The Bank originates both fixed-rate loans and adjustable-rate loans. Generally, fixed rate loans including 15, 20, 30, and five and seven year balloon reset loans are originated to meet the requirements for sale in the secondary market to the FHLMC, however, from time to time, a portion of these fixed-rate loans originated by the Bank may be retained in the Bank's loan portfolio to meet the Bank's asset/liability management objectives. The Bank uses an

automated underwriting program, which preliminarily qualifies a loan as conforming to FHLMC underwriting standards when the loan is originated. At September 30, 2003, $33.5 million, or 35.1%, of the Bank's one- to- four family loan portfolio consisted of fixed rate one- to- four family mortgage loans.

        The Bank also offers adjustable rate mortgage ("ARM") loans at rates and terms competitive with market conditions. All of the Bank's ARM loans are retained in its loan portfolio and not with a view toward sale in the secondary market.

        The Bank offers several ARM products which adjust annually after an initial period ranging from one to five years subject to a limitation on the annual increase of 2% and an overall limitation of 6%. These ARM products have utilized the weekly average yield on one year U.S. Treasury securities adjusted to a constant maturity of one year plus a margin of 2.875% to 4.00%. Loans tied to the prime rate or to LIBOR indices typically do not have periodic, or lifetime adjustments limits. Loans tied to these indices normally have margins ranging from 0.0% to 3.0%. ARM loans held in the Bank's portfolio do not permit negative amortization of principal and carry no prepayment restrictions. 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. At September 30, 2003, $61.9 million, or 64.9%, of the Bank's one- to- four family loan portfolio consisted of ARM loans.

        A portion of the Bank's ARM loans are "non-conforming" because they do not satisfy acreage limits, or various other requirements imposed by the FHLMC. Some of these loans are also originated to meet the needs of borrowers who cannot otherwise satisfy the FHLMC credit requirements because of personal and financial reasons (i.e., divorce, bankruptcy, length of time employed, etc.), and other aspects, which do not conform to the FHLMC's guidelines. Many of these borrowers have higher debt to income ratios, or the loans are secured by unique properties in rural markets for which there are no comparable sales of comparable properties to support value according to secondary market requirements. These loans are known as non-conforming loans and the Bank may require additional collateral or lower loan-to-value ratios prior to the origination of the loan. The Bank believes that these loans satisfy a need in its local market area. As a result, subject to market conditions, the Bank intends to continue to originate such loans.

        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 interest to be paid by the customer due to increases in interest rates. 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 costs to the borrower. Furthermore, because the ARM loans originated by the Bank generally provide, as a marketing incentive, for initial rates of interest below the rates which would apply were the adjustment index used for pricing initially, these loans are subject to increased risks of default or delinquency. The Bank attempts to reduce the potential for delinquencies and defaults on ARM loans by qualifying the borrower based on the borrower's ability to repay the ARM loan assuming that the maximum interest rate that could be charged at the first adjustment period remains constant during the loan term. Another consideration is that although ARM loans allow the Bank to increase the sensitivity of its asset base due to changes in the interest rates, the extent of this interest sensitivity is limited by the periodic and lifetime interest rate adjustment limits. Because of these considerations, the Bank has no assurance that yields on ARM loans will be sufficient to offset increases in the Bank's cost of funds.

        While fixed-rate, single-family residential mortgage loans are normally originated with 15 to 30 year terms, such loans typically remain outstanding for substantially shorter periods. This is because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all mortgage loans in the Bank's loan portfolio contain due-on-sale clauses providing that the Bank may declare the unpaid amount due and payable upon the sale of the property securing the loan. Typically, the Bank enforces these due-on-sale clauses to the extent permitted by law and as business judgment dictates. Thus, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

        The Bank requires fire and extended coverage casualty insurance (and loans originated since 1994, if appropriate, generally requires flood insurance) be maintained on all of its real estate secured loans.

        The Bank's lending policies generally limit the maximum loan-to-value ratio on mortgage loans secured by owner-occupied properties to 95% of the lesser of the appraised value or the purchase price. However, the Bank usually obtains private mortgage insurance ("PMI") on the portion of the principal amount that exceeds 80% of the appraised value of the security property. The maximum loan-to-value ratio on mortgage loans secured by non-owner-occupied properties is generally 80% (90% for loans originated for sale in the secondary market to the FHLMC).

        Construction and Land Development Lending. Prompted by unfavorable economic conditions in its primary market area in 1980, the Bank sought to establish a market niche and, as a result, began originating construction loans. In recent periods, construction lending activities have been primarily in the Pierce County, King County, Thurston County, and Kitsap County markets. Competition from other financial institutions has increased in recent periods and it is possible that margins on construction loans may be reduced in the future.

        The Bank currently originates three types of residential construction loans: (i) speculative construction loans, (ii) custom construction loans and (iii) owner/builder loans. The Bank initiated its construction lending with the origination of speculative construction loans. As a result, the Bank began to establish contacts with the building community and increased the origination of custom construction and land development loans in rural market areas. The Bank believes that its in-house computer system has enabled it to establish processing and disbursement procedures to meet the needs of these borrowers. To a lesser extent, the Bank also originates construction loans for the development of multi-family and commercial properties. Subject to market conditions, the Bank intends to continue to emphasize its residential construction lending activities.

        At September 30, 2003, the composition of the Bank's construction and land development loan portfolio was as follows:

        Speculative construction loans are made to home builders and are termed "speculative" because the home builder does not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent financing with either the Bank or another lender for the finished home. The home buyer may be identified either during or after the construction period, with the risk that the builder will have to debt service the speculative construction loan and finance real estate taxes and other carrying costs of the completed home for a significant time after the completion of construction until the home buyer is identified. The Bank lends to approximately 65 builders located in the Bank's primary market area, each of which generally have three to six speculative loans outstanding from the Bank during a 12 month period. Rather than originating lines of credit to home builders to construct several homes at once, the Bank originates and underwrites a separate loan for each home. Speculative construction loans are originated for a term of 12 months, with current rates ranging from 5.00% to 7.50%, and with a loan-to-value ratio of no more than 80% of the appraised estimated value of the completed property. During this 12 month period, the borrower is required to make monthly payments of accrued interest on the outstanding loan balance. At September 30, 2003 speculative construction loans totaled $26.4 million, or 28.0%, of the total construction loan portfolio. At September 30, 2003, the Bank had 11 borrowers each with aggregate outstanding speculative loan balances of more than $500,000. The largest

5

<PAGE>

aggregate outstanding balance to one borrower amounted to $3.2 million, and the largest outstanding balance for a single speculative loan was $760,000. At September 30, 2003, one speculative construction loan with a balance of $192,000 was not performing according to terms. See "-- Lending Activities -- Nonperforming Assets and Delinquencies."

