no longer useful.  This
Statement  becomes effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available.

     In June 1998,  SFAS No. 133,  "Accounting  for Derivative  Instruments  and
Hedging  Activities,"  was  issued.  SFAS No.  133  establishes  accounting  and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure those instruments at fair value. If certain  conditions are
met, a derivative may be specifically  designated as (a) a hedge of the exposure
to  changes  in  the  fair  value  of a  recognized  asset  or  liability  or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction,  or (c) a hedge of the foreign currency exposure of
a net investment in a foreign  operation,  an unrecognized  firm commitment,  an
available-for-sale  security,  or  a   foreign-currency-denominated   forecasted
transaction.  This Statement  becomes effective for fiscal years beginning after
June 15, 1999, and should not be applied  retroactively to financial  statements
of prior periods.

     The adoption of these Statements is not expected to have material impact on
the financial statements of the Company.

(2) Acquisition

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

(3) Cash and Due from Banks

     The Company is required to  maintain an average  reserve  balance  with the
Federal  Reserve Bank, or maintain such reserve balance in the form of cash. The
amount of this required reserve balance was approximately  $3.0 million and $1.7
million at  September  30, 1998 and 1997,  respectively,  and was met by holding
cash and  maintaining an average balance with the Federal Reserve Bank in excess
of this amount.
<PAGE>

(4) Investments and Mortgage Backed Securities

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

                                                          September 30, 1998
                                      -------------------------------------------------------
                                                          Gross Unrealized
                                       Amortized    --------------------------          Fair
                                          cost         Gains            Losses         value
                                      ----------    ----------        --------  -------------
Investment securities available for sale:

  U.S. Government obligations:
<S>                                 <C>            <C>            <C>            <C>         
  Maturing within one year ......   $ 11,555,117   $     95,853            $--   $ 11,650,970
  Maturing after one year through
   five years ...................     91,064,477      2,738,617           --       93,803,094


State and municipal obligations:
  Maturing after one year through
   five years ...................        890,782         21,258           --          912,040
  Maturing after ten years ......     16,515,526        675,702            567     17,190,661

Corporate obligations:
  Maturing within one year ......     14,518,739         34,576           --       14,553,315
  Maturing after one year through
   five years ...................     44,883,935        772,455         12,836     45,643,554
  Maturing after ten years ......     19,822,547             --        351,997     19,470,550
                                    ------------   ------------   ------------   ------------
                                    $199,251,123   $  4,338,461   $    365,400   $203,224,184
                                    ============   ============   ============   ============
<CAPTION>


                                                         September 30, 1997
                                    ----------------------------------------------------------
                                                         Gross Unrealized   
                                      Amortized     --------------------------          Fair
                                        cost          Gains            Losses          value
                                    ------------    ----------      ----------     ----------
Investment securities available for sale:

  U.S. Government obligations:
<S>                                 <C>            <C>            <C>            <C>         
  Maturing within one year ......   $ 13,965,878   $      9,375   $        878   $ 13,974,375
  Maturing after one year through
   five years ...................    162,907,463         72,214        317,301    162,662,376
  Maturing after five years through
   ten years ....................      8,988,131         12,454         36,210      8,964,375

State and municipal obligations:
  Maturing after one year through
   five years ...................        793,692         10,504           --          804,196
  Maturing after five years
  through ten years .............        100,000            730           --          100,730
  Maturing after ten years ......      7,966,716        225,807         10,348      8,182,175

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


<PAGE>

<TABLE>
<CAPTION>

                                                           September 30, 1998
                                           -----------------------------------------------------------
                                                                Gross Unrealized
                                            Amortized   ------------------------------            Fair
                                               Cost         Gains              Losses            Value
                                           ----------   ------------        ----------     -----------
Investment securities held to maturity:

  State and municipal obligations:
<S>                                        <C>           <C>                         <C>   <C>        
    Maturing within one year ...........   $   210,837   $     1,397                 $--   $   212,234
    Maturing after one year through
     five years ........................       677,922        36,168                  --       714,090

  Corporate obligations:
    Maturing within one year ...........     2,000,000         2,000                  --     2,002,000
                                           -----------   -----------   -----------------   -----------
                                           $ 2,888,759   $    39,565                 $--   $ 2,928,324
                                           ===========   ===========   =================   ===========
<CAPTION>

                                                          September 30, 1997
                                           -----------------------------------------------------------
                                                                Gross Unrealized
                                            Amortized   ------------------------------            Fair
                                               Cost         Gains              Losses            Value
                                           ----------   ------------   ---------------     ----------- 
 
Investment securities held to maturity:

  State and municipal obligations:
<S>                                        <C>           <C>           <C>                 <C>        
    Maturing within one year ...........   $   150,797   $        55               $--     $   150,852
    Maturing after one year through
     five years ........................       891,678        26,982                  34       918,626

  Corporate obligations:
    Maturing within one year ...........    19,894,839          --                  --      19,894,839
    Maturing after one year through
      five years .......................     2,000,000         4,680                --       2,004,680
                                           -----------   -----------   -----------------   -----------
                                           $22,937,314   $    31,717   $              34   $22,968,997
                                           ===========   ===========   =================   ===========
</TABLE>


<TABLE>
<CAPTION>

                                                                September 30, 1998
                                            ----------------------------------------------------------
                                                                  Gross Unrealized
                                             Amortized   -------------------------------          Fair
                                                 cost         Gains             Losses           value
                                            ----------   -----------   -----------------   -----------
MORTGAGE BACKED AND RELATED SECURITIES AVAILABLE FOR SALE:

