FIRSTBANK NW 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, 2005

OR

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

Commission File Number: 0-22435

FIRSTBANK NW CORP.
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(Name of registrant as specified in its charter)

Washington 84-1389562
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)

1300 16th Avenue, Clarkston, Washington 99403
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (509) 295-5100
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:

Common Stock, par value $.01 per share
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(Title of class)

Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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 if disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). YES [ ] NO [X]

The aggregate market value of voting and nonvoting common equity held
by nonaffiliates of the registrant was $73.8 million based on the last reported
sale price of the registrant's common stock on the Nasdaq National Market on
September 30, 2004. For purposes of this calculation, shares of common stock
held by persons who hold more than 5% of the outstanding common stock and by
officers and directors of the registrant have been excluded in that such persons
may be deemed to be affiliates of the registrant.

As of June 3, 2005, the registrant had 2,929,891 shares of its common
stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the registrant's Definitive Proxy Statement for its 2005 Annual
Meeting of Shareholders is incorporated by reference into Part III of this
Form 10-K.

PART I

Item 1. Business
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General

FirstBank NW Corp. (formerly known as FirstBank Corp.) ("Company"), a
Washington corporation, was organized in Delaware in March 1997 to become the
holding company for FirstBank Northwest (formerly known as First Federal Bank of
Idaho, a Federal Savings Bank) ("Bank") upon the Bank's conversion from mutual
to stock form ("Conversion"). The Company completed the Conversion and initial
public offering on July 1, 1997 through the sale of 1,983,750 shares of common
stock at $10.00 per share.

The Bank is a Washington-chartered state savings bank located in
Clarkston, Washington. The Bank was formed as an Idaho mutual savings and loan
association in 1920, converted to a federal mutual savings and loan association
in 1935 and adopted the federal mutual savings bank charter in 1990. In July
1997, the Bank relocated its main office to Clarkston, Washington and on January
30, 1998, converted to a Washington-chartered savings bank. The Bank is
currently regulated by the State of Washington, its primary regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The
Bank's deposits are insured by the FDIC's Savings Association Insurance Fund
("SAIF") and have been federally insured since 1933. The Bank has been a member
of the Federal Home Loan Bank ("FHLB") system since 1933.

The Bank is a community-oriented financial institution, operating in
one business segment, that engages primarily in the business of attracting
deposits from the general public and using those funds to originate residential
mortgage, commercial, and agricultural real estate loans within the Bank's
market area. The Bank also is active in originating construction, and consumer
and other non-real estate loans. The Bank has adopted a mortgage banking
strategy pursuant to which it generally sells a majority of the residential
mortgage loans it originates.

Business Combination

On October 31, 2003, the Company completed the acquisition of Oregon
Trail Financial Corp. ("Oregon Trail") and its wholly-owned subsidiary, Pioneer
Bank, a Federal Savings Bank ("Pioneer Bank"), for approximately $36.5 million
in cash and 1,480,064 shares of the Company's common stock for consideration of
the 3,108,657 shares of Oregon Trail common stock outstanding as of the
completion date of the acquisition. Common stock increased $14,800 and
additional paid in capital increased $33.2 million as a result of the issuance
of common stock for the acquisition. Additional paid in capital increased by an
additional $4.6 million as a result of the purchase of the fair value of Oregon
Trail's unexercised stock options as of the completion date of the acquisition.

The Company's strategic objective is to utilize capital to support
organic growth, with growth through acquisition as a longer term strategy.
Oregon Trail complements the Company's operations and business strategies with a
market area that was geographically contiguous to the Company's existing market
areas with no overlapping branches. Oregon Trail was also considered to be a
potential candidate because of its stable deposit markets, sizable asset base,
strong asset quality, and its community banking philosophy, which is shared by
the Company. In addition, Oregon Trail and the Company have common backgrounds
as converted thrift institutions, and the Board of Directors and management of
the Company believed that a combination of the two companies would enhance the
Company's competitiveness, with a minimal impact on Oregon Trail's employees. In
fiscal year 2005, the integration for the core processing system platform was
completed and now the Company is operating on one operating system. This
completes the system integrations. The acquisition doubled the Company's asset
size and the common stock outstanding. The Company is the surviving holding
company with 100% ownership of the Bank, and the Bank is the surviving thrift
subsidiary.

2

Market Area

FirstBank's general market area includes northern Idaho, eastern
Washington, and eastern Oregon, as well as Ada and Canyon Counties in southwest
Idaho. The Company's administrative offices are located in Clarkston,
Washington. The Bank operates 20 full-service offices in Lewiston, Lewiston
Orchards, Moscow, Grangeville, Coeur d'Alene, Post Falls, Hayden, and Boise,
Idaho, in Clarkston, Spokane, and Liberty Lake, Washington, and in Baker City,
La Grande, Island City, Ontario, Vale, John Day, Burns, Enterprise, and
Pendleton, Oregon. The Bank also operates six real estate loan production
centers in Lewiston, Coeur d'Alene, Boise, and Nampa, Idaho, Spokane, Washington
and Baker City, Oregon and five commercial and agricultural production centers
in Lewiston, Coeur d'Alene, and Boise, Idaho, Spokane, Washington and Baker
City, Oregon. Most of the Bank's depositors reside in the communities
surrounding the Bank's offices. The vast majority of the Bank's loans are made
to borrowers residing in the counties in which the Bank's offices are located
and in the surrounding counties.

The Bank expanded into eastern Oregon during 2003 with the acquisition
of Pioneer Bank. The market area in eastern Oregon is largely rural, with most
of the farms and ranches being relatively small and family owned. Major
employers in this market area include Confederated Tribes of the Umatilla
Indians, Eastern Oregon Correctional Institute, Fleetwood Homes, U.S. Forest
Service, Bureau of Land Management, Snake River Correctional Institute, Oregon
Department of Transportation, Boise Cascade, Ore-Ida Foods, Powder River
Correctional Facility, Treasure Valley Community College, Eastern Oregon
University, regional hospitals, local school districts and local government.

The northern Idaho and eastern Washington market areas served by the
Bank are dependent on agriculture, manufacturing, tourism and the forest
products industry, and the local economies reflect the health or weakness of
those industries. Agricultural activity consists primarily of dry land farming.
The primary crop is wheat and other major crops are barley, peas, lentils, beans
and grass seed. Livestock production is also a major part of the region's
economy.

Lewiston, Idaho serves as the regional center for state government. The
economy of Lewiston, in Nez Perce County, is connected to that of Clarkston,
Washington, which is separated from Lewiston by the Snake River. The Lewis-Clark
Valley has a population of approximately 58,000. Forest products and agriculture
are the dominant industries in the Lewiston-Clarkston area. Medical services,
light manufacturing and tourism have helped maintain the economy in recent
years. Moscow, Idaho, in Latah County, has a population of approximately 21,000
and the county itself has a population of approximately 35,000. Agriculture and
higher education are the primary industries in Moscow. The University of Idaho
is located in Moscow and is the city's largest employer. In addition, Washington
State University is located eight miles west of Moscow in Pullman, Washington.
Grangeville, Idaho, in Idaho County, has an economy based primarily on
agriculture, the forest products industry and the U.S. Forest Service. Declines
in the forest products industry have resulted in a decline in the population of
Idaho County over the last decade. Tourism has become increasingly important to
the Grangeville economy in recent years.

Coeur d'Alene, located in Kootenai County, Idaho, is the largest city
in Northern Idaho, with a population of approximately 35,000. Kootenai County
has approximately 117,000 residents. Healthcare, manufacturing, construction,
tourism, and forest products are the major industries of this region. Coeur
d'Alene has experienced significant growth in the past ten years, primarily due
to growth in the healthcare, retail trade, manufacturing, and tourism
industries. Real estate activity has been high with a large amount of new home
construction due to the increasing population. Liberty Lake, Washington is
located in the rapidly growing I-90 corridor between Coeur d'Alene, Idaho and
Spokane, Washington. Spokane is the largest city in eastern Washington and the
Spokane MSA (Metropolitan Statistical Area) has a population of 431,000. In
2002, the Bank expanded into Spokane, Washington, opening a commercial loan
center close to the city center. A residential loan production office was added
in early 2004. Management believes the Bank's growth prospects in Spokane County
are outstanding, as more businesses and technology firms locate there.

In 2002, the Bank expanded into the rapidly growing Boise, Idaho market
by opening the Boise Residential Loan Center. In 2003 a commercial loan center
was added, and in 2004, a full-service retail branch was opened. In 2004 a real
estate loan production office was opened in nearby Nampa. The Boise MSA, which
includes Ada and Canyon counties, has a population in excess of 477,000, and is
the most densely populated area in the state of Idaho. Boise is the capital of
Idaho, the home of Boise State University, and headquarters for a large number
of national and international corporations, including Micron Technology,
Albertson's Inc, JR Simplot Corp and Boise Cascade, and is also the location of
Hewlett-Packard copier manufacturing, regional banks and hospital facilities.
Management believes the Bank's growth opportunity in the Boise market is
outstanding.

3

Lending Activities

General. Commercial real estate and commercial non-real estate lending
is the principal lending activity of the Bank. The Bank is also active in the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing one- to four-family residential property as well as construction
loans and agricultural real estate and production loans. To a lesser extent, the
Bank originates home equity, other consumer, and auto dealer loans. The Bank's
net loans receivable totaled $562.1 million at March 31, 2005, representing
70.2% of consolidated total assets.

Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio by type of loan for the years indicated. The Bank
had no concentration of loans exceeding 10.0% of total gross loans other than as
disclosed below.

At March 31, 2005
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2005 2004 2003 2002 2001
----------------- ----------------- ----------------- ----------------- -----------------
Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands)

Real estate loans:
Residential $117,541 20.55% $113,016 24.20% $ 50,692 19.77% $ 62,234 26.19% $ 71,733 32.78%
Agricultural 19,434 3.40 18,567 3.98 15,921 6.21 16,264 6.84 15,383 7.03
Commercial 173,757 30.39 122,132 26.15 68,125 26.58 52,496 22.09 37,969 17.35
Construction 69,148 12.09 44,536 9.54 30,248 11.80 6,044 2.54 5,473 2.50
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 379,880 66.43 298,251 63.87 164,986 64.36 137,038 57.66 130,558 59.66
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------

Consumer and other loans:
Commercial 92,780 16.23 75,878 16.25 50,603 19.74 55,568 23.38 41,789 19.09
Home equity 37,806 6.61 24,530 5.25 19,924 7.77 24,832 10.45 27,323 12.48
Other consumer 38,724 6.77 43,425 9.30 7,843 3.06 7,924 3.34 8,255 3.77
Agricultural operating 22,625 3.96 24,876 5. 33 13,000 5.07 12,289 5.17 10,938 5.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer and other 191,935 33.57 168,709 36.13 91,370 35.64 100,613 42.34 88,305 40.34
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
loans

Total loans receivable 571,815 100.00% 466,960 100.00% 256,356 100.00% 237,651 100.00% 218,863 100.00%
====== ====== ====== ====== ======

Less:
Unearned loan fees and 2,460 1,532 1,137 692 420
discounts
Allowance for loan losses 7,254 6,314 3,414 2,563 1,758
-------- -------- -------- -------- --------
Loans receivable, net $562,101 $459,114 $251,805 $234,396 $216,685
======== ======== ======== ======== ========

Loans held for sale $ 3,999 $ 5,254 $ 5,214 $ 3,740 $ 2,466
======== ======== ======== ======== ========

Average loan balance:
Residential real estate $ 77 $ 66 $ 74 $ 75 $ 73
Agricultural real estate $ 130 $ 121 $ 114 $ 137 $ 121
Commercial real estate $ 363 $ 289 $ 349 $ 338 $ 317
Construction real estate $ 127 $ 203 $ 153 $ 143 $ 100
Consumer and other loans $ 18 $ 24 $ 38 $ 40 $ 34

Residential Real Estate Lending (Mortgage Banking). The Bank is active
in the origination of mortgage loans to enable borrowers to purchase or
refinance residential real estate. At March 31, 2005, $117.5 million, or 20.6%,
of the Bank's total gross loan portfolio consisted of loans secured by
residential real estate. The Bank presently originates both adjustable-rate
mortgage ("ARM") loans and fixed-rate mortgage loans with maturities of up to 30
years. Substantially all of the Bank's residential mortgage loans are secured by
property located in the Bank's primary market area. Very few of the properties
securing the Bank's residential mortgage loans are investment properties, second
homes or vacation properties. The Bank's conventional mortgage loans are
generally underwritten and documented in accordance with the guidelines
established by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae").

4

The Bank sells a majority of the residential mortgage loans it
originates primarily to private investors. Currently, all 10 and 15 year first
mortgage loans are added to the Bank's portfolio. The remaining loans are sold
to Fannie Mae or Freddie Mac. Loans are sold to Freddie Mac and Fannie Mae on a
servicing-retained basis, while loans sold to private investors are sold
servicing-released. Generally, loans are sold without recourse, although on
occasion, the Bank has sold loans with recourse. As of March 31, 2005, the Bank
remains contingently liable for approximately $28,000 of loans sold with
recourse. At March 31, 2005, the Bank had indemnification agreements with the
Federal Housing Administration ("FHA") for five residential mortgage loans
insured by FHA. The agreements require the Bank to reimburse FHA for any loss
incurred upon foreclosure of these loans and subsequent liquidation of the
properties held as collateral. Recently, the Bank has been notified that two of
the five loans were satisfied with no loss incurred by FHA. The Bank's decision
to hold or sell loans is based on its asset/liability management policies and
goals and the market conditions for mortgages. See "Loan Originations, Sales and
Purchases."

The Bank offers ARM loans at rates and terms competitive with market
conditions. The Bank currently offers ARM products that adjust annually after an
initial fixed period of one, three, five, or seven years based on the applicable
Treasury constant maturity index. ARM loans held in the Bank's portfolio do not
permit negative amortization of principal and carry no prepayment restrictions.
The periodic interest rate cap (the maximum amount by which the interest rate
may be increased or decreased in a given period) on the Bank's ARM loans is
generally 2% per adjustment period and 6% over the life of the loan. The terms
and conditions of the ARM loans offered by the Bank, including the index for
interest rates, may vary from time to time. 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.

A significant portion of the Bank's ARM loans are not readily saleable
in the secondary market because they are not originated in accordance with the
purchase requirements of Freddie Mac, Fannie Mae, or other private investors.
The Bank requires that non-conforming loans demonstrate appropriate compensating
factors that offset their lack of conformity. Although such loans satisfy the
Bank's underwriting requirements, they are "non-conforming" because they do not
satisfy property limits, credit requirements, repayment capacities or various
other requirements imposed by the secondary market. Accordingly, the Bank's
non-conforming loans can be sold only to private investors on a negotiated
basis. At March 31, 2005, the Bank's residential loan portfolio included $19.1
million of non-conforming ARM loans. Generally, the Bank's non-conforming ARM
loans bear a higher rate of interest than similar conforming ARM loans. The Bank
has found that its origination of non-conforming loans has not resulted in
increased amounts of nonperforming loans.

The Bank also originates residential mortgage loans that are insured by
the FHA, or guaranteed by the Veterans Administration or the U.S. Department of
Agriculture Rural Development. These loans are sold to private investors or to
the Idaho Housing and Finance Agency. A significant portion of the Bank's
residential mortgage loan originations in recent years has consisted of
government insured and guaranteed loans. Most of these loans have been
originated in the Coeur d'Alene, Idaho area, where there has been a significant
amount of entry-level housing available. The Bank generally sells the government
insured loans that it originates to private investors on a servicing-released
basis.

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 as a
result of increased 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.
Furthermore, because the ARM loans originated by the Bank generally provide, as
a marketing incentive, for "teaser rates" (i.e., initial rates of interest below
the rates that would apply were the adjusted index plus the applicable margin
initially used for pricing), 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 a rate of 200 basis points
above the initial interest rate or the fully indexed rate, whichever is higher.
Another consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in 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.

5

While one- to four-family residential real estate loans are generally
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 generally obtains title insurance insuring the status of its
lien on all loans where real estate is the primary source of security. The Bank
also requires that fire and casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the outstanding loan
balance.

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, with the condition that
private mortgage insurance is generally required on loans with loan-to-value
ratios greater than 80%. Higher loan-to-value ratios are available on certain
government insured programs.

Residential Construction Lending. The Bank invests a portion of its
loan portfolio in residential construction loans. This activity has been
prompted by favorable economic conditions, primarily in Coeur d'Alene and Boise,
Idaho, lower long-term interest rates and an increased demand for housing units
as a result of the population growth in Idaho. At March 31, 2005, construction
loans totaled $69.1 million, or 12.1% of total loans. At that date, the average
amount of the Bank's construction loans was approximately $127,000. The largest
construction loan in the Bank's portfolio at March 31, 2005 was $969,000, and
was performing in accordance with its terms. Residential construction loan
originations, excluding loans purchased and loan participations, totaled $171.6
million for the year ended March 31, 2005, which constituted 36.1% of total loan
originations. During fiscal year 2003, the Bank entered the Boise area and
increased the construction loan activity. Originations of construction loans
from the Boise loan production office totaled $117.2 million and originations of
construction loans from the Coeur d'Alene office totaled $35.0 million during
the fiscal year ended March 31, 2005.

The Bank originates construction loans to professional home builders
and to individuals building their primary residences. The Bank also makes loans
to builders for the acquisition of building lots. Construction loans made by the
Bank to professional home builders include both those with a sales contract or
permanent financing in place for the finished homes and those for which
purchasers for the finished homes may be identified either during or following
the construction period (speculative loans). At March 31, 2005, speculative
loans totaled $30.9 million, or 44.6% of the total construction loan portfolio.
Construction loans to individuals are generally converted to permanent mortgage
loans upon completion of the construction period. At March 31, 2005, permanent
construction loans to individuals totaled $9.2 million or 13.3% of the total
construction loan portfolio.

At March 31, 2005 and 2004, the composition of the Company's
construction loan portfolio was as follows:

At March 31,
-----------------------------------------
2005 2004
------------------- -------------------
Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in Thousands)

Speculative construction $ 30,850 44.62% $ 19,388 43.53%
Presold construction 26,430 38.22 17,189 38.60
Permanent construction 9,218 13.33 6,056 13.60
Land construction 2,650 3.83 1,903 4.27
Participation construction -- -- -- --
-------- -------- -------- --------
Total $ 69,148 100.00% $ 44,536 100.00%
======== ======== ======== ========

6

Construction lending provides the Bank with 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. Speculative loans carry more risk
because the payoff for the loan is dependent 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, changes in the
local economy and real estate market could adversely affect the Bank's
construction loan portfolio. Accordingly, the Bank closely monitors sales and
listings in its real estate markets and will limit the amount of speculative
loans if it perceives unfavorable market conditions.

Loans to builders for the construction of one- to four-family
residences are generally made for a term of 12 months. The Bank's loan policy
permits a maximum loan-to-value ratio of 80%. The Bank maintains a list of major
builders and establishes an aggregate credit limit for each major builder based
on the builder's financial strength, experience and reputation, and monitors
each builder's borrowings on a monthly basis. Each major builder is required to
provide the Bank with annual financial statements and other credit information.
At March 31, 2005, the Bank had approved 22 major builders, the largest
borrowing capacity of which was approximately $6.5 million. At March 31, 2005,
the Bank's major builders had total loans of $46.0 million outstanding, and was
performing in accordance with its terms. For all builders, the Bank reviews the
financial strength and credit of the builder on a loan by loan basis.

The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are based
on periodic on-site inspections by independent fee inspectors. At inception, the
Bank may require the builder (other than approved major builders) to deposit
funds to the loans-in-process account covering the difference between the actual
cost of construction and the loan amount. Alternatively, the Bank may require
that the borrower pay for the first portion of construction costs before the
loan proceeds are used. Major builders are permitted to utilize the loan
proceeds from the initiation of construction and to carry the short-fall between
construction costs and the loan amount, based on their financial strength, until
the property is sold.

Agricultural Lending. Agricultural lending has been an important part
of the Bank's lending strategy since the mid-1980s. The Chief Executive Officer
has 30 years of experience, the Chief Operating Officer has 25 years of
experience, and the Vice President of Agricultural Lending has 27 years of
experience in agricultural lending. The existing staff's experience maintains
the Bank as one of the most experienced agricultural lenders in the area.