        Unlike speculative construction loans, custom construction loans are made to home builders who, at the time of construction, have a signed contract with a home buyer who has a commitment for permanent financing for the finished home with the Bank or another lender. Custom construction loans are generally originated for a term of 12 months, with fixed interest rates ranging from 6.0% to 7.50% and with loan-to-value ratios of 80% of the appraised estimated value of the completed property or sales price, whichever is less. During this 12 month period, the borrower is required to make monthly payments of accrued interest on the outstanding loan balance.

        The Bank originates loans to local real estate developers with whom it has established relationships for the purpose of developing residential subdivisions (i.e., installing roads, sewers, water and other utilities) (generally with ten to 50 lots). At September 30, 2003, subdivision development loans totaled $7.1 million, or 7.6% of construction and land development loans receivable. Land development loans are secured by a lien on the property and made for a period of two to five years with fixed or variable interest rates, and are made with loan-to-value ratios generally not exceeding 75%. Monthly interest payments are required during the term of the loan. Land development loans are structured so that the Bank is repaid in full upon the sale by the borrower of approximately 80% of the subdivision lots. Substantially all of the Bank's land development loans are secured by property located in its primary market area. In addition, in the case of a corporate borrower, the Bank also generally obtains personal guarantees from corporate principals and reviews their personal financial statements. At September 30, 2003, the largest land development loan had an outstanding loan balance of $1.3 million, and was performing according to its terms.

        Land development loans secured by land under development involve greater risks than one- to- four family residential mortgage loans because such loans are advanced upon the predicted future value of the developed property. If the estimate of such future value proves to be inaccurate, in the event of default and foreclosure the Bank may be confronted with a property the value of which is insufficient to assure full repayment. The Bank attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on land loans to 75% of the estimated developed value of the secured property.

        The Bank also provides construction financing for multi-family and commercial properties. At September 30, 2003, such construction loans amounted to $10.8 million, or 11.4% of construction loans.  These loans are secured by motels, apartment buildings, condominiums, office buildings and retail rental space located in the Bank's primary market area and currently range in amount from $108,000 to $3.5 million. At September 30, 2003, the largest outstanding multi-family construction loan had a balance of $3.5 million (including $2.3 million of undisbursed loans in process balance), and was performing according to terms. At September 30, 2003, the largest outstanding commercial real estate construction loan had a balance of $2.5 million (including $160,000 of undisbursed loans in process balance), and was performing according to terms. This loan represents a 55% participation interest in a construction loan secured by a commercial property located in Clark County, Washington. Periodically, the Bank purchases (without recourse to the seller other than for fraud) from other lenders participation interests in multi-family and commercial construction loans. The Bank underwrites such participation interests according to its own standards.

        All construction loans must be approved by the Bank's Loan Committee or the Bank's Board of Directors. See "-- Lending Activities -- Loan Solicitation and Processing." Prior to preliminary approval of any construction loan application, an independent fee appraiser inspects the site and the Bank reviews the existing or proposed improvements, identifies the market for the proposed project and analyzes the pro forma data and assumptions on the project. In the case of a speculative or custom construction loan, the Bank reviews the experience and expertise of the builder. After preliminary approval has been given, the application is processed, which includes obtaining credit reports, financial statements and tax returns on the borrowers and guarantors, an independent appraisal of the project, and any other expert reports necessary to evaluate the proposed project. In the event of cost overruns, the Bank generally requires that the borrower increase the funds available for construction by depositing its own funds into a loans in process account.

        Loan disbursements during the construction period are made to the builder based on a line item budget. Periodic on-site inspections are made by qualified inspectors to document the reasonableness of the draw request. For most builders, the Bank disburses loan funds by providing vouchers to suppliers, which when used by the builder to purchase supplies are submitted by the supplier to the Bank for payment.

        The Bank regularly monitors the construction loan disbursements using an internal computer program.  The Bank believes that its internal monitoring system helps reduce many of the risks inherent in its construction lending.

        The Bank originates construction loan applications through customer referrals, contacts in the business community and occasionally real estate brokers seeking financing for their clients.

        Construction lending affords the Bank the opportunity to achieve higher interest rates and fees with shorter terms to maturity than does its single-family permanent mortgage lending. Construction lending, however, is generally considered to involve a higher degree of risk than single-family permanent mortgage lending because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. If the estimate of construction cost proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value upon completion proves to be inaccurate, the Bank may be confronted with a project whose value is insufficient to assure full repayment. Projects may also be jeopardized by disagreements between borrowers and builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes for which no purchaser has been identified carry more risk because the payoff for the loan depends on the builder's ability to sell the property prior to the time that the construction loan is due. The Bank has sought to address these risks by adhering to strict underwriting policies, disbursement procedures, and monitoring practices. In addition, because the Bank's construction lending is primarily secured by properties in its primary market area, changes in the local and state economies and real estate markets could adversely affect the Bank's construction loan portfolio.

        Real Estate Contracts. The Bank purchases real estate contracts and deeds of trust from individuals who have privately sold their homes or property. These contracts are generally secured by one- to- four family properties, building lots and undeveloped land and range in principal amount from $10,000 to $200,000, but typically are in amounts between $20,000 and $40,000. Properties securing real estate contracts purchased by the Bank are generally located within its primary market area. Prior to purchasing the real estate contract, the Bank reviews the contract and analyzes and assesses the collateral for the loan, the down payment made by the borrower and the credit history on the loan. As of September 30, 2003, the Bank had outstanding $1.1 million of real estate contracts.

        Multi-Family Lending. At September 30, 2003, the Bank had $18.2 million, or 5.0% of the Bank's total loan portfolio, secured by multi-family dwelling units (more than four units) located primarily in the Bank's primary market area. At September 30, 2003, approximately 34.3% of the Bank's multi-family loans represent participation interests in loans, secured by properties generally located in the Bank's primary market area, purchased from other lenders. Such participation interests are purchased without recourse to the seller other than for fraud. The Bank underwrites such participation interests according to its own standards.

        Multi-family loans are generally originated with variable rates of interest ranging from 2.00% to 3.50% over the one-year constant maturity U.S. Treasury Bill Index or a matched term FHLB advance, with principal and interest

payments fully amortizing over terms of up to 30 years. Multi-family loans currently range in principal balance from $40,000 to $6.1 million. At September 30, 2003, the largest multi-family loan had an outstanding principal balance of $6.1 million and was secured by an apartment building located in the Bank's primary market area. At September 30, 2003, this loan was performing according to its terms.

        The maximum loan-to-value ratio for multi-family loans is generally 75%. The Bank requires its multi-family loan borrowers to submit financial statements and rent rolls on the subject property annually. The Bank also inspects the subject property annually. The Bank generally imposes a minimum debt coverage ratio of approximately 1.10 times for loans secured by multi-family properties.

        Multi-family mortgage lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to- four family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to- four family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan. If the borrower is a corporation, the Bank also generally obtains personal guarantees from corporate principals based on a review of personal financial statements.