FNMA maturing after five years
<S>                                        <C>           <C>           <C>                 <C>        
   through ten years ...................   $ 4,045,247   $    40,251                 $--   $ 4,085,498

FNMA maturing after ten years ..........     8,820,853        89,676              11,334     8,899,195

FHLMC maturing after ten years .........    14,722,039       438,394               1,941    15,158,492

GNMA maturing after ten years ..........     3,619,071        43,083                  --     3,662,154

SBA maturing after ten years ...........    11,534,653         1,780               5,915    11,530,518
                                           -----------   -----------   -----------------   -----------
                                           $42,741,863   $   613,184   $          19,190   $43,335,857
                                           ===========   ===========   =================   ===========
<PAGE>

<CAPTION>

                                                           September 30, 1997
                                           -----------------------------------------------------------
                                                                Gross Unrealized
                                             Amortized   -------------------------                Fair
                                                  cost      Gains          Losses                value
                                           -----------   -----------   -----------         -----------
MORTGAGE BACKED AND RELATED SECURITIES AVAILABLE FOR SALE:

<S>                                        <C>           <C>           <C>                 <C>        
  FNMA maturing after ten years ........   $12,775,233   $   139,212   $    17,043         $12,897,402

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

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

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


<CAPTION>

                                                          September 30, 1998
                                           -----------------------------------------------------------
                                                             Gross Unrealized
                                            Amortized   -------------------------               Fair
                                               Cost         Gains        Losses                Value
                                           ----------   ------------   ----------         -----------
 
MORTGAGE BACKED AND RELATED SECURITIES HELD TO MATURITY:

<S>                                        <C>           <C>                   <C>         <C>        
  GNMA maturing after ten years ........   $ 3,661,683   $    34,761           $--         $ 3,696,444
                                           ===========   ===========   ===========         ===========
<CAPTION>

                                                           September 30, 1997
                                           -----------------------------------------------------------
                                                              Gross Unrealized
                                            Amortized   --------------------------               Fair
                                               Cost         Gains          Losses               Value
                                           ----------   ------------    ----------         -----------

MORTGAGE BACKED AND RELATED SECURITIES HELD TO MATURITY:

<S>                                        <C>           <C>                   <C>         <C>        
  GNMA maturing after ten years ........   $ 5,446,957   $    71,691           $--         $ 5,518,648
                                           ===========   ===========   ===========         ===========
</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, 1998 and 1997,  the Company  pledged  securities  totaling
$31.2 million and $26.7 million, respectively, to secure certain public deposits
and for other purposes as required or permitted by law.

     The Company has also pledged  securities of $12.0 million and $17.0 million
to secure short term  borrowings of reverse  repurchase  agreements at September
30, 1998 and 1997, respectively. (See Note 10.)

<PAGE>

(5)  Loans Receivable

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                            September 30,
                                                     ---------------------------
                                                          1998          1997
                                                     ------------   ------------
Real estate loans:
<S>                                                  <C>            <C>         
  Permanent residential 1-4 family ...............   $577,321,223   $498,594,583
  Multi-family residential .......................     19,229,984     16,881,256
  Construction ...................................     64,288,949     30,487,341
  Commercial .....................................     29,457,284     22,638,824
  Land ...........................................      2,184,595      1,586,418
                                                     ------------   ------------
     Total real estate loans .....................    692,482,035    570,188,422

Non-real estate loans:
  Savings account ................................      1,990,776      1,710,930
  Home improvement and home equity ...............      5,749,969      3,486,651
  Other ..........................................      4,480,064      1,189,770
                                                     ------------   ------------
     Total non-real estate loans .................     12,220,809      6,387,351
                                                     ------------   ------------
     Total loans .................................    704,702,844    576,575,773

Less:
  Undisbursed portion of loans ...................     26,986,869     17,096,382
  Deferred loan fees .............................      7,619,918      6,357,500
  Allowance for loan losses ......................      1,949,677      1,296,451
                                                     ------------   ------------
                                                     $668,146,380   $551,825,440
                                                     ============   ============
</TABLE>

     The weighted  average interest rate on loans at September 30, 1998 and 1997
was 7.71% and 7.82%, respectively.

     The Company serviced loans owned by others of $724,559,  $1.1 million,  and
$1.2 million at September 30, 1998, 1997, and 1996, respectively.

     Loans to employees,  officers,  and directors totaled $8.8 million and $6.0
million at September 30, 1998 and 1997, respectively.

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

                                       Years Ended September 30,
                             -----------------------------------------
                                 1998           1997           1996
                             ------------   ------------   -----------
<S>                          <C>            <C>            <C>        
Balance, beginning of year   $ 1,296,451    $   927,820    $   807,820
Charge-offs ..............       (20,774)        (1,369)          --
Additions ................       674,000        370,000        120,000
                             -----------    -----------    -----------

Balance, end of period ...   $ 1,949,677    $ 1,296,451    $   927,820
                             ===========    ===========    ===========
</TABLE>


<PAGE>

(6) Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>

                                                             September 30,
                                                     ----------------------------
                                                          1998           1997
                                                     ------------    ------------
<S>                                                  <C>             <C>         
Land .............................................   $  2,479,807    $  2,410,937
Office buildings and construction in progress ....     10,403,971       9,419,228
Furniture, fixtures and equipment ................      4,211,886       3,661,099
Automobiles ......................................         38,856          36,226
Less accumulated depreciation ....................     (4,787,053)     (3,856,366)
                                                     ------------    ------------
                                                     $ 12,347,467    $ 11,671,124
                                                     ============    ============
</TABLE>

     Depreciation expense was $1,002,938,  $469,208,  and $403,074 for the years
ended September 30, 1998, 1997, and 1996, respectively.

