OREGON TRAIL FINANCIAL CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended March 31, 2002 OR

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

Commission File Number: 0-22953

OREGON TRAIL FINANCIAL CORP.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Oregon 91-1829481
- --------------------------------------------- -------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)

2055 First Street, Baker City, Oregon 97814
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (541) 523-6327
-------------------------
Securities registered pursuant to Section
12(b) of the Act: None
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Securities registered pursuant to Section Common Stock, par
12(g) of the Act: value $.01 per share
-------------------------
(Title of Class)

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

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

As of June 26, 2002, there were issued and outstanding 3,089,249 shares
of the Registrant's Common Stock. The Registrant's voting stock is traded
over-the-counter and is listed on the Nasdaq National Market under the symbol
"OTFC." The aggregate market value of the voting stock held by nonaffiliates
of the Registrant, based on the closing sales price of the Registrant's common
stock as quoted on the Nasdaq National Market on June 26, 2002 of $19.00, was
$56,219,917.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of Registrant's Definitive Proxy Statement for the 2002
Annual Meeting of Shareholders (Part III).

OREGON TRAIL FINANCIAL CORP.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

Page
----

PART I. 1
Item 1. Business ..................................................... 1
General............................................................ 1
Market Area........................................................ 1
Lending Activities................................................. 1
Investment Activities.............................................. 17
Deposit Activities and Other Sources of Funds...................... 19
Potential Adverse Impact of Changes in Interest Rates.............. 22
Regulation......................................................... 23
Taxation........................................................... 30
Competition........................................................ 31
Subsidiary Activities.............................................. 32
Personnel.......................................................... 32
Item 2. Properties................................................... 33
Item 3. Legal Proceedings............................................ 34
Item 4. Submission of Matters to a Vote of Security Holders.......... 35
PART II. 35
Item 5. Market for the Registrant's Common Equity
and Related Shareholder Matters..................................... 35
Item 6. Selected Financial Data...................................... 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 38
Forward-Looking Statements........................................ 38
Critical Accounting Policies...................................... 38
General........................................................... 38
Comparison of Financial Condition at March 31, 2002 and
March 31, 2001................................................. 39
Comparison of Operating Results for Years Ended March 31,
2002 and 2001.................................................. 39
Comparison of Operating Results for Years Ended March 31,
2001 and 2000.................................................. 41
Average Balances, Interest and Average Yields/Cost................ 43
Rate/Volume Analysis.............................................. 44
Market Risk and Asset and Liability Management.................... 44
Liquidity and Capital Resources................................... 46
Effect of Inflation and Changing Prices........................... 47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 47
Item 8. Financial Statements and Supplementary Data.................. 47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................ 79
PART III. 79
Item 10. Directors and Executive Officers of the Registrant.......... 79
Item 11. Executive Compensation...................................... 79
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................................... 79
Item 13. Certain Relationships and Related Transactions.............. 80
PART IV. 80
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................. 80

PART I

Item 1. Business
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General

Oregon Trail Financial Corp. ("Company"), an Oregon corporation, was
organized on June 9, 1997 for the purpose of becoming the holding company for
Pioneer Bank, A Federal Savings Bank ("Bank") upon the Bank's conversion from
a federal mutual to a federal stock savings bank ("Conversion"). The
Conversion was completed on October 3, 1997. At March 31, 2002, the Company
had total assets of $398.4 million, total deposits of $256.1 million and
shareholders' equity of $52.8 million. All references to the Company herein
include the Bank where applicable.

The Bank was organized in 1901. The Bank 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 Bank also is a member of the
Federal Home Loan Bank ("FHLB") System.

The Bank is a community oriented financial institution whose principal
business is attracting retail deposits from the general public and using these
funds to originate one- to- four family residential mortgage loans and
consumer loans within its primary market area. The Bank also actively
originates home equity and second mortgage loans. Beginning in 1996, the Bank
began supplementing its traditional lending activities with commercial
business loans, agricultural loans, and the purchase of dealer-originated
automobile contracts.

In addition to its lending activities, the Bank invests excess liquidity
in short to long term U.S. Government and government agency securities and
mortgage-backed and related securities issued by U.S. Government agencies.
Investment securities and mortgage-backed and related securities constituted
23.2% of total assets at March 31, 2002. See "-- Investment Activities."

Market Area

The Bank's primary market area encompasses those regions surrounding its
offices in Baker, Grant, Harney, Malheur, Union, Wallowa, Wheeler and Umatilla
Counties in Oregon and Payette and Washington Counties in Idaho. The Bank's
home office is located in Baker City, Oregon with branches in Ontario, John
Day, Burns, Enterprise, La Grande, Island City, Vale, and Pendleton.

The principal industries of the market area are agriculture and timber
products. The Bank's market area is largely rural, with most of the farms and
ranches being relatively small and family owned. The local economies are also
dependent on retail trade with lumber, recreation and tourism providing
substantial contributions. Major employers in the market area include
Confederated Tribes of the Umatilla Indians, Eastern Oregon Correctional
Institute, Fleetwood Homes, St. Anthony's Hospital, U.S. Forest Service,
Bureau of Land Management, Snake River Correctional Institute, Oregon
Department of Transportation, Boise Cascade, Ore-Ida, Grande Ronde Hospital,
Holy Rosary Hospital, Powder River Correctional Facility, Treasure Valley
Community College, Eastern Oregon University, local school districts and local
government.

Lending Activities

General. The Bank's loan portfolio totaled $265.9 million at March 31,
2002, representing 66.7% of total assets at that date. The Bank concentrates
its lending activities within its primary market area. Historically, the
Bank's primary lending activity has been the origination of one- to- four
family residential mortgage loans. To a lesser extent, the Bank makes
mortgage loans for the purpose of constructing primarily single-family
residences.

1

As a result of management's desire to diversify its lending portfolio and
satisfy local demand for credit, the Bank has significantly increased its
origination of agricultural, indirect dealer and commercial business loans
since July 1996. During the fiscal year ended March 31, 2002, the Bank
purchased $39.3 million of commercial real estate loans. The properties
securing these loans are located in Washington and Oregon. Commercial
business and agricultural loans primarily include operating lines of credit
and term loans for fixed asset acquisitions.

The Bank has also been active in the origination of consumer loans, which
primarily consist of automobile loans and home equity loans, secured and
unsecured and, to a lesser extent, credit card loans, home improvement loans,
mobile home loans and loans secured by savings deposits. More recently, the
Bank has expanded its purchase of dealer-originated contracts to include those
secured by automobiles, motorcycles, all terrain and recreational vehicles,
including travel trailers. During the fiscal year ended March 31, 2002, the
Bank purchased $1.6 million of dealer originated contracts secured by
recreational vehicles, campers, boats, snowmobiles, and all-terrain-vehicles.

2

Loan Portfolio Analysis. The following table sets forth the composition of the Bank's loan portfolio
at the dates indicated. The Bank had no concentration of loans exceeding 10% of total gross loans other than
as presented below.

At March 31,
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)

Mortgage Loans:
One-to-four-
family........... $122,950 45.60% $137,354 53.97% $127,589 57.13% $109,089 58.00% $100,740 64.65%
Multi-family...... 10,799 4.00 2,459 0.97 2,989 1.34 2,810 1.49 1,194 0.77
Commercial........ 36,397 13.50 18,235 7.17 14,808 6.63 13,703 7.29 7,906 5.07
Agricultural...... 3,505 1.30 3,548 1.39 2,420 1.08 2,240 1.19 725 0.47
Construction...... 1,255 0.47 1,399 0.55 3,648 1.63 2,825 1.50 1,616 1.04
Land.............. 34 0.01 124 0.05 158 0.07 330 0.17 297 0.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans........... 174,940 64.88 163,119 64.10 151,612 67.88 130,997 69.64 112,478 72.18
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Home equity and
second mortgage.. 14,039 5.21 15,890 6.24 14,983 6.71 16,262 8.65 19,231 12.34
Credit card....... 1,174 0.43 1,093 0.43 1,026 0.46 949 0.50 854 0.55
Automobile(1)..... 28,147 10.44 26,501 10.41 21,547 9.65 11,843 6.30 5,719 3.67
Loans secured by
deposit accounts. 502 0.19 528 0.21 452 0.20 416 0.22 648 0.42
Unsecured......... 6,066 2.25 4,909 1.93 3,414 1.53 2,836 1.50 2,047 1.31
Other............. 4,443 1.64 3,992 1.57 3,190 1.43 2,985 1.59 4,623 2.97
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans........... 54,371 20.16 52,913 20.79 44,612 19.98 35,291 18.76 33,122 21.26
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business
loans............. 24,152 8.96 22,396 8.80 13,853 6.20 12,031 6.40 5,968 3.83
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------

Agricultural loans. 16,185 6.00 16,054 6.31 13,275 5.94 9,781 5.20 4,254 3.19
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... 269,648 100.00% 254,482 100.00% 223,352 100.00% 188,100 100.00% 155,822 100.00%
====== ====== ====== ====== ======
Less:
Undisbursed por-
tion of loans
in process....... -- -- -- -- 102
Net deferred loan
fees............. 1,505 1,487 1,365 1,125 1,035
Allowance for
loan losses...... 2,280 2,098 1,396 1,228 847
-------- -------- -------- -------- --------
Total loans re-
ceivable, net.. $265,863 $250,897 $220,591 $185,747 $153,838
======== ======== ======== ======== ========

- -----------
(1) Includes dealer-originated automobile contracts of $24.3 million, $13.6 million and $17.4 million at
March 31, 2002, 2001 and 2000, respectively.

3

One- to- Four Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of loans secured by
first mortgages on existing one- to- four family residences located in its
primary market area. At March 31, 2002, $123.0 million, or 45.6%, of the
Bank's total loan portfolio, consisted of such loans, with an average loan
balance of $64,000.

Generally, the Bank's fixed-rate one- to- four family mortgage loans have
maturities of 15 to 30 years and are fully amortizing with monthly payments
sufficient to repay the total amount of the loan with interest by the end of
the loan term. Generally, they are originated under terms, conditions and
documentation which permit them to be sold to private investors. The Bank's
fixed-rate loans customarily include "due on sale" clauses, which give the
Bank the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.

At March 31, 2002, $101.1 million, or 37.5%, of the total loans before
net items were fixed rate one- to- four family loans and $21.9 million, or
8.1%, were adjustable rate mortgage loans ("ARM loans"). The Bank recently
began offering an ARM product for its portfolio with an interest rate that is
fixed for three years then adjusts annually based on the one year Treasury
constant maturity index. The Bank's ARMs are typically based on a 30-year
amortization schedule. The Bank's current ARM loans do not provide for
negative amortization and generally provide for annual and lifetime interest
rate adjustment limits of 2.0% and 6.0%, respectively.

At March 31, 2002, $12.9 million, or 58.4% of the Bank's total ARM loans
had interest rates that adjusted annually based on the Eleventh District Cost
of Funds Index ("COFI"). The COFI is a lagging index which, together with the
periodic and overall interest rate caps, may cause the yield on such loans to
adjust more slowly than the cost of interest-bearing liabilities especially in
a rapidly rising rate environment. In November 1995, the Bank discontinued
using the COFI index and began using the one year Treasury constant maturity
index.

Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.

The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
In addition, although ARM loans allow the Bank to increase the sensitivity of
its asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations, the Bank has no assurance that
yields on ARM loans will be sufficient to offset increases in the Bank's cost
of funds. The Bank believes these risks, which have not had a material
adverse effect on the Bank to date, generally are less than the risks
associated with holding fixed-rate loans in the portfolio during a rising
interest rate environment.

The Bank requires title insurance insuring the status of its lien on all
loans where real estate is the primary source of security. The Bank also
requires the maintenance of fire and casualty insurance (and, if appropriate,
flood insurance).

The Bank's one- to- four family residential mortgage loans typically do
not exceed 80% of the lower of cost or appraised value of the security
property. Pursuant to underwriting guidelines adopted by the Bank's Board of
Directors, the Bank can lend up to 97% of the lower of cost or appraised value
of the property securing a one- to- four family residential loan; however, the
Bank obtains private mortgage insurance that insures the Bank on those loans
that exceed 80% of the appraised value of the security property.

4

Agricultural Lending. Agriculture is a major industry in the Bank's
market area. Subject to market conditions, the Bank intends to continue to
emphasize agricultural loans. In 1996, the Bank began originating a
significant number of loans to finance agricultural needs. This includes
collateral secured agricultural loans for the purchase of farmland and
equipment. At March 31, 2002, agricultural loans amounted to $19.7 million,
or 7.3%, of the total loan portfolio; $3.5 million of these loans were secured
by real estate. The Bank has sought to limit its agricultural lending to
borrowers with a strong capital base, sufficient management depth, proven
ability to operate through agricultural business cycles, reliable cash flow
and a willingness to provide the Bank with the necessary financial reporting.

Agricultural operating loans are made to finance operating expenses over
the course of a growing season with such loans being typically made in amounts
of $500,000 or less. However, the Bank's largest agricultural operating loan
had an original commitment of $2.2 million (with $1.5 million outstanding at
March 31, 2002) which was provided to finance a farming operation that grows
mint, grain, and potatoes. This loan was performing in accordance with its
terms at March 31, 2002. Agricultural operating loans generally are made as a
percentage of the borrower's anticipated income to support budgeted operating
expenses. These loans generally are secured by a blanket lien on all crops,
livestock, equipment, accounts and products and proceeds thereof. The
variables that effect income during the year are yields and market prices.
Consideration is given to projected yields and commodity prices. The interest
rate is normally adjusted monthly based on the prime rate as published in The
Wall Street Journal, plus a negotiated margin of up to 2%. Because such loans
are made to finance annual operations and expenses, they are written on a
one-year review and renewable basis. The renewal is dependent upon prior
year's performance and the forthcoming year's projections as well as overall
financial strength of the borrower. The Bank carefully monitors these loans
and prepares monthly variance reports on income and expenses. To meet the
seasonal operating needs, borrowers may qualify for single payment notes,
revolving lines of credit and/or non-revolving lines of credit.

In underwriting agricultural operating loans, the Bank considers the cash
flow of the borrower based upon the expected income stream as well as the
value of collateral used to secure the loan. Collateral generally consists of
cattle or cash crops produced by the farm, such as grains, grass seed, peas,
sugar beets, mint, onions, potatoes, corn and alfalfa. In addition to
considering cash flow and obtaining a blanket security interest in the farm's
cash crop, the Bank may also collateralize an operating loan with the
equipment, breeding stock, real estate, and federal agricultural program
payments to the borrower.

The Bank also originates loans to finance the purchase of farm equipment
and will continue to pursue this type of lending in the future. Loans to
purchase farm equipment are made for terms of up to seven years. In funding
this need, the Bank uses both fixed and adjustable rate notes, depending on
the maturity requested.

Agricultural real estate loans primarily are secured by first liens on
farmland and improvements thereon located in the Bank's market area, to
service the needs of the Bank's existing customers. The largest such loan
totaled $866,000 and was performing in accordance with its terms at March 31,
2002. Loans are generally written in amounts up to 50% to 75% of the tax
assessed or appraised value of the property at terms ranging from 10 to 20
years. Such loans have interest rates that generally adjust at least every
five years based upon the current five year Treasury Constant or The Wall
Street Journal prime, plus a negotiated margin. In originating an
agricultural real estate loan, the Bank considers the debt service coverage of
the borrower's cash flow, the appraised value of the underlying property, the
experience and knowledge of the borrower, and the borrower's past performance
with the Bank and/or market area.

Payments on an agricultural real estate loan depend, to a large degree,
on the results of operation of the related entity. The repayment is also
subject to both economic and weather conditions as well as market prices for
agricultural products, which can be highly volatile at times. Such loans are
not made to start up businesses but are generally reserved for profitable
operators with substantial equity and proven history. At March 31, 2002,
agricultural real estate loans totaled $3.5 million, or 1.3%, of the loan
portfolio.

5

Among the greatest and more common risks to agricultural lending can be
weather conditions and disease. This risk can be mitigated through
multi-peril crop insurance. The lack of water has the potential to decrease
yields and increase energy costs for the Bank's borrowers. Commodity prices
also present a risk which may be reduced by the use of set price contracts.
Required beginning and projected operating margins provide for reasonable
reserves to offset unexpected yield and price deficiencies. The Bank also
takes into consideration management succession, life insurance and business
continuation plans. The Bank is an approved Farm Service Agency ("FSA")
lender and at March 31, 2002 had one FSA guaranteed loan with an outstanding
balance of $44,000.

Construction Lending. The Bank also offers construction loans to
qualified borrowers for construction of single-family residences in the Bank's
primary market area. Typically, the Bank limits its construction lending to a
local builder for the construction of a single-family dwelling where a
permanent purchase commitment has been obtained or individuals are building
their primary residences. On a limited basis, the Bank lends to contractors
for housing construction where the house is not presold. The ability of a
developer to sell developed lots or completed dwelling units will depend on,
among other things, demand, pricing, availability of comparable properties and
economic conditions. Construction loans generally have a six-month term with
only interest being paid during the term of the loan, and convert at the end
of six months to permanent financing and are underwritten in accordance with
the same standards as the Bank's mortgages on existing properties.
Construction loans generally have a maximum loan-to-value ratio of 80%.
Borrowers must satisfy all credit requirements which would apply to the Bank's
permanent mortgage loan financing for the subject property.

Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of construction costs proves to be inaccurate,
the borrower may be required to fund the cost overruns. The Bank has sought
to minimize this risk by limiting construction lending to qualified borrowers
in the Bank's market area and by limiting the aggregate amount of outstanding
construction loans. At March 31, 2002, construction loans amounted to $1.3
million, or 0.5%, of the loan portfolio.

Multi-Family and Commercial Real Estate Lending. The multi-family
residential loan portfolio consists primarily of loans secured by apartment
buildings and the commercial real estate loan portfolio includes loans to
finance the construction or acquisition of small office buildings and retail
stores. The largest such loan totaled $2.8 million and was performing
according to its terms at March 31, 2002. At March 31, 2002, the Bank had
$10.8 million of multi-family residential and $36.4 million of commercial real
estate loans, which amounted to 4.0% and 13.5%, respectively, of the total
loan portfolio at such date. Multi-family and commercial real estate loans
are generally underwritten with loan-to-value ratios of up to 75% of the
lesser of the appraised value or the purchase price of the property. Such
loans generally are granted on 15 to 20 year terms on an adjustable rate with
established floors. On fixed rate loans, terms generally do not exceed ten
years.

Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential
property lending. Multi-family residential and commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for
office, retail and residential space, and, as such, may be subject to a
greater extent to adverse conditions in the economy generally. To minimize
risk, the Bank generally obtains personal guarantees and annual financial
statements of the principals of the partnership or corporation. The Bank
reviews all significant commercial real estate loans on an annual basis to
ensure that the loan meets current underwriting standards. In addition, the
Bank underwrites commercial real estate loans at a rate of interest
significantly above that carried on the loan at the time of origination to
evaluate the borrower's ability to meet principal and interest payments on the
loan in the event of upward adjustments to the interest rate on the loan.

6

Consumer and Other Lending. The Bank originates a variety of consumer
loans. Such loans generally have shorter terms to maturity and higher
interest rates than mortgage loans. At March 31, 2002, the Bank's consumer
loans totaled approximately $54.4 million, or 20.2%, of the Bank's total
loans. The Bank's consumer loans consist primarily of home improvement and
equity loans, automobile loans, boat and recreational vehicle loans, unsecured
loans, credit card loans and deposit account loans.

The Bank offers open-ended "preferred" lines of credit on either a
secured or unsecured basis. Secured lines of credit are generally secured by
a second mortgage on the borrower's primary residence. Secured lines of
credit have an interest rate that is one to two percentage points above the
prime lending rate, as published in The Wall Street Journal, while the rate on
unsecured lines is three to four percentage points above this prime lending
rate. In both cases, the rate adjusts monthly. The majority of the approved
lines of credit at March 31, 2002 were equal to or less than $25,000. The
Bank requires repayment of at least 2% of the unpaid principal balance
monthly. At March 31, 2002, approved lines of credit totaled $21.5 million,
of which $10.3 million was outstanding.

The Bank offers closed-end, fixed-rate home equity loans that are made on
the security of one-to-four family residences. Loans normally do not exceed
80% of the appraised or tax assessed value of the residence, less the
outstanding principal of the first mortgage, and have terms of up to 15 years
requiring monthly payments of principal and interest. At March 31, 2002,
fixed rate home equity loans and second mortgage loans amounted to $9.3
million, or 3.4%, of total loans.

At March 31, 2002, the Bank's automobile loan portfolio amounted to $28.1
million, or 51.8%, of consumer loans and 10.4% of total loans at such date.
Since January 1997, a substantial portion of the Bank's automobile loans have
been originated indirectly by a network of approximately 28 automobile
dealers, most located in the Bank's market area and adjacent markets in Oregon
and Idaho. Indirect automobile loans accounted for approximately 42.6% of the
Bank's total consumer loan originations during the year ended March 31, 2002.
The applications for such loans are taken by employees of the dealer, the
loans are written on the dealer's contract pursuant to the Bank's underwriting
standards using the dealer's loan documents with terms substantially similar
to the Bank's. All indirect loans must be approved by specific loan officers
of the Bank who have experience with this type of lending. The automobile
dealers are paid a premium by the Bank. This premium is amortized over the
life of the loan. In addition to indirect automobile lending, the Bank also
originates automobile loans directly.

The maximum term for the Bank's automobile loans is 72 months with the
amount financed based upon a percent of purchase price. The Bank generally
requires all borrowers to maintain automobile insurance, including collision,
fire and theft, with a maximum allowable deductible and with the Bank listed
as loss payee.

At March 31, 2002, unsecured consumer loans amounted to $6.1 million, or
2.3%, of total loans. These loans are made for a maximum of 36 months or less
with fixed rates of interest and are offered primarily to existing customers
of the Bank to mitigate the additional risk of the unsecured status.

Since December 1992, the Bank has offered credit card loans through its
participation as a VISA card issuer. The Bank does not actively solicit
credit card business beyond its customer base and market area and has not
engaged in mailing of pre-approved credit cards. The rate currently charged
by the Bank on its credit card loans is the prime rate, as published in The
Wall Street Journal, plus 3% to 7%, and the Bank is permitted to change the
interest rate quarterly. Processing of bills and payments is contracted to an
outside servicer. At March 31, 2002, the Bank had a commitment to fund an
aggregate of $9.6 million of credit card loans, which represented the
aggregate credit limit on credit cards, and had $1.2 million of credit card
loans outstanding, representing 0.4% of its total loan portfolio. The Bank
intends to continue credit card lending and estimates that at current levels
of credit card loans, it makes a small monthly profit net of service expenses
and write-offs.