        Commercial Real Estate Lending. Commercial real estate loans totaled $103.0 million, or 28.3% of total loans receivable at September 30, 2003, and consisted of 266 loans.  Commercial mortgage loans have now surpassed one-to-four family mortgage loans as the largest category in the Bank's loan portfolio.  The Bank originated $21.0 million of commercial mortgage loans during the year ended September 30, 2003 compared to $40.5 million originated during the year ended September 30, 2002.  The decrease in commercial mortgage loan originations is primarily attributed to a decrease demand for this product due to slow economic conditions.  The Bank originates commercial real estate loans generally at variable interest rates and secured by properties, such as restaurants, motels, office buildings and retail/wholesale facilities, located in its primary market area. The principal balances of commercial real estate loans currently ranges between $6,000 and $4.9 million. At September 30, 2003, the largest commercial real estate loan ($4.9 million) was secured by a commercial property located in Olympia, Washington. At September 30, 2003, three commercial real estate loans totaling $538,000 were not performing according to their terms. See "-- Lending Activities -- Nonperforming Assets and Delinquencies."

        The Bank requires appraisals of all properties securing commercial real estate loans. Appraisals are performed by an independent appraiser designated by the Bank, all of which are reviewed by management. The Bank considers the quality and location of the real estate, the credit of the borrower, the cash flow of the project and the quality of management involved with the property. The Bank generally imposes a minimum debt coverage ratio of approximately 1.10 for originated loans secured by income producing commercial properties. Loan-to-value ratios on commercial real estate loans are generally limited to 75%. The Bank generally obtains loan guarantees from financially capable parties based on a review of personal financial statements.

        Commercial real estate lending affords the Bank an opportunity to receive interest at rates higher than those generally available from one- to- four family residential lending. However, loans secured by such properties usually are greater in amount, more difficult to evaluate and monitor and, therefore, involve a greater degree of risk than one- to- four family residential mortgage loans. Because payments on loans secured by commercial properties often depend upon the successful operation and management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks by generally limiting the maximum loan-to-value ratio to 75% and strictly scrutinizing the financial condition of the borrower, the quality of the collateral and the management of the property securing the loan.  The Bank also requests annual financial information from the borrowers.

        Land Lending. The Bank originates loans for the acquisition of land upon which the purchaser can then build or make improvements necessary to build or to sell as improved lots. At September 30, 2003, land loans totaled $15.6

million, or 4.3% of the Bank's total loan portfolio. Land loans originated by the Bank are generally fixed-rate loans and have maturities of five to ten years. Land loans generally range in principal amount from $5,000 to $500,000. The largest land loan had an outstanding balance of $434,000 at September 30, 2003 and was performing according to its terms. At September 30, 2003, 11 land loans totaling $521,000 were not performing according to terms. See "-- Lending Activities -- Nonperforming Assets and Delinquencies."

        Loans secured by undeveloped land or improved lots involve greater risks than one- to- four family residential mortgage loans because such loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure the Bank may be confronted with a property the value of which is insufficient to assure full repayment. The Bank attempts to minimize this risk by generally limiting the maximum loan-to-value ratio on land loans to 75%.

        Consumer Lending. Consumer lending has traditionally been a small part of the Bank's business. Consumer loans generally have shorter terms to maturity and higher interest rates than mortgage loans. Consumer loans include home equity lines of credit, Title I home improvement loans, second mortgage loans, savings account loans, automobile loans, boat loans, motorcycle loans, recreational vehicle loans and unsecured loans. Consumer loans are made with both fixed and variable interest rates and with varying terms. At September 30, 2003, consumer loans amounted to $28.0 million, or 7.7%, of the total loan portfolio.

        At September 30, 2003, the largest component of the consumer loan portfolio consisted of second mortgage loans and home equity lines of credit, which totaled $19.2 million, or 5.3%, of the total loan portfolio. Home equity lines of credit and second mortgage loans are made for purposes such as the improvement of residential properties, debt consolidation and education expenses, among others. The majority of these loans are made to existing customers and are secured by a first or second mortgage on residential property. The Bank occasionally solicits these loans. The loan-to-value ratio is typically 80% or less, when taking into account both the first and second mortgage loans. Second mortgage loans typically carry fixed interest rates with a fixed payment over a term between five and 20 years. Home equity lines of credit are generally for a one year term and the interest rate is tied to the 26 week Treasury Bill or the prime rate.

        In July 1997, the Bank began issuing VISA credit cards to its existing customers. At September 30, 2003, credit card loans amounted to $1.6 million. The Bank does not engage in direct mailings of pre-approved credit cards.

        Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the 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 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. The Bank believes that these risks are not as prevalent in the case of the Bank's consumer loan portfolio because a large percentage of the portfolio consists of second mortgage loans and home equity lines of credit that are underwritten in a manner such that they result in credit risk that is substantially similar to one- to- four family residential mortgage loans. Nevertheless, second mortgage loans and home equity lines of credit have greater credit risk than one- to- four family residential mortgage loans because they are secured by mortgages subordinated to the existing first mortgage on the property, which may or may not be held by the Bank. At September 30, 2003, there were $212,000 of consumer loans delinquent in excess of 90 days.

        Commercial Business Lending. Commercial business loans totaled $9.5 million, or 2.6% of total loans receivable at September 30, 2003, and consisted of 113 loans. In July 1998, the Bank established a business banking division staffed by three experienced commercial bankers to increase the Bank's origination of commercial business loans. Currently, the division is staffed by six commercial lenders. Commercial business loans are generally secured by business equipment, accounts receivable, inventory or other property and are made at variable rates of interest equal

to a negotiated margin above the prime rate. The Bank also generally obtains personal guarantees from financially capable parties based on a review of personal financial statements.

        Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

        Loan Maturity. The following table sets forth certain information at September 30, 2003 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 and no stated maturity, and overdrafts are reported as due in one year or less.

(1)     Includes construction/permanent that convert to a permanent mortgage loan once construction is completed.

        The following table sets forth the dollar amount of all loans due after September 30, 2003, which have fixed interest rates and have floating or adjustable interest rates.

        Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their contractual terms 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.

        Loan Solicitation and Processing. Loan originations are obtained from a variety of sources, including walk-in customers, and referrals from builders and realtors. Upon receipt of a loan application from a prospective borrower, a credit report and other data are obtained to verify specific information relating to the loan applicant's employment, income and credit standing. An appraisal of the real estate offered as collateral generally is undertaken by an appraiser retained by the Bank and certified by the State of Washington.

        Mortgage loan applications are initiated by loan officers and are required to be approved by the Bank's Loan Committee, which consists of the Bank's President and four other senior management officers. Certain consumer loans up to and including $25,000 may be approved by individual loan officers and the Bank's consumer lending department manager may approve loans up to and including $50,000. Commercial business loans up to and including $250,000 may also be approved by the Bank's Business Banking Division manager. All other loans (except commercial business loans) up to and including $750,000 may be approved by two members of the Bank's Loan Committee. Loans in excess of $750,000, as well as loans of any size granted to a single borrower whose aggregate lending relationship exceeds $750,000, must be approved by the Bank's Board of Directors or a committee consisting of at least two outside Directors.