Agricultural Real Estate Lending. The Bank presently originates both
adjustable-rate and fixed-rate loans secured by farmland located in the Bank's
market area, primarily around Lewiston, Idaho and eastern Oregon. The Bank
offers adjustable-rate loans that adjust annually after an initial fixed period
of one, three or five years. Such loans generally provide for up to a 25-year
term. The Bank also offers fixed-rate loans including secondary marketing loans
with amortization up to 30 years. At March 31, 2005, agricultural real estate
loans totaled $19.4 million, or 3.4% of the Bank's total loan portfolio.
Agricultural real estate loan originations, excluding loans purchased and loan
participations, totaled $2.9 million for the year ended March 31, 2005, which
constituted 0.6% of total loan originations.

Agricultural real estate loans generally are underwritten to Federal
Agricultural Mortgage Corporation ("Farmer Mac") standards so as to qualify for
sale in the secondary market, although the Bank currently retains most of these
loans for its portfolio. In originating an agricultural real estate loan, the
Bank considers the debt service coverage of the borrower's cash flow, the amount
of working capital available to the borrower, the financial history of the
borrower and the appraised value of the underlying property as well as the
Bank's experience with and knowledge of the borrower. An environmental
assessment is also performed. The maximum loan-to-value for agricultural real
estate loans is 75%. At March 31, 2005, the Bank's average agricultural real
estate loan was approximately $130,000, and the Bank's largest agricultural real
estate loan was $892,000, which was performing according to its terms.

7

Agricultural real estate lending provides the Bank the opportunity to
earn yields higher than those generally available on standard conforming
residential real estate lending. However, agricultural real estate lending
involves a greater degree of risk than residential real estate lending. Payments
on agricultural real estate loans are dependent on the successful operation or
management of the farm property securing the loan. The success of the farm may
be affected by many factors outside the control of the farm borrower, including
adverse weather conditions that limit crop yields (such as hail, drought and
floods), declines in market prices for agricultural products and the impact of
government regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a limited
number of key individuals whose injury or death may significantly affect the
successful operation of the farm. Farming in the Bank's market area is generally
dry-land farming, with wheat being the primary crop. Accordingly, adverse
circumstances affecting the area's wheat crop could have an adverse effect on
the Bank's agricultural loan portfolio. Cattle ranching in the Bank's market
area consists of cow/calf or yearling operations and a limited number of feed
lot operations. Irrigated farming occurs primarily in Malhuer County (Ontario)
and Umatilla County (Pendleton) areas with primary crops of potatoes and onions.
Annual precipitation, favorable growing weather, and commodity prices can
substantially impact agricultural economics.

The Bank is approved to originate agricultural real estate loans
qualifying for purchase by the Farmer Mac II program, which requires Farm
Service Agency guarantees up to a maximum of 90% of the principal and interest.
Once the guaranteed loan has been funded, the Bank generally sells the
guaranteed portion of the loan to Farmer Mac II, while retaining the servicing
rights on the entire loan.

Agricultural Operating Lending. At March 31, 2005, agricultural
operating loans totaled $22.6 million, or 4.0% of total loans. Agricultural
operating loan originations, excluding loans purchased and loan participations,
totaled $8.2 million for the year ended March 31, 2005, which constituted 1.7%
of total loan originations. Agricultural operating loans or lines of credit
generally are made for a term of one to three years and may be secured or
unsecured. Such loans may be secured by a first or second mortgage, or liens on
property, vehicles, accounts receivable, crop held or growing crop. Personal
guarantees are frequently required for loans made to corporations and their
business entities. Payments on agricultural operating loans depend on the
successful operation of the farm, which may be adversely affected by weather
conditions that limit crop yields, fluctuations in market prices for
agricultural products, and changes in government regulations and subsidies.
Underwriting requires substantial cash working capital and annual production
income sufficient to meet payment obligations on an annual basis.

The risk of crop damage by weather conditions can be reduced by the
farmer with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to obtain
multi-peril crop or hail insurance. Farmers may mitigate the effect of price
declines through the use of futures contracts, options or forward contracts. The
Bank does not monitor or require the use of these instruments by its borrowers.

Of the agricultural operating loans originated, excluding loans
purchased and loan participations, in fiscal year 2005, operating loans
represent 67.3% of total loan originations, equipment loans 17.2%, working
capital loans 8.9%, and other loans 6.6%.

Commercial Real Estate Lending. Commercial real estate lending has
become a significant part of the Bank's lending strategy. At March 31, 2005, the
Bank's commercial real estate loan portfolio totaled $173.8 million, or 30.4% of
total loans. At March 31, 2005, the Bank's commercial real estate loan average
size was $363,000 and the largest loan was $6.3 million, which was performing
according to its terms. Commercial real estate loan originations, excluding
loans purchased and loan participations, totaled $95.3 million for the year
ended March 31, 2005, which constituted 20.0% of total loan originations. In
connection with the expansion of the Bank's commercial banking activities, the
Bank intends to continue commercial real estate lending, subject to market
conditions.

The Bank's commercial real estate loans include loans secured primarily
by owner-occupied buildings, storage facilities, manufactured home parks, small
office buildings, retail shops, multi-family residential properties and other
small commercial properties. The portfolio also contains a limited amount of
specialty realty (i.e., restaurants, motels, etc.). Commercial real estate loans
in the Bank's portfolio primarily consist of loans originated by the Bank.
Appraisals on properties that secure commercial real estate loans are performed
by independent appraisers engaged by the Bank before the loans are made. An
environmental assessment is also performed. Underwriting of commercial real
estate loans includes a thorough analysis of the cash flows generated by the
real estate or the borrower's business to support the debt service and the
financial resources, experience, and income level of the borrowers. Security
debt coverage ratios, total debt coverage ratios, and working capital
assessments are key underwriting criteria.

8

Commercial Business Lending. Commercial business lending is important
to the Bank's lending strategy. The Bank's real estate relationships have
resulted in commercial lending opportunities with these customers. This reflects
the Bank's objective to provide its commercial and small business customers with
a complete lending and banking relationship. At March 31, 2005, nonresidential
commercial business loans totaled $92.8 million, or 16.2% of the total loan
portfolio. At March 31, 2005, the Bank's nonresidential commercial business loan
average size was $150,000 and the largest loan was $6.0 million, which was
performing according to its terms. Commercial business loan originations,
excluding loans purchased and loan participations, totaled $52.0 million for the
year ended March 31, 2005, which constituted 10.9% of total loan originations.
The Bank presently originates both adjustable-rate and fixed-rate loans secured
by equipment, accounts receivable and inventory. Loans secured by accounts
receivable and inventory are generally operating lines of credit renewed
annually while equipment secured loans are term loans of up to five years. The
indices used for adjustable-rate loans are the applicable FHLB index, the
applicable LIBOR index, and prime rate as stated in The Wall Street Journal.

Commercial business lending provides the Bank with an opportunity to
receive interest at rates higher than those generally available from residential
mortgage loans. However, the collateral for these loans is usually more
difficult to evaluate and monitor, therefore, these loans involve a higher
degree of risk than commercial real estate or one- to four-family residential
mortgage loans. Because loan payments are dependent on cash flow and
profitability of the business, and require successful operation and management
of the business entity, repayment of such loans may be affected by adverse
conditions in the commercial real estate market or the economy. Accordingly,
management strength, performance history within the business sector and other
financial resources are included in underwriting criteria for commercial
business loans. In addition, personal guarantees are typically required to
assure those strengths are backing the credit relationship.

Of the commercial business loans originated, excluding loans purchased
and loan participations, in fiscal year 2005, operating loans represent 58.6% of
total loan originations, equipment loans 22.1%, working capital loans 3.1%,
letters of credit 11.7%, and other loans 4.5%. The Bank also participates in
small business and industry guarantee programs that are designed to assist
businesses that cannot qualify for conventional financing.

Consumer and Other Lending. The Bank originates a variety of consumer
and other non-mortgage loans. Such loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. At March 31, 2005, the
Bank's consumer and other non-mortgage loans totaled approximately $76.5
million, or 13.4% of the Bank's total loans. Consumer and other loan
originations, excluding loans purchased and loan participations, totaled $45.8
million for the year ended March 31, 2005, which constituted 9.6% of total loan
originations. The Bank's consumer loans consist primarily of secured and
unsecured consumer loans, automobile loans, boat loans, recreational vehicle
loans, home improvement and equity loans and deposit account loans. The growth
of the consumer loan portfolio in recent years has consisted primarily of an
increase in home equity loans, which the Bank has marketed more aggressively.

At March 31, 2005, home equity loans totaled $37.8 million, or 6.6% of
the Bank's total loans. The Bank offers both home equity second mortgage loans
and lines of credit. The Bank's home equity loans are secured by first or second
mortgages on residential real estate located in the Bank's primary market area.
Home equity second mortgage loans are generally offered with terms of five or
ten years with fixed interest rates and twenty-year term loans with adjustable
interest rates. Home equity lines of credit generally have adjustable interest
rates based on the prime rate. Home equity loans are generally underwritten at
80% loan-to-value including the first mortgage with exceptions granted for
demonstrated exceptional financial strength.

At March 31, 2005, other consumer loans totaled $38.7 million, of which
$24.3 million is dealer paper. Dealer paper consists of mainly automobile loans
originated indirectly by a network of automobile dealers located in the Bank's
market area. Only dealers that have been approved by the Bank and have signed a
written agreement with the Bank regarding the purchase of these contracts are
eligible for contract purchases. 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 dealers are paid a premium by the Bank which is amortized over the
life of the loan.

9

Consumer and non-mortgage loans entail 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 farm equipment. 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
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. 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.

Loans Held for Sale. Loans held for sale totaled $4.0 million at March
31, 2005 and $5.3 million at March 31, 2004. Loans originated and intended for
sale in secondary markets are carried at the lower of cost or estimated market
value in the aggregate. Loan fees (net of certain direct loan origination costs)
on loans held for sale are deferred until the related loans are sold or repaid.
Gains or losses on loan sales are recognized at the time of sale and determined
on a loan by loan basis. The Bank usually sells loans a short time after
originating the loan. The change in loan balances for loans held for sale at a
specific time fluctuates with the volume of real estate residential loan
originations.

Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 2005 regarding the dollar amount of principal
repayments for loans becoming due during the years indicated, excluding loans
held for sale. All loans are included in the year in which the final contractual
payment is due. Demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due within one year. The
table does not include any estimate of prepayments which significantly shortens
the average life of all loans and may cause the Bank's actual repayment
experience to differ from that shown below.

After After
One 5 Years 10 Years
Within Year Through Through Through Beyond
One Year 5 Years 10 Years 15 Years 15 Years Total
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)

Real estate loans:
Residential $ 805 $ 2,085 $ 16,573 $ 27,578 $ 70,500 $ 117,541
Construction 69,148 -- -- -- -- 69,148
Commercial 18,841 49,679 19,571 25,128 60,538 173,757
Agricultural 13,840 8,543 3,025 6,939 9,712 42,059
Commercial non-real estate 47,802 26,397 15,326 1,290 1,965 92,780
Consumer and other loans 4,307 26,051 41,192 3,980 1,000 76,530
---------- ---------- ---------- ---------- ---------- ----------
Total loans receivable $ 154,743 $ 112,755 $ 95,687 $ 64,915 $ 143,715 $ 571,815
========== ========== ========== ========== ========== ==========

The following table sets forth the dollar amount of all loans due after
March 31, 2006 that have fixed interest rates and have floating or adjustable
interest rates, excluding loans held for sale.
Floating or
Fixed Adjustable
Rates Rates
---------- ----------
Real estate loans: (In Thousands)
Residential $ 97,669 $ 19,067
Commercial 14,541 140,375
Agricultural 4,360 23,859
Commercial non-real estate 19,683 25,295
Consumer and other loans 55,241 16,982
---------- ----------
Total loans receivable $ 191,494 $ 225,578
========== ==========

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 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.

10

Loan Solicitation and Processing. Loan applicants come primarily
through loan officer business development calls, referrals from existing
customers, realtors, homebuilders, accountants, attorneys, and walk-ins. The
Bank also uses radio and newspaper advertising to create awareness of its loan
products. In addition to originating loans through its branch offices, the Bank
operates six loan centers located in Coeur d'Alene, Lewiston, Nampa and Boise,
Idaho, Spokane, Washington, and Baker City, Oregon to increase loan
originations. The Bank does not utilize any loan correspondents, mortgage
brokers or other forms of wholesale loan origination. 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 a certified, independent fee appraiser.

Loan Approvals. Residential real estate loans up to $691,600 that
qualify for sale in the secondary market may be approved by the Bank's
underwriters. All other portfolio real estate loans must be approved by two
members of the Management Loan Committee. Delegated loan approval authority to
residential lending centers is authorized within prescribed limits for approved
major builder loans. All other construction loans must be approved by two
members of the Management Loan Committee. Consumer loans up to $50,000 and home
equity loans up to $150,000 may be approved by designated underwriters provided
that the total loan relationship is $200,000 or less. All other consumer and
home equity loans must be approved by a member of the Management Loan Committee.
All commercial and agricultural real estate and non-real estate loans are
approved within the Bank's delegated loan approval policy. Any loan or
combination of loans to one entity of $500,000 or greater require approval by
the Executive Loan Committee, which consists of the Chief Executive Officer,
Chief Loan Officer, Chief Operations Officer, Credit Administrator, and the
Board of Directors.

Loan Originations, Sales and Purchases. While the Bank originates both
adjustable- and fixed-rate loans, its ability to generate each type of loan is
dependent upon relative customer demand for loans in its market. For the year
ended March 31, 2005, the Bank originated $475.6 million of loans, excluding
loans purchased and loan participations. Residential real estate loan
originations, excluding loans purchased and loan participations, totaled $99.7
million for the year ended March 31, 2005, which constituted 21.0% of total loan
originations. The loan centers have enhanced the originations of commercial and
agricultural real estate and non-real estate loans for the loan portfolio
growth.

In the early 1990s, the Bank adopted a mortgage banking strategy
pursuant to which it seeks to generate income from the sale of loans (which may
be sold either servicing-retained or servicing-released) and from servicing fees
from loans sold on a servicing-retained basis on residential real estate term
loans. Generally, the level of loan sale activity and, therefore, its
contribution to the Bank's profitability, depends on maintaining a sufficient
volume of loan originations, fee originations, servicing release premiums, and
par pricing, which is the premium or discount to sell the loan on the market.
Changes in the level of interest rates and the local economy affect the amount
of loans originated by the Bank and, thus, the amount of loan sales as well as
origination and loan fees earned. Gains on sales of loans totaled $1.0 million
and $2.2 million during the years ended March 31, 2005 and 2004, respectively.
The Bank sells loans on a loan-by-loan basis. Generally, a loan is committed to
be sold and a price for the loan is fixed at the time the interest rate on the
loan is fixed, which may be at the time the Bank issues a loan commitment or at
the time the loan closes. This eliminates the majority of the risk to the Bank
that a rise in market interest rates will reduce the value of a mortgage before
it can be sold. When a loan is committed to be sold before it is closed, the
Bank is subject to the risk that the loan fails to close or that the closing of
the loan is delayed beyond the specified delivery date. In that event, the Bank
may be required to compensate the purchaser for failure to deliver the loan.
Generally, loans are sold without recourse, although in the past the Bank has
sold loans with recourse.

In the past, the Bank has purchased loans and loan participations in
its primary market during periods of reduced loan demand. Through a consortium
of local financial institutions, the Bank occasionally purchases participation
interests in loans. Such loans include those secured by local low-income housing
projects, single family pre-sold and speculative housing, and commercial loans.
Management will consider any type of commercial, agricultural, and construction
participation loan. The Bank is supplementing its origination of agricultural
and commercial real estate loans and agricultural operating and nonresidential
commercial loans by purchasing participations in such loans originated by other
community banks in Idaho, Washington, and Oregon. Participations will be
utilized to facilitate market competitiveness, market diversification, and asset
allocation. Individual participating banks are required to be identified based
on asset quality, pricing, and targeted market objectives. It is intended that
participating banks are committed to a policy in this area that is consistent
with the Bank's policy. Annually, the Bank will complete a financial analysis on
each bank with active participations. All participations are monitored for
credit quality on an on-going basis like all other loans. All such purchases
will be made in conformance with the Bank's underwriting and pricing standards.
All open-end and closed-end credit participations will be based on the
participating bank being last-in and first-out of each loan. Term loans can be
repaid on a pro-rata basis. The Bank anticipates that it will purchase only a

11

small portion of any individual loan and that the originating institution will
retain a majority of the loan. Participation loans at March 31, 2005, 2004 and
2003 were $7.3 million, $7.5 million, and $4.2 million, respectively.

The following table shows total loans originated, purchased, sold and
repaid during the years ended March 31, 2005, 2004 and 2003.

Year Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)

Total loans receivable and loans held for sale
at beginning of year $ 472,214 $ 261,570 $ 241,391
---------- ---------- ----------
Loans originated:
Real estate loans:
Residential 99,694 137,242 129,681
Construction 171,625 107,188 77,125
Agricultural 2,913 1,923 2,530
Commercial 95,277 43,148 37,026
Commercial non-real estate 51,961 41,806 56,599
Agricultural non-real estate 8,236 5,725 18,897
Consumer and other loans 45,844 16,364 12,861
---------- ---------- ----------
Total loans originated 475,550 353,396 334,719
---------- ---------- ----------

Credit card advances 10,583 6,199 3,336
---------- ---------- ----------
Loans originated, not funded (56,892) (30,615) (72,001)
---------- ---------- ----------
Loans purchased and loan participations:
Real estate loans:
Residential 2,467 69,290 37
Construction 29 100 482
Agricultural 1,000 4,413 5,950
Commercial 21,739 36,689 2,900
Consumer and other loans -- 92,566 --
---------- ---------- ----------
Total loans purchased (1) 25,235 203,058 9,369
---------- ---------- ----------
Loans sold:
Servicing retained (2,080) (18,265) (26,696)
Servicing released (80,237) (136,862) (122,115)
---------- ---------- ----------
Total loans sold (82,317) (155,127) (148,811)
---------- ---------- ----------

Loan principal repayments (243,220) (106,629) (78,263)
---------- ---------- ----------

Refinanced loans (25,339) (59,638) (28,170)
---------- ---------- ----------
Change in total loans receivable 103,600 210,644 20,179
---------- ---------- ----------
Total loans receivable and loans held for sale at
end of Year $ 575,814 $ 472,214 $ 261,570
========== ========== ==========

(1) During the fiscal year ended March 31, 2004, the Company purchased $200.6
million of loans through the acquisition of Oregon Trail.

Loan Commitments. The Bank issues commitments to originate loans
conditioned upon the occurrence of certain events. Such commitments are made on
specified terms and conditions and are honored for up to 90 days from the date
of loan approval. The Bank had outstanding loan commitments of approximately
$125.3 million at March 31, 2005. In addition, the Bank had commitments to fund
outstanding credit lines of approximately $63.4 million, commitments to fund
standby letters of credit of approximately $4.8 million and commitments to fund
credit card lines of approximately $10.3 million at March 31, 2005.

12

Loan Origination and Other Fees. The Bank, in some instances, receives
loan origination fees. Loan fees are a fixed dollar amount or a percentage of
the principal amount of the mortgage loan that is charged to the borrower for
funding the loan. The amount of fees charged by the Bank generally is 1% of the
loan amount. Current accounting standards require fees received (net of 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. The Bank had $2.5 million of unearned loan fees and
discounts at March 31, 2005 and $1.5 million of unearned loan fees and discounts
at March 31, 2004.

Loan Servicing. In the past, the Bank sold residential real estate
loans to Freddie Mac and Fannie Mae on a servicing-retained basis and received
fees in return for performing the traditional services of collecting individual
payments and managing the loans. The Bank also has sold agricultural real estate
loans to private investors on a servicing-retained basis. At March 31, 2005, the
Bank was servicing $67.2 million of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real
estate taxes, hazard insurance and other loan-related items, such as private
mortgage insurance. When the Bank receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a predetermined
net amount based on the yield on that mortgage. The difference between the
coupon on the underlying mortgage and the predetermined net amount paid to the
investor is the gross loan servicing fee. In addition, the Bank retains certain
amounts in escrow for the benefit of the investor for which the Bank incurs no
interest expense but is able to invest. At March 31, 2005, the Bank held
$913,000 in escrow for its portfolio of loans serviced.