(7)   Accrued Interest Receivable

The following is a summary of accrued interest receivable:
<TABLE>
<CAPTION>

                                                             September 30,
                                                     ----------------------------
                                                          1998            1997
                                                     ------------    ------------
<S>                                                  <C>             <C>         
Loans receivable .................................   $  4,114,533    $  3,628,624
Mortgage backed and related securities ...........        424,458         644,320
Investment securities ............................      2,932,726       3,353,220
                                                     ------------    ------------
                                                     $  7,471,717    $  7,626,164
                                                     ============    ============
</TABLE>

<PAGE>
(8)   Deposit Liabilities

The following is a summary of deposit liabilities:
<TABLE>
<CAPTION>
                                                                     September 30,
                                           -------------------------------------------------------------
                                                         1998                            1997
                                           -----------------------------   -----------------------------
                                                Amount          Percent         Amount          Percent
                                           ---------------    ----------   ---------------    ----------
Checking accounts, non-interest
<S>                                        <C>                    <C>      <C>                    <C> 
 bearing ...............................   $    47,547,651          6.9%   $    52,578,155          7.8%
                                           ---------------    ---------    ---------------    ---------

Interest-bearing checking ..............        70,561,435         10.2         75,044,568         11.1
                                           ---------------    ---------    ---------------    ---------

Passbook and statement savings .........        61,413,910          8.9         63,178,697          9.4
                                           ---------------    ---------    ---------------    ---------

Money market deposits ..................       114,667,649         16.6        107,573,735         16.0
                                           ---------------    ---------    ---------------    ---------
Certificates of deposit
 Less than 4% ..........................         1,371,156          0.2          2,783,927          0.4
 4.00% to 5.99% ........................       329,246,772         47.8        310,435,332         46.0
 6.00% to 7.99% ........................        43,853,274          6.4         39,599,328          5.9
 8.00% to 9.99% ........................        20,879,498          3.0         22,784,159          3.4
                                           ---------------    ---------    ---------------    ---------
                                               395,350,700         57.4        375,602,746         55.7
                                           ---------------    ---------    ---------------    ---------
                                           $   689,541,345        100.0%   $   673,977,901        100.0%
                                           ===============    =========    ===============    =========
</TABLE>

Following is a summary of interest expense on deposits:
<TABLE>
<CAPTION>  
                                          Years Ended September 30,
                                 ------------------------------------------
                                     1998           1997           1996
                                 ------------   ------------   ------------
<S>                              <C>            <C>            <C>         
Interest-bearing checking ....   $  1,088,777   $    791,032   $    546,383
Passbook and statement savings      1,683,101      1,270,468        982,814
Money market .................      4,275,419      2,391,245      1,950,419
Certificates of deposit ......     21,990,525     18,075,128     16,835,250
                                 ------------   ------------   ------------
                                   29,037,822     22,527,873     20,314,866

Less early withdrawal
 penalties ...................        106,073         63,528         63,827

                                 ------------   ------------   ------------
  Net interest on deposits ...   $ 28,931,749   $ 22,464,345   $ 20,251,039
                                 ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>
At September 30, 1998, deposit maturities are as follows:

<S>                         <C>         
Within 1 year ...........   $483,393,453
1 year to 3 years .......    157,075,791
3 years to 5 years ......     30,038,755
Thereafter ..............     19,033,346
                            ------------
                            $689,541,345
                            ============
</TABLE>
<PAGE>

Weighted average interest rates at September 30 are as follows:
<TABLE>
<CAPTION>
                                                 1998            1997
                                              ----------      ----------
<S>                                                <C>             <C>  
Interest-bearing checking ..............           1.33%           1.92%
Passbook and statement savings .........           2.44%           2.75%
Money market ...........................           3.92%           3.92%
Certificates of deposit ................           5.81%           5.87%
Weighted average rate for all deposits .           4.66%           4.74%
</TABLE>

     Deposits in excess of $100,000 totaled $151.0 million and $119.2 million at
September  30, 1998 and 1997,  respectively.  Deposits in excess of $100,000 are
not insured by the Federal Deposit Insurance Corporation ("FDIC").

(9)   Advances from FHLB

     As a member of the FHLB of Seattle, the Association maintains a credit line
that  is  a   percentage   of  its   total   regulatory   assets,   subject   to
collateralization  requirements.  At September 30, 1998,  the credit line was 30
percent of total  assets of the  Association.  Advances  are  collateralized  in
aggregate, as provided for in the Advances, Security and Deposit Agreements with
the FHLB of Seattle,  by certain  mortgages or deeds of trust, and securities of
the U.S. Government and agencies thereof. At September 30, 1998 the minimum book
value of eligible collateral for these borrowings was $183.7 million.


Scheduled maturities of advances from the FHLB were as follows:

<TABLE>
<CAPTION>


                                     September 30, 1998                           September 30, 1997
                       ----------------------------------------------   -------------------------------------------
                                             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 .   $ 30,000,000       5.54%-5.56%       5.55%      $59,000,000    5.57%-6.70%           5.66%






After one but within
five years ..........     55,000,000       5.39%-5.74%       5.56%       70,000,000    5.39%-5.84%           5.59%

After five but within
ten years ...........     82,000,000       4.77%-5.24%       4.96%             --              --             --
                        ------------                                   ------------
                        $167,000,000                                   $129,000,000
                        ============                                   ============
</TABLE>


<PAGE>

(10)  Short Term Borrowings

     Securities  sold under  agreements  to  repurchase  at  September  30, 1998
consisted of reverse repurchase agreements of $12.1 million.