        Loan Originations, Purchases and Sales. During the years ended September 30, 2003 and 2002, the Bank's total gross loan originations were $255.5 million and $203.6 million, respectively. Periodically, the Bank purchases participation interests in construction and land development loans and multi-family loans, secured by properties located in the Bank's primary market area, from other lenders. Such purchases are underwritten to the Bank's underwriting guidelines and are without recourse to the seller other than for fraud. See "-- Lending Activities -- Construction and Land Development Lending" and "-- Lending Activities -- Multi-Family Lending."

        Consistent with its asset/liability management strategy, the Bank's policy generally is to retain in its portfolio all of the ARM loans and sell fixed rate one-to-four family mortgage loans in the secondary market to the FHLMC; however, from time to time, a portion of fixed-rate loans may be retained in the Bank's portfolio to meet its asset-liability

objectives. Loans sold in the secondary market are generally sold on a servicing retained basis. At September 30, 2003, the Bank's loan servicing portfolio totaled $161.7 million.

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

        Loan Origination Fees. The Bank generally receives loan origination fees. Loan fees are a percentage of the principal amount of the loan which are charged to the borrower for funding the loan. The amount of fees charged by the Bank is generally 0.5% to 2.0%. Current accounting standards require fees received and certain loan origination costs for originating loans to be deferred and amortized into interest income over the contractual life of the loan. Net deferred fees or costs associated with loans that are prepaid are recognized as income at the time of prepayment. Deferred origination loan fees totaled $2.9 million at September 30, 2003.

        Nonperforming Assets and Delinquencies. The Bank assesses late fees or penalty charges on delinquent loans of approximately 5% of the monthly loan payment amount. Substantially all fixed-rate and ARM loan payments are due on the first day of the month; however, the borrower is given a 15 day grace period to make the loan payment. When a mortgage loan borrower fails to make a required payment when due, the Bank institutes collection procedures. A notice is mailed to the borrower 16 days after the date the payment is due. Attempts to contact the borrower by telephone generally begin on or before the 30^th day of delinquency. If a satisfactory response is not obtained, continuous follow-up contacts are attempted until the loan has been brought current. Before the 90th day of delinquency, attempts to interview the borrower, preferably in person, are made to establish (i) the cause of the delinquency, (ii) whether the cause is temporary, (iii) the attitude of the borrower toward the debt, and (iv) a mutually satisfactory arrangement for curing the default.

        If the borrower is chronically delinquent and all reasonable means of obtaining payment on time have been exhausted, foreclosure is initiated according to the terms of the security instrument and applicable law. Interest income on loans in foreclosure is reduced by the full amount of accrued and uncollected interest.

        When a consumer loan borrower or commercial business borrower fails to make a required payment on a loan by the payment due date, the Bank institutes similar collection procedures as for its mortgage loan borrowers.  Loans becoming 90 days or more past due are placed on non-accrual status, with any accrued interest reversed against interest income, unless they are well secured and in the process of collection.

        The Bank's Board of Directors is informed monthly as to the status of all loans that are delinquent by more than 30 days, the status on all loans currently in foreclosure, and the status of all foreclosed and repossessed property owned by the Bank.

14

<PAGE>

15

<PAGE>

16

<PAGE>

17

<PAGE>

18

<PAGE>

19

<PAGE>

        The following table sets forth the maturities and weighted average yields of the investment and mortgage-backed securities in the Company's investment securities portfolio at September 30, 2003. Mutual funds and equity securities, which by their nature do not have maturities, are classified in the less than one year category.

Deposit Activities and Other Sources of Funds

20

<PAGE>

21

        Deposit Flow. The following table sets forth the balances of deposits in the various types of accounts offered by the Bank at the dates indicated.

22

<PAGE>

        Time Deposits by Rates. The following table sets forth the time deposits in the Bank classified by rates as of the dates indicated.

        Borrowings.  Deposits are the primary source of funds for the Bank's lending and investment activities and for general business purposes. The Bank has the ability to use advances from the FHLB-Seattle to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB-Seattle functions as a central reserve bank providing credit for 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 which are obligations of, or guaranteed by, the U.S. Government)

23

<PAGE>

provided certain creditworthiness standards have been met. Advances are made pursuant to several different credit programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based on the financial condition of the member institution and the adequacy of collateral pledged to secure the credit. At September 30, 2003, the Bank maintained an uncommitted credit facility with the FHLB-Seattle that provided for immediately available advances up to an aggregate amount of 35% of the Bank's total assets, under which $61.6 million was outstanding.

24

<PAGE>

25

<PAGE>

26

<PAGE>

27

<PAGE>

28

<PAGE>

29

<PAGE>

30

<PAGE>

31

<PAGE>

32

<PAGE>

33

<PAGE>

        The Bank is scheduled to open a full-service office in Gig Harbor, Washington in March 2004.  The branch facility will be leased.

35

<PAGE>

        The Bank operates 16 proprietary ATMs that are part of a nationwide cash exchange network. The Bank also began remodeling a commercial building in Hoquiam, Washington, during the fiscal year ended September 30, 2003, that will become the future location of the Bank's loan servicing department and escrow department.

Item 3. Legal Proceedings

        Periodically, there have been various claims and lawsuits involving the Bank, 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.

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

        No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2003.

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

        The Company's common stock is traded on the Nasdaq National Market under the symbol "TSBK". As of September 30, 2003, there were 4,251,680 shares of common stock issued and approximately 735 shareholders of record, excluding persons or entities who hold stock in nominee or "street name" accounts with brokers. Dividend payments by the Company are dependent primarily on dividends received by the Company from the Bank. Under federal regulations, the dollar amount of dividends the Bank may pay is dependent upon its capital position and recent net income. Generally, if the Bank satisfies its regulatory capital requirements, it may make dividend payments up to the limits prescribed in the FDIC regulations. However, institutions that have converted to a stock form of ownership may not declare or pay a dividend on, or repurchase any of, its common stock if the effect thereof would cause the regulatory capital of the institution to be reduced below the amount required for the liquidation account which was established in connection with the mutual to stock conversion.

        The following table sets forth the market price range of the Company's common stock for the years ended September 30, 2003, 2002 and 2001. This information was provided by the Nasdaq Stock Market.

36

<PAGE>

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 subsidiaries 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 presented herein.

37

<PAGE>

38

<PAGE>

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 is intended to assist in understanding the consolidated 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 included in Item 8 of this report.

Operating Strategy

        The Bank is a community-oriented bank which has traditionally offered a wide variety of savings products to its retail customers while concentrating its lending activities on real estate loans. The primary elements of the Bank's operating strategy include:

        Emphasize Residential Mortgage Lending and Residential Construction Lending. The Bank has historically attempted to establish itself as a niche lender in its primary market areas by focusing its lending activities primarily on the origination of loans secured by one- to- four family residential dwellings, including an emphasis on loans for the construction of residential dwellings. In an effort to meet the credit needs of borrowers in its primary area, the Bank actively originates one- to- four family mortgage loans that do not qualify for sale in the secondary market under FHLMC guidelines. The Bank has also been an active participant in the secondary market, originating residential loans for sale to the FHLMC on a servicing retained basis.