Consumer loans potentially have a greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured or
secured by rapidly depreciating assets such as automobiles and other vehicles.
In such cases, any repossessed collateral for a defaulted consumer loan may
not provide an adequate source of repayment of the

7

outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that
can be recovered on such loans. At March 31, 2002, the Bank had $246,000 in
consumer loans accounted for on a nonaccrual basis.

Commercial Business Lending. The Bank originates commercial business
loans to small and medium sized businesses in its primary market area.
Commercial business loans are generally made to finance fixed asset
acquisitions, and for short-term working capital. Such loans are generally
secured by equipment, accounts receivable and inventory, although commercial
business loans are sometimes granted on an unsecured basis. Generally, loans
to finance short-term working capital are made for one year or less with
interest rates adjusted monthly at a rate equal to the prime rate, as
published in The Wall Street Journal, plus a margin of up to 3%. Loans to
finance the purchase of equipment are made for terms generally seven years or
less at either a fixed or adjustable rate. At March 31, 2002, the commercial
business loans amounted to $24.2 million, or 9.0%, of the total loan
portfolio.

At March 31, 2002, the largest outstanding commercial business loan was a
$1.7 million operating line of credit to a manufacturing company with a
balance of $1.3 million. Such loan was performing according to its terms at
March 31, 2002.

The Bank is an approved Small Business Administration ("SBA") lender and
at March 31, 2002, had two SBA loans that totaled $248,000. The Bank also
entered into an agreement with the Oregon Economic Development Department
("OEDD") to provide loan guarantees on small business loans. As of March 31,
2002, the Bank had two OEDD loans that totaled $464,000. The Bank intends to
continue to originate loans to local businesses within its primary market area
using these programs, subject to market conditions.

The Bank generally underwrites its commercial business loans on the basis
of the borrower's cash flow and ability to service the debt from earnings
rather than on the basis of underlying collateral value. The Bank seeks to
structure such loans to have more than one source of repayment. The borrower
is required to provide the Bank with sufficient information to allow the Bank
to make its lending determination. In most instances, this information
consists of at least three years of financial statements, tax returns, a
statement of projected cash flows, current financial information on any
guarantor and any additional information on the collateral. Generally, for
loans with maturities exceeding two years and balances exceeding $250,000, the
Bank requires that borrowers and guarantors provide updated financial
information at least annually.

The Bank's commercial business loans may be structured as term loans or
as lines of credit. Commercial business term loans are generally made to
finance the purchase of fixed assets and have maturities of seven years or
less. Commercial business lines of credit are typically made for the purpose
of providing working capital and are usually approved with a term of between
six months and one year.

Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often
dependent on successful operation of the business involved, repayment of such
loans may be subject to adverse conditions in the economy. The Bank seeks to
minimize these risks through its underwriting guidelines, which require that
the loan be supported by adequate cash flow of the borrower, profitability of
the business, collateral, and personal guarantees of the individuals in the
business. In addition, the Bank limits this type of lending to its market
area and to borrowers with which it has prior experience or who are otherwise
well known to the Bank.

Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 2002, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments

8

and no stated maturity, and overdrafts are reported as becoming due within one
year. Loan balances do not include undisbursed loan proceeds, unearned
discounts, unearned income and allowance for loan losses.

After After
One Year 3 Years
Within Through Through Over
One Year 3 Years 5 Years Five Years Total
-------- ------- ------- ---------- -----
(In thousands)

Mortgage loans:
One- to- four family.... $ 79 $ 465 $ 822 $121,584 $122,950
Multi-family............ -- 2,104 2,645 6,050 10,799
Commercial.............. 128 920 747 34,602 36,397
Agricultural............ -- -- 73 3,432 3,505
Construction............ -- -- -- 1,255 1,255
Land.................... 2 -- 5 27 34

Consumer loans:
Home equity and second
mortgage............... 251 523 908 12,357 14,039
Automobile.............. 284 5,228 16,656 5,979 28,147
Credit card............. 26 79 117 952 1,174
Loans secured by
deposit accounts....... 151 60 279 12 502
Unsecured............... 474 365 318 4,909 6,066
Other................... 82 330 1,099 2,932 4,443

Commercial business
loans................... 6,503 2,034 6,555 9,060 24,152
Agricultural loans....... 10,026 1,623 2,443 2,093 16,185
------- ------- ------- -------- --------
Total.................. $18,006 $13,731 $32,667 $205,244 $269,648
======= ======= ======= ======== ========

The following table sets forth the dollar amount of all loans due after
March 31, 2003, which have fixed interest rates and have floating or
adjustable interest rates.

Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In thousands)

Mortgage loans:
One- to- four family.............. $100,958 $ 21,913
Multi-family...................... 1,002 9,797
Commercial........................ 4,563 31,706
Agricultural...................... 39 3,466
Construction...................... 1,255 --
Land.............................. 32 --

Consumer loans:
Home equity and second mortgage... 8,689 5,099
Automobile........................ 27,863 --
Credit card....................... -- 1,148
Loans secured by deposit accounts. 351 --
Unsecured......................... 107 5,485
Other............................. 4,358 3
Commercial business loans......... 9,888 7,761
Agricultural loans................ 3,157 3,002
-------- --------
Total........................... $162,262 $ 89,380
======== ========

9

Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual term because of prepayments. In addition, due on sale
clauses on loans generally give the Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates. Furthermore, management believes that a significant number of the
Bank's residential mortgage loans are outstanding for a period less than their
contractual terms because of the transitory nature of many of the borrowers
who reside in its primary market area.

Loan Solicitation and Processing. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. The customary sources of loan originations are realtors, walk-in
customers, referrals and existing customers. The Bank also advertises its
loan products by radio and newspaper. The Bank does not employ commissioned
loan originators.

Mortgage loan applications are initiated, underwritten and preliminarily
approved by loan officers before they are recommended for final review and
approval. Individual lending limits and credit approval limits are established
for branch and loan center personnel up to $350,000. Commercial lenders' and
administrative credit approval limits are established up to $750,000 depending
on position and lending knowledge. Loans to borrowers with an aggregate
borrowing relationship over $750,000 and up to $1.5 million requires approval
of either the President or Executive Vice President. Loans to borrowers with
an aggregate borrowing relationship in excess of $1.5 million and up to $2.5
million require the approval of the President and Executive Vice President.
Loans to borrowers with an aggregate borrowing relationship exceeding $2.5
million require approval by the President, Executive Vice President and two
board members.

Loan Originations, Sales and Purchases. Historically, the Bank's primary
lending activity has been the origination of one- to- four family residential
mortgage loans. In recent periods, the Bank has increased its origination of
consumer, commercial business and agricultural loans.

During the year ended March 31, 2002, the Bank began selling its
conforming loans along with the servicing of these loans. For the year ended
March 31, 2002, the Bank sold $13.1 million in fixed-rate one-to-four family
residential mortgage loans. At March 31, 2002, the Bank was not servicing any
loans for investors.

The Bank purchased $39.3 million of commercial real estate loans with
properties located in Washington and Idaho during the fiscal year 2002. The
balance of these loans at March 31, 2002 was $27.6 million and was performing
according to its terms.

The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.

Year Ended March 31,
----------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Loans originated:
Mortgage loans:
One- to- four family.........$ 26,446 $ 22,301 $ 30,112
Multi-family................. 450 -- 1,575
Commercial................... 6,921 4,543 3,101
Construction................. 265 1,092 6,697
Land......................... 1 11 26
Consumer..................... 18,739 14,170 13,293
Commercial business loans.... 33,907 28,778 18,076
Agricultural loans........... 35,378 32,888 28,519
-------- -------- --------
Total loans originated..... 122,107 103,783 101,399

(table continued on following page)

10

Year Ended March 31,
----------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)

Loans purchased:
Dealer-originated automobile
contracts................... 15,095 14,499 14,533
Dealer-originated other
contracts................... 1,635 -- --
Commercial real estate....... 39,262 5,275 --
-------- -------- --------
Total loans purchased...... 55,992 19,774 14,533

Loans sold:
One-to-four family........... 13,086 -- --
Loan principal repayments.... 150,047 93,251 81,088
-------- -------- --------
Net increase in loans
receivable, net............. $ 14,966 $ 30,306 $ 34,844
======== ======== ========

Loan Commitments. The Bank issues commitments for loans and lines of
credit conditioned upon the occurrence of certain events. Such commitments
are made in writing on specified terms and conditions and are honored for up
to 40 days from approval, depending on the type of transaction. At March 31,
2002, the Bank had loan commitments of $44.2 million. See Note 17 of Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.

Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modification, late
payments and for miscellaneous service related to its loans. Income from
these activities varies from period to period depending upon the volume and
type of loans made and competitive conditions.

The Bank charges loan origination fees which are calculated as a minimum
fee or as a percentage of the amount borrowed. In accordance with applicable
accounting procedures, loan origination fees and discount points in excess of
loan origination costs are deferred and recognized over the contractual
remaining lives of the related loans on a level yield basis. Discounts and
premiums on loans purchased are accreted and amortized in the same manner.
The Bank recognized $215,000, $71,000 and $107,000 of deferred loan fees
during the years ended March 31, 2002, 2001 and 2000, respectively, in
connection with loan refinancings, payoffs, and ongoing amortization of
outstanding loans.

Nonperforming Assets and Delinquencies. Generally, the borrowers are
allowed to pay up to the 15th day following the due date before the Bank
initiates collection procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the deficiency by contacting the
borrower and seeking the payment. Contacts are generally made 16 days after
the due date. In most cases, delinquencies are cured promptly. If a
delinquency continues, additional contact is made. The Bank prefers to work
with borrowers to resolve such problems, however, after the 90th day of
delinquency, foreclosure or other action is taken in an effort to minimize any
potential loss to the Bank.

When loans are contractually 90 days or more delinquent, they are placed
on nonaccrual status. Payments to such nonaccrual loans are applied to
principal when collection of the loan principal is doubtful. Loans are
reinstated to accrual status when current and collectibility of principal and
interest is no longer doubtful.

11

The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans at the dates indicated.

At March 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Mortgage loans:
One- to- four family.... $ 90 $ -- $ 131 $ 133 $ 258
Nonresidential property. -- 45 -- -- --
Consumer loans.......... 246 10 24 5 17
-------- -------- -------- -------- --------
Total................. 336 55 155 138 275

Foreclosed real estate..... -- 41 -- 37 --

Other repossessed assets... 58 22 8 -- 313
-------- -------- -------- -------- --------
Total nonperforming
assets.................. $ 394 $ 118 $ 163 $ 175 $ 588
======== ======== ======== ======== ========
Nonaccrual loans as a
percentage of loans
receivable, net........... 0.12% 0.02% 0.07% 0.07% 0.18%

Nonaccrual loans as a
percentage of total
assets.................... 0.08% 0.01% 0.04% 0.04% 0.10%

Nonperforming assets as a
percentage of total
assets.................... 0.10% 0.03% 0.04% 0.06% 0.22%

Loans receivable, net...... $265,863 $250,897 $220,591 $185,747 $153,838

Total assets............... $398,366 $388,881 $370,612 $313,473 $263,224

An additional $15,000 of interest income would have been recorded for the
year ended March 31, 2002, had nonaccruing loans been current in accordance
with their original terms.

Real Estate Acquired in Settlement of Loans. See Note 1 of Notes to
Consolidated Financial Statements included in Item 8 herein, regarding the
Bank's accounting for foreclosed real estate. At March 31, 2002, the Bank had
no foreclosed real estate.

Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS
examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are four classifications for problem
assets: substandard, other loans especially mentioned, doubtful and loss.
Substandard assets have one or more defined weaknesses and are characterized
by the distinct possibility that the insured institution will sustain some
loss if the deficiencies are not corrected. Other loans especially mentioned
have potential weaknesses that deserve management's close attention. Loans in
this classification have a plan that is approved by the borrower and the Bank
that will return the credit to a pass classification. Loans in this category
are not adversely classified and do not expose the Bank to sufficient risk to
warrant adverse classification. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values

12

questionable, and there is a high possibility of loss. An asset classified as
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. If an asset or portion thereof
is classified as loss, the insured institution establishes specific allowances
for loan losses for the full amount of the portion of the asset classified as
loss. All or a portion of general loan loss allowances established to cover
possible losses related to assets classified substandard or doubtful can be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "watch" and monitored by the
Bank.

The aggregate amounts of the Bank's classified and watch assets, and of
the Bank's general and specific loss allowances at the dates indicated, were
as follows:

At March 31,
--------------------------
2002 2001 2000
------- ------- -------
(In thousands)

Loss..................... $ -- $ -- $ --
Doubtful................. 2 -- --
Substandard assets....... 501 1,154 1,656
Other loans especially
mentioned.............. 930 1,607 --
Watch.................... 9,819 9,426 8,545

General loss allowances.. 2,280 2,098 1,396
Specific loss allowances. -- -- --

At March 31, 2002, doubtful assets consisted of one consumer/dealer loan
of $2,000.

At March 31, 2002, substandard assets consisted of four one- to- four
family mortgage loans of $196,000, 19 consumer/dealer loans of $154,000 and
two commercial/agricultural loans (two borrowers) of $151,000.

At March 31, 2002, other loans especially mentioned consisted of 11
commercial/agricultural loans (five borrowers) of $930,000.

At March 31, 2002, watch assets consisted of 10 one- to- four family
mortgage loans of $346,000, 12 consumer/dealer loans of $103,000 and 56
commercial/agricultural loans (32 borrowers) of $9.4 million.

Allowance for Loan Losses. The Bank has established a systematic
methodology for the 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.

In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses
by charging provisions for loan losses against the Bank's income.

Allowances for losses on specific problem loans and real estate owned are
charged to earnings when it is determined that the value of these loans and
properties, in the judgement of management, is impaired. In addition to
specific reserves, the Bank also maintains general provisions for loan losses
based on the evaluation of known and inherent risks in the loan portfolio,
including management's continuing analysis of the factors and trends
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

13

collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans. The
ultimate recovery of such loans is susceptible to future market factors beyond
the Bank's control, which may result in losses or recoveries differing
significantly from those provided in the consolidated financial statement. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's valuation allowance on
loans and real estate owned. Generally, a provision for losses is charged
against income quarterly to maintain the allowance for loan losses.

The Company's methodology for calculating the necessary reserves for loan
losses requires the Company to reserve specific percentages of outstanding
loan balances with the percentages varying based upon the perceived risk of
the different loan types and loan classification within specific loan types.
The specific reserve percentages are based upon the various loans type's
historic performance, loss trends, industry norms and the general economic
environment. Additionally, the Company has unallocated reserves which keep
the Company's reserves in line with industry norms as well as the inherent
changes in the portfolio risk due to macroeconomic factors.

At March 31, 2002, the Bank had an allowance for loan losses of $2.3
million, which management believes is adequate to absorb losses inherent in
the portfolio. Although management is confident that the basis for making the
allowance is sound, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with
generally accepted accounting principles, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to increase significantly its allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan
losses is adequate or that substantial increases will not be necessary should
the quality of any loan deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Bank's financial condition and results of operations.

14

The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.

Year Ended March 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Allowance at beginning
of period................ $ 2,098 $ 1,396 $ 1,228 $ 847 $ 725
-------- -------- -------- -------- --------
Provision for loan losses. 481 794 178 483 138

Recoveries:
Mortgage loans:
One- to- four family.... -- 1 23 -- 4
Consumer loans:
Credit card............. 10 5 7 9 4
Other................... 32 13 2 4 25
-------- -------- -------- -------- --------
Total recoveries....... 42 19 32 13 33
-------- -------- -------- -------- --------
Charge-offs:
Mortgage loans:
One- to- four family.... -- -- -- 4 5
Consumer loans:
Credit card............. 31 99 37 82 36
Automobile.............. 199 11 1 15 8
Unsecured............... 47 1 -- -- --
Other................... 25 -- 4 14 -
-------- -------- -------- -------- --------
Commercial............. 3 - - - -
Agriculture............ 36 - - - --
-------- -------- -------- -------- --------
Total charge-offs...... 341 111 42 115 49
-------- -------- -------- -------- --------
Net charge-offs........ 299 92 10 102 16
-------- -------- -------- -------- --------
Allowance at end
of period............ $ 2,280 $ 2,098 $ 1,396 $ 1,228 $ 847
======== ======== ======== ======== ========
Allowance for loan
losses as a percentage
of total loans outstand-
ing at the end of
the period............... 0.85% 0.82% 0.63% 0.66% 0.55%

Net charge-offs as a
percentage of average
loans outstanding
during the period........ 0.11% 0.04% --% 0.06% 0.01%

Allowance for loan
losses as a percentage
of nonperforming loans
at end of period......... 678.21% 3814.55% 900.65% 889.86% 308.07%

15

The following table sets forth the breakdown of the allowance for loan losses by loan category at the
dates indicated. Management feels that the allowance can be allocated by category only on an approximate
basis. The allocation of the allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any other category.

At March 31,
-----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in in in in in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)

Mortgage loans:
One- to- four
family......... $ 313 46.08% $ 352 54.82% $ 338 24.21% $ 381 31.03% $ 329 66.65%
Non-mortgage
loans........... 792 19.54 625 20.04 355 25.43 265 21.58 236 20.29
Commercial busi-
ness and real
estate.......... 637 27.76 494 18.15 360 25.79 300 24.43 164 8.90
Agricultural
loans........... 260 6.00 331 6.35 314 22.49 250 20.36 87 3.19
Credit cards..... 82 0.43 76 0.43 26 1.86 29 2.36 26 0.55
Loans secured
by deposit
accounts........ 5 0.19 5 0.21 3 0.22 3 0.24 5 0.42
Unallocated...... 191 -- 215 -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
Total allowance
for loan
losses....... $2,280 100.00% $2,098 100.00% $1,396 100.00% $ 1,228 100.00% $ 847 100.00%
====== ====== ====== ====== ====== ====== ======= ====== ====== =======

16

Investment Activities

The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Seattle, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various
restrictions, the Bank may also invest a portion of its assets in commercial
paper and corporate debt securities. The Bank is required to maintain an
investment in FHLB stock. The Bank is also required under federal regulations
to maintain a minimum amount of liquid assets. See "REGULATION" herein and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" included in Item 7 of this Form
10-K.

Although the Bank generally purchases investment securities with excess
liquidity, during the years ended March 31, 2001 and 2000, the Bank engaged in
a leveraging strategy using funds borrowed from the Federal Home Loan Bank to
purchase investment securities. Total purchases amounted to $44.4 million,
$17.0 million and $38.0 million during the years ended March 31, 2002, 2001
and 2000, respectively, including $24.9 million in mortgage backed securities,
$4.0 million in U.S. Government and government agency securities and $15.0
million in collateralized mortgage obligations purchased in fiscal 2002.
Purchases were funded in fiscal 2002 by selling investment securities totaling
$28.7 million, and principal repayments of securities totaling $19.7 million.
Purchases were funded by selling investment securities totaling $37.8 million
for the year ended March 31, 2001. Purchases for the year ended March 31,
2000 were funded by borrowing an additional $26.5 million from the FHLB. The
Bank's investment securities purchases have generally been limited to U.S.
Government and government agency securities with contractual maturities of
between one and ten years and mortgage-backed and related securities issued by
the Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") and Government National Mortgage Association ("GNMA")
with maturities of up to 30 years. During the year ended March 31, 1999, the
Bank began purchasing AAA rated municipal bonds of various local Oregon
governmental units with maturities ranging from 10 to 19 years. Such
municipal bonds totaled $7.2 million at March 31, 2002.

At March 31, 2002, the Bank held securities classified as available-for-
sale under SFAS 115. There were no trading securities at March 31, 2002.
See Note 2 of Notes to Consolidated Financial Statements.

The Bank's investment policies generally limit investments to U.S.
Government and government agency securities, municipal bonds, certificates of
deposits, marketable corporate debt obligations, mortgage-backed and related
securities and certain types of mutual funds. The Bank's investment policy
does not permit engaging directly in hedging activities or purchasing high
risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the
interest rate, yield, settlement date and maturity of the investment, the
Bank's liquidity position, and anticipated cash needs and sources (which in
turn include outstanding commitments, upcoming maturities, estimated deposits
and anticipated loan amortization and repayments). The effect that the
proposed investment would have on the Bank's credit and interest rate risk and
risk-based capital is also considered.

At March 31, 2002, the Bank did not have any individual investment
(excluding U.S. government bonds) that had an aggregate book value in excess
of 10% of the Company's shareholders' equity at that date.

17

The following table sets forth the amortized cost and fair value of the
Bank's debt and mortgage-backed and related securities, by accounting
classification and by type of security, at the dates indicated.

At March 31,
------------------------------------------------------
2002 2001 2000
---------------- ----------------- -----------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value(1) Total Value(1) Total Value(1) Total
------- ------ ------- ------ -------- ------
(Dollars in thousands)
Held to Maturity:
Mortgage-backed and
related securities... $ -- --% $ -- --% $ -- --%
------- ------ ------- ------ -------- ------
Total held to
maturity
securities......... -- -- -- -- -- --

Available for Sale:
U.S. Government agency
obligations.......... 10,825 11.71 16,828 17.36 28,145 23.06
Municipal securities.. 6,984 7.56 10,086 10.41 9,291 7.61
Mortgage-backed and
related securities... 74,100 80.18 70,010 72.23 84,615 69.33
Other................. 510 0.55 -- -- -- --
------- ------ ------- ------ -------- ------
Total available for
sale securities.... 92,419 100.00 96,924 100.00 122,051 100.00
------- ------ ------- ------ -------- ------
Total.................. $92,419 100.00% $96,924 100.00% $122,051 100.00%
======= ====== ======= ====== ======== ======

- ------------------
(1) The market value of the Bank's investment portfolio amounted to $92.4
million, $96.9 million and $122.1 million at March 31, 2002, 2001 and
2000, respectively. At March 31, 2002, the amortized cost of the
principal components of the Bank's investment securities portfolio was as
follows: U.S. Government securities, $18.4 million; mortgage-backed and
related securities, $73.4 million.

The following table sets forth the maturities and weighted average yields
of the debt and mortgage-backed and related securities in the Bank's
investment securities portfolio at March 31, 2002.