     The Company sold,  under agreements to repurchase,  specific  securities of
the U.S.  government  and its  agencies  and  other  approved  investments  to a
broker-dealer.  The securities  underlying the agreement with the  broker-dealer
were delivered to the dealer who arranged the transaction.  Securities delivered
to broker-dealers may be loaned out in the ordinary course of operations.
 
     All of the reverse repurchase agreements are due within 48 days and will be
renewed subsequent to year end.

Financial data pertaining to the weighted  average cost, the level of securities
sold under  agreements to repurchase,  and the related  interest  expense are as
follows:
<TABLE>
<CAPTION>
                                                          Years Ended September 30,
                                               ----------------------------------------------
                                                     1998            1997            1996
                                               --------------  --------------   -------------
<S>                                             <C>             <C>             <C>  
Weighted average interest rate at end of year           5.65%           5.75%           5.65%
Weighted daily average interest rate
during the year .............................           5.80%           5.82%           5.55%
Daily average of securities sold
under agreements to repurchase ..............   $ 14,669,203    $ 16,804,520    $  3,530,795
Maximum securities sold under
agreements to repurchase at any
month end ...................................     17,077,500      19,117,500      14,904,000
Interest expense during the year ............        850,122         978,023         196,130
</TABLE>

     The Company had an unused line of credit  totaling  $15.0 million with U.S.
National Bank of Oregon at September 30, 1998 and 1997.

(11) Taxes on Income

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

                                                          Years ended September 30,
                                                --------------------------------------------
                                                     1998            1997           1996
                                                ------------    ------------    ------------
Current Taxes
<S>                                             <C>             <C>             <C>         
Federal .....................................   $  4,771,653    $  3,076,977    $  4,384,720
State .......................................        468,978         639,503         437,053
                                                ------------    ------------    ------------
Current tax provision .......................      5,240,631       3,716,480       4,821,773
                                                ------------    ------------    ------------
Deferred Taxes
Federal .....................................         82,204         648,092        (372,005)
State .......................................         16,597          64,880         (37,241)
                                                ------------    ------------    -------------
Deferred tax provision ......................         98,801         712,972        (409,246)
                                                ------------    ------------    -------------
Provision for income taxes ..................   $  5,339,432    $  4,429,452    $  4,412,527
                                                ============    ============    =============
</TABLE>
<PAGE>

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>

                                                              Years ended September 30,
                                                -----------------------------------------------
                                                        1998            1997            1996
                                                --------------   ------------    -------------
Federal income taxes computed at
<S>                                                     <C>            <C>              <C>  
statutory rate ..............................           35.0%           35.0%           35.0%

Tax effect of:

State income taxes, net of Federal
income tax benefit ..........................            2.1             4.4             2.2
Nondeductible ESOP compensation
expense .....................................            2.4             5.4             4.0
Deductible MRDP compensation
expense .....................................           (1.5)           (2.2)           --
Elimination of valuation allowance ..........           --             (12.6)           --
Other .......................................           (0.6)            4.1             0.7
                                                -------------    ------------    ------------
Income tax expense included in the
statement of income .........................           35.9%           34.1%           41.9%
                                                =============    ============    ============
</TABLE>


     Deferred  income taxes at September 30, 1998 and 1997 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,
                                               --------------------------
                                                 1998           1997
                                               -----------   ------------
DEFERRED TAX ASSETS

<S>                                           <C>            <C>         
Deferred loan fees ........................            $--   $     11,202
Allowance for losses on loans .............        761,440        515,648
Pension liability .........................        306,462        287,220
Unearned ESOP shares ......................        422,071        235,621
Core deposit premium ......................        359,209         55,054
                                              ------------   ------------
Total gross deferred tax assets ...........      1,849,182      1,104,745
                                              ------------   ------------

DEFERRED TAX LIABILITIES

FHLB stock dividends ......................        585,949        801,204
Deferred loan fees ........................        919,314           --
Tax bad debt reserve in excess of base-
year reserve ..............................      1,469,444      1,469,444
Unrealized gain on securities held for sale      1,735,484        284,522
Other .....................................        794,935        461,148
                                              ------------   ------------
Total gross deferred tax liabilities ......      5,505,126      3,016,318
                                              ------------   ------------
Net deferred tax liability ................   $  3,655,944   $  1,911,573
                                              ============   ============
</TABLE>
<PAGE>
     At September 30, 1996 the Company created a valuation allowance of $648,837
to offset the deferred tax asset  associated  with the realized  capital loss on
the U.S. Federal  securities mutual bond fund because management was not assured
of being able to realize a capital gain and the related tax benefit.  During the
year ended September 30, 1997, the Company, through sale of certain investments,
realized a capital gain for tax purposes  that  assures  realization  of the tax
benefit and thus reduced the valuation  allowance to zero. There continues to be
no valuation allowance at September 30, 1998.

     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, 1998, 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, a deferred tax liability has not been  recognized
for  the  temporary  difference.  Management  does  not  expect  this  temporary
difference to reverse in the foreseeable future.

(12)   Shareholders' Equity

     During  September  1996,  the Board of  Directors  approved and the Company
engaged in a stock  repurchase  program  resulting in the  retirement of 620,655
shares or 5.07% of the common stock. During the quarter ended December 31, 1996,
the Company received  approval from the OTS to repurchase 10% of its outstanding
shares.  This repurchase was completed in January  resulting in the reduction of
shares outstanding by 1,161,247 and reducing equity by $18.5 million. The shares
were repurchased at an average price of $15.91.  During April 1998, the Board of
Directors  approved  and  the  Company  engaged  in a stock  repurchase  program
resulting in the retirement of 521,477 shares,  or 5%, of the common stock.  The
repurchase was completed by May 31, 1998 at an average price of $21.22.