        Diversify Primary Market Area by Expanding Branch Office Network. In an effort to lessen its dependence on the Grays Harbor County market whose economy has historically been tied to the timber and fishing industries, the Bank has opened branch offices in Pierce, King, Thurston and Kitsap Counties. Thurston, Pierce, King and Kitsap Counties contain the Olympia, Bremerton, and Seattle-Tacoma metropolitan areas and their economies are more diversified with the presence of government, aerospace and computer technology industries.

        Limit Exposure to Interest Rate Risk. In recent years, the loans that the Bank has retained in its portfolio generally have periodic interest rate adjustment features or have been relatively short-term in nature. Loans originated for portfolio retention primarily have included ARM loans and short-term construction loans. Longer term fixed-rate mortgage loans have generally been originated for sale in the secondary market. Management believes that the interest rate sensitivity of these adjustable rate and short-term loans more closely match the interest rate sensitivity of the Bank's funding sources than do other longer duration assets with fixed interest rates.

        Emphasize the Origination of Commercial Real Estate and Commercial Business Loans. The Bank established a business banking division in 1998 for the purpose of increasing the Bank's origination of commercial real estate and

39

<PAGE>

commercial business loans. Originally, three lenders were hired to staff the division. Currently, six lenders are active in the origination of commercial loans.

        Increase the Consumer Loan Portfolio. In 2001 the Bank hired a consumer loan specialist to increase the origination of consumer loans. The consumer loans generated since that time have been secured primarily by real estate. The Bank expects to continue expanding its portfolio of consumer loans.

        Pursue Low Cost Core Deposits and Deposit Related Fee Income.  The Bank has placed an emphasis on attracting commercial and personal checking accounts.  These transactional accounts typically provide a lower cost of funding than certificates of deposit accounts and generate non-interest fee income.  The Bank implemented a checking account acquisition program in 2000 in increase these transactional accounts.

Market Risk and Asset and Liability Management

        General. Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investment, deposit and borrowing activities. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. 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. The Bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities or derivative instruments. Furthermore, the Bank is not subject to foreign currency exchange rate risk or commodity price risk.

        Qualitative Aspects of Market Risk. 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 retaining in its portfolio, short-term loans and loans with interest rates subject to periodic adjustments. The Bank relies on retail deposits as its primary source of funds. Management believes retail deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent a more stable source of funds. As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms of up to six years.

        The Bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities. The primary elements of this strategy involve originating ARM loans for its portfolio; maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to- four family residential mortgage loans; matching asset and liability maturities; investing in short-term securities; originating fixed-rate loans for retention or sale in the secondary market and retaining the related loan servicing rights.

        Sharp increases or decreases in interest rates may adversely affect the Bank's earnings. However, based on a rate shock analysis prepared by the FHLB of Seattle, an increase in interest rates of up to 300 basis points would increase the Bank's projected net interest income, primarily because a larger portion of the Bank's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period. Similarly, further decreases in interest rates would negatively affect net interest income, as repricing would have the opposite effect. Management has sought to sustain the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Pursuant to this strategy, the Bank actively originates adjustable rate loans for retention in its loan portfolio. Fixed-rate mortgage loans generally are originated for the immediate or future resale in the secondary mortgage market. At September 30, 2003, adjustable rate mortgage loans and adjustable rate mortgage-backed securities constituted $208.9 million or 60.50%, of the Bank's total combined mortgage loan and mortgage-backed securities portfolio. Although the Bank has sought to originate ARM loans, the ability to originate such loans depends to a great extent on market interest

40

<PAGE>

rates and borrowers' preferences. Particularly in lower interest rate environments, borrowers often prefer to obtain fixed rate loans.

        Consumer loans and construction and land development loans typically have shorter terms and higher yields than permanent residential mortgage loans, and accordingly reduce the Bank's exposure to fluctuations in interest rates. At September 30, 2003, the construction and land development, and consumer loan portfolios amounted to $94.1 million and $28.0 million, or 25.9% and 7.7% of total loans receivable (including loans held for sale), respectively.

        Quantitative Aspects of Market Risk. Management of the Bank monitors the Bank's interest rate sensitivity through the use of a model provided for the Bank by the FHLB of Seattle. The model estimates the changes in NPV (net portfolio value) and net interest income in response to a range of assumed changes in market interest rates. The model first estimates the level of the Bank's NPV (market value of assets, less market value of liabilities, plus or minus the market value of any off-balance sheet items) under the current rate environment. In general, market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates. The model then recalculates the Bank's NPV under different interest rate scenarios. The change in NPV under the different interest rate scenarios provides a measure of the Bank's exposure to interest rate risk. The following table is provided by the FHLB of Seattle based on data at September 30, 2003.

        In the event of a 200 basis point decrease in interest rates, the Bank would be expected to experience a 5.4% decrease in NPV and a 14.6% decrease in net interest income. In the event of a 200 basis point increase in interest rates, a 4.8% increase in NPV and an 8.2% increase in net interest income would be expected. Based upon the modeling described above, the Bank's asset and liability structure generally results in decreases in NPV and decreases in net interest income in a declining interest rate scenario. This structure also generally results in increases in NPV and increases in net interest income in a rising interest rate environment.

        As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could possibly deviate significantly from those assumed in calculating the table.

41

<PAGE>

Comparison of Financial Condition at September 30, 2003 and 2002

        Total Assets: Total assets increased $18.5 million to $449.6 million at September 30, 2003 from $431.1 million at September 30, 2002. This change is reflected primarily in a $16.7 million increase in investments and interest bearing deposits in banks and a $1.8 million increase in premises and equipment.

        Premises and Equipment:  Premises and equipment increased $1.8 million to $13.4 million at September 30, 2003 from $11.7 million at September 30, 2002.  The increase is primarily related to the opening of two new branches (Silverdale and Olympia), the opening of a new facility to house the Bank's loan servicing department and escrow department, and the purchase of equipment in conjunction with the Bank's technology improvement initiatives.

        Cash and Due from Financial Institutions: Cash and due from financial institutions and interest-bearing deposit balances in banks increased to $38.1 million at September 30, 2003 from $36.1 million at September 30, 2002. The increase is primarily due to investing the proceeds from increased customer deposits.