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

Available for Sale:
U.S. Government
agency obligations.. $2,002 2.38% $1,986 3.03% $1,236 4.32% $13,095 5.28% $18,319
Mortgage-backed and
related securities.. 2 5.22 23 6.07 5,064 4.50 69,011 6.41 74,100
------ ------ ------ ------- -------
Total available for
sale securities... $2,004 $2,009 $6,300 $82,106 $92,419
====== ====== ====== ======= =======

18

Deposit Activities and Other Sources of Funds

General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments, and maturing
investment securities. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market
conditions. Borrowings from the FHLB-Seattle may be used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. The Bank also has an overnight credit line with Key Bank amounting
to $15.0 million and a $50.0 million reverse repurchase credit line with
Merrill Lynch.

Deposit Accounts. A substantial number of the Bank's depositors reside
in Oregon. The Bank's deposit products include a broad selection of deposit
instruments, including NOW accounts, demand deposit accounts, money market
accounts, statement savings accounts and term certificate accounts. Deposit
account terms vary with the principal differences being the minimum deposit to
open, early withdrawal penalties and the interest rate. The Bank reviews its
deposit mix and pricing weekly. The Bank does not utilize brokered deposits,
nor has it aggressively sought jumbo certificates of deposit. The Bank also
offers business deposit accounts in connection with its community banking
activities.

The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest interest rates on deposits, but a competitive rate. The Bank
determines the rates paid based on a number of conditions, including rates
paid by competitors, rates on U.S. Treasury securities, rates offered on
various FHLB-Seattle lending programs, and the deposit growth rate the Bank is
seeking to achieve.

In the unlikely event the Bank is liquidated, depositors will be entitled
to full payment of their deposit accounts before any payments are made to the
Company as the sole stockholder of the Bank.

The following table sets forth information concerning the Bank's time
deposits and other interest-bearing deposits at March 31, 2002.

Weighted
Average Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
---- ------------ -------------------------- ------- ------- --------
(In thousands,
except minimum balance)

N/A N/A Non-interest-bearing $21,878 $ 10 8.54%
0.50% N/A NOW accounts 35,803 10 13.98
1.75 N/A Money market accounts 60,685 1,000 23.70
1.41 N/A Statement savings accounts 18,371 5 7.17

Certificates of Deposit
-----------------------

5.55 3 to 5 years Fixed-term, fixed-rate 17,475 1,000 6.82
2.68 91 days Fixed-term, fixed-rate 11,998 1,000 4.69
2.28 182 days Fixed-term, fixed-rate 14,824 1,000 5.79
3.24 1 year Fixed-term, variable-rate 36,520 1,000 14.26
5.52 2-1/2 years Fixed-term, variable-rate 7,117 1,000 2.78
5.45 5 years Fixed-term, variable-rate 8,616 1,000 3.36
2.79 18 months Fixed-term, adjustable-rate 2,353 5 0.92
5.77 20 months Fixed-term, fixed-rate 9,449 1,000 3.70
4.27 varies Various term, fixed-rate 1,314 1,000 0.51
3.98 varies Jumbo certificates 9,675 96,000 3.78
-------- ------
TOTAL $256,078 100.00%
======== ======

19

The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of March 31, 2002. Jumbo
certificates of deposit generally have principal amounts of $100,000 or more
and have negotiable interest rates.

Certificates
Maturity Period of Deposits
--------------------------------- ------------
(In thousands)

Three months or less............. $ 2,939
Over three through six months.... 2,100
Over six through twelve months... 3,713
Over twelve months............... 5,191
-------
Total.......................... $13,943
=======

Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the dates indicated.

At March 31,
--------------------------------------------------------------------------
2002 2001 2000
-------------------------- --------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- ---------- ------ -----
(Dollars in thousands)

Non-interest-bearing......... $ 21,878 8.54% $ 2,200 $ 19,678 7.75% $ 4,717 $ 14,961 6.29%
NOW checking................. 35,803 13.98 (169) 35,972 14.17 (786) 36,758 15.46
Statement savings accounts... 18,371 7.17 2,120 16,251 6.40 (3,174) 19,425 8.17
Money market deposit......... 60,685 23.70 6,702 53,983 21.27 3,881 50,102 21.07
Fixed-rate certificates
which mature:
Within 1 year.............. 89,446 34.93 (5,058) 94,504 38.25 3,571 90,932 38.25
After 1 year, but
within 3 years........... 19,531 7.63 (5,837) 25,368 7.83 6,757 18,611 7.83
After 3 years, but
within 5 years........... 9,373 3.66 2,682 6,691 2.33 1,164 5,528 2.33
Certificates maturing
thereafter............... 991 0.39 (339) 1,330 0.53 (88) 1,418 0.60
-------- ------ ------- -------- ------ ------- -------- ------
Total................. $256,078 100.00% $ 2,301 $253,777 100.00% $16,042 $237,735 100.00%
======== ====== ======= ======== ====== ======= ======== ======

Time Deposits by Rates. The following table sets forth the amount of
time deposits in the Bank categorized by rates at the dates indicated.

At March 31,
-------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
1.00 - 1.99%............. $ 10,375 $ -- $ --
2.00 - 3.99%............. 53,067 -- --
4.00 - 4.99%............. 20,970 9,933 10,028
5.00 - 5.99%............. 16,677 38,223 81,566
6.00 - 6.99%............. 16,949 62,822 23,702
7.00% and over........... 1,303 16,915 1,193
-------- -------- --------
Total.................... $119,341 $127,893 $116,489
======== ======== ========

20

Deposit Activity. The following table sets forth the deposit activity of
the Bank for the periods indicated.

Year Ended March 31,
-------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)

Beginning balance........... $253,777 $237,735 $199,589
-------- -------- --------
Net (withdrawals) deposits
before interest credited... (5,730) 5,752 29,645
Interest credited........... 8,031 10,290 8,501
-------- -------- --------

Net increase in deposits.... 2,301 16,042 38,146
-------- -------- --------

Ending balance.............. $256,078 $253,777 $237,735
======== ======== ========

Borrowings. The Bank utilizes advances from the FHLB-Seattle to
supplement its supply of investable funds and to meet deposit/withdrawal
requirements. The FHLB-Seattle functions as a central reserve bank providing
credit for savings associations and certain other member financial
institutions. As a member of the FHLB-Seattle, the Bank is required to own
capital stock in the FHLB-Seattle and is authorized to apply for advances on
the security of such stock and certain of its mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs, all of which
have their own interest rate guidelines and range of maturities. Depending on
the program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit. The Bank is currently authorized to borrow from the FHLB
up to an amount equal to 30% of total assets. The Bank may increase the
amount of its FHLB advances if loan demand exceeds deposit growth.

During the year ended March 31, 2000, the Bank opened a $15.0 million
overnight line of credit with Key Bank and a $50.0 million reverse repurchase
agreement with Merrill Lynch. See Note 8 of Notes to Consolidated Financial
Statements included in Item 8 herein.

21

The following table sets forth certain information regarding borrowings
by the Bank at the end of and during the periods indicated:

At or For the
Year Ended March 31,
-------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in thousands)

Maximum amount of borrowings outstanding
at any month end:
FHLB advances.......................... $109,600 $87,300 $76,750

Approximate average borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase........................ -- -- 67
FHLB advances.......................... 84,989 75,871 60,418

Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase........................ --% --% 5.97%
FHLB advances.......................... 5.33 6.34 5.37

Potential Adverse Impact of Changes in Interest Rates

The financial condition and results of operations of the Bank, and of
savings institutions in general, are significantly influenced by general
economic conditions, by the related monetary and fiscal policies of the
federal government, and by the regulations of the OTS, the FDIC and the Board
of Governors of the Federal Reserve System ("Federal Reserve"). Deposit flows
and the cost of funds are influenced by interest rates of competing
investments and general market rate conditions. Lending activities are
affected by the demand for mortgage financing and for consumer and other types
of loans, which in turn are affected by the interest rates at which such
financing may be offered and by other factors affecting the supply of housing
and the availability of funds.

The Bank's profitability is substantially dependent on its net interest
income, which is the difference between the interest income received from its
interest-earning assets and the interest expense incurred in connection with
its interest-bearing liabilities. When an institution's interest-bearing
liabilities exceed its interest-earning assets which mature within a given
period of time, material and prolonged increases in interest rates generally
would adversely affect net interest income, while material and prolonged
decreases in interest rates generally would have a favorable effect on net
interest income. Like most of the savings industry, the interest-earning
assets of the Bank have longer effective maturities than its deposits, which
largely mature or are subject to repricing within a shorter period of time.
As a result, a material and prolonged increase in interest rates generally
would adversely affect net interest income, while material and prolonged
decreases in interest rates generally would have a more favorable effect on
net interest income.

The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk. The extent of interest
rate risk to which the Bank is subject is monitored by management by modeling
the change in net portfolio value ("NPV") over a variety of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The calculation is intended to
illustrate the change in NPV that will occur in the event of an immediate
change in interest rates of at least 200 basis points with no effect given to
any steps which management might take to counter the effect of that interest
rate movement. At March 31, 2002, there was a $14.4 million, or 29.6%,
decrease in the Bank's NPV as a percent of the present value of assets,
assuming a 200 basis

22

point increase in interest rates. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management and Interest Rate Risk" contained in Item 7 herein for a discussion
of the NPV methods of analyzing interest rate risk and for an illustration of
the effect of an increase in interest rates on the Bank's earnings.

Consequently, the Bank's net interest income could be adversely affected
during periods of rising interest rates. Further increases in market rates of
interest could have a material adverse effect on the Bank's net interest
income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset and Liability Management and Interest Rate
Risk." Furthermore, there has been increased scrutiny by the regulatory
agencies as to financial institutions levels of interest rate risk and Pioneer
Bank has been examined by the OTS since it increased its review of this area,
with a "satisfactory" rating.

Changes in interest rates can affect the amount of loans originated by an
institution, as well as the value of its loans and other interest-earning
assets and the resultant ability to realize gains on the sale of such assets.
Changes in interest rates also can result in disintermediation, which is the
flow of funds away from savings banks into direct investments, such as U.S.
Government and corporate securities, and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally can pay higher rates of return than savings associations.

REGULATION

General

The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners Loan Act and, in certain respects, the Federal Deposit Insurance
Act, and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with
its depositors and borrowers is also regulated to a great extent, especially
in such matters as the ownership of deposit accounts and the form and content
of the Bank's mortgage documents.

The Bank is required to file reports with the OTS and the FDIC concerning
its activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic
examinations by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on the Company, the Bank and their operations.

Federal Regulation of Savings Associations

Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS has extensive authority over the operations of savings
associations. Among other functions, the OTS issues and enforces regulations
affecting federally insured savings associations and regularly examines these
institutions.

All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2002 was $48,000.

23

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

The Bank, as a member of the FHLB-Seattle, is required to acquire and
hold shares of capital stock in the FHLB-Seattle in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB-Seattle. The Bank is in compliance with this requirement with an
investment in FHLB-Seattle stock of $6.3 million at March 31, 2002.

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

The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid in the past and could
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future.

Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF"). The Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
all savings associations.

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

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

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

24

The premium schedule for BIF and SAIF insured institutions ranged from 0
to 27 basis points. However, SAIF insured institutions and BIF insured
institutions are required to pay a Financing Corporation assessment in order
to fund the interest on bonds issued to resolve thrift failures in the 1980s.
This amount is currently equal to about 1.88 points for each $100 in domestic
deposits for SAIF and BIF insured institutions. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in 2017 through 2019.

Under the Federal Deposit Insurance Act ("FDIA"), insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged
in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC or the OTS. Management of the Bank
does not know of any practice, condition or violation that might lead to
termination of deposit insurance.

Liquidity Requirements. Federal regulations require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation. Liquid assets
include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. Liquidity management is both a
daily and long-term responsibility of management. Monetary penalties may be
imposed for failure to meet liquidity requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.

Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations
also require that a capital restoration plan be filed with the OTS within 45
days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized."

At March 31, 2002, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.

Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the OTS may
require the Bank to submit to it an acceptable plan to achieve compliance with
the standard. Management is aware of no conditions relating to these safety
and soundness standards which would require submission of a plan of
compliance.

Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 2002, the Bank met the test and its QTL percentage
was 81.4%.

25

Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "-- Savings and Loan Holding Company
Regulations."

Capital Requirements. Federally insured savings associations, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.

The capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. At March 31, 2002, the Bank
had tangible capital of $40.3 million, or 10.2% of adjusted total assets,
which is approximately $34.4 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date.

The capital standards also require core capital equal to 4% of adjusted
total assets, depending on an institution's supervisory rating. Core capital
generally consists of tangible capital. At March 31, 2002, the Bank had core
capital equal to $40.3 million, or 10.2% of adjusted total assets, which is
$28.4 million above the minimum leverage ratio requirement of 3% as in effect
on that date.

The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.

In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.

On March 31, 2002, the Bank had total risk-based capital of approximately
$42.6 million, including $40.3 million in core capital and $2.3 million in
qualifying supplementary capital, and risk-weighted assets of $261.7 million,
or total capital of 16.3% of risk-weighted assets. This amount was $21.6
million above the 8% requirement in effect on that date.

The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association," which is an
institution with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio. Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.

26

The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.

The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on their operations
and profitability.

Limitations on Capital Distributions. The OTS regulations impose various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.

Generally, savings institutions, such as the Bank, that before and after
the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.

Savings institutions proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "-- Capital Requirements."

Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2002, the Bank's limit on loans to one borrower was $7.9 million. At
March 31, 2002, the Bank's largest aggregate loan to one borrower was $3.8
million, which was performing according to its original terms.

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

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

Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Bank include the Company and any company which is under common control with
the Bank. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire
the securities of most affiliates. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.

27

Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.

Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Bank received a "satisfactory" rating as a
result of its latest evaluation.

Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.

Savings and Loan Holding Company Regulations

The Company is a unitary savings and loan company subject to regulatory
oversight of the OTS. Accordingly, the Company is required to register and
file reports with the OTS and is subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to a serious risk to the subsidiary
savings association.

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

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

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

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

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

28

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

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

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

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

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

Qualified Thrift Lender Test. If the Bank fails the qualified thrift
lender test, within one year the Company must register as, and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test" for information regarding the Bank's qualified thrift
lender test.

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

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

29

- Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-money
laundering compliance officer, (iii) ongoing employee training programs, and
(iv) an independent audit function to test the anti-money laundering program.

- Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations by
October 26, 2002 that provide for minimum standards with respect to customer
identification at the time new accounts are opened.

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

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

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

During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and interim
regulations to implement the provisions of Sections 312 and 352 of the USA
PATRIOT Act. To date, it has not been possible to predict the impact the USA
PATRIOT Act and its implementing regulations may have on the Company and the
Bank.

TAXATION

Federal Taxation

General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.

Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.

The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the

30

experience method using a formula based on actual bad debt experience over a
period of years. The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continue
to be subject to provisions of present law referred to below that require
recapture in the case of certain excess distributions to shareholders.

Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately
one and one-half times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax
rate (exclusive of state and local taxes). See "Regulation" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.

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

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

Audits. The Bank's federal income tax returns have not been audited
within the past five years.

State Taxation

The Bank is subject to an Oregon corporate excise tax at a statutory rate
of 6.6% of income. The Bank's state income tax returns have not been audited
during the past five years.

Competition

The Bank faces strong competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits
has historically come from commercial banks, credit unions, and other thrifts
operating in its market area. As of March 31, 2002, there were 20 financial
institutions, including commercial banks, credit unions, and other thrifts
operating in the Bank's primary market area. Particularly in times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate
and government securities. The Bank's

31

competition for loans comes from commercial banks, thrift institutions, credit
unions and mortgage bankers. Such competition for deposits and the
origination of loans may limit the Bank's growth in the future.

Subsidiary Activities

The Bank has two subsidiaries, Pioneer Development Corporation ("PDC")
and Pioneer Bank Investment Corporation ("PBIC"). PDC's primary interest was
to purchase land sale contracts until March 31, 1998. Currently, its primary
interest is in servicing those contracts. PBIC's primary interest is to hold
the Bank's non-conforming assets. At March 31, 2002, the Bank's equity
investment in PDC and PBIC was $2.2 million and $175,000, respectively.

Federal savings associations generally may invest up to 3% of their
assets in service corporations, provided that at least one-half of any amount
in excess of 1% is used primarily for community, inner-city and community
development projects. The Bank's investment in its subsidiaries did not
exceed these limits at March 31, 2002.

Personnel

As of March 31, 2002, the Bank had 110 full-time and eight part-time
employees, none of whom is represented by a collective bargaining unit. The
Bank believes its relationship with its employees is good.

Executive Officers. The following table sets forth certain information
regarding the executive officers of the Company.

Name Age(1) Position
--------------------- ------ --------------------------------------

Berniel L. Maughan 59 President and Chief Executive Officer

Zane F. Lockwood 47 Executive Vice President

Jonathan P. McCreary 34 Chief Financial Officer

- --------------
(1) At March 31, 2002.

Berniel L. Maughan has served as President and Chief Executive Officer of
the Company and the Bank since May 25, 2000. Mr. Maughan previously served
with U.S. Bank, Utah being appointed President and Chief Executive Officer in
February 1997, serving the bank until January 1999. Prior to that, Mr.
Maughan served in the capacity of Senior Vice President and Regional Manager,
and Executive Vice President with U.S. Bank, Oregon from January 1996 to
February 1997. Prior to that, he served as Executive Vice President and
Manager of the Retail Division of West One Bank, Oregon from November 1993
through December 1995; and as Senior Vice President and Regional Manager, West
One Bank, Idaho from August 1986 through November 1993. Mr. Maughan has 33
years of experience in commercial and retail banking, and has been an active
member of numerous civic and community organizations.

Zane F. Lockwood has served as the Bank's Executive Vice President since
March of 1999 and Senior Vice President from March 1998 to March 1999. Prior
to that time, he served as Senior Commercial Lender after joining the Bank in
October 1997. Mr. Lockwood was employed by U.S. Bank for over 25 years in
various capacities before joining the Bank. During his last ten years with
U.S. Bank, he was a team leader in their Regional Business Loan Center located
in Pendleton, Oregon. In that position he supervised the commercial and
agricultural lending in Union, Baker, Wallowa, Grant and Malheur counties.
Mr. Lockwood has been very involved in the communities he has resided in
having held numerous board memberships, including current Board Chairman for
the St. Elizabeth Health Services Foundation, Eastern Oregon University
Foundation, and past president of the La Grande/Union County Chamber of
Commerce.

32

Jonathan P. McCreary has served as Chief Financial Officer and Senior
Vice President of the Company and the Bank since July 17, 2000. Mr. McCreary
previously served with Metropolitan Mortgage & Securities Inc., since 1993,
and was Chief Investment Officer in 2000 when he left to join Oregon Trail
Financial Corp. Mr. McCreary has over 11 years experience in financial
management, portfolio management and accounting. He is a Chartered Financial
Analyst, Certified Public Accountant, Certified Managerial Accountant, and
holds a Bachelors Degree in Finance and Accounting from Central Washington
University.

Item 2. Properties
- -------------------

The following table sets forth certain information regarding the Bank's
offices at March 31, 2002, all of which are owned.

Current Year Approximate
Location Opened Square Footage Deposits
- --------------------------------- --------- ---------------- ----------
(In thousands)
Corporate Office:

2055 First Street 1979 10,700 $ 8,381
Baker City, Oregon 97814

Branch Offices:

Baker City Branch (2) 2000 12,653 61,180
1990 Washington
Baker City, Oregon 97814

La Grande Branch 1975 6,758 54,162
1215 Adams Avenue
La Grande, Oregon 97850

Ontario Branch 1960 3,700 33,254
225 SW Fourth Avenue
Ontario, Oregon 97914

John Day Branch 1973 2,420 16,383
150 West Main Street
John Day, Oregon 97845

Burns Branch 1975 3,968 21,275
77 W. Adams Street
Burns, Oregon 97720

Enterprise Branch 1976 3,360 25,999
205 West Main Street
Enterprise, Oregon 97828

Island City Branch 1997 4,200 18,797
3106 Island Avenue
La Grande, Oregon 97850

(table continued on following page)

33

Current Year Approximate
Location Opened Square Footage Deposits
- --------------------------------- --------- ---------------- ----------
(In thousands)

Vale Branch 1999 3,512 $10,438
150 Longfellow Street North
Vale, Oregon 97918

Pendleton Branch (1) 2000 3,748 6,209
1701 SW Court Avenue
Pendleton, Oregon 97801

- ---------------
(1) The Pendleton Branch office was acquired on May 26, 2000.
(2) The Baker City branch and Centralized Lending Center relocated to their
new office on April 23, 2000.

The Bank uses the services of an in-house data processing system. At
March 31, 2002, the Bank had ten proprietary automated teller machines, all of
which were located in existing branches. At March 31, 2002, the net book
value of the Bank's office properties and the Bank's fixtures, furniture and
equipment was $9.5 million or 2.4% of total assets. See Note 6 of Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.

Item 3. Legal Proceedings
- --------------------------

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

On March 13, 2002, the Company announced that it had entered into a
Standstill Agreement (the Agreement) to settle all outstanding claims and
litigation with shareholder Joseph Stilwell, Stilwell Associates, L.P.,
Stilwell Value Partners II, L.P., and Stilwell Value LLC (collectively, the
Stilwell Group), who own 8.8% of the Company's outstanding common stock.

The parties have agreed to dismiss with prejudice all pending lawsuits
between them and to exchange mutual releases. The dismissals conclude both the
lawsuits filed by the Stilwell Group for the purpose of removing two directors
from the Board of Directors of the Company and the pending lawsuit filed by
the Company against the Stilwell Group in the United States District Court for
the District of Oregon alleging violations of securities laws.

Under the Agreement, the Company agreed to adopt an annual target to
achieve return on equity greater than the median for all publicly traded
thrift institutions with assets between $250 and $500 million for the fiscal
year beginning April 1, 2001. So long as the Company is successful in meeting
this target, the Stilwell Group will not vote for any nominee for election to
the Company's Board of Directors other than those supported by the Company's
Board of Directors and will vote all shares in favor of nominees for director
nominated by the Board of Directors and in favor of any proposal submitted by
the Company's management. In addition, the Company has agreed to endeavor to
reduce its capital ratio to 11% within one year of the date of the Agreement,
subject to the Boards fiduciary duties and the Company's applicable regulatory
and securities requirements. The Agreement also provides that the Stilwell
Group will not propose or seek to effect a merger or sale of the Company,
solicit proxies in opposition to recommendations or proposals of the Company's
management, or seek to exercise any control or influence over the management
of the Company. If the Company fails to achieve its annual return on equity
target, it has agreed to utilize its investment banking firm to help the
Company evaluate alternatives to maximize shareholder value.

34

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2002.