Mortgage Servicing Rights. At March 31, 2005, mortgage servicing rights
were $614,000, which includes an impairment recovery on mortgage servicing
rights of $81,000. At March 31, 2004, mortgage servicing rights were $710,000,
which was net of an allowance for impairment on mortgage servicing rights of
$121,000. The value of the loans serviced for others is significantly affected
by interest rates. In general, during periods of falling interest rates such as
the ones recently experienced, mortgage loans prepay at faster rates and the
value of the mortgage servicing declines. Conversely, during periods of rising
interest rates, the value of the mortgage servicing rights generally increases
as a result of slower rates of prepayment. Impairment of mortgage servicing
rights is assessed based on the fair value of those rights. Fair values are
estimated using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
For purposes of measuring impairment, the rights are stratified by predominant
characteristics, such as interest rates and terms. The amount of impairment
recognized is the amount by which the capitalized mortgage servicing rights for
a stratum exceeds their fair value. The following table is an analysis of the
changes in mortgage servicing rights for the years ended March 31, 2005 and
2004:

Year Ended March 31,
------------------------
2005 2004
---------- ----------
(In Thousands)
Beginning Balance $ 710 $ 826
Additions 29 199
Amortization (206) (194)
Impairment recovered (recognized) 81 (121)
---------- ----------
Ending Balance $ 614 $ 710
========== ==========

Goodwill and Other Intangible Assets. Goodwill at March 31, 2005 was
$16.7 million. No impairment loss on goodwill was recorded for the year ended
March 31, 2005, since there were no impairment indicators during the period.

Core deposit intangible at March 31, 2005 was $2.9 million, net of
accumulated amortization of $1.0 million. Amortization expense for the net
carrying amount of the core deposit intangible at March 31, 2005 is estimated to
be as follows:

For the year ended March 31,
(In Thousands)
2006 $ 715
2007 715
2008 715
2009 715
2010 67
----------
Estimated total core deposit intangible amortization expense $ 2,927
==========

13

Delinquencies and Classified Assets

Delinquent Loans. When a loan borrower fails to make a required payment
when due, the Bank institutes collection procedures. If the loan is within the
first three months of the term, the borrower is contacted by telephone
approximately ten days after the payment is due in order to permit the borrower
to make the payment before the imposition of a late fee. The first notice is
mailed to the borrower when the payment is 16 days past due. Attempts to contact
the borrower by telephone generally begin when a payment becomes 25 days past
due. If the loan has not been brought current by the 60th day of delinquency,
the Bank attempts to interview the borrower in person and to physically inspect
the property securing the loan.

In most cases, delinquencies are cured promptly; however, if by the
91st day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans delinquent over 90 days is reduced
by the full amount of accrued and uncollected interest.

The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of generally
accepted accounting principles ("GAAP") at the years indicated. It is the policy
of the Bank to cease accruing interest on loans more than 90 days past due.

At March 31,
---------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in Thousands)

Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 294 $ 701 $ 429 $ 177 $ 308
Construction -- 364 -- -- 316
Agricultural -- 78 10 86 57
Commercial 251 -- 175 -- --
Commercial non-real estate 1 1,661 499 89 226
Consumer and other loans 173 96 138 239 254
------ ------ ------ ------ ------
Total 719 2,900 1,251 591 1,161
------ ------ ------ ------ ------
Accruing loans which are contractually
past due 90 days or more 377 -- -- -- 282
------ ------ ------ ------ ------

Total of nonaccrual and 90 days past
due loans 1,096 2,900 1,251 591 1,443
Real estate owned 603 552 120 424 33
Repossessed assets 18 52 -- -- --
------ ------ ------ ------ ------
Total nonperforming loans 1,717 3,504 1,371 1,015 1,476

Restructured loans $1,094 $ 152 $ 442 $ 107 $ --
------ ------ ------ ------ ------

Total nonperforming assets $2,811 $3,656 $1,813 $1,122 $1,476
====== ====== ====== ====== ======

Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net 0.19% 0.63% 0.50% 0.25% 0.66%
Nonaccrual and 90 days or more past
due loans as a percent of total assets 0.14% 0.41% 0.38% 0.19% 0.51%
Nonperforming assets as a percent of
total assets 0.35% 0.50% 0.55% 0.36% 0.53%
Total nonperforming assets to total loans 0.49% 0.78% 0.71% 0.47% 0.67%

Interest income that would have been recorded for the year ended March
31, 2005 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $68,000.

14

Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
("REO") until it is sold. When property is acquired, it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan, plus
foreclosure costs, or 90 day liquidation value. Subsequent to foreclosure, REO
is carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At March 31, 2005, the Bank had $603,000 of REO.

Asset Classification. The State of Washington 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, State of Washington examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, 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. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified 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 may 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 which require additional monitoring by the
Bank are classified as special mention.

The aggregate amounts of the Bank's classified assets for the years ended March
31, 2005, 2004 and 2003 were as follows:

At March 31,
--------------------------
2005 2004 2003
------ ------ ------
(In Thousands)
Doubtful:
Consumer $ 17 $ -- $ 10
Residential -- 12 14
Commercial non-real estate -- 120 --
------ ------ ------
Total doubtful 17 132 24
------ ------ ------
Substandard:
Consumer 251 310 206
Residential 595 950 886
Commercial non-real estate 1,483 1,870 685
Commercial real estate 1,486 756 175
Real estate owned 603 552 120
Repossessed assets 18 -- --
Overdrawn NOW accounts 56 -- --
------ ------ ------
Total substandard 4,492 4,438 2,072
------ ------ ------

Total classified assets $4,509 $4,570 $2,096
====== ====== ======

The increase in substandard loans from March 31, 2003 to March 31, 2004 was
primarily attributable to the acquisition of Oregon loans.

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.

15

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 income.

The general allowance is maintained to cover losses inherent in the
portfolio of performing loans. Management's periodic evaluation of the adequacy
of the allowance is based on management's evaluation of probable losses in the
loan portfolio. The evaluation of the adequacy of specific and general valuation
allowances is an ongoing process. This process includes information derived from
many factors including historical loss trends, trends in classified assets,
trends in delinquency and nonaccrual loans, trends in portfolio volume,
diversification as to type of loan, size of individual credit exposure, current
and anticipated economic conditions, loan policies, collection policies and
effectiveness, quality of credit personnel, effectiveness of policies,
procedures and practices, and recent loss experience of peer banking
institutions. Specific valuation allowances are established to absorb losses on
loans for which full collectibility may not be reasonably assured, based upon,
among other factors, the estimated fair market value of the underlying
collateral and estimated holding and selling costs. Generally, a provision for
losses is charged against income on a quarterly basis to maintain the
allowances.

At March 31, 2005, the Bank had an allowance for loan losses of $7.3
million. The allowance for loan losses is maintained at an amount management
considers adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, 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.

While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, 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 loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses would adversely affect the Bank's financial
condition and results of operations.

The following table sets forth an analysis of the Bank's allowance for
loan losses for the years indicated. Where specific loan loss reserves have been
established, any differences between the loss allowances and the amount of loss
realized has been charged or credited to current income.

Year Ended March 31,
----------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
(Dollars in Thousands)

Allowance at beginning of year $6,314 $3,414 $2,563 $1,758 $1,604
Addition through acquisition -- 2,863 -- -- --
Provision for loan losses(1) 1,528 395 1,033 1,064 303

Recoveries 110 120 22 7 6

Charge-offs:
Real estate loans:
Residential 7 11 -- 41 44
Commercial 138 19 -- -- --
Construction -- -- -- 12 --
Commercial non-real estate 211 225 18 16 --
Consumer and other loans 342 223 186 197 111
------ ------ ------ ------ ------
Total charge-offs 698 478 204 266 155
------ ------ ------ ------ ------
Net charge-offs 588 358 182 259 149
------ ------ ------ ------ ------
Balance at end of year $7,254 $6,314 $3,414 $2,563 $1,758
====== ====== ====== ====== ======

Allowance for loan losses as a percent of
total loans receivable 1.27% 1.35% 1.33% 1.08% 0.80%
Net charge-offs to average outstanding loans 0.12% 0.10% 0.07% 0.12% 0.07%

16

(1) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Comparison of Operating Results for the Years
Ended March 31, 2004 and 2005 -- Provision for Loan Losses" for a
discussion of the factors contributing to changes in the Bank's provision
for loan losses between the years.

The following table sets forth the breakdown of the allowance for loan
losses by loan category for the years indicated. 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,
-------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------- --------------- --------------- --------------- ---------------
(Dollars in Thousands)
% of % of % of % of % of
Loans Loans Loans Loans 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
------ ------ ------ ------ ------ ------ ------ ------ ------ ------

Residential $ 238 20.55% $ 282 24.20% $ 243 19.77% $ 268 26.19% $ 234 32.78%
Construction 1,272 12.09 927 9.54 660 11.80 133 2.54 140 2.50
Agricultural 735 7.36 738 9.31 425 11.28 365 12.01 318 12.03
Commercial 4,628 46.62 3,630 42.40 1,973 46.32 1,571 45.47 882 36.44
Consumer and other 381 13.38 737 14.55 113 10.83 226 13.79 184 16.25
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses $7,254 100.00% $6,314 100.00% $3,414 100.00% $2,563 100.00% $1,758 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======

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 Federal
Home Loan Bank of Seattle ("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. Savings institutions like the
Bank are also required to maintain an investment in FHLB stock.

Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," requires
that investments be categorized as "held-to-maturity," "trading securities" or
"available-for-sale," based on management's intent as to the ultimate
disposition of each security. SFAS No. 115 allows debt securities to be
classified as "held-to-maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as
"held-to-maturity." Debt and equity securities held for current resale are
classified as "trading securities." Such securities are reported at fair value,
and unrealized gains and losses on such securities would be included in
earnings. Debt and equity securities not classified as either "held-to-maturity"
or "trading securities" are classified as "available-for-sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of equity. The unrealized gains and losses are also reported as a separate
component of the Statement of Other Comprehensive Income.

The Chief Executive Officer and the Chief Financial Officer determine
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures. The Bank's investment policies generally
limit investments to FHLB obligations, certificates of deposit, U.S. Government
and agency securities, municipal bonds rated AAA, mortgage-backed securities and
certain types of mutual funds. The Bank does not purchase high-risk mortgage
derivative products. 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 during the evaluation.

17

Investment securities are purchased primarily for managing liquidity.
Generally, the Bank purchases mortgage-backed securities during times of reduced
loan demand. The Bank's investments are primarily long term, insured bank
qualified State of Idaho or Oregon municipal bonds. Most of the mortgage-backed
securities are longer-term Freddie Mac, Fannie Mae, and Ginnie Mae backed
securities.

In connection with the acquisition of Oregon Trail, $9.5 million of
investment securities were added to the held-to-maturity classification and
$771,000 of mortgage-backed securities were added to the held-to-maturity
classification during the fiscal year ended March 31, 2004. Held-to-maturity
securities were classified as such because these securities were intended to be
held-to-maturity and used to satisfy collateral requirements. For the year ended
March 31, 2004, proceeds from maturities and sales of securities were $34.6
million and purchases of securities were $50.8 million. The proceeds from
maturities and sale of securities were used to purchase securities. In December
2003, the Company engaged in a $25.0 million leveraged transaction, purchasing
held-to-maturity mortgage-backed securities funded by cash and short term FHLB
advances. This generated net interest income, helping defray the costs of
depository branches in Hayden and Boise, Idaho. Held-to-maturity mortgage-backed
and investment securities of $26.1 million were purchased to minimize the
extension of risk by shortening the maturity dates of securities given the
current interest rate environment.

The following table sets forth the composition of the Bank's investment
and mortgage-backed securities portfolios for the dates indicated.

At March 31,
-----------------------------------------------------------------------
2005 2004 2003
--------------------- --------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)

Available-for-sale:
Investment securities $ 17,427 15.81% $ 19,116 16.50% $ 16,813 63.61%
Mortgage-backed securities 39,441 35.78 54,128 46.74 7,649 28.94
--------- --------- --------- --------- --------- ---------
Total available-for-sale 56,868 51.59 73,244 63.24 24,462 92.55
--------- --------- --------- --------- --------- ---------

Held-to-maturity:
Investment securities $ 30,907 28.03% $ 19,671 16.99% $ -- --%
Mortgage-backed securities 22,463 20.38 22,899 19.77 1,969 7.45
--------- --------- --------- --------- --------- ---------
Total held-to-maturity 53,370 48.41 42,570 36.76 1,969 7.45
--------- --------- --------- --------- --------- ---------
Total $ 110,238 100.00% $ 115,814 100.00% $ 26,431 100.00%
========= ========= ========= ========= ========= =========

The table below sets forth certain information regarding the carrying
value, average tax effected weighted yields and maturities of the Bank's
investment and mortgage-backed securities at March 31, 2005.

Over Over
Less than One to Five to Over Ten
One Year Five Years Ten Years Years
----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)

Investment securities $ 450 2.90% $14,388 3.78% $ 5,878 7.73% $27,618 7.69%

Mortgage-backed
securities 7 -- -- -- 8,922 4.28 52,975 5.12
------- ------- ------- ------- ------- ------- ------- -------
Total $ 457 2.86% $14,388 3.78% $14,800 5.65% $80,593 6.00%
======= ======= ======= ======= ======= ======= ======= =======

18

Other Investment Activities. The Bank purchases bank owned life
insurance policies ("BOLI") to offset future employee benefit costs, and at
March 31, 2005, bank owned life insurance policies and cash surrender value of
life insurance policies was $23.3 million. The purchase of BOLI policies, and
its increase in cash surrender value, is classified as "bank owned and cash
surrender value of life insurance policies" in the Company's Consolidated
Statements of Financial Condition. The income related to the BOLI of $1.1
million, which is generated by the increase in the cash surrender value of the
policy, is classified in "other interest earning assets" in the Company's
Consolidated Statements of Income.

Deposit Activities and Other Sources of Funds

General. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. 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 through the FHLB-Seattle are used
to compensate for reductions in the availability of funds from other sources.
The Company also maintains an additional credit facility of $23.5 million with
US Bank.

Deposit Accounts. Savings deposits are the primary source of funds for
the Bank's lending and investment activities and for its general business
purposes. Substantially all of the Bank's depositors are residents of Idaho,
Washington and Oregon. Deposits are attracted from within the Bank's market area
through the offering of a broad selection of deposit instruments, including NOW
accounts, money market deposit accounts, regular savings accounts, certificates
of deposit, retirement savings plans, and securities sold under agreements to
repurchase. The Bank also offers "TT&L" (treasury, taxes and loans) accounts for
local businesses. Deposit account terms vary, according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of its deposit accounts, the
Bank considers current market interest rates, profitability to the Bank,
matching deposit and loan products and its customer preferences and concerns.
The Bank reviews its deposit mix and pricing weekly. Currently, the Bank accepts
brokered deposits with maturities between ninety days and ten years. At March
31, 2005, the Bank had $42.7 million in brokered deposits, which was 5.3% of
total assets. At March 31, 2005, certificates of deposit that are scheduled to
mature in less than one year totaled $124.5 million. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The FHLB-Seattle has lowered its dividend payout and has changed its
method of calculating the dividend payout based on earnings from the prior
quarter, subject to certain limitations. As of May 18, 2005, the FHLB-Seattle
has suspended the payment of dividends on all classes of stock. For additional
information see `News' under `Our Company' on the FHLB-Seattle's website at
www.fhlbsea.com. The dividend declared and paid for the quarter ended March 31,
2004 was 4.0% on class B(1) stock and 0.641% on class B(2) stock. The dividend
declared for the quarter ended March 31, 2005 is 1.63% on class B(1) stock and
1.50% on class B(2) stock. The Company will recognize this lower return on
equity securities on its statement of financial condition and results of
operations.

19

The following table sets forth information concerning the Bank's
deposits and securities sold under agreements to repurchase at March 31, 2005.

Weighted
Average Checking and Savings Deposits Percentage
Interest and Securities Sold Under Minimum of Total
Rate Agreements to Repurchase Amount Balance Deposits
- ------ ------------------------------- -------- -------- --------
(Dollars in Thousands, except Minimum Amount)

0.22% NOW and Securities Sold Under
Agreements to Repurchase $ -- $157,397 29.44%
1.05 Money Market Deposit 100 44,940 8.40
1.27 Money Market Deposit 1,000 30,710 5.74
2.50 Money Market Deposit 2,500 43,231 8.09
0.25 Statement Savings 100 41,189 7.70
-------- --------
Total Checking and Savings Deposits
and Securities Sold Under Agreements
to Repurchase 317,467 59.37
-------- --------

Certificates of Deposit
-----------------------
1.56 7 days to 179 days 2,500 15,487 2.90
1.97 6 months to less than 1 year 2,500 12,066 2.26
1.83 1 year to less than 2 years 2,500 9,794 1.83
2.23 2 years to less than 3 years 2,500 6,325 1.18
3.06 2 years to 5 years - Add on 500 5,134 0.96
3.15 3 years to less than 4 years 2,500 17,538 3.28
4.22 4 years to less than 5 years 2,500 1,525 0.29
4.31 5 years to less than 10 years 2,500 17,390 3.25
2.54 IRA Variable 500 762 0.14
3.55 Brokered 100,000 42,733 7.99
1.88 2 year Step Rate 5,000 641 0.12
3.60 3 year Step Rate 5,000 8,141 1.52
4.91 4 year Step Rate 5,000 2,499 0.47
3.37 Special, 2 years to less than 3 years 10,000 2,935 0.55
1.21 91 days 1,000 1,508 0.28
1.65 182 days 1,000 7,736 1.45
1.83 1 year 1,000 18,724 3.50
2.34 2 1/2 years 1,000 4,577 0.86
3.59 3 to 5 years 1,000 14,022 2.62
4.37 5 years 1,000 19,048 3.56
3.38 6 years 1,000 603 0.11
2.00 18 month add on 5 2,791 0.52
1.59 20 month 1,000 2,764 0.52
2.22 Mini jumbo certificates 96,000 1,921 0.36
2.08 Various term, fixed rate 1,000 568 0.11
-------- --------

Total Certificates of Deposit 217,232 40.63
-------- --------

Total Deposits and Securities Sold Under
Agreements to Repurchase $534,699 100.00%
======== ========

20

The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 2005.
Jumbo certificates of deposit are certificates in amounts of more than $100,000.

Maturity Period Amount
- --------------- ----------
(In Thousands)
Three months or less $ 22,750
Over three through six months 11,643
Over six through 12 months 13,231
Over 12 months 41,411
----------

Total jumbo certificates of deposit $ 89,035
==========

Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits and securities sold
under agreements to repurchase in the various types of accounts offered by the
Bank between the years ended March 31, 2005, 2004 and 2003.

At March 31,
----------------------------------------------------------------------------------------
2005 2004 2003
------------------------------- ------------------------------- ------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
--------- ------ --------- --------- ------ --------- --------- ------
(Dollars in Thousands)

NOW accounts and securities
sold under agreements to
repurchase $ 157,397 29.44% $ 11,438 $ 145,959 29.72% $ 83,479 $ 62,480 29.15%
Savings accounts 41,189 7.70 1,367 39,822 8.11 24,287 15,535 7.25

Money market deposit
accounts 118,881 22.23 14,269 104,612 21.30 80,374 24,238 11.31

Fixed-rate certificates
which mature:
Within 1 year 124,463 23.28 20,418 104,045 21.19 79,471 24,574 11.46

After 1 year, but within
2 years 37,065 6.93 4,432 32,633 6.65 20,876 11,757 5.49
After 2 years, but within
5 years 51,181 9.57 (6,321) 57,502 11.71 (7,996) 65,498 30.56
Certificates maturing
Thereafter 4,523 0.85 (1,939) 6,462 1.32 (3,796) 10,258 4.78
--------- ------ --------- --------- ------ --------- --------- ------
Total $ 534,699 100.00% $ 43,664 $ 491,035 100.00% $ 276,695 $ 214,340 100.00%
========= ====== ========= ========= ====== ========= ========= ======

Time Deposits by Rates. The following table sets forth the time
deposits in the Bank categorized by rates at the years ended March 31, 2005,
2004 and 2003.

At March 31,
----------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)

0.0 - 2.99% $ 117,771 $ 109,775 $ 51,940
3.0 - 3.99% 47,069 30,501 11,937
4.0 - 4.99% 33,841 35,777 32,126
5.0 - 5.99% 16,144 18,728 14,523
6.0 - 6.99% 2,407 4,944 1,219
7.0 - 7.99% -- 917 336
8% and over -- -- 6
---------- ---------- ----------
Total $ 217,232 $ 200,642 $ 112,087
========== ========== ==========

21

The following table sets forth the amount and maturities of time
deposits at March 31, 2005.