        Investments, Mortgage-backed Securities and FHLB Stock: Investments, mortgage-backed securities and FHLB Stock increased $13.0 million to $59.8 million at September 30, 2003 from $46.7 million at September 30, 2002 as proceeds from increased customer deposits were invested. For additional details on investments and mortgage-backed securities, see Note 3 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

        Loans Receivable and Loans Held for Sale, net of allowance for loan losses: Net loans receivable, including loans held-for-sale, decreased slightly to $322.2 million at September 30, 2003 from $322.5 at September 30, 2002. The composition of the portfolio continued to migrate away from the Bank's historical dependence on one-to-four family mortgage loans as the percentage of one-to-four family mortgage loans decreased to 26.2% at September 30, 2003 from 31.3% at September 30, 2002. The lower levels of one-to-four family mortgage loans were partially offset by increased levels of construction loans, commercial real estate loans, and consumer loans. During the year one-to-four family mortgage loans decreased by $17.8 million and multi-family mortgage loans decreased by $5.9 million. However, net construction loans increased by $11.5 million, commercial mortgage loans increased by $5.3 million, and consumer loans increased by $6.2 million. Loan volume was very strong during the year ended September 30, 2003 as the Bank originated loans of $255.5 million and sold $108.8 million in fixed rate one-to-four family mortgage loans. Management elected to sell a majority of the fixed rate residential loans originated rather than adding them to the Bank's portfolio due to the low interest-rate environment.

        Real Estate Owned: Real estate owned ("REO") and other repossessed assets increased $578,000 to $1.3 million at September 30, 2003 from $680,000 at September 30, 2002. The balance increased as nine properties totaling $1.0 million were added to REO status and seven properties totaling $422,000 were sold during the year. For additional information, see "Item 1, Business - Lending Activities - Nonperforming Assets" and Note 7 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplemental Data."

        Deposits: Deposits increased by $15.4 million to $307.7 million at September 30, 2003 from $292.3 million at September 30, 2002, primarily due to a $15.4 million increase in the Bank's N.O.W. checking accounts, a $9.2 million increase in passbook savings accounts, and a $5.5 million increase in non-interest bearing accounts. These increases were partially offset by an $8.4 million decrease in money market accounts and a $6.4 million decrease in certificate of deposit accounts. The Bank chose not to compete for high-rate time deposits, electing instead to focus on attracting transaction accounts that typically provide more of a core deposit relationship with customers.

        Borrowings: Borrowings decreased $154,000 to $61.6 million at September 30, 2003 from $61.8 million at September 30, 2002 due to scheduled amortization payments on FHLB advances.

        Shareholders' Equity: Total shareholders' equity increased by $3.2 million to $77.6 million at September 30, 2003 from $74.4 million at September 30, 2002. The components of shareholders' equity were primarily affected by net income of $6.64 million, the repurchase of 188,367 shares of the Company's stock for $3.85 million and the payment

42

<PAGE>

of $2.15 million in dividends to shareholders. Also affecting shareholders' equity was a $1.50 million increase to additional paid in capital from the exercise of stock options, a $364,000 decrease in accumulated other comprehensive income, and decreases of $644,000 and $528,000 in the equity components related to unearned shares issued to the Management Recognition and Development Plan and Employee Stock Ownership Plans, respectively, as more shares vested under the MRDP and were released under the ESOP.

        On February 14, 2003 the Company announced a plan to repurchase 380,028 shares of the Company's stock. This marked the Company's eleventh stock repurchase plan. As of September 30, 2003, the Company had purchased 112,108 of these shares and cumulatively had repurchased 2,710,671 (41.0%) of the 6,612,500 shares that were issued when the Company went public in January 1998.

Comparison of Financial Condition at September 30, 2002 and 2001

        Total Assets: Total assets increased by $44.7 million to $431.1 million at September 30, 2002 from $386.3 million at September 30, 2001 primarily due to increased deposit levels.

        Cash and Due from Financial Institutions: Cash and due from financial institutions and interest-bearing deposit balances in banks increased to $36.1 million at September 30, 2002 from $13.4 million at September 30, 2001. This increase is primarily due to investing proceeds from increased customer deposits.

        Investments, Mortgage-backed Securities and FHLB Stock: Investments, mortgage-backed securities and FHLB stock increased to $46.7 million at September 30, 2002 from $34.2 million at September 30, 2001 primarily due to the conversion of $12.2 million in fixed rate loans held for sale to mortgage-backed securities. For additional details on investments and mortgage-backed securities, see Note 3 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

        Loans Receivable and Loans Held for Sale, net of allowance for loan losses: Net loans receivable, including loans held-for-sale, decreased $1.2 million to $322.5 million at September 30, 2002 from $323.8 at September 30, 2001, primarily due to an $18.6 million decrease in the Bank's net construction loan portfolio and a $16.9 million decrease in the Bank's one-to-four family mortgage loan portfolio. The construction loan decrease resulted primarily from the pay down of loans secured by condominium projects pursuant to unit sales and the conversion of construction loans to permanent status. The decrease of one-to-four family mortgages held in the portfolio was primarily due to the conversion of $12.2 million of loans held for sale to mortgage-backed securities and the sale of $70.2 million in fixed rate one-to-four family mortgage loans during the twelve-month period. The decreases in construction and one-to-four family mortgages were partially offset by a $34.1 million increase in commercial real estate and business loans, which were originated primarily by the Bank's Business Banking Division.

        Bank owned life insurance ("BOLI"): The Bank purchased $10.0 million of BOLI during the September 30, 2002 quarter to cover certain officers of the Bank and the Company. The annual increases in the cash surrender value of the insurance policies are reported as tax-exempt non-interest income under the current provisions of the IRS code. The Bank anticipates that the tax-equivalent yield on this asset will be greater than alternative investments and will help the Bank offset the cost of its employee benefit plans.

        Real Estate Owned, Net: Real Estate Owned, net, decreased to $680,000 from $1.0 million at September 30, 2001. This balance decreased due to $459,000 in one-to-four family REO's and $260,000 in land REO's being sold and was offset by the addition of $430,000 in one-to-four family REO's. For additional information, see "Item 1, Business -- Lending Activities -- Nonperforming Assets" and Note 7 to the Notes to Consolidated Financial Statements contained in "Item 8, Financial Statements and Supplementary Data."

        Deposits: Deposits increased by 20.6% to $292.3 million at September 30, 2002 from $242.4 million at September 30, 2001, primarily due to a $20.6 million increase in the Bank's money market accounts, an $11.6 million increase in N.O.W. checking accounts, a $6.1 million increase in passbook savings accounts and a $6.6 million increase

43

<PAGE>

in non-interest bearing accounts. Management attributes the deposit growth to its targeted marketing program and to consumer uncertainty regarding alternative investment options.

        Borrowings: Borrowings decreased $7.2 million to $61.8 million at September 30, 2002 from $69.0 million at September 30, 2001, as funds from increased deposits were used to pay down the level of FHLB advances.

        Shareholders' Equity: Total shareholders' equity increased by $2.6 million to $74.4 million at September 30, 2002 from $71.8 million at September 30, 2001. The components of shareholder's equity were affected by net income of $6.9 million, the repurchase of 274,272 shares of the Company's stock for $4.4 million, the payment of $2.0 million in dividends to shareholders, and a $255,000 increase in accumulated other comprehensive income. Also affecting shareholders equity were decreases of $645,000 in the equity component related to unearned shares issued to the Management Recognition and Development Plan and $529,000 in the equity component related to the unearned shares issued to the Employee Stock Ownership Plan, and a $588,000 increase to additional paid in capital from the exercise of stock options.