PART II

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

Oregon Trail Financial Corp. common stock is traded over-the-counter on
the Nasdaq National Market under the symbol "OTFC" since October 3, 1997.
Stockholders of record at March 31, 2002 totaled 804. This total does not
reflect the number of persons or entities who hold stock in nominee or
"street" name through various brokerage firms. The following table shows the
reported high and low sale prices of the Company's common stock and declared
dividends for each quarter within the two most recent fiscal years.

Sale Price
------------- Dividends
Year High Low Declared
---- ---- --- ---------
Fiscal 2002
First quarter $ 14.99 $13.938 $0.09
Second quarter 16.10 14.52 0.10
Third quarter 18.63 15.48 0.10
Fourth quarter 18.62 17.51 0.10

Fiscal 2001
First quarter 11.625 8.938 0.08
Second quarter 12.125 10.563 0.08
Third quarter 14.375 11.250 0.08
Fourth quarter 14.375 13.313 0.08

Under Oregon law, the Company is permitted to pay cash dividends either
out of surplus or, if there is no surplus, out of net profits for the fiscal
year in which the dividend is declared and/or the preceding fiscal year. The
principal source of funds for the Company are dividend payments from the Bank.
OTS regulations require the Bank to give the OTS 30 days advance notice of any
proposed declaration of dividends to the Company, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends to
the Company. The OTS imposes certain limitations on the payment of dividends
from the Bank to the Company which utilize a three-tiered approach that
permits various levels of distributions based primarily upon a savings
association's capital level. See "REGULATION -- Federal Regulation of Savings
Associations -- Limitations on Capital Distributions." In addition, the
Company may not declare or pay a cash dividend on its capital stock if the
effect thereof would be to reduce the regulatory capital of the Company below
the amount required for the liquidation account to be established pursuant to
the Company's Plan of Conversion adopted in connection with the Conversion.

35

Item 6. Selected Financial Data
- --------------------------------

The following table sets forth certain information concerning the
consolidated financial position and results of operations of the Company and
its subsidiary at and for the dates indicated. The consolidated data is
derived in part from, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and its subsidiary contained in Item 8 of
this Form 10-K.

At March 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)

FINANCIAL CONDITION DATA:
Total assets..............$398,366 $388,881 $370,612 $313,473 $263,224
Loans receivable, net..... 265,863 250,897 220,591 185,747 153,838
Stock in FHLB............. 6,315 4,651 3,897 3,221 2,985
Investment securities
available for sale...... 18,319 26,914 37,436 37,965 37,225
Mortgage-backed and
related securities
available for sale...... 74,100 70,010 84,615 60,371 27,778
Mortgage-backed and
related securities
held to maturity........ -- -- -- 9,338 12,805
Cash and cash equivalents. 7,795 10,581 9,261 6,276 20,311
Deposits.................. 256,078 253,777 237,735 199,589 192,734
Advances from FHLB........ 87,100 73,125 76,750 50,250 --
Total shareholders'
equity.................. 52,823 57,806 53,104 60,083 67,301

Year Ended March 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
OPERATING DATA:

Interest income.............$ 27,861 $ 28,279 $ 24,548 $ 20,582 $ 18,511
Interest expense............ 12,739 15,392 11,776 8,064 7,824
Net interest income......... 15,122 12,887 12,772 12,518 10,687
Provision for loan losses... 481 794 178 483 138
Net interest income after
provision for loan losses. 14,641 12,093 12,594 12,035 10,549
Gains (losses) from sale of
securities................ 314 (957) -- -- --
Noninterest income.......... 3,165 2,155 1,602 1,098 1,046
Noninterest expense......... 11,283 10,947 10,115 8,182 6,533
Income before income taxes.. 6,837 2,344 4,081 4,951 5,062
Provision for income taxes.. 1,922 650 1,472 1,797 2,026

Net income..................$ 4,915 $ 1,694 $ 2,609 $ 3,154 $ 3,036

Basic earnings per share(1).$ 1.58 $ 0.51 $ 0.74 $ 0.78 $ 0.38

Weighted average common
shares outstanding (1).... 3,104 3,331 3,547 4,065 4,326
Diluted earnings per share..$ 1.52 $ 0.50 $ 0.70 $ 0.76 $ 0.38
Weighted average common
dilutive shares........... 3,229 3,367 3,724 4,160 4,326

36

At March 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)
OTHER DATA:

Number of:
Real estate loans
outstanding............... 2,188 2,182 2,298 2,346 2,245
Deposit accounts............ 31,573 32,306 31,384 28,820 28,781
Full-service offices........ 9 9 8 7 7

At or For Year Ended March 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------

SELECTED FINANCIAL RATIOS

Performance Ratios:
Return on average assets(2). 1.24% 0.44% 0.76% 1.14% 1.25%
Return on average equity(3). 8.77 3.09 4.60 4.90 6.65
Interest rate spread(4)..... 3.58 3.18 3.10 3.85 3.73
Net interest margin(5)...... 4.11 3.51 3.89 4.70 4.60
Average interest-earning
assets to average
interest-bearing
liabilities............... 115.11 118.71 122.02 128.10 125.92
Noninterest expense as a
percent of average total
assets.................... 2.86 2.85 2.95 2.96 2.69
Efficiency ratio(6)......... 60.66 79.14 70.37 60.09 55.68
Dividend payout ratio(7).... 24.68 64.00 42.14 28.95 13.16

Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of total
loans, net................ 0.12 0.02 0.07 0.07 0.18
Nonperforming assets as a
percent of total assets... 0.10 0.03 0.04 0.01 0.22
Allowance for losses as a
percent of gross loans
receivable................ 0.85 0.82 0.63 0.66 0.55
Allowance for losses as a
percent of nonperforming
loans..................... 678.21 3,814.55 900.65 889.86 308.07
Net charge-offs to average
outstanding loans......... 0.08 0.04 -- 0.06 0.01

Capital Ratios:
Total equity-to-assets
ratio..................... 13.26 14.86 14.33 19.17 25.57
Average equity to average
assets(8)................. 14.13 14.28 16.55 23.27 18.82

- -----------------
(1) Weighted average shares outstanding for fiscal year 1998 included shares
from conversion on October 3, 1997 to year end. Earnings per share
include only earnings from date of conversion to year end.
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average equity.
(4) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Other expenses divided by the sum of net interest income and other
income.
(7) Dividends declared per share divided by net income per share.
(8) Average total equity divided by average total assets.

37

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

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

Forward-looking Statements

Management's Discussion and Analysis and other portions of the report
contain certain "forward-looking statements" of Financial Condition and
Results of Operations concerning the expected future operations of Oregon
Trail Financial Corp. (the "Company"). Management wishes to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995 and is including this statement for the express purpose of availing
the Company of the protections of such safe harbor with respect to all
"forward-looking statements" contained in this Form 10-K. "Forward-looking
statements" are used to describe future plans and strategies, including
expectations of the Company's future financial results. Management's ability
to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could cause actual results to differ materially
include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgages and other
loans, real estate values, competition, loan delinquency rates, changes in
accounting principles, practices, policies or guidelines, changes in
legislation or regulation, and other economic, competitive governmental,
regulatory and technological factors effecting operations, pricing, products
and services. Accordingly, these factors should be considered in evaluating
the forward-looking statements, and undue reliance should not be placed on
such statements.

Critical Accounting Policies

The Company has established various accounting policies that govern the
application of accounting principles generally accepted in the United States
of America in the preparation of the Company's Consolidated Financial
Statements. The preparation of these financial statements requires management
to use assumptions, judgement and estimates. Management evaluates its use of
these assumptions, judgments and estimates on an ongoing basis. Estimates are
based on current economic and business conditions in our market area.
Management believes that the judgments, estimates and assumptions used in the
preparation of the Company's Consolidated Financial Statements are appropriate
given the factual circumstances at the time of preparation. However, the use
of judgments, estimates and assumptions could result in material differences
in our results of operation and financial condition. The Company has
determined that its most critical accounting policy is the determination of
its provision for loan losses. See additional discussion under "Comparison of
Operating Results for the Years Ended March 31, 2002 and 2001 -- Provision for
Loan Losses" in this section.

General

Management's Discussion and Analysis of Financial Condition and Results
of Operations is intended to assist in understanding the financial condition
and results of operations of the Company. The information contained in this
section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto contained in this report.

The Company, an Oregon Corporation, became the unitary savings and loan
holding company of Pioneer Bank, a Federal Savings Bank (the "Bank") upon the
Bank's conversion from a federally chartered mutual to a federally chartered
stock savings bank (the "Conversion") on October 3, 1997. Accordingly, the
Company is primarily engaged in the business of planning, directing and
coordinating the business activities of the Bank, the deposits of which are
insured by the Federal Deposit Insurance Corporation ("FDIC") under the
Savings Association Insurance Fund ("SAIF"). The Bank conducts business from
its main office in Baker City, Oregon and its nine branch offices located in
Eastern Oregon.

The Bank operates as a community oriented financial institution devoted
to serving the needs of its customers. The Bank's business consists generally
of attracting retail deposits from the general public and using those funds to

38

originate one-to-four family residential loans, consumer loans and commercial
loans in its market area. To a lesser extent the Bank also purchases loans in
or near its market area and utilizes wholesale funding from the Federal Home
Loan Bank of Seattle ("FHLB").

The Bank's results of operations depend primarily on its net interest
income, which is the difference between the income earned on its
interest-earning assets, such as loans and investments, and the cost of its
interest-bearing liabilities, consisting of deposits and FHLB borrowings. The
Bank's net income is also affected by, among other things, fee income,
provisions for loan losses, operating expenses and income tax provisions. The
Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and policies concerning monetary and fiscal
affairs, housing and financial institutions and the attendant actions of the
regulatory authorities.

Comparison of Financial Condition at March 31, 2002 and March 31, 2001

Total assets at March 31, 2002 increased $9.5 million to $398.4 million
compared to $388.9 million at March 31, 2001. The growth in assets is
primarily attributable to a $15.0 million increase in net loans receivable
partially offset by a $4.5 million decrease in securities. The increase in
loans receivable was caused by a $26.5 million increase in commercial real
estate loans, a $1.9 million increase in commercial and agricultural loans and
a $1.4 million increase in consumer loans partially offset by a $14.4 million
decrease in residential real estate loans. The decrease in residential real
estate loans reflects the Company's strategy to decrease interest rate risk by
selling newly originated fixed rate real estate loans. The net loan growth
was funded by $14.0 million increase in borrowings and $2.3 million increase
in deposits offset by a $5.0 million decrease in shareholders' equity. The
increase in deposits reflects the Company's emphasis on core deposit growth.
Demand and savings accounts at March 31, 2002 increased by a total of $10.9
million, or 8.6%, to $136.7 million compared to $125.9 million at March 31,
2001. Certificates of deposits decreased by $8.6 million, or 6.7% partially
offsetting the growth in core deposits. The decrease in shareholders' equity
was largely caused by the Company purchasing $9.7 million of its stock, paying
$1.3 million of dividends, and partially offset by earnings of $4.9 million.
Generally, the Company purchases its outstanding shares through formal share
repurchase programs, when purchases are thought to be accretive to earnings
per share and the Company has excess capital available for such purchases.

Comparison of Operating Results for the Years Ended March 31, 2002 and 2001

General. Net income for the year ended March 31, 2002 was $4.9 million
or $1.58 per basic share compared to net income of $1.7 million or $0.51 per
share for the year ended March 31, 2001. The increase in net income is due to
a $2.2 million increase in net interest income, a $1.3 million increase in
non-interest income, and a $600,000 decrease in non-interest expense. The
decrease in non-interest expense in the year ended March 31, 2002 was largely
due to one-time restructuring expenses incurred in the year ended March 31,
2001 including a $303,000 reduction in force charge and a $957,000 loss on
sale of low yielding securities. The substantial increase in earnings per
share are a result of a favorable interest rate environment as well as the
successful execution of the Company's strategic plan which required the
development of sustainable earnings per share growth as its primary objective.
Related objectives included, but were not limited to, reduction of interest
rate sensitive assets, non-interest income growth, non-interest expense
control, core deposit growth and a Company-wide emphasis of customer service
combined with a de-emphasis of "best price."

Interest Income. Interest income for the year ended March 31, 2002 was
$27.9 million compared to $28.3 million for the year ended March 31, 2001, a
decrease of $400,000, or 1.4%. The decrease in interest income was a result
of a 14 basis point decrease in the yield on average interest earning assets
to 7.56% for the year ended March 31, 2002 compared to 7.70% for the year
ended March 31, 2001. Average interest earning assets increased by $849,000
to $368.3 million during the year ended March 31, 2002, partially offsetting
the reduction in yield on those assets. The decrease in the yield on average
interest earning assets is a result of a decreasing rate environment in 2002
as well as increases in adjustable rate loans and a decrease in fixed rate
real estate loans. The average yield on interest earning asset groups for the
year ended March 31, 2002 compared to the year ended March 31, 2001 were as
follows: loans receivable: 8.05% versus 8.31%, mortgage-backed securities:
6.65% versus 7.10%, investment securities: 6.14% versus

39

6.44%, FHLB stock: 6.74% versus 6.48%, and cash and overnight investments:
0.16% versus 1.59%, respectively. The average balance of interest earning
assets for the year ended March 31, 2002 compared to the year ended March 31,
2001 were as follows: loans receivable: $282.3 million versus $242.7 million,
mortgage-backed securities: $52.0 million versus $77.4 million, investment
securities: $20.9 million versus $34.2 million, FHLB stock: $5.9 million
versus $4.4 million, and cash and overnight investments: $7.3 million versus
$8.8 million, respectively.

Interest Expense. Interest expense for the year ended March 31, 2002
was $12.7 million compared to $15.4 million for the year ended March 31, 2001,
a decrease of $2.7 million, or 17.5%. The decrease in interest expense was
due to a 99 basis point reduction in the average cost of interest bearing
liabilities for the year ended March 31, 2002 to 3.98% from 4.72% during the
year ended March 31, 2001. The decrease in the average cost of liabilities
was partially offset by a $10.4 million, or 3.4% increase in average interest
bearing liabilities to $320.0 million for the year ended March 31, 2002 versus
$309.6 million for the year ended March 31, 2001 the average cost of interest
bearing liabilities for the year ended March 31, 2002 compared to the year
ended March 31, 2001 were as follows: interest checking: 0.09% versus 1.25%,
savings: 1.81% versus 2.34%, money market: 2.48% versus 4.11%, certificates of
deposit 5.04% versus 5.97%, respectively. The average balance of interest
bearing liabilities for the year ended March 31, 2002 compared to the year
ended March 31, 2001 were as follows: interest checking: $36.7 million versus
$37.1 million, savings: $17.2 million versus $17.0 million, money market:
$60.6 million versus $53.9 million, certificates of deposit $120.6 million
versus $125.8 million, respectively.

Provision and Allowance for Loan Losses. The provision for loan losses
are changes to earnings to bring the total allowance for loan losses to levels
considered by management as adequate to provide for known and inherent risks
in the loan portfolio, including management's continuing analysis of factors
underlying the quality of the loan portfolio. These factors include changes
in portfolio size and composition, 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. See Note 1 of Notes to the Consolidated Financial Statements.

The Company's methodology for calculating the necessary allowance for
loan losses requires the Company to reserve specific percentages of
outstanding loan balances with the percentages varying based upon the
perceived risk of the different loan types and loan classification within
specific loan types. Additionally, the Company has $191,000 of unallocated
reserves. Unallocated reserves were added in 2000 to help bring the Company's
allowance for loan losses in line with the reserves of its peer institutions
and to be reflective of the increased risk in the loan portfolio stemming from
the growth in commercial, agricultural and consumer loans. Loans classified
as doubtful at March 31, 2002 increased by $2,000 compared to the prior year,
in which the Company had no loans classified as doubtful. The increase in
doubtful loans caused the allowance for loan losses to be increased by $352.
Loans classified as substandard decreased $653,000 to $501,000 at March 31,
2002 compared to $1.2 million at March 31, 2001. The decrease in substandard
loans caused the allowance to be decreased by $56,000. Loans classified as
other loans especially mentioned decreased by $677,000 to $930,000 at March
31, 2002 from $1.6 million at March 31, 2001. The decrease in other loans
especially mentioned caused the allowance to be decreased by $39,000. Loans
that were not classified as doubtful, substandard, or other loans especially
mentioned increased by $16.5 million, causing the allowance to be increased by
$301,000. The unclassified reserve decreased by $24,000 to $191,000 at March
31, 2002 from $215,000 at March 31, 2001. The combination of changes in the
amount of classified loans, total loans outstanding, trends in loan quality,
micro and macro economic factors caused an aggregate increase in the allowance
for loan losses for the year ended March 31, 2002 of $182,000. The provision
for loan losses for the year ended March 31, 2002 was $481,000 while net
charge offs for the year were $299,000. At March 31, 2002 the allowance for
loan losses was 0.85% of total loans compared to 0.82% at March 31, 2001. The
allowance for loan losses was 678.2% of non-performing loans at March 31,
2002.

Non-Interest Income. Non-interest income for the year ended March 31,
2002 increased by 58%, or $1.3 million, to $3.5 million when compared to the
year ended March 31, 2001. The increase in non-interest income was
principally due to a $627,000 increase in income from bank owned life
insurance, a $314,000 net increase in gain on sale of securities and a
$193,000 gain on sale of loans.

40

Non-Interest Expenses. Non-interest expense for the year ended March
31, 2002 decreased by $621,000, or 5%, to $11.3 million from $11.9 million for
the year ended March 31, 2001. The primary factors affecting the decrease in
non-interest expense were $957,000 of losses on sales of securities in the
year ended March 31, 2001 compared to no net losses for the year ended March
31, 2002, $1.1 million of legal expenses in fiscal 2002 versus $307,000 of
legal expenses in fiscal 2001, and $6.2 million of compensation and benefits
in fiscal 2002 compared to $6.6 million of compensation and benefits in fiscal
2001. The increased legal expenses in fiscal 2002 were due to increased
litigation activity which have subsequently been settled. The higher
compensation and benefits in fiscal 2001 were largely due to restructuring
charges associated with a reduction in force.

Income Taxes. Income tax expense was $1.9 million for the year ended
March 31, 2002 compared to $650,000 for the prior year. The Company's
effective tax rate for the years ended March 31, 2002 and 2001 were 28.1% and
27.7%, respectively. The Company's effective tax rate has benefitted by
increased levels of tax advantaged assets. In the year ended March 31, 2002 a
$168,000 tax benefit related to the Company's employee stock ownership plan in
fiscal 2002 reduced earnings in fiscal 2001.

Comparison of Operating Results for the Years Ended March 31, 2001 and 2000

General. Net income for the year ended March 31, 2001 was $1.7 million
or $0.51 per basic share, compared to net income of $2.6 million or $.74 per
basic share, for the year ended March 31, 2000. The reduction in net income
is due to restructuring charges taken in the second and third quarters of
2001, including a $303,000 reduction in force charge, a $500,000 boost to loss
reserves reflecting increasing commercial loans and a $957,000 loss on sale of
low yielding securities.

Interest Income. Interest income for the year ended March 31, 2001 was
$28.3 million compared to $24.5 million for the year ended March 31, 2000, an
increase of $3.8 million, or 16%. The increase in interest income was a
result of an increase of $38.8 million in average balances of interest-earning
assets and a 0.23% increase in the average yield on those assets. The
increased yield on interest-earning assets was attributable to a higher
interest rate environment in 2001 versus 2000 as well as execution of the
strategic plan, which required the liquidation of low yielding securities and
loan pricing methodology changes which emphasize service over price. Average
loans receivable for the year ended March 31, 2001 increased by $36.7 million,
or 17.8%, when compared to the year ended March 31, 2000.

Interest Expense. Interest expense for the year ended March 31, 2001 was
$15.4 million compared to $11.8 million for the prior year, an increase of
$3.6 million, or 30.5%. The increase in interest expense was due to the $8.0
million growth in average interest-bearing liabilities and the increase in the
average cost of all interest-bearing liabilities from 4.37% to 4.72%. Average
interest bearing deposit balances increased $24.0 million to $233.7 million
while average borrowing balances increased $16.3 to $75.9 million for the year
ended March 31, 2001. The cost of average interest-bearing liabilities
increased 45 basis points for deposits and 98 basis points for borrowings,
reflecting market increases in interest rates as well as greater sensitivity
of the Bank's borrowings as compared to its deposits.

Provision for Loan Losses. The provision for loan losses represents
charges to earnings to bring the total allowance for loan losses to levels
considered by management as adequate to provide for known and inherent risks
in the loan portfolio, including management's continuing analysis of factors
underlying the quality of the loan portfolio. These factors include changes
in portfolio size and composition, 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. See Note 1 of Notes to Consolidated Financial Statements.

The allowance for loan losses increased by $794,000 to $2.1 million at
March 31, 2001. In the year ended March 31, 2001, the Company experienced a
27.4% increase in agricultural, commercial and consumer loans while total
loans grew at a rate of 13.9% from March 31, 2000 levels. Management deemed a
greater provision necessary due to the higher percentage growth in the
agricultural, commercial and consumer loans, which are inherently riskier than
one-to-four family mortgage loans. Net charge-offs remained low for 2001
coming in at $92,000, or 0.04% of average

41

outstanding loans, compared to $10,000 or 0.00%, for the prior year. The
allowance for loan losses equaled 3815% of non-performing loans at March 31,
2001 compared to 901% of non-performing loans at March 31, 2000. Management
believes the allowance for loan losses is adequate at March 31, 2001.

Noninterest Income. Noninterest income increased by $553,000 to a level
of $2.2 million for the year ended March 31, 2001. This increase resulted
primarily from a 58.8% increase in core deposit fees. The increase in core
deposit fees reflects the successful addition of several new deposit products
and services implemented to increase fee income and cause the Bank's earnings
to be less subject to changes in interest rates.

Noninterest Expenses. Noninterest operating expenses increased by $1.8
million from $10.1 million for the year ended March 31, 2000, to $11.9 million
for the year ended March 31, 2001. The increase in expenses was largely due
to $1.3 million of restructuring charges which consisted of $957,000 in
realized losses on sales of securities and $303,000 in reduction of force
charges. Total non-cash compensation expense related to stock based
compensation and benefits amounted to $874,000 for the year representing a
11.3% decrease from the year-ended March 31, 2000 amount of $985,000.
Depreciation expense increased $209,000 due to additional buildings and other
capital expenditures.

Income Taxes. The provision for income taxes was $650,000 for the year
ended March 31, 2001 compared to $1.5 million for the year ended March 31,
2000 decreasing the effective tax rate from 36.1% for the prior year to 27.7%
for the current year. The decrease in the effective tax rate was primarily
due to the addition of two qualified zone academy loans made to local school
districts which provide the Bank with tax credits, as well as a higher
percentage of municipal interest income.