Amount Due
--------------------------------------------------------------------------
Percent
After After After of Total
Less Than 1 to 2 2 to 3 3 to 4 After Certificate
One Year Years Years Years 4 Years Total Accounts
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)

0.0 - 2.99% $ 98,426 $ 13,391 $ 5,143 $ 228 $ 583 $117,771 54.21%
3.0 - 3.99% 10,644 2,689 19,509 6,623 7,604 47,069 21.67
4.0 -4.99% 11,093 8,728 6,155 101 7,764 33,841 15.58
5.0 - 5.99% 2,314 12,032 1,736 11 51 16,144 7.43
6.0 - 6.99% 1,986 225 105 -- 91 2,407 1.11
7% and over -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total $124,463 $ 37,065 $ 32,648 $ 6,963 $ 16,093 $217,232 100.00%
======== ======== ======== ======== ======== ======== ========

Deposit Activity. The following table sets forth the deposit and
securities sold under agreements to repurchase activities of the Bank for the
years ended March 31, 2005, 2004 and 2003.

Year Ended March 31,
----------------------------------
2005 2004 2003
-------- -------- --------
(In Thousands)

Beginning balance $491,035 $214,340 $196,123
-------- -------- --------
Net increase
before interest credited 36,309 15,082 13,574
Purchased in Oregon Trail acquisition -- 256,312 --
Interest credited 7,355 5,301 4,643
-------- -------- --------
Net increase
in savings deposits 43,664 276,695 18,217
-------- -------- --------

Ending balance $534,699 $491,035 $214,340
======== ======== ========

Borrowings. The Bank utilizes 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 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. 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. The Bank is currently
authorized to borrow from the FHLB up to an amount equal to 30% of total assets,
provided that the Bank holds sufficient collateral.

22

The following tables set forth certain information regarding borrowings
by the Bank for the years ended March 31, 2005, 2004 and 2003:

At or For the
Year Ended March 31,
----------------------------------------
2005 2004 2003
---------- ---------- ----------
(Dollars in Thousands)

Maximum amount of FHLB advances and other borrowings
outstanding at any month end during the year $ 192,338 $ 144,164 $ 83,586
Approximate average FHLB advances and other borrowings
outstanding during the year 158,235 101,106 82,271
Balance of FHLB advances and other borrowings outstanding
at end of year 185,337 132,056 81,816
Weighted average rate paid on
FHLB advances and other borrowings at end of year 4.28% 4.78% 4.93%
Approximate weighted average rate paid on
FHLB advances and other borrowings during the year 3.77% 4.58% 4.94%

At March 31, 2005 One Year to Five Years to
Less than Less than Less than Ten Greater than
One Year Five Years Years Ten Years
-------- ---------- -------- ---------
(Dollars in Thousands)

Maturities of FHLB advances and other
borrowings $109,681 $ 31,346 $ 37,589 $ 6,721
Range of interest rates 2.36% - 7.01% 3.05% - 7.03% 3.42% - 7.12% 6.66% - 7.10%
Weighted average interest rate 3.59% 4.87% 5.32% 7.03%
Percentage of total advances 59.18% 16.91% 20.28% 3.63%

At March 31, 2005, there were $45.8 million of advances from the
FHLB-Seattle that were callable, of which $5.0 million of less than one year
advances were callable within one year, $5.0 million of one to less than five
year advances were callable within one year, $5.8 million of one to less than
five year advances were callable within one to less than five years, $10.0
million of five to less than ten year advances were callable within one year,
and $20.0 million of five to less than ten year advances were callable within
one to less than five years. As of March 31, 2004, there were $45.8 million of
advances from the FHLB-Seattle that were callable, of which $10.0 million of one
to less than five year advances were callable within one year, $750,000 of one
to less than five year advances were callable within one to less than five
years, $30.0 million of five to less than ten year advances were callable within
one year, and $5.0 million of five to less than ten year advances were callable
in one to less than five years.

The Bank also maintains additional credit facility of $23.5 million
with US Bank. Advances of $2.2 million were outstanding under this facility at
March 31, 2005.

Competition

The Bank operates in a competitive market 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.
The Bank's competitors include large regional and superregional banks. These
institutions are significantly larger than the Bank and therefore have greater
financial and marketing resources than the Bank. 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 competition for loans comes from commercial
banks and other thrifts operating in its market as well as from mortgage bankers
and brokers, consumer finance companies, and, with respect to agricultural
loans, government sponsored lending programs. Such competition for deposits and
the origination of loans may limit the Bank's growth and profitability in the
future.

23

Subsidiary Activities

The Bank has two subsidiaries, Tri-Star Financial Corporation, and
Pioneer Development Corporation ("PDC"). Tri-Star sells life insurance and tax
deferred annuities on an agency basis. PDC purchased land sale contracts until
March 1998, and currently services those contracts. Both subsidiaries reflect
residual value of assets and income and they are not currently pursuing or
engaging in any business activity.

Personnel

As of March 31, 2005, the Bank had 217 full-time and 59 part-time
employees. The number of full-time equivalent employees increased 5.9% from
March 31, 2004 to March 31, 2005. The number of full-time equivalent employees
at March 31, 2005 was 270. The number of full time equivalent employees at March
31, 2004 was 255. The Bank used temporary services to hire employees for
approximately 2,200 hours during the year ended March 31, 2005. The Bank's
employees are not represented by a collective bargaining unit and the Bank
believes its relationship with its employees to be good.

The following table sets forth certain information with respect to the
executive officers of the Company and the Bank:

Executive Officers of the Company and Bank
------------------------------------------

Age at
March 31, Position
Name 2005 Company Bank
- ---------------- ---- -------------------------- ---------------------------------------------------

Clyde E. Conklin 53 President, Chief Executive Chief Executive Officer and Director
Officer and Director
Larry K. Moxley 54 Executive Vice President, Chief Financial Officer,
Chief Financial Officer, Secretary/Treasurer and Director
Corporate Secretary, and
Director
Terence A. Otte 48 -- Executive Vice President, Chief Operating Officer
Donn L. Durgan 51 -- Executive Vice President, Chief Lending Officer
Richard R. Acuff 44 -- Executive Vice President, Chief Information Officer

Biographical Information

Clyde E. Conklin, who joined the Bank in 1987, has served as the Chief
Executive Officer of the Bank since February 1996 and as President and Chief
Executive Officer of the Company since its formation in 1997. From September
1994 to February 1996, Mr. Conklin served as Senior Vice President - Lending. In
1993, Mr. Conklin became Vice President - Lending. Prior to that time, Mr.
Conklin served as the Agricultural Lending Manager.

Larry K. Moxley, who joined the Bank in 1973, currently serves as Chief
Financial Officer of the Bank, a position he has held since February 1996. Mr.
Moxley has served as Executive Vice President, Chief Financial Officer and
Secretary/Treasurer of the Company since its formation in 1997. Mr. Moxley
served as Senior Vice President - Finance from 1993 to February 1996 and as Vice
President - Finance from 1984 to 1993.

Terence A. Otte joined the Bank in June 1989 as an Agricultural Loan
Officer, and currently serves as Executive Vice President, Chief Operating
Officer. From 1991 to 1994, he served as manager of the Bank's Moscow, Idaho
branch. In 1994, he became Vice President, Lending and Agricultural Lending
Manager and in 1996 became Senior Vice President, Agricultural and Consumer
Lending and Compliance Officer.

Donn L. Durgan, who joined the Bank in February 1996, currently serves
as Executive Vice President, Chief Lending Officer. Prior to that time, Mr.
Durgan was employed by First Security Bank, now known as Wells Fargo Bank, for
11 years in various positions in commercial and residential real estate lending.

Richard R. Acuff, who joined the Bank in February 1983, currently
serves as Executive Vice President, Chief Information Officer. From 1983 to
1992, he served as Staff Accountant, Assistant Controller, and Asset and
Liability Manager. From 1992 to 2003, he served as Manager, Assistant Vice
President, Vice President, and Senior Vice President of Management Information
Systems.

24

REGULATION

FirstBank Northwest

General. As a state-chartered, federally insured depository
institution, the Bank is subject to extensive regulation. Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. The Bank is
regularly examined by the FDIC and the Washington Department of Financial
Institutions, Division of Banks ("Division") and files quarterly and periodic
reports concerning the Bank's activities and financial condition with its
regulators. The Bank's relationship with depositors and borrowers also is
regulated to a great extent by both federal law and state law, especially in
such matters as the ownership of deposit accounts and the form and content of
mortgage documents.

Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.

State Regulation and Supervision. As a state-chartered savings bank,
the Bank is subject to applicable provisions of Washington law and the
regulations of the Division adopted thereunder. Washington law and regulations
govern the Bank's ability to take deposits and pay interest thereon, to make
loans on or invest in residential and other real estate, to make consumer loans,
to invest in securities, to offer various banking services to its customers, and
to establish branch offices. Under state law, savings banks in Washington also
generally have all of the powers that federal savings banks have under federal
laws and regulations. The Bank is subject to periodic examination and reporting
requirements by and of the Division.

Deposit Insurance. The Bank is a member of the SAIF, which is
administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and this insurance is backed by the full faith and credit of the United
States Government.

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. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the Office of Thrift Supervision 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.

Since January 1, 1997, the premium schedule for Bank Insurance Fund
("BIF") and SAIF insured institutions has ranged from 0 to 27 basis points.
However, SAIF 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 equal to approximately 1.5 points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of BIF and SAIF deposits, will continue until the bonds mature in the
year 2017.

25

Capital Requirements. FDIC regulations recognize two types, or tiers,
of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1
capital generally includes common stockholders' equity and noncumulative
perpetual preferred stock, less most intangible assets. Tier 2 capital, which is
limited to 100 percent of Tier 1 capital, includes such items as qualifying
general loan loss reserves, cumulative perpetual preferred stock, mandatory
convertible debt, term subordinated debt and limited life preferred stock;
however, the amount of term subordinated debt and intermediate term preferred
stock (original maturity of at least five years but less than 20 years) that may
be included in Tier 2 capital is limited to 50% of Tier 1 capital.

The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average total
assets. Most banks are required to maintain a minimum leverage ratio of at least
4% to 5% of total assets. The Bank had a leverage ratio of 6.7% as of March 31,
2005. The Bank has not been notified by the FDIC of any higher capital
requirements specifically applicable to it.

FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in one
of four categories and given a percentage weight based on the relative risk of
that category. In addition, certain off-balance-sheet items are converted to
balance-sheet credit equivalent amounts, and each amount is then assigned to one
of the four categories. Under the guidelines, the ratio of total capital (Tier 1
capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and
the ratio of Tier 1 capital to risk-weighted assets must be at least 4%. In
evaluating the adequacy of a bank's capital, the FDIC may also consider other
factors that may affect the bank's financial condition. Such factors may include
interest rate risk exposure, liquidity, funding and market risks, the quality
and level of earnings, concentration of credit risk, risks arising from
nontraditional activities, loan and investment quality, the effectiveness of
loan and investment policies, and management's ability to monitor and control
financial operating risks. The Bank had a total risk-based ratio of 10.3% and a
Tier 1 risk-based capital ratio of 9.0% at March 31, 2005.

The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement. At March 31, 2005, the Bank had a Tier 1
capital to average assets ratio of 6.7%, a Tier 1 capital to risk-weighted
assets ratio of 9.0%, and a total capital to risk-weighted assets ratio of
10.3%.

The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future. In this regard, it is currently anticipated that $3.0 million of term
subordinated debt will be added through US Bank during the quarter ending June
30, 2005 to increase the risk-weighted capital. However, events beyond the
control of the Bank, such as a downturn in the economy in areas where the Bank
has most of its loans, could adversely affect future earnings and, consequently,
the ability of the Bank to meet its capital requirements. For additional
information concerning the Bank's capital, see Notes 12 and 21 of the Notes to
the Consolidated Financial Statements.

Prompt Corrective Action. The FDIC is required to take certain
supervisory actions against undercapitalized savings institutions, 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
FDIC is required to appoint a receiver or conservator for a savings institution
that is critically undercapitalized. FDIC regulations also require that a
capital restoration plan be filed with the FDIC within 45 days of the date a
savings institution receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Compliance with the plan must
be guaranteed by any parent holding company in an amount of up to the lesser of
5% of the institution's assets or the amount which would bring the institution
into compliance with all capital standards. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The FDIC also
could take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.

26

At March 31, 2005, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.

Activities and Investments of Insured State-Chartered Banks. Federal
law generally limits the activities and equity investments of FDIC insured,
state-chartered banks to those that are permissible for national banks. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.

Washington State recently enacted a new law regarding financial
institution parity. Primarily, the law affords Washington chartered commercial
banks the same powers as Washington chartered savings banks. In order for a bank
to exercise these powers, it must provide 30 days notice to the Director of
Financial Institutions and the Director must authorize the requested activity.
In addition, the law provides that Washington chartered commercial banks may
exercise any of the powers that the Federal Reserve has determined to be closely
related to the business of banking and the powers of national banks, subject to
the approval of the Director in certain situations. The law also provides that
Washington chartered savings banks may exercise any of the powers of Washington
chartered commercial banks, national banks and federally chartered savings
banks, subject to the approval of the Director in certain situations. Finally,
the law provides additional flexibility for Washington chartered commercial and
savings banks with respect to interest rates on loans and other extensions of
credit. Specifically, they may charge the maximum interest rate allowable for
loans and other extension of credit by federally chartered financial
institutions to Washington residents.

Environmental Issues Associated With Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
a federal statute, generally imposes strict liability on all prior and present
"owners and operators" of sites containing hazardous waste. However, Congress
created a safe harbor provision to protect secured creditors by providing that
the term "owner and operator" excludes a person whose ownership is limited to
protecting its security interest in the site. Since the enactment of the CERCLA,
this "secured creditor exemption" has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that they hold as collateral
for a loan.

To the extent that legal uncertainty exists in this area, all
creditors, including the Bank, that have made loans secured by properties with
potential hazardous waste contamination (such as petroleum contamination) could
be subject to liability for cleanup costs, which costs often substantially
exceed the value of the collateral property.

Federal Home Loan Bank System. The Bank is a member of the
FHLB-Seattle, which is one of 12 regional FHLBs that administer the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans or advances to members in accordance with policies
and procedures, established by the Board of Directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing. As of March 31, 2005, the Bank had advances,
including $2.8 million merger premium, totaling $183.2 million from the
FHLB-Seattle, which mature in 2005 through 2030 at interest rates ranging from
2.36% to 7.12%. See "Business -- Deposit Activities and Other Sources of Funds
- -- Borrowings."

As a member, the Bank is required to purchase and maintain stock in the
FHLB-Seattle. At March 31, 2005, the Bank had $12.8 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock. Over the past two fiscal years such
dividends have averaged 2.25% and 3.93% for the fiscal years ended March 31,
2005 and 2004, respectively. For the year ended March 31, 2005, the Bank
received $284,000 in dividends from the FHLB-Seattle.

27

Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

Federal Reserve System. The Federal Reserve Board requires under
Regulation D that all depository institutions, including savings banks, maintain
reserves on transaction accounts or non-personal time deposits. These reserves
may be in the form of cash or non-interest-bearing deposits with the regional
Federal Reserve Bank. Negotiable order of withdrawal accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a savings bank. As of
March 31, 2005, the Bank's deposit with the Federal Reserve Bank and vault cash
exceeded its reserve requirements.

Affiliate Transactions. The Company and the Bank are separate and
distinct legal entities. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Company, generally limiting a single
transaction with the Company to 10% of the Bank's capital and surplus and
limiting all such transactions to 20% of the Bank's capital and surplus. These
transactions, including extensions of credit, sales of securities or assets and
provision of services, also must be on terms and conditions consistent with safe
and sound banking practices that are substantially the same as those prevailing
at the time for transactions with unaffiliated companies.

Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.

Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the Community Reinvestment Act. The
Community Reinvestment Act requires the FDIC, in connection with the examination
of the Bank, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the FDIC. Due to the heightened attention being given to the Community
Reinvestment Act in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The Bank was
examined for Community Reinvestment Act compliance and received a rating of
satisfactory in its latest examination.

Dividends. Dividends from the Bank constitute the major source of funds
for dividends which may be paid by the Company to stockholders. The amount of
dividends payable by the Bank to the Company depend upon the Bank's earnings and
capital position, and is limited by federal and state laws, regulations and
policies. According to Washington law, the Bank may not declare or pay a cash
dividend on its capital stock if it would cause its net worth to be reduced
below (i) the amount required for its liquidation account or (ii) the net worth
requirements, if any, imposed by the Director of the Division. Dividends on the
Bank's capital stock may not be paid in an aggregate amount greater than the
aggregate retained earnings of the Bank, without the approval of the Director of
the Division.

The amount of dividends actually paid during any one period will be
strongly affected by the Bank's policy of maintaining a strong capital position.
Federal law further provides that no insured depository institution may make any
capital distribution (which would include a cash dividend) if, after making the
distribution, the institution would be "undercapitalized," as defined in the
prompt corrective action regulations. Moreover, the federal bank regulatory
agencies also have the general authority to limit the dividends paid by insured
banks if such payments should be deemed to constitute an unsafe and unsound
practice.

28

Privacy Standards. On November 12, 1999, the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 ("GLBA") was signed into law. The
purpose of this legislation is 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.

The Bank is subject to FDIC regulations implementing the privacy
protection provisions of the GLBA. These regulations require the Bank to
disclose its privacy policy, including identifying with whom it shares
"non-public personal information," to customers at the time of establishing the
customer relationship and annually thereafter.

The regulations also require the Bank to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, the Bank is required to provide its customers with the
ability to "opt-out" of having the Bank share their non-public personal
information with unaffiliated third parties before they can disclose such
information, subject to certain exceptions.

The Bank is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of the GLBA. The guidelines describe the agencies' expectations for
the creation, implementation and maintenance of an information security program,
which would include administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are intended
to insure the security and confidentiality of customer records and information,
protect against any anticipated threats or hazards to the security or integrity
of such records and protect against unauthorized access to or use of such
records or information that could result in substantial harm or inconvenience to
any customer.

Anti-Money Laundering and Customer Identification. In response to the
terrorist events of September 11, 2001, the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (the "USA Patriot Act") was signed into law 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.
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. Title III of the USA
Patriot Act and the related OTS regulations impose the following requirements
with respect to financial institutions:

o establishment of anti-money laundering programs;
o establishment of a program specifying procedures for obtaining identifying
information from customers seeking to open new accounts, including
verifying the identity of customers within a reasonable period of time;
o establishment of enhanced due diligence policies, procedures and controls
designed to detect and report money laundering;
o prohibitions on correspondent accounts for foreign shelled banks and
compliance with record keeping 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. The Bank's policies and procedures have been
updated to reflect the requirements of the USA Patriot Act, which had a minimal
impact on business and customers.

FirstBank NW Corp.

General. The Company is a unitary savings and loan holding company
subject to regulatory oversight of the Office of Thrift Supervision ("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 institution
subsidiaries, which also permit the OTS to restrict or prohibit activities that
are determined to present a serious risk to the subsidiary savings institution.

29

Mergers and Acquisitions. The Home Owners Loan Act ("HOLA") and OTS
regulations issued thereunder generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring more than 5% of the voting
stock of any other savings institution 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 which is not a subsidiary of
such savings and loan holding company, unless the acquisition is approved by the
OTS. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance funds, the convenience
and the needs of the community and competitive factors.

Activities Restrictions. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions. The Company and
its non-savings institution subsidiaries are subject to statutory and regulatory
restrictions on their business activities specified by federal regulations,
which include performing services and holding properties used by a savings
institution subsidiary, activities authorized for savings and loan holding
companies as of March 5, 1987, and non-banking activities permissible for bank
holding companies pursuant to the Bank Holding Company Act of 1956 or authorized
for financial holding companies pursuant to the GLBA.

Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that fails the qualified thrift lender ("QTL") test must,
within one year after the date on which the Bank ceases to be a QTL, register as
and be deemed a bank holding company subject to all applicable laws and
regulations. Currently, the QTL test requires that either an institution qualify
as a domestic building and loan association under the Internal Revenue Code or
that 65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are: loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets; 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 2005, the Bank was in compliance with the QTL test.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law on July 30, 2002 in response to
public concerns regarding corporate accountability in connection with the recent
accounting scandals at Enron and WorldCom. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly traded
companies and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws.