     On April 9, 1998 and 1997 the vested  portion of awarded  MRDP  shares were
released.  Many of the  recipients  of this award had the Company  withhold  and
retire some of their shares to pay the associated  taxes.  This further  reduced
the number of shares outstanding by 22,608 and 21,689 shares, respectively,  and
reduced equity by $498,054 and $377,000, respectively.

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

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

     In September  1998, the Board of Directors  authorized the repurchase of up
to  1,983,353   shares  of  the  Company's   common  stock,   which   represents
approximately 20 percent of its outstanding shares as of September 30, 1998. The
repurchase  will be made through a "Modified  Dutch Auction  Tender." Under this
procedure, the Company's shareholders will be given the opportunity to sell part
or all of their  shares to the  Company  at a price of not less than  $18.00 per
share and not more than $20.00 per share.  The Company  expects to complete  the
repurchase early in 1999.
<PAGE>

(13) Earnings Per Share

     Earnings  per share  ("EPS") is computed in  accordance  with  Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which was
adopted by the Company as of December 31, 1997.  EPS for all prior  periods have
been  restated  to reflect  the  adoption.  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 held by the Company's  Employee  Stock  Ownership  Plan ("ESOP") that are
committed  for  release,  shares  awarded but not released  under the  Company's
Management  Recognition and Development Plan ("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 Years Ended September 30, 
                                                --------------------------------------------
                                                    1998            1997            1996
                                                ------------   -------------    ------------
Weighted average common
<S>                                                <C>             <C>            <C>       
shares outstanding - basic ..................      9,066,471       9,438,915      11,004,939
                                                ------------    ------------    ------------
Effect of Dilutive Securities on Number of Shares:
MRDP shares .................................         63,656          45,824           2,686
ESOP shares .................................         48,933          48,933          48,933
Stock options ...............................        341,657         228,787          25,803
                                                ------------    ------------    ------------
Total Dilutive Securities ...................        454,246         323,544          77,422
                                                ------------    ------------    ------------
Weighted average common shares
 outstanding - with dilution ................      9,520,717       9,762,459      11,082,361
                                                ============    ============    ============
</TABLE>



<PAGE>

(14) Employee Benefit Plans

Employee Retirement Plan

     The  Company  is a member  of a  multiple-employer  trusteed  pension  plan
("Plan")  covering  all  employees  with at least one year of  service  and pays
direct  pensions to certain  retired  employees.  Benefits are based on years of
service with the Company and salary excluding  bonuses,  fees commissions,  etc.
Participants  are vested in their accrued  benefits after five years of service.
Pension  expense of $180,000,  $170,613,  and  $198,000 was incurred  during the
years ended September 30, 1998, 1997, and 1996, respectively. Separate actuarial
valuations,  including  computed  value of  vested  benefits,  are not made with
respect to each contributing  employer, nor are the plan assets so segregated by
the trustee.  The Plan had an over-funded  accumulated  benefit of approximately
$680.4 million at June 30, 1998.

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, 1998, 1997, and 1996 were $71,052,  $71,052, and $71,053,  respectively.  At
September 30, 1998 and 1997, the projected  benefit  obligation was $779,392 and
$727,140, respectively.

Management Recognition and Development Plan

     In February 1996, the Board of Directors approved a MRDP for the benefit of
officers and non-employee directors which authorizes the grant of 489,325 common
stock shares.  The MRDP was approved by the Company's  shareholders  on April 9,
1996.  Those  eligible  to receive  benefits  under the MRDP are  determined  by
members of a committee appointed by the Board of Directors of the Company.  MRDP
awards vest over a five-year period in equal installments  beginning on April 9,
1997  (the  first  anniversary  of the  effective  date of the MRDP) or upon the
participant's death or disability. On April 9, 1996, 391,459 shares were awarded
to officers and  directors.  In  accordance  with the vesting  schedule,  78,293
shares were  released to those  individuals  on April 9, 1997 and an  additional
78,293  shares were  released on April 9, 1998. On November 19, 1997 a new award
of 6,116  shares was made to a director.  Under the plan these  shares will vest
over a five year period.  During 1998, 17,616 shares awarded under the plan were
forfeited upon resignation of an officer.  The Company  recognizes  compensation
expense  in the amount of the cost of the common  stock in  accordance  with the
vesting schedule during the years in which the shares are payable.  Compensation
expense for the years  ended  September  30, 1998 and 1997 was $1.1  million and
$1.1 million,  respectively.  There was no compensation expense recorded for the
year ended September 30, 1996 because no shares were vested under the plan.

Stock Option Plan

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


<PAGE>

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

                                                                  Weighted
                                                Number of          Average
                                                   Shares   Exercise Price
                                              ------------  --------------
<S>                                                <C>       <C>                                         
Outstanding, September 30, 1995 ...........           --             --
Granted ...................................        971,308   $     13.125
Exercised .................................           --             --
Canceled ..................................           --             --
                                              ------------   ------------
Outstanding, September 30, 1996 ...........        971,308   $     13.125
Granted ...................................           --             --
Exercised .................................           --             --
Canceled ..................................           --             --
                                              ------------   ------------
Outstanding, September 30, 1997 ...........        971,308   $     13.125
Granted ...................................         23,243   $     20.577
Exercised .................................        (31,317)  $     13.125
Canceled ..................................        (46,976)  $     13.125
                                              ------------   ------------
Outstanding, September 30, 1998 ...........        916,258   $     13.314
                                              ============   ============
</TABLE>


     At September  30, 1998,  275,738  shares were  available  for future grants
under the Stock Plan.