42

Average Balances, Interest and Average Yields/Costs

The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities and average
yields and costs. Such yields and costs for the periods indicated are derived
by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances for the years ended March 31, 2002, 2001 and 2000.

Year Ended March 31,
----------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------ -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in thousands)

Interest-earning assets:

Loans receivable,
net (1)............. $282,267 $22,710 8.05% $242,662 $20,155 8.31% $206,006 $ 16,709 8.11%
Mortgage-backed
securities.......... 51,950 3,456 6.65 77,413 5,496 7.10 76,393 5,208 6.82
Investment securities. 20,944 1,286 6.14 34,164 2,201 6.44 37,573 2,379 6.33
FHLB stock............ 5,891 397 6.74 4,411 286 6.48 3,373 239 7.09

Federal funds sold
and overnight
interest-bearing
deposits............ 7,294 12 0.16 8,847 141 1.59 5,402 13 0.24
-------- ------- -------- ------- -------- --------
Total interest-
earning assets... 368,346 27,861 7.56 367,497 28,279 7.70 328,747 24,548 7.47
-------- ------- -------- ------- -------- --------
Non-interest-earning
assets.............. 27,955 16,512 14,167
-------- -------- --------
Total assets...... $396,301 $384,009 $342,914
======== ======== ========
Interest-bearing liabilities:

Passbook accounts..... $ 17,175 311 1.81 $ 16,983 397 2.34 $ 19,986 472 2.36
Money market accounts. 60,575 1,505 2.48 53,852 2,213 4.11 44,500 1,922 4.32
NOW accounts.......... 36,680 315 0.86 37,122 463 1.25 37,341 460 1.29
Certificates of
deposit............. 120,577 6,075 5.04 125,756 7,502 5.97 107,912 5,672 5.26
-------- ------- -------- ------- -------- --------
Total interest-
bearing deposits.. 235,007 8,206 3.49 233,713 10,575 4.52 209,739 8,526 4.07
-------- ------- -------- ------- -------- --------
Securities sold under
agreements to
repurchase.......... -- -- NA -- -- NA 67 4 5.97

FHLB advances......... 84,989 4,533 5.33 75,871 4,817 6.35 59,609 3,246 5.37
-------- ------- -------- ------- -------- --------
Total interest bear-
ing liabilities... 319,996 12,739 3.98 309,584 15,392 4.72 269,415 11,776 4.37
-------- ------- -------- ------- -------- --------
Non-interest-bear-
ing liabilities... 20,291 19,607 16,755
-------- -------- --------
Total liabilities.. 340,287 329,191 286,170
-------- -------- --------
Shareholders' equity.. 56,014 54,818 56,744
-------- -------- --------
Total liabilities
and shareholders'
equity............ $396,301 $384,009 $342,914
======== ======== ========
Net interest income... $15,122 $12,887 $12,772
======= ======= =======
Interest rate spread.. 3.58% 3.18% 3.10%
Net interest margin... 4.11% 3.51% 3.89%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities......... 115.11% 118.71% 122.02%

- ------------
(1) Does not include interest on loans 90 days or more past due.

43

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes
on net interest income of the Bank. Information is provided with respect to
(i) effects on interest income attributable to changes in rate (changes in
rate multiplied by prior volume); (ii) effects on interest income attributable
to changes in volume (changes in volume multiplied by prior rate); (iii) the
net change attributable to the combined impact of volume and rate; and (iv)
the total change (the sum of the prior columns).

Year Ended March 31, Year Ended March 31,
2002 Compared to Year 2001 Compared to Year
Ended March 31, 2001 Ended March 31, 2000
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------- ---------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In thousands)

Interest-earning assets:
Loans receivable (1).....$ (631) $ 3,291 $(105) $ 2,555 $ 412 $2,973 $ 61 $3,446
Mortgage-backed and
related securities...... (348) (1,808) 116 (2,040) 214 70 4 288
Investment securities.... (102) (851) 38 (915) 41 (216) (3) (178)
FHLB stock............... 11 96 4 111 (21) 74 (6) 47
Federal funds sold and
overnight interest-
bearing deposits........ (127) (25) 23 (129) 73 8 47 128
------- ------- ----- ------- ------ ------ ----- ------
Total net change in
income on interest-
earning assets....... (1,197) 703 76 (418) 719 2,909 103 3,731
------- ------- ----- ------- ------ ------ ----- ------
Interest-bearing liabilities:
Passbook accounts........ (90) 4 -- (86) (4) (71) -- (75)
Money market accounts.... (878) 276 (106) (708) (93) 404 (20) 291
NOW accounts............. (145) (6) 3 (148) (15) (3) 21 3
Certificate accounts..... (1,170) (309) 52 (1,427) 766 939 125 1,830
Securities sold under
agreements to
repurchase.............. -- -- -- -- -- -- (4) (4)
FHLB advances............ (774) 579 (89) (284) 584 873 114 1,571
------- ------- ----- ------- ------ ------ ----- ------
Total net change in
expense on interest-
bearing liabilities... (3,057) 544 (140) (2,653) 1,238 2,142 236 3,616
------- ------- ----- ------- ------ ------ ----- ------
Net change in net interest
income...................$ 1,860 $ 159 $ 216 $ 2,235 $ (519) $ 767 $(133) $ 115
======= ======= ===== ======= ====== ====== ===== ======
- --------------
(1) Does not include interest on loans 90 days or more past due.

Market Risk and Asset and Liability Management

Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Bank manages other risks, such as credit quality and liquidity
risk, in the normal course of business, management considers interest rate
risk to be its most significant market risk that could potentially have the
largest material effect on the Bank's financial condition and results of
operations. Other types of market risks, such as foreign currency exchange
rate risk and commodity price risk, do not arise in the normal course of the
Bank's business activities.

44

The Bank's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating market interest
rates. The Bank has sought to reduce the exposure of its earnings to changes
in market interest rates by attempting to manage the mismatch between asset
and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of the
Bank's interest-earning assets by originating for its portfolio an increasing
proportion of loans with interest rates subject to periodic adjustment to
market conditions (including commercial business, agricultural and consumer
loans). The Bank relies on retail deposits as its primary source of funds.
Management believes retail deposits and in particular core deposits (checking
and passbook savings accounts), compared to brokered deposits, reduce the
effects of interest rate risk. Management's efforts at lowering the Bank's
interest rate risk have proven successful. The Bank was examined by the OTS
and received a "satisfactory" rating.

The Bank's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling, which is performed for the Bank by the
OTS. The modeling process is designed to capture the dynamics of balance
sheet, interest rate and spread movements and to quantify variations in net
interest income resulting from those movements under different rate
environments. The interest rate sensitivity analysis performed by the OTS for
the Bank incorporates end of period rate, balance and maturity data compiled
by the Bank's management using various levels of aggregation of that data.

The following table is provided by the OTS and sets forth the change in
the Bank's net portfolio value ("NPV") at March 31, 2002, based on OTS
assumptions, that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that management might take to
counteract that change. NPV is defined as the present value of expected net
cash flows from existing assets minus the present value of expected net cash
flows from existing liabilities plus the present values of net expected cash
inflows from existing off-balance sheet contracts.

Basis Points ("bp") Estimated Change in
Change in Interest Rates Net Portfolio Value
------------------------ ------------------------------------------
2002 2001
------------------- -------------------
(Dollars In Thousands)

300 bp $(21,412) (45.1)% $(19,371) (32.0)%
200 (14,430) (29.6) (12,868) (21.0)
100 (7,156) (14.3) (5,567) (9.0)
0 -0- -0- -0- -0-
(100) 4,202 0.8 4,454 7.0
(200) N/A N/A 6,465 11.0
(300) N/A N/A 7,462 12.0

The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at March 31, 2002 would reduce the
Bank's NPV by approximately $14.4 million, or 29.6% at that date. This
compares to a reduction in the Bank's NPV by approximately $12.9 million, or
21.0% at March 31, 2001.

Certain assumptions utilized by the OTS in assessing the interest rate
risk of savings associations within its region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.

As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. In
the event of a change in interest rates, expected rates of prepayments on
loans and early withdrawals from certificates could deviate significantly from
those assumed in calculating the table. The model assumes a parallel change in
rates, whereas actual market interest rates would not necessarily react in a
parallel manner. Further, call provisions of certain securities, which
shorten the actual term to maturity if exercised, are not taken into account
in the model.

45

The following table presents the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair value at March 31, 2002. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives and
other financial instruments.

One Year After
Average Within to Three 3 Years to Beyond Fair
Rate One Year Years 5 Years 5 Years Total Value
---- -------- ----- ------- ------- ----- -----
(Dollars in thousands)

Interest Sensitive Assets:
Loans receivable............... 7.82% $18,006 $13,731 $32,667 $205,246 $269,648 $278,536
Mortgage-backed securities..... 6.38 13,381 19,193 18,212 23,314 74,100 74,100
Tax free municipal bonds....... 4.49 -- -- -- 7,197 7,197 7,197
Investments and other
interest-earning assets...... 4.94 -- -- -- 11,122 11,122 11,122
FHLB stock..................... 6.00 -- -- -- 6,315 6,315 6,315

Interest Sensitive Liabilities:
NOW checking................... 0.50 10,548 12,966 6,267 6,022 35,803 35,803
Passbook savings............... 1.41 5,512 6,558 3,214 3,087 18,371 18,371
Money market deposits.......... 1.75 47,155 12,988 520 22 60,685 60,685
Time certificates.............. 3.96 89,446 19,531 9,373 991 119,341 120,489

Off-balance Sheet Items:
Commitments to extend credit... 8.65 14,027 14,027 14,027

Liquidity and Capital Resources

The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on loans, maturing securities and FHLB
advances. While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows, mortgage prepayments and maturing
securities, cash flows and anticipated maturities of mortgage-backed bonds and
agency securities are greatly influenced by general interest rates, economic
conditions and competition.

The Bank must maintain an adequate level of liquidity to ensure
sufficient funds to fund loan originations and deposit withdrawals, to satisfy
other financial commitments and to take advantage of investment opportunities.
The Bank generally maintains sufficient cash and short-term investments to
meet short-term liquidity needs. At March 31, 2002 cash and cash equivalents
totaled $7.8 million or 2.0% of total assets. The Bank also maintained an
uncommitted credit facility with the FHLB which provided for immediately
available advances up to an aggregate amount of $119.5 million, under which
$87.1 million in advances were outstanding at March 31, 2002. In addition to
the FHLB credit facility, at March 31, 2002 the Bank had a $50.0 million
reverse repurchase line of credit available with Merrill Lynch and a $15.0
million overnight line of credit with Key Bank.

The Bank's primary investing activity is the origination of one-to-four
family mortgage loans within its primary market area. During the years ended
March 31, 2002, 2001 and 2000 the Bank originated $26.4 million, $22.3
million, and $30.1 million of such loans, respectively. At March 31, 2002,
the Bank had commitments to extend credit totaling $44.2 million. The Bank
anticipates that it will have sufficient funds available to meet current loan
commitments. Certificates of deposit that are scheduled to mature in less than
one year from March 31, 2002 totaled $89.4 million. Historically, the Bank
has been able to retain a significant amount of its deposits as they mature.

OTS regulations require the Bank to maintain specific amounts of
regulatory capital. As of March 31, 2002, the Bank complied with all
regulatory capital requirements as of that date with tangible, core and total
capital ratios of

46

10.2%, 10.2% and 16.3%, respectively. See "REGULATION -- Federal Regulation
of Savings Associations -- Capital Requirements" and Note 15 of Notes to
Consolidated Financial Statements contained in Item 8 herein.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time due to inflation.
The primary impact of inflation is reflected in the increased cost of the
Bank's operations. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------

The information contained in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Market Risk and Asset and
Liability Management" contained in Item 7 of this Form 10-K is incorporated
herein by reference.

Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------

Index to Consolidated Financial Statements

Page
----

Independent Auditors' Report.......................................... 48
Consolidated Balance Sheets as of March 31, 2002 and 2001............. 49
Consolidated Statements of Income For the Years Ended
March 31, 2002, 2001 and 2000....................................... 51
Consolidated Statements of Shareholders' Equity For the
Years Ended March 31, 2002, 2001 and 2000........................... 53
Consolidated Statements of Cash Flows For the Years Ended
March 31, 2002, 2001 and 2000....................................... 55
Notes to Consolidated Financial Statements............................ 57

47

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Oregon Trail Financial Corp.
Baker City, Oregon

We have audited the accompanying consolidated balance sheets of Oregon Trail
Financial Corp. and Subsidiary (the "Company) as of March 31, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended March 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Oregon Trail Financial Corp. and
Subsidiary as of March 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2002, in conformity with accounting principles generally accepted in the
United States of America.

/s/Deloitte & Touche LLP

Portland, Oregon
May 31, 2002

48

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
(In thousands)
- ------------------------------------------------------------------------------

ASSETS 2002 2001

Cash and due from banks $ 1,725 $ 1,955
Interest-bearing deposits 6,070 8,626
-------- --------
Total cash and cash equivalents 7,795 10,581

Securities:
Investment securities available for sale, at fair
value (amortized cost of $18,433 and $26,915) 18,319 26,914
Mortgage-backed and related securities available
for sale, at fair value (amortized cost of
$73,371 and $68,682) 74,100 70,010
Loans receivable, net of allowance for loan losses
of $2,280 and $2,098 265,863 250,897
Accrued interest receivable 2,308 2,372
Premises and equipment, net 9,466 10,136
Stock in FHLB, at cost 6,315 4,651
Real estate owned and other repossessed assets 58 63
Other assets 14,142 13,257
-------- --------
TOTAL ASSETS $398,366 $388,881
======== ========

(Continued)

49

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
(In thousands, except share data)
- ------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001

LIABILITIES:
Deposits:
Interest-bearing $114,859 $106,206
Noninterest-bearing 21,878 19,678
Time certificates 119,341 127,893
-------- --------

Total deposits 256,078 253,777

Accrued expenses and other liabilities 2,052 3,684
Advances from FHLB 87,100 73,125
Net deferred tax liability 276 467
Advances from borrowers for taxes and insurance 37 22
-------- --------
Total liabilities 345,543 331,075
-------- --------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value; 8,000,000 shares
authorized; March 31, 2002, 4,694,875 issued,
2,854,548 outstanding; March 31, 2001, 4,694,875
issued, 3,325,757 outstanding 31 36
Additional paid-in capital 22,965 30,972
Retained earnings (substantially restricted) 32,042 28,374
Unearned shares issued to the ESOP (1,341) (1,878)
Unearned shares issued to the MRDP (1,253) (515)
Accumulated other comprehensive income 379 817
-------- --------
Total shareholders' equity 52,823 57,806
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $398,366 $388,881
======== ========

See notes to consolidated financial statements. (Concluded)

50

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(In thousands)
- ------------------------------------------------------------------------------

2002 2001 2000

INTEREST INCOME:
Interest and fees on loans receivable $ 22,710 $ 20,155 $ 16,709
Securities:
Mortgage-backed and related securities 3,456 5,496 5,208
U.S. government and government agencies
and other 1,298 2,342 2,392
FHLB dividends 397 286 239
-------- -------- --------
Total interest income 27,861 28,279 24,548
-------- -------- --------

INTEREST EXPENSE:
Deposits 8,206 10,575 8,526
Securities sold under agreements to repurchase - - 4
FHLB advances 4,533 4,817 3,246
-------- -------- --------
Total interest expense 12,739 15,392 11,776
-------- -------- --------

Net interest income 15,122 12,887 12,772

PROVISION FOR LOAN LOSSES 481 794 178
-------- -------- --------

Net interest income after provision for
loan losses 14,641 12,093 12,594
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 1,793 1,728 1,088
Loan servicing fees 437 391 284
Gain on sale of loans 193 - -
Realized gain on sale of securities 314 - -
Income from Bank Owned Life Insurance 685 58 -
Other income 57 (22) 230
-------- -------- --------
Total noninterest income 3,479 2,155 1,602
-------- -------- --------

(Continued)

51

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(In thousands, except share data)
- ------------------------------------------------------------------------------

2002 2001 2000

NONINTEREST EXPENSES:
Employee compensation and benefits $ 6,227 $ 6,601 $ 6,022
Supplies, postage, and telephone 895 860 850
Depreciation 852 895 686
Occupancy and equipment 730 705 618
Customer accounts 515 550 426
Advertising 322 314 449
Professional fees 1,424 429 267
FDIC insurance premium 48 49 103
Realized loss on sale of securities - 957 -
Other 270 544 694
-------- -------- --------

Total noninterest expenses 11,283 11,904 10,115
-------- -------- --------

Income before income taxes 6,837 2,344 4,081

PROVISION FOR INCOME TAXES 1,922 650 1,472
-------- -------- --------
NET INCOME $ 4,915 $ 1,694 $ 2,609
======== ======== ========

Basic earnings per share $ 1.58 $ 0.51 $ 0.74

Diluted earnings per share $ 1.52 $ 0.50 $ 0.70

Weighted average common shares outstanding:
Basic 3,104,121 3,331,002 3,546,873
Diluted 3,229,081 3,367,210 3,723,600

See notes to consolidated financial statements. (Concluded)

52

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(In thousands, except share data)

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

Unearned Unearned
Shares Shares Accumulated
Issued to Issued to Other
Employee Management Compre- Compre-
Common Stock Additional Stock Recognition hensive hensive
-------------- Paid-in Retained Ownership and Develop- Income Income
Shares Amount Capital Earnings Trust ment Plan (Loss) (Loss) Total

BALANCE, APRIL
1, 1999 3,763,564 $ 42 $ 38,357 $ 26,206 $ (2,951) $ (1,453) $ (118) $60,083
Net income - - - 2,609 - - $2,609 - 2,609
Cash dividends
paid - - - (1,056) - - - - (1,056)
Stock repurchased
and retired (534,228) (6) (6,350) - - - - - (6,356)
Earned ESOP
shares 53,656 - 76 - 536 - - - 612
New MRDP shares
granted - - 71 - - (71) -
Earned MRDP
shares 34,014 - - - - 373 - - 373
Forteiture of
MRDP shares - - (411) - - 411 -
Net unrealized
loss on
securities
available for
sale (net of
$1,970 of tax
benefit) - - - - - - (3,161) (3,161) (3,161)
-------
Comprehensive
loss - - - - - - $ (552) - -
--------- ----- -------- -------- ------- ------- ======= ------- -------

BALANCE, MARCH
31, 2000 3,317,006 36 31,743 27,759 (2,415) (740) (3,279) 53,104
Net income - - - 1,694 - - $ 1,694 - 1,694
Cash dividends
paid - - - (1,079) - - - - (1,079)
Stock repurchased
and retired (76,308) (1) (945) - - - - - (946)
Earned ESOP
shares 53,656 - 70 - 537 - - - 607
New MRDP shares
granted - - 42 - - (42) - - -
Earned MRDP
shares 25,811 - - - - 267 - - 267
Exercise of
stock options 5,592 1 62 - - - - - 63
Net unrealized
gain on
securities
available for
sale of $5,584
(net of tax
expense of
$3,319) less
reclassifi-
cation adjust-
ment for net
losses included
in net income
of $1,488 (net
of tax benefit
of $766) - - - - - - 4,096 4,096 4,096
-------
Comprehensive
income
loss - - - - - - $ 5,790 - -
--------- ----- -------- -------- ------- ------- ======= ------- -------

BALANCE, MARCH
31, 2001 3,325,757 36 30,972 28,374 (1,878) (515) 817 57,806

(Continued)

53

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(In thousands, except share data)

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

Unearned Unearned
Shares Shares Accumulated
Issued to Issued to Other
Employee Management Compre- Compre-
Common Stock Additional Stock Recognition hensive hensive
-------------- Paid-in Retained Ownership and Develop- Income Income
Shares Amount Capital Earnings Trust ment Plan (Loss) (Loss) Total

BALANCE, MARCH
31, 2001 3,325,757 $ 36 $ 30,972 $ 28,374 $ (1,878) $ (515) - $ 817 $ 57,806
Net income - - - 4,915 - - $ 4,915 - 4,915
Cash dividends
paid - - - (1,247) - - - - (1,315)
Stock repurchased
and retired (574,587) (6) (9,672) - - - - - (9,678)
Earned ESOP
shares 53,656 - 339 - 537 - - - 944
New MRDP shares
granted 29,380 - - - - 318 - - 318
Earned MRDP
shares - - 1,056 - - (1,056) - -
Exercise of
stock options 20,342 1 270 - - - - - 271
Net unrealized
loss on
securities
available for
sale of $236
(net of tax
benefit of
$148)less
reclassifi-
cation adjust-
ment for net
gains included
in net income
of $202 (net
of tax expense
of $126) - - - - - - (438) (438) (438)

Comprehensive
income - - - - - $ 4,477 - -
--------- ----- -------- -------- ------- ------- ======= ------- -------
BALANCE, MARCH
31, 2002 2,854,548 31 22,965 32,042 (1,341) (1,253) 379 52,823
========= ===== ======== ======== ======= ======= ======= =======

See notes to consolidated financial statements. (Concluded)

54

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(In thousands)
- ------------------------------------------------------------------------------

2002 2001 2000

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,915 $ 1,694 $ 2,609
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 852 895 686
Compensation expense related to ESOP 876 607 612
Compensation expense related to MRDP 318 267 373
Amortization of deferred loan fees (215) (71) (107)
Provision for loan losses 481 794 178
Deferred income taxes (97) (267) (264)
Amortization and accretion of premiums and
discounts on investments and loans
purchased 355 361 191
FHLB dividends (397) (286) (239)
Gain on sale of real estate owned - - (22)
(Gain) loss on sale of premises and
equipment (1) 5 (158)
Change in assets and liabilities:
Accrued interest receivable 64 80 (440)
Other assets (885) (12,678) (6)
Accrued expenses and other liabilities (1,632) 1,351 (66)
--------- --------- ---------
Net cash provided by (used in)
operating activities 4,634 (7,248) 3,347
--------- --------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (122,107) (103,783) (101,399)
Loan principal repayments 149,298 92,291 80,661
Loans purchased (55,992) (19,774) (14,533)
Loans sold 13,086 - -
Proceeds from maturity of securities
available for sale - - 5,027
Principal repayments of securities
available for sale 19,672 10,808 13,362
Purchase of securities available for sale (44,368) (17,000) (37,989)
Proceeds from sale of securities
available for sale 28,746 37,841 -
Purchases of stock in FHLB (1,267) (468) (437)
Purchase of premises and equipment (293) (1,137) (2,990)
Proceeds from sale of premises and equipment 111 3 385
Proceeds from sale of real estate owned 52 - 324
--------- --------- ---------

Net cash used in investing activities (13,062) (1,219) (57,589)
--------- --------- ---------

(Continued)

55

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
(In thousands)
- ------------------------------------------------------------------------------

2002 2001 2000

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net of withdrawals $ 2,301 $ 16,042 $ 38,146
Change in advances from borrowers for
taxes and insurance 15 (668) (7)
Change in borrowings from FHLB 13,975 (3,625) 26,500
Payment of cash dividends (1,247) (1,079) (1,056)
Stock options exercised 270 63 -
Stock repurchased and retired (9,672) (946) (6,356)
--------- --------- ---------
Net cash provided by financing
activities 5,642 9,787 57,227
--------- --------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,786) 1,320 2,985

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,581 9,261 6,276
--------- --------- ---------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,795 $ 10,581 $ 9,261
========= ========= =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest on deposits and other borrowings $ 12,564 $ 14,691 $ 11,229
Income taxes 2,745 435 1,385
Noncash investing activities:
Transfer of loans to foreclosed real estate - 41 264
Unrealized gain (loss) on securities
available for sale, net of tax (438) 4,096 (3,161)

See notes to consolidated financial statements. (Concluded)

56

OREGON TRAIL FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2001, AND 2000
- ------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements include
the accounts of Oregon Trail Financial Corp. and its wholly-owned subsidiary,
Pioneer Bank, a Federal Savings Bank (the "Bank"), collectively (the
"Company"). Oregon Trail Financial Corp. became the holding company of the
Bank upon conversion of the Bank from a federally-chartered mutual savings and
loan association to a federally-chartered capital stock savings and loan
association on October 3, 1997. All intercompany accounts and transactions
have been eliminated in consolidation.