The Sarbanes-Oxley Act generally applies to all companies, both U.S.
and non-U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934.

The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules and mandates further studies of certain issues by the SEC
and Comptroller General. The Sarbanes-Oxley Act represents significant federal
involvement in matters traditionally left to state regulatory systems, such as
the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board
of directors and its committees.

The Sarbanes-Oxley Act addresses, among other matters:

o audit committees;
o certification of financial statements by the chief executive officer
and the chief financial officer;
o the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of
any financial statements that later require restatement;
o a prohibition on insider trading during pension fund black out periods;
o disclosure of off-balance sheet transactions;

30

o a prohibition on personal loans to directors and officers, subject to
exemptions;
o expedited filing requirements for Form 4s;
o disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o "real time" filing of periodic reports;
o the formation of a public company accounting oversight board;
o auditor independence; and
o various increased criminal penalties for violations of securities laws.

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

The Bank operates twenty full-service facilities in Lewiston, Lewiston
Orchards, Moscow, Grangeville, Coeur d'Alene, Post Falls, Boise, and Hayden,
Idaho, Clarkston, Spokane, and Liberty Lake, Washington, and Baker City, La
Grande, Ontario, John Day, Burns, Enterprise, Island City, Vale, and Pendleton,
Oregon and six loan production offices in Lewiston, Coeur d'Alene, Boise, and
Nampa, Idaho, Spokane, Washington, and Baker City, Oregon.

The Company owns the Lewiston, Lewiston Orchards, Moscow, Grangeville,
Coeur d'Alene, Hayden, Idaho, Clarkston, Washington and all Oregon facilities,
and leases the in-store location of the Post Falls branch on a one year optional
term with the initial five year term commencing on March 1, 1999. In November
1999, the Bank opened the newly constructed Liberty Lake branch, which is
located on leased land. The land lease is a ten-year lease. The Boise and
Spokane branches are located on the same property as the loan production
offices.

The loan production offices in Lewiston, and Coeur d'Alene, Idaho and
Baker City, Oregon are located in the same facility as the Bank's full-service
office. The loan production office in Boise is an office space leased for five
years, ten and one-half months commencing on April 15, 2002. The loan production
office in Nampa is an office space leased for one year plus five one-year
options commencing on November 1, 2004. The loan production office in Spokane is
an office space leased for 62 months commencing on August 1, 2002.

The corporate office is located in the same building as the Clarkston,
Washington full-service facility.

A portion of the Coeur d'Alene facility is leased to an unaffiliated
brokerage firm for a period of ten years expiring in 2006.

At March 31, 2005, the net book value of the properties (including land
and buildings) and the Bank's fixtures, furniture and equipment was $18.7
million. The Company believes that its existing facilities are adequate for the
current level of operations.

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

From time to time, the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are currently
considered to have a material impact on the Company's financial position,
results of operations, or cash flows.

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, 2005.

31

PART II

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

The common stock of the Company is traded on the Nasdaq National Market
under the symbol "FBNW." The table below reflects the high, low, and closing
market prices of its common stock based on the daily price, cash dividends paid
per share, and tangible book value for the last two fiscal years. The common
stock began trading on July 2, 1997. At March 31, 2005, there were approximately
502 holders of record of common stock of the Company.

Tangible
Book
High Low Close Dividends Value*
-------- -------- -------- -------- --------
2005 $ 29.750 $ 24.500 $ 28.000 $ 0.68 $ 18.00
- ----
First Quarter 29.750 24.500 0.17 16.92
Second Quarter 29.250 26.590 0.17 17.33
Third Quarter 29.440 27.330 0.17 17.71
Fourth Quarter 29.000 26.580 0.17 18.00

2004 $ 31.050 $ 23.500 $ 29.750 $ 0.62 $ 16.88
- ----
First Quarter 29.000 23.500 0.15 23.91
Second Quarter 30.010 26.130 0.15 24.02
Third Quarter 31.050 27.550 0.15 16.59
Fourth Quarter 30.900 29.650 0.17 16.88

* Tangible book value is computed using actual shares outstanding, excluding
unallocated Employee Stock Ownership Plan ("ESOP") shares and including
undisbursed Management Recognition and Development Plan ("MRDP") shares.

The payment of dividends on the common stock is subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital and financial condition of the
Company, industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the continued payment thereof will
depend upon various factors at the intended time of declaration and payment,
including the Bank's profitability and liquidity, alternative investment
opportunities, and regulatory restrictions on dividend payments and on capital
levels applicable to the Bank. Accordingly, there can be no assurance that any
dividends will be paid in the future. Periodically, the Board of Directors, if
market, economic and regulatory conditions permit, may combine or substitute
periodic special dividends with or for regular dividends. In addition, because
the Company has no significant source of income other than dividends from the
Bank and earnings from investment of the net proceeds of the Conversion retained
by the Company, the payment of dividends by the Company depends in part upon the
amount of the net proceeds from the Conversion retained by the Company and the
Company's earnings thereon and the receipt of dividends from the Bank, which are
subject to various tax and regulatory restrictions on the payment of dividends.
Dividend payments by the Company are subject to regulatory restriction under OTS
policy as well as to limitation under applicable provisions of Washington law.

On April 21, 2005, the Board of Directors declared a cash dividend of $0.17 per
common share to shareholders of record as of May 20, 2005. The dividend was paid
on June 3, 2005.

32

Stock Repurchases

The following table sets forth the Company's repurchases of its
outstanding Common Stock during the fiscal year ended March 31, 2005.

ISSUER PURCHASES OF EQUITY SECUTITIES

(c) Total Number (d) Maximum
of Shares Number of
Purchased Shares that
as part May Yet Be
(a) Total Number (b) Average of Publicly Purchased
of Shares Price Paid per Announced Under the
Purchased Share Plans Plans
------------ ------------ ------------ ------------

April 2004 -- -- -- 41,432(1)
May 2004 -- -- -- 41,432
June 2004 -- -- -- 41,432
July 2004 -- -- -- 41,432
August 2004 41,432 $ 27.26 41,432 147,866(2)
September 2004 52,500 28.91 52,500 95,366
October 2004 -- -- -- 95,366
November 2004 -- -- -- 95,366
December 2004 -- -- -- 95,366
January 2005 -- -- -- 95,366
February 2005 -- -- -- 95,366
March 2005 -- -- -- 95,366
------------ ------------ ------------ ------------
TOTAL 93,932 $ 28.18 93,932 95,366
============ ============ ============ ============

(1) On November 21, 2003, the Company's Board of Directors authorized a 5%
stock repurchase plan, or 146,432 shares of the Company's outstanding
common stock. As of July 31, 2004, 105,000 shares were repurchased under
this program. The stock repurchase of this plan was completed in August
2004.

(2) On August 27, 2004, the Company's Board of Directors authorized a 5% stock
repurchase plan, or 147,866 shares of the Company's outstanding common
stock. As of March 31, 2005, 52,500 shares had been repurchased under this
program.

33

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

The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at the
dates and for the fiscal years indicated.

At March 31,
-------------------------------------------------------------
FINANCIAL CONDITION DATA: 2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(In Thousands)

Total assets $ 801,122 $ 700,232 $ 332,398 $ 307,840 $ 281,062
Loans receivable, net 562,101 459,114 251,805 234,396 216,685
Loans held for sale 3,999 5,254 5,214 3,740 2,466
Cash and cash equivalents 41,801 38,397 24,741 24,012 12,805
Investment securities available-for-sale 17,427 19,116 16,813 12,524 12,568
Investment securities held-to-maturity 30,907 19,671 -- -- --
Mortgage-backed securities held-to-maturity 22,463 22,899 1,969 2,140 2,335
Mortgage-backed securities available-for-sale 39,441 54,128 7,649 9,293 17,704
Deposits 518,676 480,548 203,189 188,857 157,797
Securities sold under agreements to repurchase 16,023 10,487 11,151 7,265 --
FHLB advances and other borrowings 185,337 132,056 81,816 79,722 90,917
Stockholders' equity 72,311 69,332 30,064 27,813 27,976

At March 31,
-------------------------------------------------------------
SELECTED OPERATING DATA: 2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
(In Thousands)

Interest income $ 40,631 $ 27,415 $ 20,575 $ 20,248 $ 20,757
Interest expense 13,319 9,934 8,710 9,992 11,617
--------- --------- --------- --------- ---------
Net interest income 27,312 17,481 11,865 10,256 9,140
Provision for loan losses (1,528) (395) (1,033) (1,064) (303)
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 25,784 17,086 10,832 9,192 8,837
Non-interest income 6,010 5,516 4,693 4,015 2,594
Non-interest expenses 23,149 16,762 11,699 9,766 8,683
--------- --------- --------- --------- ---------
Income before income tax expense 8,645 5,840 3,826 3,441 2,748
Income tax expense 2,367 1,482 1,054 1,065 866
--------- --------- --------- --------- ---------
Net income $ 6,278 $ 4,358 $ 2,772 $ 2,376 $ 1,882
========= ========= ========= ========= =========
Per share data:
Basic earnings per share $ 2.17 $ 2.26 $ 2.15 $ 1.76 $ 1.34
Diluted earnings per share $ 2.09 $ 2.12 $ 2.07 $ 1.70 $ 1.30
========= ========= ========= ========= =========

Dividends per share $ 0.68 $ 0.62 $ 0.54 $ 0.44 $ 0.38
========= ========= ========= ========= =========

34

At or For the Year Ended March 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------

KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1) 0.84% 0.90% 0.87% 0.82% 0.71%
Return on average equity (2) 8.85 9.26 9.49 8.47 7.07
Average equity to average assets (3) 9.54 9.71 9.16 9.73 10.00
Total equity to total assets at end of year 9.03 9.90 9.04 9.03 9.95
Interest rate spread (4) 4.38 4.23 4.14 3.86 3.31
Net interest margin (5) 4.38 4.28 4.27 4.05 3.92
Average interest-earning assets to average interest-bearing
liabilities 112.36 113.44 114.96 114.05 113.10
Non-interest expense as a percent of average assets 3.11 3.46 3.67 3.39 3.27
Efficiency ratio (6) 65.91 68.88 67.36 65.44 70.50
Dividend payout ratio 31.27 29.73 25.37 25.60 29.19

Bank Equity Ratios:
Tier I capital to average assets 6.67 6.51 8.40 8.79 9.18
Tier I capital to risk-weighted assets 9.04 9.24 11.84 12.28 13.52
Total capital to risk-weighted assets 10.29 10.50 13.09 13.47 14.45

Asset Quality Ratios:
Nonaccrual and 90 days or more past due loans as a percent
of loans receivable, net 0.19 0.63 0.50 0.25 0.66
Nonperforming assets as a percent of total assets 0.35 0.50 0.55 0.36 0.53
Allowance for loan losses as a percent of total loans
receivable 1.27 1.35 1.33 1.08 0.80
Allowance for loan losses as a percent of nonperforming
Loans 661.86 217.72 272.90 433.67 121.83
Net charge-offs to average outstanding loans 0.12 0.10 0.07 0.12 0.07
Allowance for loan losses as a multiple of net charge-offs 12.34 17.64 18.76 9.90 11.80

Averages are based on average daily balances.

(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Average equity divided by average assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on total deposits and borrowed funds.
(5) Net interest income and tax effects as a percentage of average
interest-earning assets.
(6) Non-interest expenses divided by the sum of tax equivalent net interest
income and non-interest income.

35

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

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.

Management's discussion and analysis of financial condition and results
of operations and other portions of this Annual Report on Form 10-K contain
certain "forward-looking statements" concerning the future operations of the
Company. Management desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing the Company of the protections of
such safe harbor with respect to all "forward-looking statements" contained in
its Annual Report. The Company has used "forward-looking statements" 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 affect
the results include interest rate trends, the general economic climate in the
Bank's market area and the country as a whole, the real estate market in
Washington, Idaho and Oregon, the demand for mortgage loans, the ability of the
Company to control costs and expenses, competition and pricing, loan delinquency
rates, and changes in federal and state regulation. These factors should be
considered in evaluating the "forward-looking statements," and undue reliance
should not be placed on such statements. The Company does not undertake to
update any forward-looking statements.

The profitability of the Company's operations depends primarily on its
net interest income, its non-interest income (principally from loan origination
fees and transaction account service charges) and its non-interest expense. Net
interest income is the difference between the income the Company receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings. Net interest income is a function of the
Company's interest rate spread, which is the difference between the yield earned
on interest-earning assets and the rate paid on total deposits and borrowed
funds, as well as a function of the average balance of interest-earning assets
as compared to the average balance of total deposits on borrowed funds.
Non-interest income is comprised of income from mortgage banking activities,
transaction service charge fees, gain on the occasional sale of assets and
miscellaneous fees and income. Mortgage banking generates income from the sale
of mortgage loans and from servicing fees on loans serviced for others. The
contribution of mortgage banking activities to the Company's results of
operations is highly dependent on the demand for loans by borrowers and
investors, and therefore the amount of gain on sale of loans may vary
significantly from period to period as a result of changes in market interest
rates and the local and national economy. The Company's profitability is also
affected by the level of non-interest expense. Non-interest expenses include
compensation and benefits, occupancy and maintenance expenses, deposit insurance
premiums, data servicing expenses, advertising expenses, supplies and postage,
and other operating costs. Additional expenses that were incurred in fiscal year
2005 include establishing new loan production office in Nampa, Idaho and new
branches in Boise and Hayden, Idaho, conversion/deconversion costs for the core
system, integration and enhancements to security of the wide-area network
computing systems, and some consulting fees for compliance with the
certification provisions regarding internal controls required by Section 404 of
the Sarbanes-Oxley Act of 2002, including Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") certifications on management's assessments on
internal controls. Additional expenses that are expected to be incurred in
fiscal year 2006 include constructing and opening a second full service branch
in Boise, Idaho and consulting fees for addition Sarbanes-Oxley Act and FDICIA
compliance. The Company's results of operations may be adversely affected during
periods of reduced loan demand to the extent that non-interest expenses
associated with mortgage banking activities are not reduced commensurate with
the decrease in loan originations.

Business Strategy. The Company's strategy is to operate as an independent
community-based financial institution serving commercial, agricultural, small
business, and individual financial needs. The Company focuses on providing
exceptional customer service in the delivery of quality and competitive deposit
and loan products, and we strive to deliver local decisions to each community
served. Our principal business is to attract deposits from individuals,
businesses and public entities, which are invested primarily in commercial,
agricultural, small business and consumer loans, both in real estate and
non-real estate. The Company intends to pursue this strategy and endeavors to
continue to diversify the loan portfolio consistent with our commercial banking
philosophy.

36

Mission Statement. The mission of the Company is to exceed the expectations of
its stockholders, customers, employees and community. As an independent
community bank, the Bank will deliver excellent service to its consumer and
business customers through knowledgeable and dedicated employees. We will
provide convenient access to banking and financial related products/services
that meet the changing needs of our targeted customers. We will achieve this
mission profitably, therefore ensuring our long-term commitment to all of our
stakeholders.

Operating Strategy. Our goal is to grow FirstBank on a profitable basis
consistent with our mission statement, while expanding our community banking
franchise in existing markets and expanded markets. We plan to achieve this by:

o maintaining a strong credit culture through disciplined credit
administration;

o continuing loan growth through focused new loan origination in our loan
centers;

o enhanced branch deposit growth focused on core deposit growth from
commercial, small business, agriculture and individual customers within our
communities. Existing branch market share and enhanced new branch
performance is essential to deposit growth initiatives;

o seeking to improve net interest margin through a combination of reduced
funding costs and improved pricing levels for loans relative to risk, with
emphasis on construction and commercial lending;

o analyzing profitability of product and business lines and allocating
resources accordingly. Focus will remain on our community banking mission
as we address these initiatives;

o expanding our reach to targeted customer base through enhanced delivery
channels;

o enhancing management culture which is driven by a focus on profitability
through decentralized decisions based on clear authorities,
responsibilities and accountabilities;

o establishing a Bank-wide training program that develops employee's
knowledge of products, services, procedures, and sales culture as well as
professional development;

o utilizing technology to gain efficiencies in processing customer
information and servicing support in order to deliver consistent service
and comply with policy, processes and regulations;

o continued diversification of loan portfolio;

o maintaining Bank capital within policy limits and consistent with the risk
profile of the loan portfolio and other relative risk factors as the Bank
continues to grow;

o maintaining interest rate risk profile within policy and consistent with
asset/liability management objectives. No inordinate interest rate risk
will be positioned into specific rate environments nor will net income
module be initiated outside of interest rate risk policies.

Critical Accounting Policies

Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. Not all
of these critical accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, management believes that
the following policies and those disclosed could be considered critical within
the SEC's definition. We believe that our most critical accounting policies upon
which our financial condition depends, and which involve the most complex or
subjective decisions or assessments are as follows:

37

Allowance for Loan Losses. Arriving at an appropriate level of reserve
for loan losses involves a high degree of judgment. The provision for loan
losses is based upon management's ongoing review and evaluation and the Board of
Directors' regular review of the loan portfolio and consideration of economic
conditions which may affect the ability of borrowers to repay their loans on a
monthly basis. A loan loss grading system assists management in determining the
overall risk in the loan portfolio. Individual loans are reviewed periodically
for classification into six categories: satisfactory, acceptable, special
mention, substandard, doubtful and loss; and are assigned a standard loan loss
percentage. The change in loan types per category is multiplied by the assigned
loan loss percentage to arrive at the basic monthly adjustment to the provision
for loan loss. The second element of the provision for loan losses is based on
management's review and evaluation of the allowance for loan losses based on an
analysis of historical trends, individual loans for which full collectibility
may not be reasonably assured, estimated fair value of the underlying
collateral, industry comparisons, unemployment rate in the Bank's market, and
inherent risks in the Bank's portfolio. The reserve may be affected by changing
economic conditions and various external factors, which may impact the portfolio
in ways currently unforeseen. The reserve is increased by provisions for loan
losses and by recoveries of loans previously charged-off and reduced by loans
charged-off.

Mortgage Servicing Rights (MSRs). Determination of the fair value of
MSRs requires the estimation of multiple interdependent variables, the most
important of which is mortgage prepayment speeds. Prepayment speeds are
estimates of the pace and magnitude of future mortgage payoff or refinance
behavior of customers whose loans are serviced by the Bank. At least quarterly,
the Company engages a qualified third party to provide an estimate of the fair
value of MSRs using a discounted cash flow model with assumptions and estimates
based upon observable market-based data and methodology common to the mortgage
servicing market. Management believes the model applies reasonable assumptions
under the circumstances, however, because of possible volatility in the market
price of MSRs, and the vagaries of any relatively illiquid market, there can be
no assurance that risk management and existing accounting practices will prevent
impairment charges in future periods.

The cost of mortgage servicing rights is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. For purposes of measuring impairment, the rights are
stratified by predominant characteristics, such as interest rates and terms. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceeds their fair value.

Securities. Estimates are used in the presentation of the securities
portfolio and these estimates impact the Company's financial condition and
results of operations. Many of the securities included in the securities
portfolio are purchased at a premium or discount. The premiums or discounts are
amortized or accreted over the life of the security. For mortgage-related
securities, including collateralized mortgage obligations (CMOs), the
amortization or accretion is based on estimated lives of the securities. The
lives of the securities can fluctuate based on the amount of prepayments
received on the underlying collateral of the securities. The Company uses
estimates for the lives of these mortgage-related securities based on
information provided by third parties. The Company adjusts the rate of
amortization or accretion regularly to reflect changes in the estimated lives of
these securities.

Goodwill and Other Intangible Assets. Analysis of the fair value of
recorded goodwill for impairment involves a substantial amount of judgment, as
well as establishing and monitoring estimated lives of other amortizable
intangible assets. The Company has goodwill and other intangible assets as a
result of business combinations. The Company adopted Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets" effective January 1,
2002. In accordance with this Standard, goodwill and other intangibles with
indefinite lives are no longer being amortized but instead will be tested for
impairment on an annual basis or more frequently if impairment indicators arise.
Management has completed impairment testing for the Company's intangibles with
indefinite lives and determined that there was no impairment.