        On May 10, 2002 the Company announced a plan to repurchase 193,659 shares of the Company's stock. This marked the Company's tenth 5% stock repurchase plan. As of September 30, 2002, the Company had purchased 117,400 of these shares and cumulatively had repurchased 2,522,304 (38.1%) of the 6,612,500 shares that were issued when the Company went public in January 1998.

Comparison of Operating Results for Years Ended September 30, 2003 and 2002

        Net Income: Net income for the year ended September 30, 2003 was $6.64 million, or $1.66 per diluted share ($1.74 per basic share) compared to $6.89 million, or $1.71 per diluted share ($1.76 per basic share) for the year ended September 30, 2002. The lower earnings for the current year were primarily a result of increased non-interest expenses related to technology improvements, higher employee costs resulting from a larger employee base, and higher premises and equipment expenses due to additional branches and remodeling costs. The increased expenses were, however, partially offset by higher non-interest income, largely related to mortgage loan sales and earnings on bank owned life insurance.

        During the year a number of technology enhancements were implemented to provide additional opportunities to serve and expand the Bank's customer base. The Bank converted to the Kirchman Bankway core processing system from its in-house supported system, and changed its Internet banking system, its loan platform system and its ATM service provider. The technology related conversion expenses totaled $586,000 ($387,000 net of income tax) and reduced earnings by $0.10 per diluted share.  The majority of the Company's planned technology related conversion expenses occurred during the year ended September 30, 2003.  However, the Company does anticipate additional conversion expenses related to employee overtime, additional equipment upgrades, and continued training to occur during the quarters ended December 31, 2003 and March 31, 2004 as additional aspects of the technology upgrades are fully implemented.  While the technology upgrades reduced profitability in the short term, the Company believes the investment will be beneficial to its customers and ultimately to its long-term investors.

        Net Interest Income: Net interest income decreased $596,000 to $18.78 million for the year ended September 30, 2003 from $19.37 million for the year ended September 30, 2002. Total interest income decreased $2.54 million to $27.72 million for the year ended September 30, 2003 from $30.26 million for the year ended September 30, 2002, primarily due to a reduction in average yields on earning assets. The yield on earning assets was 6.80% for the year ended September 30, 2003 compared to 7.93% for the year ended September 30, 2002. In addition to overall lower market rates, the yield on earning assets was also reduced by a change in the composition of total earning assets. In 2002, loans, the Company's highest yielding class of assets, comprised 84.9% of average earning assets. In 2003, loans comprised 78.4% of average earning assets. This change was largely influenced by the decision to sell many of the loans originated during this low interest rate cycle. That had the effect of increasing the gain on loans sold, at the expense of interest income. The impact of lower average yields was, however, partially offset by increased levels of average earning assets. Total interest expense decreased $1.94 million to $8.95 million for the year ended September 30, 2003 from $10.89 million for the year ended September 30, 2002. The average cost of funds for each of the Bank's deposit account

44

<PAGE>

types for the current period was lower than a year ago. The overall cost of funds decreased to 2.69% for the year ended September 30, 2003 from 3.59% for the year ended September 30, 2002. As a result of these changes, the net interest margin decreased to 4.61% for the year ended September 30, 2003 from 5.08% for the year ended September 30, 2002.

        Provision for Loan Losses: The provision for loan losses decreased $645,000 to $347,000 for the year ended September 30, 2003 from $992,000 for the year ended September 30, 2002. The provision for loan losses was lower in 2002 primarily because the Bank experienced a lower level of net charge-offs in 2003. For the years ended September 30, 2003 and 2002, net charge-offs were $86,000 and $412,000, respectively.

        The Bank has established a systematic methodology for determining the provision for loan losses. On a quarterly basis the Bank performs an analysis taking into consideration historic loss experience for various loan segments, changes in economic conditions, delinquency rates, and other factors to determine the level of allowance for loan losses needed. The allowance for loan losses had a net increase of $261,000 to $3.89 million at September 30, 2003 from $3.63 million at September 30, 2002. The increased level of allowance for loan losses was primarily due to an increased level of loans classified as substandard and changes in the composition of the loan portfolio. The level of loans classified as substandard increased the level of allowance for loan losses deemed necessary by the analysis as the aggregate amount of substandard loans increased $1.1 million to $9.1 million at September 30, 2003 from $8.0 million at September 30, 2002. Also contributing to the higher allowance for loan loss level were changes in the composition of the loan portfolio. The combined percentage of construction and commercial real estate loans in the portfolio increased to 54.2% at September 30, 2003 from 49.2% at September 30, 2002, while the percentage of one-to-four family mortgage loans declined to 26.2% at September 30, 2003 from 31.3% at September 30, 2002. Construction lending and commercial real estate lending typically involve a greater degree of risk than one-to-four family residential mortgage lending and therefore construction loans and commercial real estate loans have been assigned a loss factor that is greater than the loss factor assigned to one-to-four family residential mortgage loans.

        Estimated loss factors used in the allowance for loan loss analysis are established based in part on historic charge-off data by loan category and economic conditions. Based on the trends in historical charge-off analysis, the loss factors used in the allowance for loan loss analysis for credit cards were increased during the year ended September 30, 2003 and the loss factors for commercial business loans were decreased.

        Based on the systematic methodology, management deemed the allowance for loan losses of $3.89 million at September 30, 2003 (1.19% of loans receivable and 99.9% of non-performing loans) adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. For additional information, see "Item 1, Business - Lending Activities - Allowance for Loan Losses" included herein.

        Non-interest Income: For the year ended September 30, 2003 non-interest income increased $1.35 million to $6.01 million from $4.66 million for the year ended September 30, 2002. This increase is primarily due to a $494,000 increase in BOLI income, a $475,000 increase in gain on sale of loans, a $150,000 increase in security sale gains, and a $147,000 increase in service charges on deposits. The increased BOLI income is a result of having a full year's earnings on the BOLI investment that was made in September 2002. The increased loan sale gains are primarily the result of a larger volume of mortgage banking activity due to the strong refinance demand, which was prompted by a decline in interest rates to historically low levels.  The Bank sold $108.8 million in fixed rate one-to-four family mortgages during the year ended September 30, 2003 compared to $70.2 million for the previous year.

        Non-interest Expense: For the year ended September 30, 2003 non-interest expense increased by $2.12 million to $14.83 million from $12.72 million for the year ended September 30, 2002. The increase is primarily a result of increased employee expenses, increased premises, and equipment expenses and technology enhancement expenses.

        During the year, the Company converted to the Kirchman Bankway core processing system from its in-house supported system, and changed its Internet banking system, its loan platform system and its ATM service provider. The technology enhancements were undertaken to provide additional opportunities to serve and expand the Bank's customer base. The technology-related conversion expenses totaled $586,000 for the year ended September 30, 2003 and are reflected in the income statement under other non-interest expenses ($290,000), premises and equipment expenses

45

<PAGE>

($210,000) and salaries and employee benefit expenses ($86,000). While the technology upgrades reduced profitability in the short term, the Company believes the investment will be beneficial to its customers and ultimately to its long-term investors.