Nature of Operations - The Company is engaged in the business of accepting
savings and demand deposits and providing mortgage, consumer, and commercial
loans, and to a lesser extent, agricultural loans to its customers in eastern
Oregon.

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

Cash and Cash Equivalents - The Company considers all cash on hand and due
from banks, all interest-bearing deposits held at domestic banks, and
investment securities with a maturity of three months or less at date of
acquisition to be cash equivalents.

Securities - The Company accounts for securities in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Securities
are classified as held to maturity where the Company has the ability and
positive intent to hold them to maturity. Securities held to maturity are
carried at cost, adjusted for amortization of premiums and accretion of
iscounts to maturity. Securities bought and held principally for the purpose
of sale in the near term are classified as trading securities and are carried
at fair value. There were no trading securities or held to maturity securities
at March 31, 2002 and 2001. Securities not classified as trading, or as held
to maturity, are classified as available for sale. Unrealized holding gains
and losses on securities available for sale are excluded from earnings and
are reported net of tax as a separate component of equity until realized.
Unrealized losses on securities resulting from an other than temporary decline
in fair value are recognized in earnings when incurred. Realized and
unrealized gains and losses are determined using the specific identification
method.

Federal Home Loan Bank Stock - The Company's investment in Federal Home Loan
Bank of Seattle ("FHLB") stock is carried at cost, which approximates its fair
value. As a member of the FHLB system, the Company is required to maintain a
minimum level of investment in FHLB stock based on specified percentages of
its outstanding mortgages, total assets or

57

FHLB advances. The Company's minimum investment requirement was approximately
$4,355,000, and $3,656,000 at March 31, 2002 and 2001 respectively. The
Company may request redemption at par value of any stock in excess of the
amount the Company is required to hold. Stock redemptions are granted at the
discretion of the FHLB.

Loans Receivable - Loans are stated at unpaid principal less net deferred loan
origination fees. Interest income on loans is recognized based on the
principal and the stated interest rates and includes the amortization of net
deferred loan origination fees based on the level yield method over the
contractual life of the loans adjusted on a prospective basis for prepayments
and delinquencies. Net deferred loan origination fees on loans held for sale
are recognized in earnings when sold. Recognition of interest income is
discontinued and accrued interest is reversed when a loan is placed on
nonaccrual status. A loan is generally placed on nonaccrual status when the
loan becomes contractually past due more than 90 days. Delinquent interest on
loans past due 90 days or more is charged off or an allowance is established
by a charge to income equal to all interest previously accrued. Interest
payments received on nonaccrual loans are applied to principal if collection
of principal is doubtful. Loans are removed from nonaccrual status only when
the loan is deemed current and collectibility of principal and interest is no
longer doubtful.

Loans Held for Sale - To mitigate interest rate sensitivity, from time to time
certain fixed rate loans are identified as held for sale in the secondary
market. Accordingly, such loans are classified as held for sale in the
consolidated balance sheets and are carried at the lower of aggregate cost or
net realizable value. At March 31, 2002 and 2001, there were no loans held for
sale.

Allowance for Loan Losses - Allowances for losses on specific problem 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 a
general allowance for loan losses based on evaluating known and inherent risks
in the loan portfolio, including management's continuing analysis of the
actors 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 Company accounts for impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures. These statements address the disclosure requirements and
allocations of the allowance for loan losses for certain impaired loans. A
loan within the scope of these statements is considered impaired when, based
on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement, including scheduled interest payments. Smaller balance
homogeneous loans, including single family residential and consumer loans, are
excluded from the scope of this statement.

When a loan has been identified as being impaired, the amount of the
impairment is measured by using discounted cash flows, except when it is
determined that the sole source of repayment for the loan is the operation or
liquidation of the underlying collateral. In such case, impairment is measured
at current fair value of the collateral, reduced by estimated

58

selling costs. When the measurement of the impaired loan is less than the
recorded investment in the loan (including accrued interest, net deferred loan
fees or costs, and premium or discount), loan impairment is recognized by
establishing or adjusting an allocation of the allowance for loan losses. The
Company generally considers these loans on a nonaccrual status to be impaired.
SFAS No. 114, as amended, does not change the timing of charge-offs of loans
to reflect the amount ultimately expected to be collected.

Real Estate Owned - Real estate acquired through foreclosure is stated at the
lower of cost (principal balance of the former mortgage loan plus costs of
obtaining title and possession) or estimated fair value at the time of
foreclosure less estimated selling costs. Costs of development and improvement
of property are capitalized, and holding costs and market adjustments are
charged to expense as incurred.

Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is recognized on the straight-line
method over the estimated useful lives of the assets as follows:

Software 3 years
Furniture and Equipment 5 to 7 years
Buildings and Improvements 15 to 39 years

Major renewals and betterments are capitalized and repairs are expensed. Gains
or losses from disposals of premises and equipment are reflected in other
noninterest expenses.

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 temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.

Employee Stock Ownership Plan - The Company sponsors an Employee Stock
Ownership Plan ("ESOP"). The ESOP is accounted for in accordance with the
American Institute of Certified Public Accountants Statement of Position 93-6,
Employer's Accounting for Employee Stock Ownership Plans. Accordingly, the
shares held by the ESOP are reported as unearned shares issued to the employee
stock ownership plan in the balance sheet. As shares are committed to be
released, compensation expense is recorded equal to the then current market
price of the shares, and the shares become outstanding for earnings per share
calculations. The Company is allocating the shares ratably over a seven-year
period beginning with the first allocation on December 31, 1997.

Management Recognition and Development Plan - The Company sponsors a
Management Recognition and Development Plan ("MRDP"). The MRDP is accounted
for in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
The plan authorizes the grant of common stock shares to certain officers and
directors, which vest over a two to six year period in equal installments. The
Company recognizes compensation expense based on the fair value of the common
stock at the grant date. Granted MRDP shares that have not yet vested are
considered to be contingently issuable shares and are only included in diluted

59

earnings per share. When the MRDP shares vest, they are included in basic
earnings per share.

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.

SFAS No. 123 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 the pro forma effect on net income and earnings per share as if the fair
value method had been used.

Recently Issued/Adopted Accounting Pronouncements - In July 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations". The statement
discontinues the use of the pooling of interest method of accounting for
business combinations. The statement is effective for all business
combinations initiated after June 30, 2001. Management has completed an
evaluation of the effects of this statement and does not believe that it will
have a material effect on the Company's consolidated financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". The statement will require discontinuing the amortization of goodwill
and other intangible assets with indefinite useful lives. Instead, these
assets will be tested periodically for impairment and written down to their
fair market value as necessary. This statement is effective for fiscal years
beginning after December 15, 2001, however, early adoption is allowed for
companies that have not issued first quarter financial statements as of July
1, 2001. The Company plans to adopt the provisions of this statement on April
1, 2002, and is currently evaluating the effect on the Company's consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". The statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". Management
does not believe that the adoption of this statement will have a material
effect on the Company's consolidated financial statements. The Company plans
to adopt the provisions of these statements on April 1, 2002.

2. SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair
value of securities classified as available for sale at March 31, 2002 and
2001 are summarized as follows (in thousands):

60

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

March 31, 2002
Available for sale:
U.S. government and
government agency
obligations $ 11,042 $ 353 $ (423) $ 10,972
Trust preferred
securities 6,881 87 (131) 6,837
Other Securities 510 - - 510
Mortgage-backed and
related securities 58,499 1,052 (248) 59,303
Collateralized mortgage
obligations 14,872 4 (79) 14,797
-------- ------- ------- --------
Total available for
sale $ 91,804 $ 1,066 $ (451) $ 92,419
======== ======= ======= ========

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

March 31, 2001
Available for sale:
U.S. government and
government agency
obligations $ 20,032 $ 137 $ (115) $ 20,054
Trust preferred
securities 6,883 40 (63) 6,860
Mortgage-backed and
related securities 59,237 1,350 (31) 60,556
Collateralized mortgage
obligations 9,445 9 - 9,454
-------- ------- ------- --------
Total available for
sale $ 95,597 $ 1,536 $ (209) $ 96,924
======== ======= ======= ========

The carrying value and fair value of available for sale debt securities at
March 31, 2002 with contractual maturity dates are as follows (in thousands):

Amortized Cost Fair Value

Due in five years or less $ 4,029 $ 4,013
Due after five years through ten years 6,322 6,300
Due after ten years 81,453 82,106
-------- --------
Total $ 91,804 $ 92,419
======== ========

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

Investments and mortgage-backed and related securities totaling $41,357,000
and $46,564,000 were pledged against public funds and other deposits at March
31, 2002 and 2001, respectively.

61

3. LOANS RECEIVABLE

Loans receivable are summarized as follows (in thousands):

March 31,
---------------------
2002 2001
Mortgage loans:
One-to-four family $ 122,950 $ 137,354
Multi-family 10,799 2,459
Commercial 36,397 18,235
Agricultural 3,505 3,548
Construction 1,255 1,399
Land 34 124
--------- ---------
Total mortgage loans 174,940 163,119
--------- ---------
Consumer loans:
Unsecured $ 6,066 $ 4,909
Home equity and second mortgage 14,039 15,890
Auto loans 28,147 26,501
Credit card 1,174 1,093
Loans secured by savings deposits 502 528
Other secured 4,443 3,992
--------- ---------
Total consumer loans 54,371 52,913
--------- ---------
Commercial loans:
Business 24,152 22,396
Agricultural 16,185 16,054
--------- ---------
Total commercial loans 40,337 38,450
--------- ---------
Total loans 269,648 254,482

Less:
Net deferred loan fees 1,505 1,487
Allowance for loan losses 2,280 2,098
--------- ---------
Total loans receivable, net $ 265,863 $ 250,897
========= =========

The weighted average interest rate on loans at March 31, 2002 and 2001 was
7.77% and 8.26%, respectively.

Allowance for loan loss activity is summarized as follows for the years ended
March 31, 2002, 2001, and 2000 (in thousands):

62

2002 2001 2000

Balance, beginning of year $ 2,098 $ 1,396 $ 1,228
Provision for loan losses 481 794 178
Charge-offs (341) (111) (42)
Recoveries 42 19 32
-------- -------- --------
$ 2,280 $ 2,098 $ 1,396
======== ======== ========

At March 31, 2002 and 2001, the Company's recorded investment in loans for
which an impairment has been recognized under the guidance of SFAS No. 114 and
SFAS No. 118 was $336,000 and $55,000, respectively. The allowance for loan
losses in excess of specific reserves is available to absorb losses from all
loans, although allocations have been made for certain loan categories as part
of management's analysis of the allowance. The average investment in impaired
loans was approximately $381,000, $111,000 and $237,000 during the years ended
March 31, 2002, 2001, and 2000, respectively.

4. TRANSACTIONS WITH AFFILIATES

Loans - Certain directors and executive officers of the Company are customers
of, and have had transactions with, the Bank in the ordinary course of
business. An analysis of activity with respect to loans receivable from
directors and executive officers of the Company for the years ended March 31,
2002, 2001, and 2000 is summarized as follows (in thousands):

2002 2001 2000

Beginning balance $ 1,245 $ 1,216 $ 1,362
Additions 734 238 132
Reductions (380) (209) (278)
-------- -------- --------
Ending balance $ 1,599 $ 1,245 $ 1,216
======== ======== ========

At March 31, 2002, all loans to directors and executive officers of the
Company were current.

5. ACCRUED INTEREST RECEIVABLE

Accrued interest receivable is summarized as follows (in thousands):

March 31,
-------------------
2002 2001

Loans receivable $ 1,698 $ 1,615
Mortgage-backed and related securities 394 410
U.S. government and government agencies 216 347
-------- --------
$ 2,308 $ 2,372
======== ========

63

6. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows (in thousands):

March 31,
-------------------
2002 2001

Land $ 1,226 $ 1,226
Buildings and improvements 8,751 8,733
Furniture, fixtures and equipment 4,137 3,999
Construction in process 3 36
-------- --------

14,117 13,994
Less accumulated depreciation 4,651 3,858
-------- --------

$ 9,466 $ 10,136
======== ========

7. DEPOSITS

Savings deposits at March 31 are summarized as follows (dollars in thousands):

2002 2001
------------------- -------------------
Weighted Weighted
Average Average
Interest Interest
Rate Balance Rate Balance

Non-interest bearing - % $ 21,878 - % $ 19,678
NOW checking 0.50 35,803 1.25 35,972
Passbook savings accounts 1.41 18,371 2.33 16,251
Money market deposit 1.75 60,685 3.70 53,983
Time certificates 3.96 119,341 6.12 127,893
---- -------- ---- --------
2.43 % $256,078 4.20 % $253,777
==== ======== ==== ========

At March 31, 2002, time certificate maturities are as follows (dollars in
thousands):

Within one year $ 89,446
One year to two years 11,013
Two years to three years 8,518
Three years to four years 2,861
Four years to five years 6,512
Thereafter 991
---------
$ 119,341
=========

The aggregate amount of time certificates with a minimum denomination of
$100,000 was $32.9 million and $32.0 million at March 31, 2002 and 2001,
respectively. Deposit accounts

64

in excess of $100,000 are not insured by the Federal Deposit Insurance
Corporation ("FDIC").

Interest expense on deposits is summarized as follows for the years ended
March 31, 2002, 2001, and 2000 (dollars in thousands):

2002 2001 2000

NOW checking $ 314 $ 462 $ 480
Passbook savings accounts 311 398 472
Money market deposit 1,504 2,213 1,922
Time certificates 6,077 7,502 5,652
------- ------- -------
$ 8,206 $10,575 $ 8,526
======= ======= =======

8. BORROWINGS

The Bank has entered into borrowing arrangements with the FHLB to borrow funds
under a short-term cash management advance program and long-term loan
agreements. All borrowings are secured by stock of, and cash deposits in, the
FHLB. Additionally, mortgage loans receivable and securities issued, insured,
or guaranteed by the U.S. Government or agencies thereof are pledged as
security for the loans.

At March 31, 2002, FHLB advances were scheduled to mature as follows (dollars
in thousands):

Adjustable Rate Fixed Rate Total
Advances Advances Advances
-------------- -------------- --------------
Rate* Amount Rate* Amount Rate* Amount

Due in less than one year 1.95% $13,600 3.53% $34,000 3.08% $47,600
One to two years N/A - 6.37 17,500 6.37 17,500
Three to four years N/A - 7.01 7,000 7.01 7,000
Greater than four years N/A - 7.08 15,000 7.08 15,000
---- ------- ---- ------- ---- -------
1.95% $13,600 5.26% $73,500 4.75% $87,100
==== ======= ==== ======= ==== =======

* Weighted average interest rate

The maximum and average outstanding balances and average interest rates on
advances from the FHLB were as follows for the years ended March 31, 2002,
2001, and 2000 (dollars in thousands):

65

2002 2001 2000

Maximum outstanding at any month end $109,600 $ 87,300 $ 76,750
Daily average outstanding 84,989 75,871 60,418
Weighted average interest rates:
Annual 5.33% 6.34% 5.37%
End of year 4.75% 6.10% 5.91%
Interest expense during the year $ 4,533 $ 4,817 $ 3,246

During the year ended March 31, 2000, the Bank opened a $15.0 million
overnight line of credit with Key Bank and a $50.0 million reverse repurchase
agreement with Merrill Lynch. At March 31, 2002, there were no outstanding
balances in either account.

9. INCOME TAXES

A reconciliation between federal income taxes computed at the statutory rate
and the effective tax rate for the years ended March 31 is as follows:

2002 2001 2000
---- ---- ----

Federal income taxes at statutory rate 34.0% 34.0% 34.0%
State income taxes at statutory rate, net
of related federal tax effect 3.5 4.4 4.4
Officers life insurance (3.4) - -
Tax exempt interest (1.4) (6.8) (3.8)
Tax credit for qualified loans (1.1) (5.3) -
Other, net (3.5) 1.6 1.5
---- ---- ----
28.1% 27.9% 36.1%
==== ==== ====

Provision (benefit) for income taxes for the years ended March 31, 2002, 2001,
and 2000 is summarized as follows (in thousands):

2002 2001 2000
Current:
Federal $ 1,473 $ 711 $ 1,436
State 352 206 300
------- ------ -------
Total current 1,825 917 1,736
------- ------ -------
Deferred:
Federal 83 (221) (219)
State 14 (46) (45)
------- ------ -------
Total deferred 97 (267) (264)
------- ------ -------
Total provision for income taxes $ 1,922 $ 650 $ 1,472
======= ====== =======

The components of net deferred tax assets and liabilities at March 31, 2002
and 2001 are summarized as follows (in thousands):

66

Deferred loan fees $ 323 $ 384
Allowance for loan losses 792 807
Vacation accrual 137 122
Other 122 142
------- -------
Total deferred tax assets 1,374 1,455
------- -------
Deferred tax liabilities:
Unrealized gains on securities available for sale (250) (538)
FHLB stock dividends (1,322) (1,161)
Accumulated depreciation (76) (120)
Tax bad debt reserve in excess of base-year reserve - (103)
Other (2) -
------- -------
Total deferred tax liabilities (1,650) (1,922)
------- -------
Net deferred tax liability $ (276) $ (467)
======= =======

For the fiscal year ended June 30, 1996 and years prior, the Company
determined bad debt expense deducted from taxable income based on 8% of
taxable income before such deduction or based on the experience method as
provided by the Internal Revenue Code ("IRC"). In August 1996, the provision
in the IRC allowing the 8% of taxable income deduction was repealed.
Accordingly, the Company is required to use the experience method to record
bad debt expense, and must also recapture the excess reserve accumulated from
use of the 8% method ratably over a six-taxable-year period for all years
subsequent to 1987. The income tax provision from 1987 to 1996 included an
amount for the tax effect of such reserves. At March 31, 2002, all remaining
bad debt has been recaptured.

As a result of the bad debt deductions taken in years prior to 1988, retained
earnings include accumulated earnings of approximately $2,500,000, on which
federal income taxes have not been provided. If, in the future, this portion
of retained earnings is used for any purpose other than to absorb losses on
loans or on property acquired through foreclosure, federal income taxes may be
imposed at the then prevailing corporate tax rates. The Company does not
contemplate that such amounts will be used for any purpose which would create
a federal income tax liability; therefore, no provision has been made.

10. SHAREHOLDERS' EQUITY

Oregon Trail Financial Corp. ("OTFC") was incorporated under Oregon law in
June 1997 to acquire and hold all of the outstanding capital stock of the
Bank, as part of the Bank's conversion from a federally chartered mutual
savings and loan association. In connection with the conversion, which was
consummated on October 3, 1997, OTFC issued and sold 4,694,875 shares of
common stock including the shares allocated to the ESOP (par value of $.01 per
share) at a price of $10.00 per share for net total proceeds of $45,729,000
after conversion expenses of $1,220,000.

At the time of conversion, the Company established a liquidation account in an
amount equal to its retained earnings as of March 31, 1997, the date of the
latest balance sheet 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

67

Bank after conversion. In the event of a complete liquidation of the Bank (and
only in such 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
Bank 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 participates in stock repurchase programs in which it actively
repurchases shares of its common stock. The repurchase programs result in a
reduction of shares outstanding and reduce equity. A portion of the shares
repurchased were used to fund the MRDP and the ESOP. These plans were
approved by shareholders in August 1998 and were implemented in October 1998.

Repurchases of the Company's stock which were approved by the Board of
Directors and completed by management are summarized as follows:

Number of Average
Month Completed Shares Price

August 1998 422,539 $ 15.51
February 1999 213,666 13.14
July 1999 210,299 13.03
October 1999 6,144 11.31
November 1999 199,785 12.03
October 2000 3,508 11.69
December 2000 179,000 10.71
September 2001 332,900 15.77
October 2001 3,233 15.74
November 2001 151,754 17.52
December 2001 98,500 18.24

Since converting to a stock company, 1,821,328 shares, or 38.8% of shares
initially outstanding, have been repurchased.

11. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")

As part of the conversion discussed in Note 10, an ESOP was established for
all employees. The ESOP borrowed $3,756,000 from the Company and used the
funds to purchase 375,590 shares of the common stock of the Company issued in
the conversion. The loan will be repaid by the ESOP Trust over a seven-year
period. The loan had an outstanding balance of $1,600,000 and $2,151,000 at
March 31, 2002 and 2001, respectively, at an interest rate of 8.5%. The shares
included in the ESOP are held in a suspense account and released to
participants quarterly over a seven-year period. Compensation expense is
recognized to the extent of the fair value of shares committed to be released.
The Company recorded compensation expense related to the ESOP of $876,000,
$607,000, and $612,000 during the years ended March 31, 2002, 2001, and 2000,
respectively.