Comparison of Financial Condition at March 31, 2005 and March 31, 2004

Assets. Total assets increased $100.9 million, or 14.4%, from $700.2
million at March 31, 2004 to $801.1 million at March 31, 2005. This increase is
primarily the result of $103.0 million in loan growth. The following table
identifies and explains the categories with notable variances for the fiscal
years ended March 31, 2005 and 2004:

38

Balance at Balance at Dollar Percentage
March 31, March 31, Increase Increase
2005 2004 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)

Noninterest-bearing cash deposits $ 39,769 $ 22,329 $ 17,440 78.10%
Interest-bearing cash deposits 2,032 16,067 (14,035) (87.35)
Investment securities held-to-maturity 30,907 19,671 11,236 57.12
Investment securities available-for-sale 17,427 19,116 (1,689) (8.84)
Mortgage-backed securities,
available-for-sale 39,441 54,128 (14,687) (27.13)
Loans receivable, net 562,101 459,114 102,987 22.43
Equity securities, at cost 12,789 12,506 283 2.26
Other assets 4,130 3,350 780 23.28

The increase in non-interest bearing deposits was the result of
additional contemporaneous reserve requirements on deposits regulated by the
Federal Reserve. The decrease in interest-bearing cash deposits was the result
of funding the increase in loans.

The increase in held-to-maturity investment securities was the result
of purchases of $11.4 million in the first quarter of fiscal 2005 to provide
leverage with short term securities, $213,000 net increase in amortization, and
$44,000 principal repayment.

The decrease in available-for-sale investment securities was the result
of payments from sales and calls of $960,000 and a $792,000 decrease in market
value.

The decrease in available-for-sale mortgage-backed securities was the
result of payments from maturities of $16.4 million, purchases of $3.0 million,
a $1.1 million decrease in market value, and $256,000 in amortization.

The increase in net loans receivable was the result of loans originated
in the Company's marketing area, especially commercial real estate and
construction loans in the Boise, Coeur D'Alene, and Spokane markets. Most of
these type of loans are adjustable and tied to prime. Management has focused on
increasing loans receivable as part of the Company's operating strategy.

Equity securities, including FHLB stock, remained relatively unchanged
and it is not anticipated that the increases historically experienced will be
maintained. As of May 18, 2005, the FHLB-Seattle has suspended the payment of
dividends on all classes of stock. For additional information see `News' under
`Our Company' on the FHLB-Seattle's website at www.fhlbsea.com. The Company will
recognize no income on its FHLB stock, which will reduce earnings in the future.

The increase in other assets, including income taxes receivable, was
primarily the result of the $1.1 million increase in income taxes receivable,
which was primarily a result of stock option tax benefits of $810,000.

Liabilities. Total liabilities increased $97.9 million, or 15.5%, from
$630.9 million at March 31, 2004 to $728.8 million at March 31, 2005. The growth
in liabilities resulted from deposit growth, which was part of management's
focus in fiscal year 2005, and increases in borrowings. The following table
identifies and explains the categories with notable variances for the fiscal
years ended March 31, 2005 and 2004:

39

Balance at Balance at
March 31, March 31, Dollar Percentage
2005 2004 Increase Increase
------------ ------------ ------------ ------------
(Dollars in Thousands)

Noninterest-bearing deposits $ 76,072 $ 53,541 $ 22,531 42.08%
Interest-bearing deposits 442,604 427,007 15,597 3.65
------------ ------------ ------------ ------------
Total deposits 518,676 480,548 38,128 7.93

Securities sold under agreements
to repurchase 16,023 10,487 5,536 52.79
FHLB advances and other borrowings 185,337 132,056 53,281 40.35

The increase in total deposits was the result of increasing the number
of customer accounts. The Company had good growth in money market and checking
accounts (core accounts), with little change in certificates of deposits. Idaho
and Washington branches had increases in certificate of deposits, which were
offset by decreases in certificates of deposit at the Oregon branches. The
Company pays interest on certificate of deposits at the average rate in the
market and gives the branches latitude to adjust rates based upon customer
relationships. The Oregon branches, formerly owned by Pioneer Bank, paid
interest on certificate of deposits at a rate close to the highest in the
market. Management has focused on increasing core deposits as part of the
Company's operating strategy.

The increase in securities sold under agreements to repurchase and FHLB
advances and other borrowings was utilized to fund loan growth. The maturity of
these borrowings are mostly short term to match the adjustable rate loans that
were funded.

Stockholders' Equity. Total equity increased $3.0 million from $69.3
million at March 31, 2004 to $72.3 million at March 31, 2005. This increase was
primarily the result of $6.3 million in net income partially offset by an
increase of $1.3 million in unrealized losses on available-for-sale securities,
net of tax benefit, and the Company paying $2.0 million in dividends to its
stockholders during fiscal 2005.

Additional paid-in-capital decreased $290,000 to $45.2 million at March 31, 2005
from $45.5 million at March 31, 2004 due to $2.6 million in repurchases of
common stock, $2.2 million in stock issued from the exercise of stock options,
and $152,000 in ESOP shares released. Unearned ESOP shares decreased $83,000 to
$719,000 at March 31, 2005 from $802,000 at March 31, 2004. Retained earnings
increased $4.3 million to $27.6 million at March 31, 2005 from $23.3 million at
March 31, 2004 as a result of $6.3 million net income and $2.0 million in
dividends paid. Accumulated other comprehensive income decreased $1.2 million to
$149,000 at March 31, 2005 from $1.3 million at March 31, 2004 as a result of
changes in market value on available-for-sale securities.

Comparison of Operating Results for the Years Ended March 31, 2004 and 2005

General. Net income increased $1.9 million, or 44.1%, from $4.4 million
($2.26 per share - basic, $2.12 per share - diluted) for the year ended March
31, 2004 to $6.3 million ($2.17 per share - basic, $2.09 per share - diluted)
for the year ended March 31, 2005. The Company acquired Oregon Trail on October
31, 2003 causing the results of operations to increase for the fiscal year ended
March 31, 2005 from the fiscal year ended March 31, 2004. For the year ended
March 31, 2004, the results of operations exclude seven months ending October
2003 of Oregon Trail operations and the year ended March 31, 2005 include a full
period of combined operations. The increase in net income is a result of an
increase in net interest income of $9.8 million, an increase in provision for
loan losses of $1.1 million, an increase in non-interest income of $494,000, an
increase in non-interest expense of $6.4 million, and an increase in income tax
expense of $885,000.

40

Net Interest Income. Net interest income increased $9.8 million, or 56.2%, from
$17.5 million for the year ended March 31, 2004 to $27.3 million for the year
ended March 31, 2005. The yield on interest-earning assets decreased, the
average balance on interest-earning assets increased, the cost of total deposits
and borrowed funds decreased, and the average balance on total deposits and
borrowed funds increased. The following table compares the average
interest-earning asset balances, average total deposits and other borrowed
funds, associated yields, and interest rate spread, for the fiscal years ended
March 31, 2005 and 2004:

For the Year Ended March 31,
-------------------------------------------------------
2005 2004
------------------------- -------------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)

Total interest-earning assets $ 664,277 6.38% $ 439,882 6.54%
Total deposits and borrowed funds $ 665,003 2.00 $ 430,864 2.31
---------- ----------
Interest rate spread 4.38% 4.23%
---------- ----------

The average interest-earning assets and average total deposits and
other borrowed funds increased as a result of acquiring Oregon Trail on October
31, 2003. For the year ended March 31, 2004, the results of operations exclude
seven months ending October 2003 of Oregon Trail operations and the year ended
March 31, 2005 include a full period of combined operations.

Total Interest Income. Total interest income increased $13.2 million,
or 48.2%, from $27.4 million for the year ended March 31, 2004 to $40.6 million
for the year ended March 31, 2005. The increase in total interest income is a
result of an increase in interest income on interest-earning assets. The
following table compares detailed average earning asset balances, and associated
yields for the fiscal years ended March 31, 2005 and 2004:

For the Year Ended March 31,
-------------------------------------------------------
2005 2004
------------------------- -------------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)

Loans receivable, net $ 506,053 6.72% $ 335,589 6.83%
Loans held for sale 4,708 5.67 7,584 5.26
Mortgage-backed securities, 68,761 4.50 35,869 5.16
Investment securities 46,438 6.36 24,840 7.69
Other earning assets 38,317 5.56 36,000 4.69
---------- ---------- ---------- ----------
Total interest-earning assets $ 664,277 6.38% $ 439,882 6.54%
========== ---------- ========== ----------

Interest income from loans receivable increased as a result of the
acquisition of Oregon Trail on October 31, 2003. For the year ended March 31,
2004, the results of operations exclude seven months ending October 2003 of
Oregon Trail operations and the year ended March 31, 2005 include a full period
of combined operations. The areas with the largest growth are the commercial
real estate loans and construction loans.

Interest income from mortgage-backed securities increased as a result
of additional income from the $58.7 million of mortgage-backed securities from
Oregon Trail that became assets of the Company on October 31, 2003 and from
additional income on the $3.0 million purchases of mortgage-backed securities in
the first quarter of fiscal year 2005. Also, in December 2003, the Company
engaged in a $25.0 million leveraged transaction, purchasing mortgage-backed
securities funded by cash and short term FHLB advances. This generated net
interest income, helping offset the costs of depository branches in Hayden,
Idaho and Boise, Idaho.

Interest income from investment securities increased as a result of
additional income from the $14.0 million of investment securities from Oregon
Trail and from additional income on the $11.5 million purchases of short term
investment securities primarily purchased in the first quarter of fiscal year
2005 in a leveraged transaction.

41

The increase in other earning assets is the result of the increase in
insurance interest income and dividends from the FHLB-Seattle. Additional income
from insurance is a result of the $14.3 million of insurance policies acquired
from Oregon Trail. Interest income from FHLB dividends was $284,000 and $398,000
for the years ended March 31, 2005 and 2004, respectively.

Total Interest Expense. Total interest expense increased $3.4 million,
or 34.1%, from $9.9 million for the year ended March 31, 2004 to $13.3 million
for the year ended March 31, 2005. The following table compares detailed average
balances and associated costs for the fiscal years ended March 31, 2005 and
2004:

For the Year Ended March 31,
-------------------------------------------------------
2005 2004
------------------------- -------------------------
Average Average
Balance Costs Balance Costs
---------- ---------- ---------- ----------
(Dollars in Thousands)

Savings, checking and
money market accounts $ 231,963 0.71% $ 137,025 0.65%
Certificates of deposit 200,980 2.84 149,626 2.95
FHLB advances and other borrowings 158,235 3.77 101,106 4.58
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 591,178 2.25% $ 387,757 2.56%
========== ---------- ========== ----------

The increase in the average balance of total savings, checking, money
market, and certificates of deposit accounts was attributable to the acquisition
of Oregon Trail on October 31, 2003 and management's focus to increase core
deposit accounts as part of the Company's operating strategy.

The increase in the average balance of FHLB advances and other
borrowings is a result of utilizing these sources of funds to fund loan growth
that is not covered by deposits.

Provision for Loan Losses. As a result of the Bank's evaluation of
allowance for loan losses discussed in the critical accounting policies, the
Company's provision for loan losses increased to $1.5 million for year ended
March 31, 2005 from $395,000 for the year ended March 31, 2004. The Company
acquired Oregon Trail on October 31, 2003 causing the results of operations to
increase for the year ended March 31, 2005 from the year ended March 31, 2004.
For the year ended March 31, 2004, the results of operations exclude seven
months ending October 2003 of Oregon Trail operations and the year ended March
31, 2005 include a full period of combined operations. The increase in provision
for loan losses was also a result of loan growth, mostly in commercial and
construction lending.

Non-interest Income. Total non-interest income increased $494,000, or
9.0%, from $5.5 million for the year ending March 31, 2004 to $6.0 million for
the year ending March 31, 2005. The following table summarizes the components of
non-interest income for the fiscal years ended March 31, 2005 and 2004:

March 31,
-------------------------
2005 2004
---------- ----------
(In Thousands)
Gain on sale of loans $ 1,044 $ 2,188
Recovery of impairment of mortgage
serving rights 81 --
Mortgage servicing fees -- 77
Service fees and charges 4,504 3,043
Commissions and other 381 208
---------- ----------
Total non-interest income $ 6,010 $ 5,516
========== ==========

Gain on sale of loans decreased $1.1 million, or 52.3%, to $1.0 million
for the year ended March 31, 2005 from $2.2 million for the year ended March 31,
2004. This decrease is attributable to the decrease in refinance loan
originations and sales of loans sold. Proceeds from the sale of loans decreased
$72.8 million, or 46.9%, from $155.1 million for the year ended March 31, 2004
to $82.3 million for the year ended March 31, 2005.

42

Service fees and charges are mostly checking insufficient funds fees,
ATM service fees, Visa fees, merchant bank card fees, checking service charges,
and late charges on loans. The Company recognized a decline in the insufficient
funds fees due to fewer customers overdrawing their accounts.

Non-interest Expense. Total non-interest expense increased $6.3
million, or 38.1%, from $16.8 million for the year ended March 31, 2004 to $23.1
million for the year ended March 31, 2005. The following table summarizes the
components of non-interest expense for the fiscal years ended March 31, 2005 and
2004:

March 31,
-------------------------
2005 2004
---------- ----------
(In Thousands)
Compensation and related benefits $ 14,044 $ 10,095
Occupancy 2,844 2,077
Supplies and postage 994 681
Data and automated teller machine processing 963 780
Professional fees 667 283
Advertising 542 506
Travel and meals 240 154
Impairment of mortgage servicing rights -- 121
Debit and credit card expense 977 681
Telephone 445 294
Insurance 315 232
Bank service charges 159 170
Charitable contributions 75 92
Organizational dues 106 75
Loan expense 148 103
Operations of investment in real estate 118 107
Other 512 311
---------- ----------
Total noninterest expense $ 23,149 $ 16,762
========== ==========

Compensation and related benefits increased $3.9 million, or 39.1%,
from fiscal 2004 to fiscal 2005. The increase in compensation and related
benefits was a result of an increase in the number of full-time equivalent
employees due to growth and additional employees in Oregon resulting from the
acquisition of Oregon Trail. Staff was added for the new retail branches in
Hayden and Boise, Idaho, and the new residential loan center in Nampa, Idaho.

Occupancy expense increased $767,000 primarily due to the acquisition
of Oregon Trail on October 31, 2003. For the year ended March 31, 2004, the
results of operations exclude seven months ending October 2003 of Oregon Trail
operations and the year ended March 31, 2005 include a full period of combined
operations. Additional occupancy expenses incurred in fiscal year 2005 include
establishing a new loan production office in Nampa, Idaho and new branches in
Boise and Hayden, Idaho

All other non-interest expense increased $1.7 million, or 36.4%, to
$6.3 million for the year ended March 31, 2005 from $4.6 million for the year
ended March 31, 2004. This increase in other non-interest expense is
attributable to the purchase of Oregon Trail on October 31, 2003. Professional
fees increased as a result of expenses related to the conversion and training to
convert the entire core processing system into one system to increase
efficiencies, additional regulatory examinations, and some consulting fees for
Sarbanes-Oxley and FDICIA compliance and certifications.

Income Taxes. Income tax expense increased $885,000, or 59.7%, from
$1.5 million for the year ended March 31, 2004 to $2.4 million for the year
ended March 31, 2005. The effective tax rates for the years ended March 31, 2005
and 2004 were 27.38% and 25.38%, respectively. The increase in the effective tax
rate is due to permanent tax differences on bank owned life insurance income and
tax exempt interest income on securities in relation to taxable income.

43

Comparison of Operating Results for the Years Ended March 31, 2003 and 2004

General. Net income increased $1.6 million, or 57.2%, from $2.8 million
($2.15 per share - basic, $2.07 per share - diluted) for the year ended March
31, 2003 to $4.4 million ($2.26 per share - basic, $2.12 per share - diluted)
for the year ended March 31, 2004. The Company acquired Oregon Trail on October
31, 2003, causing the results of operations to increase for the fiscal year
ended March 31, 2004 from the fiscal year ended March 31, 2003. For the year
ended March 31, 2004, the results of operations include five months, starting
November 2003, of Oregon Trail operations and the year ended March 31, 2003
exclude combined operations. The increase in net income is a result of an
increase in net interest income of $5.6 million, a decrease in the provision for
loan losses of $638,000, an increase in non-interest income of $823,000, an
increase in non-interest expense of $5.1 million, and an increase in income tax
expense of $428,000.

Net Interest Income. Net interest income increased $5.6 million, or
47.3%, from $11.9 million for the year ended March 31, 2003 to $17.5 million for
the year ended March 31, 2004. The yield on interest-earning assets decreased to
6.54% from 7.20% for the fiscal years ended March 31, 2004 and 2003. The cost of
funding, on interest-earning liabilities, decreased to 2.56% from 3.37% for the
fiscal years ended March 31, 2004 and 2003. The Company's interest rate spread
between the yield on interest-earning assets and the rate paid on total deposits
and borrowed funds increased from 4.14% for fiscal 2003 to 4.23% for fiscal
2004.

Total Interest Income. Total interest income increased $6.8 million, or
33.2%, from $20.6 million for the year ended March 31, 2003 to $27.4 million for
the year ended March 31, 2004. The increase in total interest income is a result
of an increase in interest income attributable to the purchase of Oregon Trail.
The following table compares detailed average earning asset balance, and
associated yields for the fiscal years ended March 31, 2004 and 2003:

For the Year Ended March 31,
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)

Loans receivable, net $ 335,589 6.83% $ 243,449 7.38%
Loans held for sale 7,584 5.26 6,483 5.55
Mortgage-backed securities, 35,869 5.16 10,832 6.73
Investment securities 24,840 7.69 14,554 7.82
Other earning assets 36,000 4.69 21,540 5.51
---------- ---------- ---------- ----------
Total interest-earning assets $ 439,882 6.54% $ 296,858 7.20%
========== ---------- ========== ----------

The $4.9 million increase in total interest income on loans receivable
is attributable to interest income on Oregon loans of $5.6 million and loan
growth from the Washington and Idaho loans, but is offset by a reduction in
yield from 7.38% to 6.83% for the fiscal years ended March 31, 2003 and 2004.

Interest income on mortgage-backed securities increased as a result of
a $1.4 million increase in interest income attributable to the acquisition of
Oregon Trail and additional income on the purchases of mortgage-backed
securities. In December 2003, the Company engaged in a $25.0 million leveraged
transaction, purchasing mortgage-backed securities funded by cash and short term
FHLB advances. This generated net interest income, helping offset the costs of
depository branches in Hayden, Idaho and Boise, Idaho.

Interest income during the fiscal year ended March 31, 2004 on the
investment securities purchased from Oregon Trail was $200,000.

44

Total Interest Expense. Total interest expense increased by $1.2
million, or 14.1%, from $8.7 million for the year ended March 31, 2003 to $9.9
million for the year ended March 31, 2004. For the year ended March 31, 2004,
the total interest expense includes five months, starting November 2003, of
Oregon Trail operations and the year ended March 31, 2003 exclude interest
expense from Oregon Trail operations. The following table compares detailed
average balances and associated costs for the fiscal years ended March 31, 2004
and 2003:

For the Year Ended March 31,
-------------------------------------------------------
2004 2003
------------------------- -------------------------
Average Average
Balance Costs Balance Costs
---------- ---------- ---------- ----------
(Dollars in Thousands)

Savings, checking and
money market accounts $ 137,025 0.65% $ 67,522 0.79%
Certificates of deposit 149,626 2.95 108,406 3.79
FHLB advances and other borrowings 101,106 4.58 82,292 4.94
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 387,757 2.56% $ 258,220 3.37%
========== ---------- ========== ----------

The increase in average balance of total savings, checking, money
market, and certificates of deposit accounts was primarily a result of the
acquisition of Oregon Trail on October 31, 2003. The average cost of funds
declined about the same as the average yield on assets. FHLB advances were used
to fund the growth in loans in excess of deposit growth.

Provision for Loan Losses. As a result of the Bank's evaluation of
allowance for loan losses discussed in the critical accounting policies, the
provision for loan losses decreased to $395,000 for the year ended March 31,
2004 from $1.0 million for the year ended March 31, 2003. The decrease in
provision for loan losses was a direct result of slow loan growth.