        Salary and benefit expenses increased primarily due to a larger employee base as the Bank opened two new branches during the year and increased staffing levels in several other departments. The number of full time equivalent employees increased during the year to 186 at September 30, 2003 from 159 at September 30, 2002. Premises and equipment expense increased during the year primarily due to the additional branches opened, expenses associated with remodeling the Bank's loan center, and the technology related expenses previously discussed.

        As a result of the increased non-interest expenses, the Company's efficiency ratio increased to 59.85% for the year ended September 30, 2003 from 52.91% for the year ended September 30, 2002.

        Provision for Income Taxes: The provision for income taxes decreased to $3.0 million for the year ended September 30, 2003 from $3.4 million for the year ended September 30, 2002 primarily as a result of lower income before taxes and an increased level of tax-exempt income. The effective tax rate was 30.9% for the year ended September 30, 2003 and 33.2% for September 30, 2002. The lower effective rate was primarily a result of the increased level of tax-exempt income from the bank owned life insurance program that was implemented in September 2002.

Comparison of Operating Results for Years Ended September 30, 2002 and 2001

        Net Income: Net income for the year ended September 30, 2002 was $6.89 million or $1.71 per diluted share ($1.76 per basic share) compared to net income of $5.46 million or $1.28 per diluted share ($1.30 per basic share) for the year ended September 30, 2001. The primary factors affecting the improved performance for the current year were increased net interest income, increased deposit fee income, increased income from loan sales, and a decreased provision for loan losses. These items were partially offset by higher non-interest expenses.

        Net Interest Income: Net interest income increased 9.03 % to $19.37 million for the year ended September 30, 2002 from $17.77 million for the year ended September 30, 2001, primarily due to decreased funding costs. Interest expense decreased by $3.03 million as the Company's overall cost of funds decreased to 3.59% for the year ended September 30, 2002 from 4.95% for the year ended September 30, 2001. Total interest income decreased $1.43 million to $30.26 million for the year ended September 30, 2002 from $31.69 million for the year ended September 30, 2001 primarily due to lower average yields on interest earning assets, from 8.90% in 2001 to 7.93% in 2002. The Company's net interest margin was 5.08% for the year ended September 30, 2002 compared to a net interest margin of 4.99% for the year ended September 30, 2001, primarily due to interest-bearing liabilities repricing more quickly than interest earning assets in the declining rate environment.

        Provision for Loan Losses: The provision for loan losses decreased to $992,000 for the year ended September 30, 2002 from $1.4 million for the year ended September 30, 2001. The provision for loan losses was lower in 2002 primarily because the Bank experienced a lower level of net charge-offs in 2002. For the years ended September 30, 2002 and 2001, net charge-offs were $412,000 and $990,000, respectively. During the year ended September 30, 2001 the Bank made a special $600,000 provision for loan losses when it determined that the credit quality of a large commercial business loan had deteriorated. The loan was subsequently charged off in the year ended September 30, 2001.

        The Bank has established a systematic methodology for the determination of provisions for loan losses. On a quarterly basis the Bank performs an analysis taking into consideration historic loss experience for various loan segments, changes in economic conditions, delinquency rates, and other factors to determine the level of allowance for loan losses needed. The allowance for loan losses increased $580,000 to $3.63 million at September 30, 2002 from $3.05 million at September 30, 2001. The increased level of allowance for loan losses was primarily due to changes in the composition of the loan portfolio and increased loss factors utilized in the allowance for loan loss analysis.

46

<PAGE>

        Changes in the composition of the loan portfolio were responsible for a portion of the increased allowance for loan losses. The percentage of commercial real estate loans in the Bank's loan portfolio increased to 27.0% of total loans receivable at September 30, 2002 from 17.8% at September 30, 2001, while the percentage of one- to- four family residential mortgage loans decreased to 31.3% of total loans receivable at September 30, 2002 from 35.1% at September 30, 2001. Commercial real estate lending typically involves a greater degree of risk than one- to- four family residential mortgage lending and therefore commercial real estate loans have been assigned a loss factor that is greater than the loss factor assigned to one- to- four family residential mortgage loans.

        Estimated loss factors used in the allowance for loan loss analysis are established based in part on historic charge-off data by loan category and economic conditions. Based on the trends in historical charge-offs analysis, the loss factors used in the allowance for loan loss analysis for commercial business loans and credit cards were increased during the year ended September 30, 2002. The loss estimate factors for one- to- four family mortgage loans, multi family loans, commercial real estate loans, construction loans and land loans were also increased to a lesser extent due to weaknesses and uncertainties in the regional economy.

        Based on the systematic methodology management deemed the allowance for loan losses of $3.63 million at September 30, 2002 (1.11% of loans receivable and 97.0 % of non-performing loans) adequate to provide for estimated losses based on an evaluation of known and inherent risks in the loan portfolio at that date. For additional information, see "Item 1, Business -- Lending Activities - Allowance for Loan Losses" included herein.

        Non-interest Income: For the year ended September 30, 2002 non-interest income increased $1.73 million to $4.66 million from $2.93 million for the year ended September 30, 2001. This increase is primarily due to an $822,000 increase in service charges on deposits, and a $609,000 increase in gain on sale of loans. The increased deposit-related service charge income is primarily a result of the Bank's checking account acquisition program. The increased loan sale gains are a result of the Company selling $70.2 million in fixed-rate one-to-four family loans during the year compared to $27.6 million in 2001.

        Non-interest Expense: Total non-interest expense increased $1.62 million for the year ended September 30, 2002 compared to 2001. This increase is primarily reflected in a $945,000 increase in salary and benefit expense due primarily to increased numbers of employees, a $239,000 increase in ATM operating expenses, a $172,000 increase in expenses related to premises and equipment resulting from new branches, and a $102,000 increase in profitability improvement consulting fees. Also affecting the year-to-year comparison was the recovery in 2001 of a prior NSF kiting related expense. This recovery reduced the non-interest expense for the 2001 year by $150,000.

        Provision for Income Taxes: The provision for income taxes increased to $3.4 million for the year ended September 30, 2002 from $2.7 million for the year ended September 30, 2001 primarily as a result of higher income before income taxes. The effective rate was 33.2% for the year ended September 30, 2002 and 33.4% for the year ended September 30, 2001.

Nonperforming Assets

        Information with respect to the Bank's nonperforming assets at September 30, 2003 and September 30, 2002 is contained in "Item 1, Business -- Lending Activities -- Nonperforming Assets and Delinquencies."

Average Balances, Interest and Average Yields/Cost

        The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of interest-bearing liabilities, as well as the relative amount of the Company's interest-earning assets and interest- bearing liability portfolios.

        The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities and average yields and costs. Such yields and costs for the periods indicated are derived by dividing income or expense by the average weekly balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from weekly balances. Management does not believe that the use of weekly balances instead of daily balances has caused any material difference in the information presented.

47

<PAGE>