Additional information regarding options outstanding as of September 30, 1998 is
as follows:
<TABLE>
<CAPTION>

                                                            Weighted Avg.
       Range of             Options            Options          Remaining
Exercise Prices         Outstanding        Exercisable   Contractual Life
----------------      -------------      -------------   ----------------
<S>     <C>                 <C>                <C>                    <C>

       $  13.125            893,015            357,206                7.5
       $  20.577             23,243                 --                9.1
                      -------------      -------------
                            916,258            357,206
                      =============      =============
</TABLE>

Additional Stock Plan Information

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

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation" ("SFAS No. 123") requires the disclosure of pro forma
net income and earnings per share had the Company  adopted the fair value method
as of the  beginning  of fiscal  1996.  Under  SFAS 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.

<PAGE>

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

                                              November 1997     April 1996
                                                  Grant           Grant
                                              -------------     ----------
<S>                                                  <C>            <C>  
Risk free interest rates ..................           5.79%          6.33%
Expected dividend .........................           1.75%          1.75%
Expected lives, in years ..................            7.5            7.5
Expected volatility .......................          23.24%         19.63%
</TABLE>

     The weighted average grant-date fair value of options granted during fiscal
years  1998  and  1996  were  $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  with SFAS No. 123, the  Company's  net income and earnings per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
                                                     Year ended September 30,
                                             1998             1997             1996
                                          ----------       ----------       ----------
Net earnings:                                                                                    
<S>                                       <C>              <C>              <C>       
                As reported               $9,551,032       $8,557,750       $6,109,797
                Pro forma                  9,040,748        8,063,929        5,862,887
Earnings per common 
share - basic
                As reported                    $1.05            $0.91            $0.56
                Pro forma                      $1.00            $0.85            $0.53
Earnings per common 
share - fully diluted:
                As reported                    $1.00            $0.88            $0.55
                Pro forma                      $0.95            $0.83            $0.53
</TABLE>

(15) 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 $6.9 million and $7.8 million at September  30, 1998
and 1997,  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 $2.0 million, $1.7 million and,
$1.4 million for the years ended September 30, 1998, 1997 and 1996, respectively
and 97,865 shares were allocated among the participants in each of those years.
<PAGE>

(16) Fair Value of Financial Instruments

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

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

                                                      September 30, 1998                  September 30, 1997
                                           ---------------------------------   ---------------------------------
                                                  Carrying              Fair          Carrying              Fair
                                                    amount             value            amount             value
                                           ---------------   ---------------   ---------------   ---------------
Financial Assets

<S>                                        <C>               <C>               <C>               <C>            
Cash and due from banks ................   $    25,644,460   $    25,644,460   $    24,503,768   $    24,503,768
Interest earning deposits with banks ...        11,496,026        11,496,026         1,431,087         1,431,087
Federal funds sold and
securities purchased under
agreements to resell ...................        29,844,783        29,844,783         6,108,341         6,108,341
Investment securities
available for sale .....................       203,224,184       203,224,184       261,846,320       261,846,320
Investment securities held
to maturity ............................         2,888,759         2,928,324        22,937,314        22,968,997
Mortgage backed and related
securities available for sale ..........        43,335,857        43,335,857        64,868,633        64,868,633
Mortgage backed and related
securities held to maturity ............         3,661,683         3,696,444         5,446,957         5,518,648
Loans receivable, net ..................       668,146,380       721,213,589       551,825,440       568,098,444
FHLB stock .............................        10,172,900        10,172,900         7,150,400         7,150,400

Financial Liabilities

Deposit liabilities ....................       689,541,345       693,936,011       673,997,901       676,182,990
FHLB advances ..........................       167,000,000       166,432,152       129,000,000       128,358,966
Short term borrowings ..................        12,112,500        12,112,500        17,077,500        17,077,500

</TABLE>


<PAGE>

(17) Regulatory Capital Requirements

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and Tier
I capital  to  risk-weighted  assets,  of Tier I capital  to total  assets,  and
tangible  capital to tangible assets (set forth in the table below).  Management
believes that the Association  meets all capital adequacy  requirements to which
it is subject as of September 30, 1998.

     As of  September  30,  1998,  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 and FDIC routinely examine the Association
as part of their legally prescribed  oversight of the thrift industry.  Based on
these examinations,  the regulators can direct that the Association's  financial
statements be adjusted in accordance with their findings.  A future  examination
by the OTS or the FDIC could include a review of certain  transactions  or other
amounts reported in the Association's 1998 financial statements.  In view of the
uncertain  regulatory  environment in which the  Association  now operated,  the
extent,  if any, to which a forthcoming  regulatory  examination  may ultimately
result in  adjustments  to the 1998  financial  statements  cannot be  presently
determined.