Non-interest Income. Total non-interest income increased $823,000, or
17.5%, from $4.7 million for year ended March 31, 2003 to $5.5 million for the
year ended March 31, 2004. For the year ended March 31, 2004 the total
non-interest income includes five months, starting November 2003, of Oregon
Trail operations and the year ended March 31, 2003 exclude non-interest income
from Oregon Trail operations. The following table summarizes the components of
non-interest income for the fiscal years ended March 31, 2004 and 2003:

2004 2003
---------- ----------
(In Thousands)
Gain on sale of loans $ 2,188 $ 2,434
Mortgage servicing fees 77 184
Service fees and charges 3,043 1,914
Commissions and other 208 161
---------- ----------
Total non-interest income $ 5,516 $ 4,693
========== ==========

Gain on sale of loans decreased as a result of the decrease in pricing
on loans sold to meet market demands. Proceeds from sale of loans increased from
$148.8 million for the year ended March 31, 2003 to $155.1 million for the year
ended March 31, 2004. Originations of loans held for sale increased from $147.9
million for the year ended March 31, 2003 to $154.2 million for the year ended
March 31, 2004.

Service fees and charges increased mainly due to the increase in
operations from Oregon, ATM service fees, Visa fees, and merchant bank card
fees. Checking insufficient funds fees were relatively unchanged in fiscal years
2003 and 2004.

45

Non-interest Expense. Total non-interest expense increased $5.1
million, or 43.3%, from $11.7 million for the year ended March 31, 2003 to $16.8
million for the year ended March 31, 2004. Total non-interest expense
attributable to the purchase of Oregon Trail was $3.4 million. The following
table summarizes the components of non-interest expense for the fiscal years
ended March 31, 2004 and 2003:

March 31,
-------------------------
2004 2003
---------- ----------
(In Thousands)
Compensation and related benefits $ 10,095 $ 7,057
Occupancy 2,077 1,260
Supplies and postage 681 385
Data and automated teller machine processing 780 561
Professional fees 283 233
Advertising 506 309
Travel and meals 154 135
Impairment of mortgage servicing rights 121 306
Debit and credit card expense 681 486
Telephone 294 192
Insurance 232 160
Bank service charges 170 112
Charitable contributions 92 73
Organizational dues 75 58
Loan expense 103 90
Operations of investment in real estate 107 13
Other 311 269
---------- ----------
Total non-interest expense $ 16,762 $ 11,699
========== ==========

Compensation related benefits increased as a result of the $2.0 million
expense attributable to the purchase of Oregon Trail, annual compensation
increases, and an increase in the expense from a change in the vacation and sick
leave policy to a paid time off policy.

Occupancy expense increased $817,000 primarily due to $567,000 from the
Oregon branches and an increase in additional depreciation from the remodel and
expansion of the Orchards branch in Lewiston, Idaho, construction of the
Clarkston, Washington building, and construction of a new branch in Hayden,
Idaho.

All other non-interest expense increased $1.2 million, or 35.7%, to
$4.6 million for the year ended March 31, 2004 from $3.4 million for the year
ended March 31, 2003. This increase in other non-interest expense is
attributable to $782,000 from the purchase of Oregon Trail and increases in data
processing, postage, insurance, and merchant bank card expenses.

Income Taxes. Income tax expense increased $428,000, or 40.6%, from
$1.1 million for the year ended March 31, 2003 to $1.5 million for the year
ended March 31, 2004. The effective tax rates for the years ended March 31, 2004
and 2003 were 25.38% and 27.55%, respectively. The decrease in the effective tax
rate is due to permanent tax differences on bank owned life insurance income and
tax exempt interest income on securities in relation to taxable income and the
recognition of tax benefits from moving the administrative offices to the state
of Washington which does not impose a state income tax.

46

Average Balances, Interest and Average Yields/Cost

The following table sets forth certain information for the years
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 tax
effected yields and costs. Such yields and costs for the years indicated are
derived by dividing tax effected income or expense by the average daily balance
of assets or liabilities, respectively, for the years ended March 31, 2005, 2004
and 2003.

Years Ended March 31,
--------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------ ------------------------------ ------------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost(1) Balance Dividends Cost(2) Balance Dividends Cost(3)
--------- --------- ------ --------- --------- ------ --------- --------- ------
(Dollars in Thousands)

Interest-earning assets (4):
Loans receivable:
Mortgage loans receivable $ 117,016 $ 7,356 6.29% $ 74,416 $ 5,065 6.81% $ 55,975 $ 4,160 7.43%
Commercial loans receivable 223,158 14,193 6.43 150,557 9,274 6.25 109,559 7,361 6.81
Construction loans receivable 53,857 4,416 8.20 36,356 2,832 7.79 19,750 1,717 8.69
Consumer loans receivable 74,413 4,964 6.67 43,063 3,263 7.58 31,085 2,558 8.23
Agricultural loans receivable 46,240 2,906 6.28 37,547 2,334 6.22 30,894 2,077 6.72
Unearned loan fees and
discounts and allowance
for loan losses (8,631) -- -- (6,350) -- -- (3,814) -- --
--------- --------- ------ --------- --------- ------ --------- --------- ------
Loans receivable, net 506,053 33,835 6.72 335,589 22,768 6.83 243,449 17,873 7.38
Loans held for sale 4,708 267 5.67 7,584 399 5.26 6,483 360 5.55
Mortgage-backed securities 68,761 3,092 4.50 35,869 1,850 5.16 10,832 729 6.73
Investment securities 46,438 1,991 6.36 24,840 1,161 7.69 14,554 692 7.82
Other earning assets 38,317 1,446 5.56 36,000 1,237 4.69 21,540 921 5.51
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 664,277 40,631 6.38 439,882 27,415 6.54 296,858 20,575 7.20
--------- --------- ---------
Non-interest-earning assets 78,981 44,684 21,880
--------- --------- ---------
Total assets $ 743,258 $ 484,566 $ 318,738
========= ========= =========

Interest-earning liabilities:
Savings, NOW and money
market accounts $ 231,963 1,657 0.71 $ 137,025 892 0.65 $ 67,522 534 0.79
Certificates of deposit 200,980 5,698 2.84 149,626 4,410 2.95 108,406 4,109 3.79
--------- --------- --------- --------- --------- ---------
Total deposits 432,943 7,355 1.70 286,651 5,302 1.85 175,928 4,643 2.64
FHLB advances and
other 158,235 5,964 3.77 101,106 4,632 4.58 82,292 4,067 4.94
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities 591,178 13,319 2.25 387,757 9,934 2.56 258,220 8,710 3.37
--------- ---------
Total non-interest-bearing
deposits 73,825 -- 43,107 -- 26,140 --
--------- --------- ---------
Total deposits and
borrowed funds 665,003 2.00 430,864 2.31 284,360 3.06
--------- ------ --------- ------ --------- ------
Non-interest-bearing
liabilities 7,327 6,638 5,169
--------- --------- ---------
Total liabilities 672,330 437,502 289,529
Total stockholders' equity 70,928 47,064 29,209
--------- --------- ---------
Total liabilities and
total stockholders' equity $ 743,258 $ 484,566 $ 318,738
========= ========= =========

Net interest income $ 27,312 $ 17,481 $ 11,865
========= ========= =========
Interest rate spread 4.38% 4.23% 4.14%
====== ====== ======
Net interest margin (5) 4.38% 4.28% 4.27%
========= ========= =========
Ratio of average interest-
earning assets to average
interest- bearing liabilities 112.36% 113.44% 114.96%
========= ========= =========

See next page for referenced notes.

47

(1) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis. The tax benefit on interest income for the year ended
March 31, 2005 is $1.8 million. Excluding this tax effect, average yields
on commercial loans would have been 6.36%, net loans receivable would have
been 6.69%, investment securities would have been 4.29%, and other earning
assets would have been 3.77%. Total interest-earning assets would have been
6.11%, interest rate spread would have been 4.11%, and net interest margin
would have been 4.11%.
(2) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis. The tax benefit on interest income for the year ended
March 31, 2004 is $1.3 million. Excluding this tax effect, average yields
on commercial loans would have been 6.16%, net loans receivable would have
been 6.78%, investment securities would have been 4.67%, and other earning
assets would have been 3.44%. Total interest-earning assets would have been
6.24%, interest rate spread would have been 3.93%, and net interest margin
would have been 3.97%.
(3) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis. The tax benefit on interest income for the year ended
March 31, 2003 is $810,000. Excluding this tax effect, average yields on
commercial loans would have been 6.72%, net loans receivable would have
been 7.34%, investment securities would have been 4.75%, and other earning
assets would have been 4.28%. Total interest-earning assets would have been
6.93%, interest rate spread would have been 3.87%, and net interest margin
would have been 4.00%.
(4) Does not include interest on loans 90 days or more past due.
(5) Tax effected.

Rate/Volume Analysis

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

Year Ended March 31, 2005 Year Ended March 31, 2004
Compared to Year Ended Compared to Year Ended
March 31, 2004 March 31, 2003
-------------------------------------------- -------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- -------------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
-------- -------- -------- -------- -------- -------- -------- --------
(In Thousands)

Interest-earning assets:
Loans receivable (1) $ (330) $ 11,565 $ (168) $ 11,067 $ (1,356) $ 6,765 $ (513) $ 4,895
Loans held for sale 31 (151) (12) (132) (19) 61 (3) 39
Mortgage-backed securities (237) 1,696 (217) 1,242 (170) 1,685 (394) 1,121
Investment securities (96) 1,009 (83) 830 (12) 489 (8) 469
Other earning assets 122 80 7 209 (181) 618 (122) 316
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in income
on interest-earning assets (510) 14,199 (473) 13,216 (1,738) 9,618 (1,040) 6,840
-------- -------- -------- -------- -------- -------- -------- --------

Interest-bearing liabilities:
Savings, NOW and money
market accounts 87 618 60 765 (94) 550 (97) 358
Certificates of deposit (168) 1,514 (57) 1,289 (914) 1,562 (348) 301
FHLB advances and other (822) 2,617 (464) 1,331 (297) 930 (68) 565
-------- -------- -------- -------- -------- -------- -------- --------
Total net change in expense
on interest-bearing liabilities (903) 4,749 (461) 3,385 (1,305) 3,042 (513) 1,224
-------- -------- -------- -------- -------- -------- -------- --------
Net increase (decrease) in net
interest income $ 393 $ 9,450 $ (12) $ 9,831 $ (433) $ 6,576 $ (527) $ 5,616
======== ======== ======== ======== ======== ======== ======== ========

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

48

Asset and Liability Management

The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Company has sought to reduce 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 Company's interest-earning
assets by retaining for its portfolio shorter term loans and loans with interest
rates subject to periodic adjustment to market conditions and by selling
substantially all of its longer term, fixed-rate residential mortgage loans. The
Company has historically relied on retail deposits as its primary source of
funds. However, because loan growth has exceeded that of deposits, FHLB advances
and brokered CDs have been used to fund the loan growth. Management believes
retail core deposits, compared to brokered and CD 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
Company promotes non-interest-bearing transaction accounts, interest-bearing
accounts, money market accounts, and certificates of deposit with longer
maturities (up to five years) to reduce the interest sensitivity of its
interest-bearing liabilities.

Market Risk

Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. The Company's primary
market risk exposure is interest rate risk. The on-going monitoring and
management of the risk is an important component of the Company's
asset/liability management process, which is governed by policies established by
its Board of Directors that are reviewed and approved annually. The Board of
Directors delegates responsibility for carrying out the asset/liability
management policies to the Asset/Liability Committee ("ALCO"). In this capacity,
ALCO develops guidelines and strategies impacting the Company's asset/liability
management related activities based upon estimated market risk sensitivity,
policy limits and overall market interest rate levels/trends.

Off-Balance Sheet Arrangements and Contractual Obligations

Contractual obligations at March 31, 2005 consisted of the following:

One Year to Three Years to
Less than Less than Less than Five Years
Total One Year Three Years Five Years and Greater
---------- ---------- ---------- ---------- ----------
(In Thousands)

Maturities of FHLB advances and
Other borrowings $ 185,337 $ 109,681 $ 23,172 $ 8,174 $ 44,310
Operating leases future minimum
rental payments $ 568 $ 207 $ 301 $ 60 $ --

Other commitments at March 31, 2005 consisted of the following:

One Year to Three Years to
Less than Less than Less than Five Years
Total One Year Three Years Five Years and Greater
---------- ---------- ---------- ---------- ----------
(In Thousands)

Loan commitments $ 125,267 $ 70,117 $ 25,524 $ 1,768 $ 27,858
Credit card line commitments $ 10,311 $ 10,311 $ -- $ -- $ --
Lines of credit $ 63,422 $ 48,266 $ 11,522 $ 1,323 $ 2,311
Standby letters of credit $ 4,844 $ 4,706 $ 138 $ $ --
Forward contracts on residential
sold loans $ 359 $ 359 $ -- $ -- $ --

The Company has signed several contracts with vendors for its data
processing operations. The terms of the contracts expire in one year or less.
The annual fees are paid at the beginning of the terms or paid monthly based
upon usage, transactions, or number of customers. The data processing, automated
teller machine, merchant bank card, and Visa credit card expense, which include
these contracts, was $1.9 million for the year ended March 31, 2005.

49

Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. These guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions. At March 31, 2005, these commitments totaled $4.8 million.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Company holds cash,
marketable securities, or real estate as collateral supporting those commitments
for which collateral is deemed necessary. The Company has not been required to
perform on any financial guarantees during the past three years. The Company has
not incurred any losses on its commitments in fiscal 2005, 2004 or 2003. The
liability recorded associated with standby letters of credit at March 31, 2005
and 2004 was $25,000 and $31,000, respectively.

Liquidity and Capital Resources

The primary function of asset/liability management is to ensure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and liabilities. Management actively analyzes and
manages the Company's liquidity position. The objective of liquidity management
is to ensure the availability of sufficient cash flows to support loan growth
and deposit withdrawals, to satisfy financial commitments, and to take advantage
of investment opportunities. Liquidity is defined as being able to raise funds
in 30 days without a loss of principal.

The Company's primary recurring sources of funds are customer deposits,
proceeds from principal and interest payments on loans, proceeds from sales of
loans, maturing securities, FHLB advances, and borrowings from the Portland
Branch Office of the Federal Reserve Bank of San Francisco. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, and competition. See the Company's Consolidated Statement
of Cash Flows to assist in analyzing our liquidity position.

The primary investing activity of the Company is the origination of
loans. During the year ended March 31, 2005, the Company originated loans,
excluding loans purchased and loan participations, based upon new production in
the amount of $475.6 million. The Company maintains a laddered maturity of
securities that provides prepayments and payments at maturity and a portfolio of
available-for-sale securities that could be converted to cash quickly. Proceeds
from maturity of securities provided $17.8 million and $10.2 million for the
years ended March 31, 2005 and 2004, respectively. Proceeds from the sale of
loans provided $82.3 million for the year ended March 31, 2005 and $155.1
million for the year ended March 31, 2004.

For the year ended March 31, 2005, proceeds from maturities and sale of
securities were $17.8 million and purchases of securities were $14.5 million.
The proceeds from maturities and sale of securities were used to purchase
securities. In December 2003, the Company engaged in a $25.0 million leveraged
transaction, purchasing mortgage-backed securities funded by cash and short term
FHLB advances. This generated net interest income, helping defray the costs of
depository branches in Hayden, Idaho and Boise, Idaho. Mortgage-backed and
investment securities of $26.1 million were purchased to minimize extension risk
by shortening the maturity dates of securities given the current interest rate
environment.

The primary financing activities of the Company are customer deposits,
brokered deposits, and FHLB advances. As indicated on the Company's Consolidated
Statement of Cash Flows, deposits provided $44.5 million for the year ended
March 31, 2005, which consisted of a $25.6 million increase in branch deposits
and $18.9 million increase in brokered deposits. In addition, the Company
maintains a credit facility with the FHLB-Seattle, which provides for
immediately available advances. FHLB advances totaled $183.2 million, including
$2.8 million merger premium, at March 31, 2005. The Company also maintains
additional credit facilities with US Bank with available funds totaling $23.5
million and the Federal Reserve Bank of San Francisco. The Company had an
outstanding balance of $2.2 million under these facilities as of March 31, 2005.
The Bank also has used other sources of funding when the need arises including
brokered certificates of deposit (up to 15% of assets under current Board
policy) and the national certificates of deposit markets. Cash provided by
advances from FHLB and other borrowing facilities was $636.7 million for the
year ended March 31, 2005. Cash used for payments on these advances was $582.6
million for the year ended March 31, 2005.

At March 31, 2005, the Company held cash and cash equivalents of $41.8
million, or 5.2% of total assets. In addition, at that date $56.9 million of the
Company's investment securities were classified as available-for-sale.

50

The Company has commitments that have a future impact on the Company's
liquidity position. Because some commitments are expected to expire without
being drawn upon, the total commitment amounts do not represent future cash
requirements. At March 31, 2005, the Company had loan commitments totaling
$125.3 million, and undisbursed lines of credit and standby letters of credit
totaling $68.3 million. The Company anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificates
of deposit that are scheduled to mature in less than one year from March 31,
2005 totaled $124.5 million. Historically, the Company has been able to retain a
significant amount of its deposits as they mature. In addition, management
believes that it can adjust the offering rates of savings certificates to retain
deposits in changing interest rate environments.

The Bank is required to maintain specific amounts of capital pursuant
to Federal Deposit Insurance Corporation and State of Washington requirements.
As of March 31, 2005, the Bank was in compliance with all regulatory capital
requirements effective as of that date with Tier 1 Capital to average assets,
Tier 1 Capital to risk-weighted assets and total capital to risk-weighted assets
of 6.7%, 9.0% and 10.3%, respectively. For a detailed discussion of regulatory
capital requirements, see "Regulation - State Regulation and Supervision" and
"--Capital Requirements."

Impact of New Accounting Standards

In December 2004, the FASB issued Statement No. 123(R), Share-Based
Payment. This Statement replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. Statement No. 123(R) requires that the compensation cost
relating to share-based payment transactions (for example, stock options granted
to employees of the Company) be recognized in financial statements. That cost
will be measured based on the fair value of the equity or liability instruments
used. Statement 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans. Public
entities (other than those filing as small business issuers) will be required to
apply Statement No. 123(R) as of the first interim or annual reporting period
that begins after December 15, 2005. The Company intends to adopt the provisions
of FASB Statement No. 123(R) effective January 1, 2006, and is in the process of
evaluating the impact on its consolidated financial position and consolidated
results of operations.

In December 2004, the FASB issued Statement No. 153, Exchanges of
Nonmonetary Asset, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transaction. The amendments made by Statement 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Statement 153 is the result of a broader
effort by the FASB to improve the comparability of cross-border financial
reporting by working with the International Accounting Standards Board toward
development of a single set of high-quality accounting standards. The Statement
is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company intends to adopt the provisions of
FASB Statement No. 153 effective June 15, 2005, and does not expect the initial
implementation to have a significant impact on its consolidated financial
position and consolidated results of operations.

In December 2003, the FASB issued Statement No. 132(R), Employers'
Disclosures about Pensions and Other Postretirement Benefits. Statement No. 132,
as originally issued, is effective until the provisions of Statement No. 132(R)
are fully adopted. All new disclosure requirements for the domestic plans of
publicly traded entities are effective for years ending after December 15, 2003.
Estimated future benefit payments, and all other new disclosure requirements for
foreign plans and nonpublic entities are effective for years ending after June
15, 2004. The Company adopted the provisions of FASB Statement No. 132(R)
effective March 31, 2005, and it did not have a significant impact on its
consolidated financial position and consolidated results of operations.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, 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 Company'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.

51

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

Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
and five-year horizon, it also utilizes additional tools to monitor potential
longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet as well as for
off-balance-sheet derivative financial instruments, if any. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII exposure over a one year horizon, assuming no balance sheet
growth, given both a 200 basis point (bp) upward and 100 or 200 bp downward
shift in interest rates. A parallel and pro rata shift in rates over a 12-month
period is assumed. Based on the asset sensitivity of the balance sheet at March
31, 2005, the Bank is expecting to be well positioned to benefit from rising
rates and minimize negative impact of declining rates. If rates were to sustain
a 200 bp increase, net interest income would be expected to rise by 1.71%, all
else being equal. If rates were to sustain a 100 bp decrease, net interest
income would be expected to decline by 2.11%, all else being equal. The
following reflects the Company's NII sensitivity analysis as of March 31, 2005
and 2004 as compared to the 10.00% Board approved policy limit.