ESOP share activity is summarized as follows:

68

Committed to
Unreleased be Released
ESOP Shares Shares

Balance, March 31, 1999 295,106 80,484
2000 release (53,656) 53,656
-------- --------
Balance, March 31, 2000 241,450 134,140
2001 release (53,656) 53,656
-------- --------

Balance, March 31, 2001 187,794 187,796
2002 release (53,656) 53,656
-------- --------

Balance, March 31, 2002 134,138 241,452
======== ========

12. MANAGEMENT RECOGNITION AND DEVELOPMENT PLAN ("MRDP")

In May 1998, the Board of Directors approved an MRDP for the benefit of
officers and non-employee directors which authorizes the grant of 187,795
common stock shares. Shareholders approved the plan in July 1998. 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
ratably over a two- to five-year period beginning on the first anniversary of
the effective date of the MRDP, or upon the participant's death or disability.
The Company recognizes compensation expense based on the fair value of the
common stock on the grant date in accordance with the vesting schedule during
the years in which the shares are payable. Compensation expense for the years
ended March 31, 2002, 2001, and 2000 was $318,000, $267,000, and $373,000
respectively. MRDP grants are as follows:

Number of Grant
Year Awarded Shares Price

1999 147,322 $ 11.15
2000 6,350 11.18
2001 7,130 11.72
2002 5,500 15.55
2002 58,362 16.63

In fiscal 2000, 36,871 shares were forfeited at a share price of $11.15. At
March 31, 2002, outstanding MRDP shares totaled 98,585.

13. EARNINGS PER SHARE ("EPS")

EPS is computed in accordance with SFAS No. 128, Earnings Per Share. Basic EPS
is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period,
without considering any dilutive items. Diluted EPS is computed using the
treasury stock method, giving effect to potential additional common shares
that were outstanding during the period. Potential dilutive common shares
include shares awarded but not released under the Company's MRDP Plan

69

and stock options granted under the stock option plan. Shares held by the
Company's ESOP that are committed for release are included in the basic and
diluted EPS calculations. The following is a summary of the effect of dilutive
securities in weighted average number of shares (denominator) for the basic
and diluted EPS calculations for the years ended March 31, 2002, 2001, and
2000. There are no resulting adjustments to net earnings:

2002 2001 2000
Weighted average common shares out-
standing - basic 3,104,121 3,331,002 3,546,873
Effect of dilutive securities on
number of shares:
MRDP shares 23,621 25,723 127,596
Stock options 101,339 10,485 49,131
--------- --------- ---------
Total dilutive securities 124,960 36,208 176,727
Weighted average common shares out-
standing - assuming dilution 3,229,081 3,367,210 3,723,600

14. STOCK OPTION PLAN

In May 1998, the Board of Directors approved a stock option plan for officers,
directors, and employees, which authorizes the granting of stock options.
Shareholders approved the plan in July 1998. The maximum number of shares
which may be issued under this plan is 469,488 with a maximum term of ten
years for each option from the date of grant. All awards vest in equal
installments over a three- to five-year period, with the exception of 102,368
shares granted in fiscal 2002 which vested immediately upon grant. Unvested
options become immediately exercisable in the event of death or disability.

70

Stock option activity is summarized as follows:

Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual Exercisable
Shares Price Life Options

Outstanding, March 31, 1999 356,500 $ 11.15 9.5 years

Granted 5,047 11.18
Canceled (73,805) 11.15
-------- -------

Outstanding, March 31, 2000 287,742 11.15 8.5 years 80,119

Granted 66,251 9.70
Canceled (26,287) 11.15
Exercised (5,592) 11.15
-------- -------

Outstanding, March 31, 2001 322,114 10.85 7.9 years 120,823

Granted 120,626 16.46
Canceled (309) 11.15
Exercised (20,342) 11.18
-------- -------

Outstanding, March 31, 2002 422,089 $ 12.44 7.7 years 280,277
======== =======

As of March 31, 2002, outstanding stock options consists of the following:

Weighted Weighted Weighted
Average Average Average
Options Exercise Remaining Exercisable Exercise
Exercise Price Range Outstanding Price Life Options Price

$ 9.13 - $ 11.72 301,463 $ 10.83 6.91 years 177,909 $ 11.04
$ 15.55 - $ 16.63 120,626 16.46 9.55 years 102,368 16.63
------- ------- ---------- ------- -------
Total 422,089 $ 12.44 7.66 years 280,277 $ 13.08

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

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 year 2000. 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

71

significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.

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

2002 2001 2000
---- ---- ----
Risk-free interest rate 4.49% 4.64% 5.95%
Expected dividend 2.42% 2.66% 2.61%
Expected lives, in years 7.9 5.0 5.0
Expected volatility 14% 21% 19%

The estimated weighted average grant-date fair value of options granted was
$3.15, $1.91, and $2.39 per share for the years ended March 31, 2002, 2001,
and 2000, respectively. Had compensation cost for these awards been determined
in accordance with SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts for the years
ended March 31, 2002, 2001, and 2000 (dollars in thousands):

2002 2001 2000
Net income:
As reported $ 4,915 $ 1,694 $ 2,609
Pro forma 4,644 1,612 2,534

Earnings per common share - basic:
As reported $ 1.58 $ 0.51 $ 0.74
Pro forma 1.50 0.48 0.71

Earnings per common share - diluted:
As reported $ 1.52 $ 0.50 $ 0.70
Pro forma 1.44 0.48 0.68

15. REGULATORY MATTERS AND CAPITAL REQUIREMENTS

Regulatory Capital The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank'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 Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk weighted assets, of Core capital to total assets, and tangible
capital to tangible assets (set forth in the table

72

below). Management believes that the Bank meets all capital adequacy
requirements to which it is subject as of March 31, 2002.

As of March 31, 2002, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized," the Bank must
maintain minimum total risk-based and Tier I risk-based ratios as set forth in
the table below. There are no conditions or events, since the notification,
that management believes have changed the Bank's category.

The Bank's actual and required capital amounts and ratios are presented in the
table below (dollars in thousands):

Categorized as
"Well Capitalized"
For Under
Capital Adequacy Prompt Corrective
Actual Purposes Action Provision
-------------- -------------- ----------------
As of March 31, 2002 Amount Ratio Amount Ratio Amount Ratio

Total Capital
(To risk weighted
assets) $42,583 16.3% $20,939 8.0% $26,174 10.0%

Tier I Capital
(To risk weighted
assets) $40,303 15.4% N/A N/A $15,704 6.0%

Core Capital
(To total assets) $40,303 10.2% $15,823 4.0% $19,778 5.0%

Tangible Capital
(To tangible assets) $40,303 10.2% $ 5,934 1.5% N/A N/A

As of March 31, 2001

Total Capital
(To risk weighted
assets) $50,646 22.3% $18,203 8.0% $22,754 10.0%

Tier I Capital
(To risk weighted
assets) $48,548 21.3% N/A N/A $13,652 6.0%

Core Capital
(To total assets) $48,548 12.5% $15,490 4.0% $19,362 5.0%

Tangible Capital
(To tangible assets) $48,548 12.5% $ 5,809 1.5% N/A N/A

The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles, to regulatory tangible
and risk-based capital at March 31, 2002 (in thousands):

73

Equity $ 40,903
Unrealized securities gains (345)
Equity of non-includable subsidiaries (175)
Goodwill and other intangible assets (80)
---------

Tangible capital 40,303
General valuation allowance 2,280
---------

Total capital $ 42,583
=========

At periodic intervals, the OTS and the FDIC routinely examine the Bank as part
of their legally prescribed oversight of the thrift industry. Based on these
examinations, the regulators can direct that the Bank'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 Bank's 2002, 2001, and 2000 financial statements. In view of
the uncertain regulatory environment in which the Bank operates, the extent,
if any, to which a forthcoming regulatory examination may ultimately result in
adjustments to the accompanying financial statements cannot presently be
determined.

16. EMPLOYEE BENEFIT PLAN

The Company sponsors a contributory defined contribution plan pursuant to
Section 401(k) of the IRC covering substantially all employees. Under the
plan, the Company made contributions limited to 3.33% of participating
employees' salaries for the years ended March 31, 2002, 2001 and 2000.
Contributions and plan administration expenses totaled $110,000, $101,000, and
$100,000 for the years ended March 31, 2002, 2001, and 2000, respectively.

17. COMMITMENTS AND CONTINGENCIES

The Company is a party to certain financial instruments with off-balance sheet
risk to meet the financing needs of customers. Commitments to extend credit
were $44,161,149 at March 31, 2002, which include fixed rate loan commitments
of $2,939,141. The ranges of interest rates for these loan commitments are
4.30% to 9.00%.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee by the customer. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates creditworthiness on an individual customer basis.

The Bank originates residential real estate loans and, to a lesser extent,
commercial, agriculture, and consumer loans. Greater than 75% of all loans in
the Bank's portfolio are secured by properties located in communities of
eastern Oregon and western Idaho.

The Company is party to litigation arising in the ordinary course of business.
In the opinion of management, these actions will not have a material adverse
effect, if any, on the Company's financial position, results of operations, or
cash flows.

74

18. FAIR VALUE OF FINANCIAL INSTRUMENTS

A summary of carrying value and estimated fair value of financial instruments
is summarized as follows (in thousands):

March 31, 2002 March 31, 2001
--------------------- ---------------------
Carrying Carrying
Value Fair Value Value Fair Value

Financial assets:
Cash and cash equivalents $ 7,795 $ 7,795 $ 10,581 $ 10,581
Securities 92,419 92,419 96,924 96,924
Loans receivable, net of
allowance for loan losses 265,863 278,536 250,897 263,341
FHLB stock 6,315 6,315 4,651 4,651

Financial liabilities:
Demand and savings deposits 136,737 136,737 125,884 125,884
Time certificates of deposit 119,341 120,489 127,893 129,069
FHLB advances 87,100 89,664 73,125 75,715

Financial assets and liabilities other than investment securities are not
traded in active markets. Estimated fair values require subjective judgments
and are approximate. The above estimates of fair value are not necessarily
representative of amounts that could be realized in actual market
transactions, nor of the underlying value of the Company. Changes in the
following methodologies and assumptions could significantly affect the
estimates.

Financial Assets - The estimated fair value approximates the carrying value of
cash and cash equivalents. For securities, the fair value is based on quoted
market prices. The fair value of loans is estimated by discounting future cash
flows using current rates at which similar loans would be made. The fair value
of FHLB stock approximates the carrying amount.

Financial Liabilities - The estimated fair value of demand and savings
deposits approximates carrying amounts. The fair value of time certificates of
deposit and FHLB advances is estimated by discounting the future cash flows
using current rates offered on similar instruments. The value of long-term
relationships with depositors is not reflected.

Off-Balance Sheet Financial Instruments - Commitments to extend credit
represent all off-balance-sheet financial instruments. The fair value of these
commitments is not significant. See Note 17 to the consolidated financial
statements.

19. DIRECTORS' PENSION PLAN

The Company established a director emeritus plan (the "Plan") effective
February 25, 1997. The purpose of the Plan is to reward and retain directors
of experience and ability in key positions of responsibility by providing such
directors with a benefit upon their retirement from the Board of Directors, as
compensation for their past services to the Bank and as an incentive to
perform such services in the future. The Plan is funded through current
operations and no assets are specifically identified to fund future benefit
payments.

75

Following are disclosures related to the Plan (in thousands):

2002 2001 2000
Change in benefit obligation:
Benefit obligation, beginning of year $ 299 $ 303 $ 313
Service cost 8 8 8
Interest cost 23 23 23
Benefits paid (29) (35) (41)
------ ------ ------
Benefit obligation, end of year $ 301 $ 299 $ 303
====== ====== ======
Unrecognized prior service cost $ 237 $ 259 $ 281
====== ====== ======
Weighted average assumption - discount rate 7% 7% 7%
====== ====== ======

Components of net periodic benefit cost:
Service cost $ 8 $ 8 $ 8
Interest cost 23 23 23
Amortization of prior service cost 22 22 22
------ ------ ------
Net periodic benefit cost $ 53 $ 53 $ 53
====== ====== ======

20. PARENT COMPANY FINANCIAL INFORMATION

The Parent company financial information at March 31, 2002 and 2001 is as
follows (in thousands):

2002 2001
Assets:
Cash $ 7,407 $ 4,960
Investment in subsidiary 40,972 49,632
Other assets 4,520 3,349
------- -------
Total $52,899 $57,941
======= =======

Liabilities and Shareholders' Equity:
Liabilities:
Other liabilities $ 76 $ 135
Shareholders' equity 52,823 57,806
------- -------
Total $52,899 $57,941
======= =======

The statements of income for the years ended March 31, 2002, 2001, and 2000
are as follows (in thousands):

76

2002 2001 2000
Other income:
Equity in undistributed income
of subsidiary $ 5,686 $ 2,177 $ 3,015
Interest on debt securities 139 - -
-------- -------- --------
Subtotal 5,825 2,177 3,015

Other expense:
Interest and other 1,404 784 651
Income tax benefit (494) (301) (245)
-------- -------- --------
Net income $ 4,915 $ 1,694 $ 2,609
======== ======== ========

The statements of cash flows for the years ended March 31, 2002, 2001, and
2000 are as follows (in thousands):

2002 2001 2000

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,915 $ 1,694 $ 2,609
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed income
of subsidiary (5,686) (2,177) (3,015)
Compensation expense related to MRDP 318 267 373
Compensation expense related to ESOP 876 607 612
Change in assets and liabilities:
Increase (decrease) in other assets (1,171) (295) 448
(Increase) decrease in other
liabilities (59) 46 89
------- ------- -------
Net cash provided by (used in)
operating activities (807) (142) 1,116
------- ------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Dividend received from subsidiary 14,000 5,548 3,015
------- ------- -------
Net cash provided by investing
activities 14,000 5,548 3,015
------- ------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (9,672) (946) (6,356)
Proceeds from exercise of stock options 270 63 -
Investment in subsidiary (97) 409 (2,094)
Payment of cash dividend (1,247) (1,079) (1,056)
------- ------- -------
Net cash used in financing
activities (10,746) (1,553) (9,506)
------- ------- -------

Net increase (decrease) in cash 2,447 4,137 (5,375)

Cash:
Beginning of year 4,960 823 6,198
------- ------- -------

End of year $ 7,407 $ 4,960 $ 823
======= ======= =======

77

21. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

Year ended March 31, 2002 (in thousands, except share data):

June 30 September 30 December 31 March 31

Total interest income $ 7,248 $ 7,322 $ 6,860 $ 6,431
Total interest expense 3,785 3,445 2,954 2,555
------- ------- ------- -------
Net interest income 3,463 3,877 3,906 3,876
Provision for loan losses 318 24 (4) 144
------- ------- ------- -------
Net interest income after
provision 3,145 3,853 3,910 3,732

Noninterest income 1,019 723 796 942
Noninterest expense 2,732 2,718 2,973 2,861
------- ------- ------- -------
Income before income taxes 1,432 1,858 1,733 1,813
Provision for income taxes 358 525 513 526
------- ------- ------- -------
Net income $ 1,074 $ 1,333 $ 1,220 $ 1,287
======= ======= ======= =======

Basic earnings per share $ 0.32 $ 0.40 $ 0.42 $ 0.45

Diluted earnings per share $ 0.31 $ 0.39 $ 0.40 $ 0.43

Year ended March 31, 2001(in thousands, except share data):

June 30 September 30 December 31 March 31

Total interest income $ 6,835 $ 7,245 $ 7,238 $ 6,961
Total interest expense 3,633 4,032 3,978 3,749
------- ------- ------- -------
Net interest income 3,202 3,213 3,260 3,212
Provision for loan losses 104 502 117 71
------- ------- ------- -------
Net interest income after
provision 3,098 2,711 3,143 3,141

Noninterest income 441 182 958 574
Noninterest expense 2,611 2,722 3,933 2,638
------- ------- ------- -------
Income before income taxes 928 171 168 1,077
Provision for income taxes 315 55 52 228
------- ------- ------- -------
Net income $ 613 $ 116 $ 116 $ 849
======= ======= ======= =======

Basic earnings per share $ 0.19 $ 0.03 $ 0.03 $ 0.26

Diluted earnings per share $ 0.19 $ 0.03 $ 0.03 $ 0.25

* * * * *

78

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

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------

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

Item 11. Executive Compensation
- --------------------------------

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

Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------

(a) Security Ownership of Certain Beneficial Owners

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

(b) Security Ownership of Management

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

Equity Compensation Plan Information. The following table summarizes
share and exercise price information about the Company's equity compensation
plans as of March 31, 2002.

(c)
Number of securities
(a) (b) remaining available
Number of securities Weighted-average for future issuance
to be issued upon exercise price under equity
exercise of of outstanding compensation plans
outstanding options, options, warrants (excluding securities
Plan category warrants and rights and rights reflected in column (a))
- ------------------------- ------------------- ----------------- ------------------------

Equity compensation
plans approved by
security holders:
Option plan............. 422,089 $12.44 21,465
Restricted stock plan... 98,585 14.66 2

Equity compensation
plans not approved by
security holders.......... -- -- --

79

(c) Changes in Control

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

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

Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------

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

PART IV

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

(a) Exhibits

3(a) Articles of Incorporation of the Registrant (1)
3(b) Bylaws of the Registrant (1)
3(c) Amendment to Bylaws of the Registrant (2)
10(a) Amended Employment Agreement with Berniel Maughan(3)
10(b) Amended Employment Agreement with Zane F. Lockwood(3)
10(c) Employment Agreement with Jonathan P. McCreary
10(d) Amended Employee Severance Compensation Plan (4)
10(e) Pioneer Bank, a Federal Savings Bank 401 (k) Plan (1)
10(f) Pioneer Bank Director Emeritus Plan (1)
10(g) 1998 Stock Option Plan (5)
10(h) August 21, 2001 Amendment to 1998 Stock Option Plan (6)
10(i) January 30, 2002 Amendment to 1998 Stock Option Plan
10(j) 1998 Management Recognition and Development Plan (5)
10(k) August 21, 2001 Amendment to 1998 Management Recognition and
Development Plan (6)
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent

- -------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (333-30051), as amended.
(2) Incorporated by reference to the Registrant's Amended Form 10-Q for the
quarter ended December 31, 2000.
(3) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter
ended December 31, 2000.
(4) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended June 30, 2000.
(5) Incorporated by reference to the Registrant's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders.
(6) Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 2001.

(b) Reports on Form 8-K

One Current Report on Form 8-K was filed during the quarter ended
March 31, 2002. The Form 8-K was filed on March 13, 2002, which announced the
Company's settlement of litigation with Joseph Stilwell.

80

SIGNATURES

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

OREGON TRAIL FINANCIAL CORP.

Date: June 28, 2002 By:/s/ Berniel L. Maughan
-----------------------------------------
Berniel L. Maughan
President and Chief Executive Officer
(Duly Authorized Representative)

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

SIGNATURES TITLE DATE
- ---------- ------------------------------------ -------------

/s/ Berniel L. Maughan President and Chief Executive June 28, 2002
- ------------------------- Officer (Principal Executive Officer)
Berniel L. Maughan

/s/ Jon McCreary Chief Financial Officer June 28, 2002
- ------------------------- (Principal Financial Officer)
Jon McCreary

/s/ Stephen R. Whittemore Chairman of the Board June 28, 2002
- -------------------------
Stephen R. Whittemore

/s/ John Gentry Director June 28, 2002
- -------------------------
John Gentry

/s/Albert H. Durgan Director June 28, 2002
- -------------------------
Albert H. Durgan

/s/ Edward H. Elms Director June 28, 2002
- -------------------------
Edward H. Elms

Director , 2002
- ------------------------- -------
Charles Rouse

Director , 2002
- ------------------------- -------
Kevin D. Padrick

81

Exhibit 10(c)

Employment Agreement with Jonathan P. McCreary

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 18th day of September 2001 by and between Oregon Trail Financial Corp.
(the "Company") and Jonathan P. McCreary (the "Employee").

WHEREAS, the Employee serves as the Senior Vice President and Chief
Financial Officer of the Company's wholly-owned subsidiary, Pioneer Bank, a
Federal Savings Bank (the "Bank");

WHEREAS, the board of directors of the Company (the "Board of Directors")
believes it is in the best interests of the Company and its subsidiaries for
the Company to enter into this Agreement with the Employee in order to assure
continuity of management of the Company and its subsidiaries; and

WHEREAS, the Board of Directors has approved and authorized the execution
of this Agreement with the Employee;

NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:

1. Definitions.

(a) A "Change in Control" of the Company or the Bank shall be
deemed to occur if and when (1) an individual or entity other than the Company
purchases shares of the stock of the Company or the Bank pursuant to a tender
or exchange offer for such shares; (2) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
("Exchange Act")) is or becomes the beneficial owner, as defined in Section
13d-3 of the Exchange Act, directly or indirectly, of securities of the
Company or the Bank representing twenty-five percent (25%) or more of the
combined voting power of the Company's or the Bank's then outstanding shares;
(3) the membership of the Board of Directors of the Company or the Bank
changes as the result of a contested election, such that individuals who were
directors at the beginning of any twenty-four (24) month period (whether
commencing before or after the date of adoption of this Agreement) do not
constitute a majority of the Board at the end of such period; or (4)
shareholders of the Company or the Bank approve a merger, consolidation, sale
or disposition of all or substantially all of the Company's or the Bank's
assets, or a plan of partial or complete liquidation. Whether a Change in
Control has occurred shall be decided by the Board of either the Company or
the Bank, as applicable, in its reasonable, good faith discretion.

(b) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
consolidated group of the Company (or its successors) for federal income tax
reporting.

(c) The term "Date of Termination" means the date upon which the
Employee's employment with the Company or the Bank or both ceases, as
specified in a notice of termination pursuant to Section 8 of this Agreement.

(d) The term "Effective Date" means August 1, 2001.

(e) The term "Involuntary Termination" means the termination of the
employment of Employee (i) by either the Company or the Bank or both without
his express written consent; or (ii) by the Employee by reason of a material
diminution of or interference with his duties, responsibilities or benefits,
including (without limitation) any of the following actions unless consented
to in writing by the Employee: (1) a requirement that the Employee be based
at any place other than Baker City, Oregon, or within 35 miles thereof, except
for reasonable travel on Company or Bank business; (2) a material demotion of
the Employee; (3) a material reduction in the number or seniority of personnel
reporting to the Employee or a material reduction in the frequency with which,
or in the nature of the matters with respect to which such personnel are to
report to the Employee, other than as part of a Bank- or Company-wide
reduction in staff; (4) a reduction in the Employee's salary or a material
adverse change in the Employee's perquisites, benefits, contingent benefits or
vacation; (5) a material permanent increase in the required hours of work or
the workload of the Employee; or (6) the failure of the Board of Directors (or
a board of directors of a successor of the Company) to elect him as Senior
Vice President and Chief Financial Officer of the Bank (or a successor of the
Bank) or any action by the Board of Directors (or a board of directors of the
Bank or a successor of the Bank) removing him from such office. The term
"Involuntary Termination" does not include Termination for Cause or
termination of employment due to death or permanent disability pursuant to
Section 7(g) of this Agreement, or suspension or temporary or permanent
prohibition from participation in the conduct of the affairs of a depository
institution under Section 8 of the Federal Deposit Insurance Act ("FDIA").