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

<PAGE>

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

                                                                                     To be
                                                                                 Categorized as "Well
                                                                                  Capitalized" Under
                                                            For Capital           Prompt Corrective
                                       Actual            Adequacy Purposes         Action Provision
                              -----------------------  ----------------------   ----------------------
                                    Amount     Ratio         Amount     Ratio         Amount     Ratio
                              ------------    ------   ------------     -----   ------------     -----
As of September 30, 1998:
<S>                           <C>              <C>     <C>               <C>    <C>              <C>  
 Total Capital: ...........   $ 83,179,044     16.1%   $ 41,257,520      8.0%   $ 51,571,900     10.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........     81,232,367     15.8%            N/A      N/A      30,943,140      6.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........     81,232,367      8.3%     29,487,686      3.0%     49,146,143      5.0%
  (To Total Assets)
 Tangible Capital: ........     81,232,367      8.3%     14,743,843      1.5%            N/A      N/A
  (To Tangible Assets)

As of September 30, 1997:
 Total Capital: ...........    103,325,941     23.1%     35,755,744      8.0%     44,694,680     10.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........    102,029,490     22.8%            N/A      N/A      26,816,808      6.0%
  (To Risk Weighted Assets)
 Tier I Capital: ..........    102,029,490     11.1%     27,643,595      3.0%     46,072,658      5.0%
  (To Total Assets)
 Tangible Capital: ........    102,029,490     11.1%     13,821,797      1.5%            N/A      N/A
  (To Tangible Assets)
</TABLE>

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


                                                 September 30, 1998      September 30, 1997
                                                --------------------    --------------------
<S>                                             <C>                     <C>                 
Association's equity ........................   $         95,448,624    $        115,678,187
Unrealized securities (gains) losses ........             (2,785,239)               (565,002)
Core deposit intangible .....................            (11,431,018)            (13,083,695)
                                                --------------------    --------------------
Tangible capital ............................             81,232,367             102,029,490
General valuation allowances ................              1,946,677               1,296,451
                                                --------------------    --------------------
Total capital ...............................   $         83,179,044    $        103,325,941
                                                ====================    ====================
</TABLE>

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

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

     At September 30, 1998, loan  commitments  amounted to  approximately  $31.2
million  comprised  of  $305,000 in variable  rate loans  ranging  from 8.99% to
14.50% and $30.9  million in fixed rate loans  ranging from 6.13% to 10.75%.  At
September 30, 1997, loan  commitments  amounted to  approximately  $11.5 million
comprised  of $4.2 million in variable  rate loans  ranging from 5.50% to 14.50%
and $7.3 million in fixed rate loans ranging from 7.13% to 11.88%.
<PAGE>

     The  Company  originates  residential  real  estate  loans and, to a lesser
extent,  commercial and multi-family real estate and consumer loans. Over 86% of
the mortgage  loans in the  Association's  portfolio  are secured by  properties
located in Klamath,  Jackson,  and  Deschutes  counties in Southern  and Central
Oregon.  An economic downturn in these areas would likely have a negative impact
on  the  Company's  results  of  operations  depending  on the  severity  of the
downturn.

(19) Parent Company Financial Information

Condensed  financial  information as of September 30, 1998 and 1997, for Klamath
First  Bancorp,  Inc. is presented  and should be read in  conjunction  with the
consolidated financial statements and the notes thereto:
<TABLE>
<CAPTION>
BALANCE SHEETS
                                                               September 30, 
                                                --------------------------------------------
                                                        1998                    1997
                                                --------------------    --------------------
Assets
<S>                                             <C>                     <C>                 
Cash and cash equivalents ...................   $         41,737,415    $         10,736,534
Investment and mortgage backed securities ...             20,003,078              34,996,109
Investment in wholly-owned subsidiary .......             95,448,624             115,678,183
Other assets ................................              1,099,598               1,033,966
                                                --------------------    --------------------
Total assets ................................   $        158,288,715    $        162,444,792
                                                ====================    ====================

Liabilities

Short-term borrowings .......................   $         12,112,500    $         17,077,500
Other liabilities ...........................              1,095,260                 904,849
                                                --------------------    --------------------
Total liabilities ...........................             13,207,760              17,982,349
                                                --------------------    --------------------
Shareholders' equity

Common stock ................................                 99,168                 104,295
Additional paid-in capital ..................             82,486,183              92,601,639
Retained earnings ...........................             73,883,019              65,209,049
Unearned ESOP shares at cost ................             (6,850,550)             (7,829,200)
Unearned MRDP shares at cost ................             (4,536,865)             (5,623,340)
                                                --------------------    --------------------
Total shareholders' equity ..................            145,080,955             144,462,443
                                                --------------------    --------------------
Total liabilities and shareholders' equity ..   $        158,288,715    $        162,444,792
                                                ====================    ====================
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
                                                              Years Ended September 30,
                                                --------------------------------------------
                                                          1998                    1997
                                                --------------------    --------------------
<S>                                             <C>                     <C>                 
Equity in undistributed income of subsidiary    $          9,259,035    $          7,984,527
Total interest income .......................              2,995,169               3,397,760
Total interest expense ......................                850,122                 978,023
Non-interest income .........................                   --                      --
Non-interest expense ........................              1,674,321               1,681,062
                                                --------------------    --------------------
Earnings before income taxes ................              9,729,761               8,723,202
Provision for income tax ....................                178,724                 165,452
                                                --------------------    --------------------
Net earnings ................................   $          9,551,037    $          8,557,750
                                                ====================    ====================
</TABLE>                                             
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
                                                            Years Ended September 30,
                                                --------------------------------------------
                                                          1998                    1997
                                                --------------------    --------------------
<S>                                             <C>                     <C>                 
Net cash flows from operating activities ....   $         34,654,657    $         15,790,720
                                                --------------------    --------------------
Cash flows from investing activities

Investment in subsidiary ....................               (261,300)               (250,299)
Maturity of investment and mortgage
backed securities ...........................             20,227,224               5,311,184
(Purchase) sale of investment and mortgage
backed securities ...........................             (5,035,162)              3,985,625
                                                 -------------------    --------------------
Net cash flows from investing activities ....             14,930,762               9,046,510
                                                 -------------------    --------------------
Cash flows from financing activities
Cost of ESOP shares released ................                978,650                 978,650
Proceeds from short-term borrowings .........             72,503,199              84,750,150
Repayments of short-term borrowings .........            (77,468,199)            (82,577,050)
Stock retirement ............................            (11,561,483)            (18,878,128)
Stock options exercised .....................                411,035                    --
Dividends paid ..............................             (3,447,740)             (3,193,428)
                                                 -------------------    --------------------
Net cash flows from financing activities ....            (18,584,538)            (18,919,806)
                                                 -------------------    --------------------
Net increase/(decrease) in cash and cash
equivalents .................................             31,000,881               5,917,424

Cash and cash equivalents beginning
of year .....................................             10,736,534               4,819,110
                                                --------------------    --------------------
Cash and cash equivalents end of year .......   $         41,737,415    $         10,736,534
                                                ====================    ====================
</TABLE>

<PAGE>

(20) Selected Quarterly Financial Data
(unaudited)

<TABLE>
<CAPTION>

                                              Fiscal Year Ended September 30, 1998
                                         ---------------------------------------------
                                          December       March        June   September
                                         ---------   ---------   ---------   ---------
                                               (In thousands except per share data)
                                                                                    
<S>                                      <C>         <C>         <C>         <C>      
Total interest income ................   $  16,945   $  17,180   $  17,710   $  17,898
Total interest expense ...............       9,186       9,123       9,710       9,829
                                         ---------   ---------   ---------   ---------
Net interest income ..................       7,759       8,057       8,000       8,069
Provision for loan losses ............          75          91         198         310
                                         ---------   ---------   ---------   ---------
Net interest income after provision ..       7,684       7,966       7,802       7,759
Non-interest income ..................         697         577         823       1,106
Non-interest expense .................       4,829       4,888       4,832       4,974
                                         ---------   ---------   ---------   ---------
Earnings before income taxes .........       3,552       3,655       3,793       3,891
Provision for income tax .............       1,406       1,447       1,302       1,184
                                         ---------   ---------   ---------   ---------
Net earnings .........................   $   2,146   $   2,208   $   2,491   $   2,707
                                         =========   =========   =========   =========
Net earnings per share - basic .......   $    0.23   $    0.24   $    0.28   $    0.31
                                         =========   =========   =========   =========
Net earnings per share - fully diluted   $    0.22   $    0.23   $    0.26   $    0.30
                                         =========   =========   =========   =========
</TABLE>
<TABLE>
<CAPTION>     
                                         ---------------------------------------------
                                          December       March        June   September
                                         ---------   ---------   ---------   ---------
                                               (In thousands except per share data)

<S>                                      <C>         <C>         <C>         <C>      
Total interest income ................   $  12,603   $  12,409   $  13,081   $  16,074
Total interest expense ...............       6,916       6,798       7,304       8,838
                                         ---------   ---------   ---------   ---------
Net interest income ..................       5,687       5,611       5,777       7,236
Provision for loan losses ............          30         240          45          55
                                         ---------   ---------   ---------   ---------
Net interest income after provision ..       5,657       5,371       5,732       7,181
Non-interest income ..................         112         102         103         493
Non-interest expense .................       2,604       2,442       2,443       4,275
                                         ---------   ---------   ---------   ---------
Earnings/(loss) before income taxes ..       3,165       3,031       3,392       3,399
Provision for income tax .............       1,252         550       1,342       1,285
                                         ---------   ---------   ---------   ---------
Net earnings/(loss) ..................   $   1,913   $   2,481   $   2,050   $   2,114
                                         =========   =========   =========   =========
Net earnings per share - basic .......   $    0.19   $    0.27   $    0.22   $    0.23
                                         =========   =========   =========   =========
Net earnings per share - fully diluted   $    0.18   $    0.26   $    0.22   $    0.22
                                         =========   =========   =========   =========
</TABLE>

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

Klamath First Bancorp, Inc.
Corporate Information

Corporate                               Common Stock
Headquarters                            Traded over-the-counter/
540 Main Street                         Nasdaq National Market
Klamath Falls, OR 97601                 Nasdaq Symbol: KFBI
541-882-3444
                                        Form 10-K
Independent                             Information
Auditors                                Available without charge
Deloitte & Touche LLP                   to shareholders of record
3900 U.S. Bancorp Tower                 upon written request to
111 SW Fifth Avenue                     Marshall Alexander,
Portland, OR 97204-3698                 Senior Vice President -
503-222-1341                            Chief Financial Officer
                                        Klamath First Bancorp, Inc.
Corporate Counsel                       540 Main Street
Craig M. Moore                          Klamath Falls, Or 97601
540 Main Street
Klamath Falls, OR 97601                 Annual Meeting
541-882-3444                            The annual meeting of
                                        shareholders will be held
Special Counsel                         Wednesday,
Breyer & Associates, PC                 January 27, 1999
1100 New York Avenue                    beginning at 2:00 p.m.,
N.W.                                    Pacific Time at:
Suite 700 East                            The Shilo Inn
Washington, DC 20005                      2500 Almond Street
202-737-7900                              Klamath Falls, OR 97601.
                                        Shareholders of record as of
Transfer Agent                          the close of business on
Registrar & Transfer Co.                November 24, 1998 shall
10 Commerce Drive                       be those entitled to notice
Cranford, NJ 07016-3572                 of and to vote at the
800-866-1340                            meeting.