(f) The terms "Termination for Cause" and "Terminated for Cause"
mean termination of the employment of the Employee with either the Company or
the Bank, as the case may be, because of the Employee's dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (excluding violations which do not
have a material adverse affect on the Company or the Bank) or final
cease-and-desist order, or (except as provided below) material breach of any
provision of this Agreement. No act or failure to act by the Employee shall
be considered willful unless the Employee acted, or failed to act, with an
absence of good faith and without a reasonable belief that his action or
failure to act was in the best interest of the Company. The Employee shall
not be deemed to have been Terminated for Cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by
the affirmative vote of not less than a majority of the entire membership of
the Board of Directors or the board of directors of the Bank at a meeting of
such board duly called and held for such purpose (after reasonable notice to
the Employee and an opportunity for the Employee, together with the Employee's
counsel, to be heard before such board), stating that in the good faith
opinion of such board the Employee has engaged in conduct described in the
preceding sentence and specifying the particulars thereof in detail.

2

2. Term. The term of this Agreement shall be a period of twenty (20)
months commencing on the Effective Date, subject to earlier termination as
provided herein. On August 1, 2002, and each anniversary of that date, the
term shall be extended for a period of one year in addition to the then-
remaining term, provided that the Company has not given notice to the
Employee in writing at least 90 days prior to such anniversary that the term
of this Agreement shall not be extended further, and provided further that the
Employee has not received an unsatisfactory performance review by either the
Board of Directors or the board of directors of the Bank. Reference herein to
the term of this Agreement shall refer to both the initial term and any
extended terms.

3. Employment. The Employee will be employed as the Senior Vice
President and Chief Financial Officer of the Bank. As such, the Employee
shall render administrative and management services as are customarily
performed by persons situated in similar executive capacities, and shall have
such other powers and duties as the Board of Directors or the board of
directors of the Bank may prescribe from time to time. The Employee shall
also render services to the Company, or to any subsidiary or subsidiaries of
the Company or the Bank as requested by the Company or the Bank from time to
time consistent with his executive position. The Employee shall devote his
best efforts and reasonable time and attention to the business and affairs of
the Company and the Bank to the extent necessary to discharge his
responsibilities hereunder. The Employee may (i) serve on corporate or
charitable boards or committees, and (ii) manage personal investments, so long
as such activities do not interfere materially with the performance of his
responsibilities hereunder.

4. Cash Compensation.

(a) Salary. The Company agrees to pay the Employee during the term
of this Agreement a base salary (the "Company Salary") the annualized amount
of which shall be not less than $112,000; provided that any amounts of salary
actually paid to the Employee by any Consolidated Subsidiaries shall reduce
the amount to be paid by the Company to the Employee. The Company Salary
shall be paid no less frequently than monthly and shall be subject to
customary tax withholding. The amount of the Employee's Company Salary shall
be increased (but shall not be decreased) from time to time in accordance with
the amounts of salary approved by the Board of Directors or the board of
directors of any of the Consolidated Subsidiaries after the Effective Date.
The amount of the Company Salary shall be reviewed by the Board of Directors
of the board of directors of the Bank at least annually during the term of
this Agreement.

(b) Bonuses. The Employee shall be entitled to participate in an
equitable manner with all other executive officers of the Company and the Bank
in such performance-based and discretionary bonuses, if any, as are authorized
and declared by the Board of Directors for executive officers of the Company
and by the board of directors of the Bank for executive officers of the Bank.
In addition, Employee is eligible to earn an annual performance bonus ranging
from 15% to 30% of his Company Salary, to be paid no later than the end of the
third month of the fiscal year next following the fiscal year for which the
annual bonus is awarded. The bonus performance criteria applicable solely to
Employee and the calculations will be contained in a separate document that
will

3

be mutually agreed to by the Employee and the Company, and will be referred to
as "Executive Bonus Calculation."

(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of the Company and the Bank,
provided that the Employee accounts for such expenses as required under such
policies and procedures.

5. Benefits.

(a) Participation in Benefit Plans. The Employee shall be entitled
to participate, to the same extent as executive officers of the Company and
the Bank generally, in all plans of the Company and the Bank relating to
pension, retirement, thrift, profit-sharing, savings, group or other life
insurance, hospitalization, medical and dental coverage, travel and accident
insurance, education, and other retirement or employee benefits or
combinations thereof.

(b) Fringe Benefits. The Employee shall be eligible to participate
in, and receive benefits under, any other fringe benefit plans or perquisites
which are or may become generally available to the Company's or the Bank's
executive officers, including but not limited to supplemental retirement,
incentive compensation, supplemental medical or life insurance plans, club
dues, physical examinations, financial planning and tax preparation services.

6. Vacations; Leave. The Employee shall be entitled to paid vacation in
accordance with the vacation program or policy in effect from time to time
for the Company's or the Bank's executive officers. The Employee shall also
be entitled to voluntary leaves of absence, with or without pay, from time to
time at such times and upon such conditions as the Board of Directors may
determine in its discretion.

7. Termination of Employment.

(a) Involuntary Termination. If the Employee experiences an
Involuntary Termination, such termination of employment shall be subject to
the Company's obligations under this Section 7. In the event of the
Involuntary Termination of the Employee, subject to Section 7(b) of this
Agreement, the Company shall, during the lesser period of the remaining term
of this Agreement or 18 months following the Date of Termination (the
"Liquidated Damage Period"), as liquidated damages (i) pay to the Employee
monthly one-twelfth of the Company Salary at the annual rate in effect
immediately prior to the Date of Termination; and (ii) maintain substantially
the same group life insurance, hospitalization, medical, dental, prescription
drug and other health benefits, and long-term disability insurance (if any)
for the benefit of the Employee and his dependents and beneficiaries who would
have been eligible for such benefits if the Employee had not suffered
Involuntary Termination and on terms substantially as favorable to the
Employee

4

including amounts of coverage and deductibles and other costs to him in effect
immediately prior to such Involuntary Termination (the "Employee's Health
Coverage").

(b) Reduction of the Company's Obligations Under Section 7(a).

(1) In the event that the Employee becomes entitled to
liquidated damages pursuant to Section 7(a), (i) the Company's obligation
thereunder with respect to cash damages shall be reduced by the amount of the
Employee's cash income, if any, earned from providing personal services during
the Liquidated Damage Period from the date of his Involuntary Termination
until the date this Agreement would have terminated had the Involuntary
Termination not occurred; and (ii) the Company's obligation to maintain Health
Coverage shall be reduced to the extent, if any, that the Employee receives
such benefits, on no less favorable terms, from another employer during the
Liquidated Damage Period. For purposes of this Section 7(b), the term "cash
income" shall include amounts of salary, wages, bonuses, incentive
compensation and fees paid to the Employee in cash but shall not include
shares of stock, stock options, stock appreciation rights or other earned
income not paid to the Employee in cash. To the extent the provisions of this
Section 7(b)(1) are applicable and an overpayment has been made to the
Employee as of the expiration of the Liquidated Damage Period, the Employee
shall reimburse the Company in an amount equal to the after tax benefit
realized by the Employee from such overpayment (i.e., amount realized net of
all federal, state, local, employment and medicare taxes). In making the
reimbursement calculation it shall be presumed that the Employee is subject to
the highest marginal federal and state income tax rates.

(2) The Employee agrees that in the event he becomes entitled
to liquidated damages pursuant to Section 7(a), throughout the Liquidated
Damage Period, he shall promptly inform the Company of the nature and amounts
of cash income and the type of health benefits and coverage which he earns or
receives from providing personal services, and shall provide such
documentation of such cash income and such health benefits and coverage as the
Company may request. In the event of changes to such cash income or such
health benefits or coverage from time to time, the Employee shall inform the
Company of such changes, in each case within five days after the change
occurs, and shall provide such documentation concerning the change as the
Company may request.

(c) Change in Control; Cut Back; and Tax Gross Up. In the event
that the Employee experiences an Involuntary Termination within the six months
preceding, at the time of, or within 24 months following a Change in Control,
in addition to the Company's obligations under Section 7(a) of this Agreement,
the Company shall pay to the Employee in cash, within 30 days after the later
of the date of such Change in Control or the Date of Termination, an amount
equal to 299% of the Employee's "base amount" as determined under Section 280G
of the Code, less the acceleration and lapse value of options granted to the
Employee by the Company that are taken into account in the determination of
"parachute payments" under 280G(b)(2) of the Code by virtue of vesting
acceleration or deemed vesting acceleration in connection with such Change in
Control.

5

In the event that any payments or benefits provided or to be provided to
the Employee pursuant to this Agreement, in combination with payments or
benefits, if any, from other plans or arrangements maintained by the Company
or any of the Consolidated Subsidiaries, constitute "excess parachute
payments" under Section 280G of the Code that are subject to excise tax under
Section 4999 of the Code, the Company shall pay to the Employee in cash an
additional amount equal to the amount of the Gross Up Payment (as hereinafter
defined). The "Gross Up Payment" shall be the amount needed to ensure that
the amount of such payments and the value of such benefits received by the
Employee (net of such excise tax and any federal, state and local tax on the
Company's payment to him attributable to such excise tax) equals the amount of
such payments and value of such benefits as he would receive in the absence of
such excise tax and any federal, state and local tax on the Company's payment
to him attributable to such excise tax. The Company shall pay the Gross Up
Payment within 30 days after the Date of Termination. For purposes of
determining the amount of the Gross Up Payment, the value of any non-cash
benefits and deferred payments or benefits shall be determined by the
Company's independent auditors in accordance with the principles of Section
280G(d)(3) and (4) of the Code. In the event that, after the Gross Up Payment
is made, the amount of the excise tax is determined to be less than the amount
calculated in the determination of the actual Gross Up Payment made by the
Company, the Employee shall repay to the Company, at the time that such
reduction in the amount of excise tax is finally determined, the portion of
the Gross Up Payment attributable to such reduction, plus interest on the
amount of such repayment at the applicable federal rate under Section 1274 of
the Code from the date of the Gross Up Payment to the date of the repayment.
The amount of the reduction of the Gross Up Payment shall reflect any
subsequent reduction in excise taxes resulting from such repayment. In the
event that, after the Gross Up Payment is made, the amount of the excise tax
is determined to exceed the amount anticipated at the time the Gross Up
Payment was made, the Company shall pay to the Employee, in immediately
available funds, at the time that such additional amount of excise tax is
finally determined, an additional payment ("Additional Gross Up Payment")
equal to such additional amount of excise tax and any federal, state and local
taxes thereon, plus all interest and penalties, if any, owned by the Employee
with respect to such additional amount of excise and other tax. The Company
shall have the right to challenge, on the Employee's behalf, any excise tax
assessment against him as to which the Employee is entitled to (or would be
entitled if such assessment is finally determined to be proper) a Gross Up
Payment or Additional Gross Up Payment, provided that all costs and expenses
incurred in such a challenge shall be borne by the Company and the Company
shall indemnify the Employee and hold him harmless, on an after-tax basis,
from any excise or other tax (including interest and penalties with respect
thereto) imposed as a result of such payment of costs and expenses by the
Company.

(d) Termination for Cause. In the event of Termination for Cause,
the Company shall have no further obligation to the Employee under this
Agreement after the Date of Termination.

(e) Voluntary Termination. The Employee may terminate his
employment voluntarily at any time by a notice pursuant to Section 8 of this
Agreement. In the event that the Employee voluntarily terminates his
employment other than by reason of any of the actions that constitute
Involuntary Termination under Section 1(e)(ii) of this Agreement ("Voluntary

6

Termination"), the Company shall be obligated to the Employee for the amount
of his Company Salary and benefits only through the Date of Termination, at
the time such payments are due, and the Company shall have no further
obligation to the Employee under this Agreement.

(f) Death. In the event of the death of the Employee while employed
under this Agreement and prior to any termination of employment, the Company
shall pay to the Employee's estate, or such person as the Employee may have
previously designated in writing, (i) the Company Salary which was not
previously paid to the Employee through the last day of the calendar month in
which Employee's death occurred and, if applicable, the Change in Control
payment set forth in the first paragraph of Section 7(c), provided Employee
died within 24 months following such change in control; and (ii) the amounts
of any benefits or awards which, pursuant to the terms of any applicable plan
or plans, were earned with respect to the fiscal year in which the Employee
died and which the Employee would have been entitled to receive if he had
continued to be employed, and the amount of any bonus or incentive
compensation for such fiscal year which the Employee would have been entitled
to receive if he had continued to be employed, pro-rated in accordance with
the portion of the fiscal year prior to his death, provided that such amounts
shall be payable when and as ordinarily payable under the applicable plans.

(g) Permanent Disability. For purposes of this Agreement, the term
"permanently disabled" means that the Employee has a mental or physical
infirmity which permanently impairs his ability to perform substantially his
duties and responsibilities under this Agreement and which results in (i)
eligibility of the Employee under the long-term disability plan of the Company
or the Bank, if any; or (ii) inability of the Employee to perform
substantially his duties and responsibilities under this Agreement for a
period of 90 consecutive days. Either the Company or the Bank or both may
terminate the employment of the Employee after having established that the
Employee is permanently disabled. Notwithstanding such termination, however,
the Company shall pay to Employee the remainder of his Company Salary for the
remaining term of this Agreement as if this Agreement had not been terminated,
offset by any amounts actually paid to Employee as a result of any disability
insurance payments from any source.

(h) Regulatory Action. Notwithstanding any other provisions of this
Agreement:

(1) If the Employee is removed and/or permanently prohibited
from participating in the conduct of the affairs of a depository institution
by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C.
1818(e)(4) and (g)(1), all obligations of the Company under this Agreement
shall terminate as of the effective date of the order, but vested rights of
the contracting parties shall not be affected;.

(2) If the Bank is in default (as defined in Section 3(x)(1) of
the FDIA), all obligations of the Company under this Agreement shall terminate
as of the date of default, but this provision shall not affect any vested
rights of the contracting parties; and

7

(3) All obligations of the Company under this Agreement shall
be terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank: (i) by the
Director of the Office of Thrift Supervision (the "Director") or his or her
designee, at the time the Federal Deposit Insurance Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA; or (ii) by the Director or
his or her designee, at the time the Director or his or her designee approves
a supervisory merger to resolve problems related to operation of the Bank or
when the Bank is determined by the Director to be in an unsafe or unsound
condition. Any rights of the parties that have already vested, however, shall
not be affected by any such action.

(4) If the Employee is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the FDIA, 12 U.S.C. 1818(e)(3) and (g)(1),
the Company's obligations under this Agreement shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Company may in its discretion (1) pay the
Employee all or part of the compensation withheld while its obligations under
this Agreement were suspended and (ii) reinstate in whole or in part any of
its obligations which were suspended.

(5) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. 1828(k) and any regulations promulgated thereunder.

8. Notice of Termination. In the event that the Company or the Bank, or
both, desire to terminate the employment of the Employee during the term of
this Agreement, the Company or the Bank, or both, shall deliver to the
Employee a written notice of termination, stating whether such termination
constitutes Termination for Cause or Involuntary Termination, setting forth in
reasonable detail the facts and circumstances that are the basis for the
termination, and specifying the date upon which employment shall terminate,
which date shall be at least 30 days after the date upon which the notice is
delivered, except in the case of Termination for Cause. In the event that the
Employee determines in good faith that he has experienced an Involuntary
Termination of his employment, he shall send a written notice to the Company
stating the circumstances that constitute such Involuntary Termination and the
date upon which his employment shall have ceased due to such Involuntary
Termination. In the event that the Employee desires to effect a Voluntary
Termination, he shall deliver a written notice to the Company, stating the
date upon which employment shall terminate, which date shall be at least 30
days after the date upon which the notice is delivered, unless the parties
agree to a date sooner.

9. Attorneys Fees. The Company shall pay all legal fees and related
expenses (including the costs of experts, evidence and counsel) incurred by
the Employee as a result of (i) the Employee's contesting or disputing any
termination of employment, or (ii) the Employee's seeking to obtain or enforce
any right or benefit provided by this Agreement or by any other plan or
arrangement maintained by the Company (or its successors) or the Consolidated
Subsidiaries under which the Employee is or may be entitled to receive
benefits; provided that the Company's obligation to pay

8

such fees and expenses is subject to the Employee's prevailing with respect to
the matters in dispute in any action initiated by the Employee or the
Employee's having been determined to have acted reasonably and in good faith
with respect to any action initiated by the Company or the Bank.

10. Restrictive Covenants.

(a) Non-Disclosure. The Employee acknowledges that he has
acquired, and will continue to acquire while employed by the Company and/or
any Consolidated Subsidiary, special knowledge of the business, affairs,
strategies and plans of the Company and the Consolidated Subsidiaries which
has not been disclosed to the public and which constitutes confidential and
proprietary business information owned by the Company and the Consolidated
Subsidiaries, including but not limited to, information about the customers,
customer lists, software, data, formulae, processes, inventions, trade
secrets, marketing information and plans, and business strategies of the
Company and the Consolidated Subsidiaries, and other information about the
products and services offered or developed or planned to be offered or
developed by the Company and/or the Consolidated Subsidiaries ("Confidential
Information"). The Employee agrees that, without the prior written consent
of the Company, he shall not, during the term of his employment or at any
time thereafter, in any manner directly or indirectly disclose any
Confidential Information to any person or entity other than the Company and
the Consolidated Subsidiaries. Notwithstanding the foregoing, if the Employee
is requested or required (including but not limited to by oral questions,
interrogatories, requests for information or documents in legal proceeding,
subpoena, civil investigative demand or other similar process) to disclose any
Confidential Information the Employee shall provide the Company with prompt
written notice of any such request or requirement so that the Company and/or a
Consolidated Subsidiary may seek a protective order or other appropriate
remedy and/or waive compliance with the provisions of this Section 10(a). If,
in the absence of a protective order or other remedy or the receipt of a
waiver from the Company, the Employee is nonetheless legally compelled to
disclose Confidential Information to any tribunal or else stand liable for
contempt or suffer other censure or penalty, the Employee may, without
liability hereunder, disclose to such tribunal only that portion of the
Confidential Information which is legally required to be disclosed, provided
that the Employee exercise his best efforts to preserve the confidentiality of
the Confidential Information, including without limitation by cooperating with
the Company and/or a Consolidated Subsidiary to obtain an appropriate
protective order or other reliable assurance that confidential treatment will
be accorded the Confidential Information by such tribunal. On the Date of
Termination, the Employee shall promptly deliver to the Company all copies of
documents or other records (including without limitation electronic records)
containing any Confidential Information that is in his possession or under his
control, and shall retain no written or electronic record of any Confidential
Information.

(b) Non-Compete. Employee agrees that for a period of one year
following the termination of this Agreement he shall not personally compete
with the Company or the Bank within a distance of 150 miles of the current
market areas then being served by the Company or the Bank.

9

The provisions of this Section 10 shall survive any termination of the
Employee's employment and any termination of this Agreement.

11. No Assignments.

(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Company shall require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
by an assumption agreement in form and substance satisfactory to the Employee,
to expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no such
succession or assignment had taken place. Failure of the Company to obtain
such an assumption agreement prior to the effectiveness of any such succession
or assignment shall be a breach of this Agreement and shall entitle the
Employee to compensation and benefits from the Company in the same amount and
on the same terms as provided for an Involuntary Termination under Section 7
hereof. For purposes of implementing the provisions of this Section 11(a),
the date on which any such succession becomes effective shall be deemed the
Date of Termination.

(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.

12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company at its home
office, to the attention of the Board of Directors with a copy to the
Secretary of the Company, or, if to the Employee, to such home or other
address as the Employee has most recently provided in writing to the Company.

13. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein
otherwise provided.

14. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.

15. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

16. Governing Law. This Agreement shall be governed by the laws of the
State of Oregon.

17. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American

10

Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.

18. Equitable and Other Judicial Relief. In the event of an actual or
threatened breach by the Employee of any of the provisions of Section 10,
following a decision by an arbitrator, the Company shall be entitled to
equitable relief in the form of an injunction from a court of competent
jurisdiction and such other equitable and legal relief as such court deems
appropriate under the circumstances. The parties agree that the Company shall
not be required to post any bond in connection with the grant or issuance of
an injunction (preliminary, temporary and/or permanent) by a court of
competent jurisdiction, and if a bond is nevertheless required, the parties
agree that it shall be in a nominal amount. The parties further agree that in
the event of a breach by the Employee of any of the provisions of Section 10,
the Company will suffer irreparable damage and its remedy at law against the
Employee is inadequate to compensate it for such damage.

11

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.

Attest: OREGON TRAIL FINANCIAL CORP.

/s/Zane F. Lockwood /s/Stephen R. Whittemore
- ---------------------------- -----------------------------
Secretary By: Stephen R. Whittemore
Its: Chairman

EMPLOYEE

/s/Jonathan P. McCreary
-----------------------------
Jonathan P. McCreary

12

Exhibit 10(i)

January 30, 2002 Amendment to 1998 Stock Option Plan

OREGON TRAIL FINANCIAL CORP.
AMENDMENT TO THE 1998 STOCK OPTION PLAN

Effective August 21, 2001, the following amendment was adopted:

RESOLVED, effective retroactive to the Plan effective date, the
definition of "Director" is amended to read as follows:

DIRECTOR shall mean a member of the Board of Directors, or a
member of the board of directors of any subsidiary of the
Corporation, who is not also an employee of the Corporation or its
subsidiaries.

* * * * *

Exhibit 21

Subsidiaries of Registrant

Percentage Jurisdiction or
Subsidiary (1) Owned State of Incorporation
- -------------- ----- ----------------------

Pioneer Bank, A Federal Savings Bank 100% United States
Pioneer Development Corporation(2) 100% Oregon
Pioneer Bank Investment Corporation(2) 100% Oregon

- ------------
(1) The operations of the Company's subsidiary are included in the Company's
consolidated financial statements.
(2) Wholly-owned subsidiary of Pioneer Bank, A Federal Savings Bank.

Exhibit 23

Consent of Deloitte & Touche LLP

[Letterhead of Deloitte & Touche LLP]

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements Nos.
333-67541 and 333-37427 of Oregon Trail Financial Corp. on Form S-8, of our
report dated May 31, 2002, appearing in the Annual Report on Form 10-K of
Oregon Trail Financial Corp. for the year ended March 31, 2002.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Portland, Oregon
June 28, 2002