March 31, 2005: -100 BP Flat +200 BP
---------- ---------- ----------
(Dollars in Thousands)

Year 1 NII $ 29,070 $ 29,698 $ 30,206
NII $ Change (628) -- 508
NII % Change -2.11% -- 1.71%

March 31, 2004: -100 BP Flat +200 BP
---------- ---------- ----------
(Dollars in Thousands)
Year 1 NII $ 25,187 $ 25,593 $ 25,995
NII $ Change (406) -- 402
NII % Change -1.59% -- 1.57%

The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon an indicator of expected future operating
results. These hypothetical estimates are based upon numerous assumptions
including the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest rates.

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

For the financial statements, see index on page F-1.

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

None.

52

Item 9A. Controls and Procedures
- --------------------------------

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rules
13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was
carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management as of the end of the
period covered by this report. The Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company
in the reports it files or submits under the Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.

(b) Changes in Internal Controls: There have not been any changes in the
Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) of the Act) during the most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.

The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning the
Company's business. While the Company believes the present design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Company to modify its disclosure
controls and procedures.

Item 9B. Other Information.
- ---------------------------

None.

53

PART III

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

The information required by this Item is incorporated by reference from
the sections captioned "Proposal 1 - Election of Directors" and "Meetings and
Committees of the Board of Directors" in the Company's definitive Proxy
Statement concerning the Annual Meeting of Stockholders (the "2005 Proxy
Statement").

Audit Committee Financial Expert
--------------------------------

The Audit Committee, consists of Directors Cox (Chairman), Jurgens,
Gentry and Powell. Each member of the Audit Committee is independent, in
accordance with the requirements for companies quoted on The Nasdaq Stock
Market. The Board of Directors has designated Director Powell as the audit
committee financial expert, as defined by the SEC's Regulation S-K. Director
Powell is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act.

Code of Ethics.
---------------

On January 15, 2004, the Board of Directors adopted the Officer and
Director Code of Ethics, which was reviewed and approved by the Board on
September 16, 2004 in conjunction with the review and approval of the Bank's
Personnel Policy and Procedures. On March 3, 2005, the Code of Ethics was
reviewed by the Corporate Governance and Nominating Committee and no changes or
amendments were recommended. The Code is applicable to each of the Company's
officers and employees, including the principal executive officer and senior
financial officers, and requires individuals to maintain the highest standards
of professional conduct. A copy of the Code of Ethics is available on the
Company's website at www.fbnw.com.

For information regarding the executive officers of the Company and the
Bank, see the information contained herein under the section captioned "Item 1
Business - Personnel - Executive Officers of the Registrant" above.

The information required by this Item with respect to Item 405 of
Regulation S-K is incorporated by reference to the section captioned "Section
16(a) Beneficial Ownership Reporting Compliance" in the 2005 Proxy Statement.

The information required by this Item with respect to Item 406 of
Regulation S-K is incorporated by reference to the section captioned "Meetings
and Committees of the Board of Directors" in the 2005 Proxy Statement.

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

The information required by this Item is incorporated by reference to
the sections captioned "Directors' Compensation" and "Executive Compensation" in
the 2005 Proxy Statement.

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

(a) Security Ownership of Certain Beneficial Owners

The information required by this Item is incorporated by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners
and Management" in the 2005 Proxy Statement.

(b) Security Ownership of Management

The information required by this Item is incorporated by reference to
the sections caption "Security Ownership of Certain Beneficial Owners
and Management" in the 2005 Proxy Statement.

54

(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.

(d) Equity Compensation Plan Information

The following table sets forth certain information with respect to
securities to be issued under the Company's equity compensation plans
as of March 31, 2005.

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

Equity compensation plans
approved by security holders:
1998 Stock Option Plan 129,540 $ 17.00 37,375
Oregon Trail 1998 Stock
Option Plan 32,586 $ 13.68 --

Equity compensation plans not
approved by security holders: N/A N/A N/A
--------------- --------------- ---------------

Total 162,126 $ 16.33 37,375
=============== =============== ===============

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

The information required by this Item is incorporated by reference to
the information under the caption "Transactions with Management" in the 2005
Proxy Statement.

Item 14. Principal Accountant Fees and Services
- ------------------------------------------------

This information set forth under the section captioned "Ratification of
Appointment of Independent Auditors" in the 2005 Proxy Statement is incorporated
herein by reference.

55

Item 15. Exhibits, Financial Statement Schedules
- ------------------------------------------------

(a) Exhibits

3.1 Articles of Incorporation of the Registrant*
3.2 (a) Bylaws of the Registrant*
3.2 (b) Bylaws Amendment adopted by the Board of Directors on
May 23, 2002.**
10.1 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Clyde E. Conklin***
10.2 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Larry K. Moxley***
10.3 Salary Continuation Agreement between First Federal
Bank of Idaho, F.S.B. and Clyde E. Conklin***
10.4 Salary Continuation Agreement between First Federal
Bank of Idaho, F.S.B. and Larry K. Moxley***
10.5 Management Recognition and Development Plan****
10.6 1998 Stock Option Plan****
10.7 Oregon Trail 1998 Stock Option Plan*****
21 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accountants
31.1 Certification of Chief Executive Officer of FirstBank
NW Corp. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of FirstBank
NW Corp. Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer of FirstBank
NW Corp. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer of FirstBank
NW Corp. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

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

* Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-KSB for the year ended March 31, 2000.
** Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-KSB for the year ended March 31, 2002.
*** Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 333-23395).
**** Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-8 filed on September 28, 1998.
***** Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-8 filed on November 5, 2003.

(b) Financial Statement Schedules

The Consolidated Financial Statements and Notes thereto are
included in Item 8 of this Form 10-K.

56

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.

FIRSTBANK NW CORP.

Date: June 10, 2005 By: /s/ CLYDE E. CONKLIN
-------------------------------------
Clyde E. Conklin
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/ CLYDE E. CONKLIN President, Chief June 10, 2005
- --------------------------- Executive Officer and
Clyde E. Conklin Director (Principal
Executive Officer)

/s/ LARRY K. MOXLEY Executive Vice President, June 10, 2005
- --------------------------- Chief Financial Officer,
Larry K. Moxley and Director (Principal
Financial Officer)

/s/ CYNTHIA M. MOORE Controller June 10, 2005
- --------------------------- (Principal Accounting
Cynthia M. Moore Officer)

/s/ STEVE R. COX Director and Chairman of June 10, 2005
- --------------------------- the Board
Steve R. Cox

/s/ JAMES N. MARKER Director June 10, 2005
- ---------------------------
James N. Marker

/s/ W. DEAN JURGENS Director June 10, 2005
- ---------------------------
W. Dean Jurgens

/s/ RUSSELL H. ZENNER Director June 10, 2005
- ---------------------------
Russell H. Zenner

/s/ JOHN W. GENTRY Director June 10, 2005
- ---------------------------
John W. Gentry

/s/ SANDRA T. POWELL Director June 10, 2005
- ---------------------------
Sandra T. Powell

57

FirstBank NW Corp. and Subsidiaries

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm F-2

Financial Statements:
Consolidated Statements of Financial Condition F-3 - F-4
Consolidated Statements of Income F-5
Consolidated Statements of Comprehensive Income F-6
Consolidated Statements of Changes in Stockholders' Equity F-7 - F-8
Consolidated Statements of Cash Flows F-9 - F-10
Summary of Accounting Policies F-11 - F-19
Notes to Consolidated Financial Statements F-20 - F-55

F-1
- --------------------------------------------------------------------------------

Financial Statements
- --------------------

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
FirstBank NW Corp. and Subsidiaries
Clarkston, Washington

We have audited the accompanying consolidated statement of financial condition
of FirstBank NW Corp. and subsidiaries as of March 31, 2005 and 2004, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for the years ended March 31, 2005, 2004,
and 2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FirstBank NW Corp. and subsidiaries as of March 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for the years
ended March 31, 2005, 2004, and 2003 in conformity with accounting principles
generally accepted in the United States of America.

/s/ Moss Adams LLP
Spokane, Washington
May 20, 2005

F-2
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

ASSETS

March 31,
-----------------------
2005 2004
---------- ----------

Cash and cash equivalents:
Noninterest-bearing cash deposits $ 39,769 $ 22,329
Interest-bearing cash deposits 2,032 16,067
Federal funds sold -- 1
---------- ----------

Total cash and cash equivalents 41,801 38,397

Investment securities:
Held-to-maturity, fair value of $30,869 and $20,035 30,907 19,671
Available-for-sale 17,427 19,116
Mortgage-backed securities:
Held-to-maturity, fair value of $22,147 and $23,222 22,463 22,899
Available-for-sale 39,441 54,128
Loans held for sale 3,999 5,254
Loans receivable, net of allowance for loan losses of
$7,254 in 2005 and $6,314 in 2004 562,101 459,114
Accrued interest receivable 3,834 3,349
Equity securities, at cost 12,789 12,506
Premises and equipment, net 18,688 18,274
Bank-owned and cash surrender value of life insurance policies 23,318 22,192
Mortgage servicing rights 614 710
Goodwill 16,683 17,408
Other intangible assets 2,927 3,642
Deferred income tax asset, net -- 222
Other assets 4,130 3,350
---------- ----------

TOTAL ASSETS $ 801,122 $ 700,232
========== ==========

See accompanying notes. F-3
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

March 31,
------------------------
2005 2004
---------- ----------

LIABILITIES
Deposits:
Noninterest-bearing deposits $ 76,072 $ 53,541
Interest-bearing deposits 442,604 427,007
---------- ----------

Total deposits 518,676 480,548

Securities sold under agreements to repurchase 16,023 10,487
Advances from borrowers for taxes and insurance 913 960
FHLB advances other borrowings 185,337 132,056
Deferred income tax liability, net 543 --
Accrued expenses and other liabilities 7,319 6,849
---------- ----------

TOTAL LIABILITIES 728,811 630,900
---------- ----------

COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 20)

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 5,000,000 shares
authorized, 2,998,595 and 2,940,047 shares issued,
2,927,802 and 2,860,898 shares outstanding at
March 31, 2005 and 2004, respectively 30 29
Additional paid-in capital 45,249 45,539
Unearned ESOP shares (719) (802)
Retained earnings, substantially restricted 27,602 23,276
Accumulated other comprehensive income 149 1,290
---------- ----------

TOTAL STOCKHOLDERS' EQUITY 72,311 69,332
---------- ----------

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 801,122 $ 700,232
========== ==========

See accompanying notes. F-4
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

Year Ended March 31,
--------------------------------------------
2005 2004 2003
------------ ------------ ------------

Interest and dividend income:
Loans receivable $ 34,102 $ 23,167 $ 18,233
Mortgage-backed securities 3,092 1,850 729
Investment securities, taxable 704 416 --
Investment securities, tax-exempt 1,287 745 692
Other interest-earning assets 1,446 1,237 921
------------ ------------ ------------
Total interest and dividend income 40,631 27,415 20,575
------------ ------------ ------------

Interest expense:
Deposits 7,236 5,253 4,515
FHLB advances and other borrowings 5,964 4,633 4,067
Securities sold under agreements to repurchase 119 48 128
------------ ------------ ------------
Total interest expense 13,319 9,934 8,710
------------ ------------ ------------

Net interest income 27,312 17,481 11,865

Provision for loan losses (1,528) (395) (1,033)
------------ ------------ ------------

Net interest income after provision for loan losses 25,784 17,086 10,832
------------ ------------ ------------

Non-interest income:
Gain on sale of loans 1,044 2,188 2,434
Recovery of impairment of mortgage servicing rights, net 81 -- --
Service fees and charges 4,504 3,120 2,098
Commissions and other 381 208 161
------------ ------------ ------------
Total non-interest income 6,010 5,516 4,693
------------ ------------ ------------

Non-interest expenses:
Compensation and related benefits 14,044 10,095 7,057
Occupancy 2,844 2,077 1,260
Supplies and postage 994 681 385
Data and automated teller machine processing 963 780 561
Professional fees 667 283 233
Advertising 542 506 309
Travel and meals 240 154 135
Impairment of mortgage servicing rights, net -- 121 306
Debit and credit card expense 977 681 486
Telephone 445 294 192
Insurance 315 232 160
Bank service charges 159 170 112
Charitable contributions 75 92 73
Organizational dues 106 75 58
Loan expense 148 103 90
Foreclosed real estate expense 118 107 13
Other 512 311 269
------------ ------------ ------------
Total non-interest expense 23,149 16,762 11,699
------------ ------------ ------------

Income before income tax expense 8,645 5,840 3,826

Income tax expense 2,367 1,482 1,054
------------ ------------ ------------

NET INCOME $ 6,278 $ 4,358 $ 2,772
============ ============ ============

Basic earnings per share $ 2.17 $ 2.26 $ 2.15
============ ============ ============

Diluted earnings per share $ 2.09 $ 2.12 $ 2.07
============ ============ ============

Weighted average common shares outstanding - basic 2,896,307 1,925,804 1,287,967
============ ============ ============

Weighted average common shares outstanding - diluted 2,997,630 2,055,635 1,341,111
============ ============ ============

See accompanying notes. F-5
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

Year Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------

Net income $ 6,278 $ 4,358 $ 2,772
---------- ---------- ----------

Other comprehensive income (loss):
Net change in unrealized gain (loss) on securities
available-for-sale (1,844) 622 1,172
Less deferred income tax (benefit) provision 726 (240) (460)
Net change in unrealized gain on cash flow hedge (38) (208) 247
Less deferred income tax provision (benefit ) 15 81 (98)
---------- ---------- ----------

Net other comprehensive income (loss) (1,141) 255 861
---------- ---------- ----------

COMPREHENSIVE INCOME $ 5,137 $ 4,613 $ 3,633
---------- ---------- ----------

See accompanying notes. F-6
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

Retained Accumulated
Common Stock Additional Unearned Earnings Other Total
---------------------- Paid-In ESOP Deferred Substantially Comprehensive Stockholders'
Shares Amount Capital Shares Compensation Restricted Income Equity
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, March 31, 2002 1,440,072 $ 14 $ 10,843 $ (970) $ (393) $ 18,145 $ 174 $ 27,813

Repurchase of common
stock (63,280) (1) (1,149) -- -- -- -- (1,150)
Amortization of deferred
compensation -- -- -- -- 236 -- -- 236
Dividends paid -- -- -- -- -- (703) -- (703)
Net change in unrealized
gain on securities
available for sale,
net of tax -- -- -- -- -- -- 712 712
Net change in unrealized
gain on cash flow
hedge, net of tax -- -- -- -- -- -- 149 149
ESOP shares released -- -- 82 86 -- -- -- 168
Stock issued from the
exercise of stock
options 4,200 1 66 -- -- -- -- 67
Net income -- -- -- -- -- 2,772 -- 2,772
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, March 31, 2003 1,380,992 14 9,842 (884) (157) 20,214 1,035 30,064

Repurchase of common
stock (167,982) (2) (5,121) (5,123)
Amortization of deferred
compensation 157 157
Dividends paid (1,296) (1,296)
Net change in unrealized
gain on securities
available for sale,
net of tax 382 382
Net change in unrealized
gain on cash flow
hedge, net of tax (127) (127)
ESOP shares released 139 82 221
Stock issued from the
exercise of stock
option 246,973 2 2,811 2,813
Stock issued in
acquisition 1,480,064 15 33,213 33,228
Stock options issued
in acquisition 4,563 4,563
Tax benefit of stock
options exercised 92 92
Net income -- -- -- -- -- 4,358 -- 4,358
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, March 31, 2004 2,940,047 $ 29 $ 45,539 $ (802) $ -- $ 23,276 $ 1,290 $ 69,332

See accompanying notes. F-7
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

Retained Accumulated
Common Stock Additional Unearned Earnings Other Total
---------------------- Paid-In ESOP Deferred Substantially Comprehensive Stockholders'
Shares Amount Capital Shares Compensation Restricted Income Equity
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, March 31, 2004 2,940,047 $ 29 $ 45,539 $ (802) $ -- $ 23,276 $ 1,290 $ 69,332

Repurchase of common
stock (93,932) (1) (2,646) -- -- -- -- (2,647)
Dividends paid -- -- -- -- -- (1,952) -- (1,952)
Net change in
unrealized gain
on securities
available for sale,
net of tax -- -- -- -- -- -- (1,118) (1,118)
Net change in unrealized
gain on cash flow
hedge, net of tax -- -- -- -- -- -- (23) (23)
ESOP shares released -- -- 152 83 -- -- -- 235
Stock issued from the
exercise of stock
options 152,480 2 2,142 -- -- -- -- 2,144
Tax benefit of stock
options exercised -- -- 62 -- -- -- -- 62
Net income -- -- -- -- -- 6,278 -- 6,278
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, March 31, 2005 2,998,595 $ 30 $ 45,249 $ (719) $ -- $ 27,602 $ 149 $ 72,311
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------

See accompanying notes. F-8
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

Year Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,278 $ 4,358 $ 2,772
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,381 1,047 622
Amortization (accretion) of securities, net (492) (422) (43)
Provision for loan losses 1,528 395 1,033
Gain on sale of loans held for sale (1,044) (2,188) (2,434)
Proceeds from sale of loans held for sale 82,317 155,127 148,811
Originations of loans held for sale (79,891) (154,249) (147,850)
Other gains, net (111) 83 (7)
Deferred income taxes 953 (352) (289)
Federal Home Loan Bank stock dividends (284) (398) (351)
Deferred compensation expense -- 157 439
ESOP compensation expense 235 221 168
Impairment (recovery) of mortgage servicing rights (81) 121 306
Changes in assets and liabilities:
Accrued interest receivable and other assets (184) 2,375 (320)
Income taxes receivable 282 272 (39)
Accrued expenses and other liabilities 405 (1,486) 1,728
---------- ---------- ----------

Net cash provided by operating activities 11,292 5,061 4,546
---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of mortgage-backed securities; held-to-maturity 339 159 165
Proceeds from maturities of mortgage-backed securities; available-for-sale 16,408 9,724 2,106
Proceeds from maturities of investment securities; available-for-sale 960 289 --
Proceeds from maturities of investment securities; held-to-maturity 44 -- --
Proceeds from sale of mortgage-backed securities; available-for-sale -- 21,671 --
Proceeds from sale of investment securities; available-for-sale -- 2,774 --
Proceeds from call of mortgage-backed securities; held-to-maturity 19 -- --
Purchase of mortgage-backed securities; held-to-maturity -- (20,871) --
Purchase of mortgage-backed securities; available-for-sale (3,028) (19,328) --
Purchase of investment securities; held-to-maturity (11,364) (10,217) --
Purchase of investment securities; available-for-sale (117) (382) (3,530)
Other net change in loans receivable (105,412) (11,321) (18,514)
Net cash in acquisition, net -- 24,707 --
Purchases of premises and equipment (1,899) (3,336) (2,325)
Net increase in bank-owned and cash surrender value of life insurance (1,062) (620) (423)
Proceeds from disposition of assets 90 2 2
Proceeds from the sale of foreclosed and repossessed assets 1,015 888 382
---------- ---------- ----------

Net cash used by investing activities (104,007) (5,861) (22,137)
---------- ---------- ----------

See accompanying notes. F-9
- --------------------------------------------------------------------------------

FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------

Year Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 38,968 $ 19,331 $ 14,332
Net increase in securities sold under agreements to repurchase 5,536 (664) 3,885
Net decrease in advances from borrowers for taxes and insurance (47) (237) (204)
FHLB advances and other borrowings 636,722 165,069 120,089
Repayments on FHLB advances and other borrowings (582,605) (165,437) (117,995)
Repurchase of common stock (2,647) (5,123) (1,150)
Cash dividends paid on common stock (1,952) (1,296) (703)
Proceeds from the exercise of stock options 2,144 2,813 66
---------- ---------- ----------

Net cash provided by financing activities 96,119 14,456 18,320
---------- ---------- ----------

NET CHANGE IN CASH AND CASH EQUIVALENTS 3,404 13,656 729

Cash and cash equivalents, beginning of year 38,397 24,741 24,012
---------- ---------- ----------

Cash and cash equivalents, end of year $ 41,801 $ 38,397 $ 24,741
========== ========== ==========

Supplemental disclosures for cash flow information:
Cash paid during the year for:
Interest $ 14,069 $ 9,997 $ 8,812
========== ========== ==========

Income taxes $ 2,067 $ 1,628 $ 1,539
========== ========== ==========

Noncash investing and financing activities:
Unrealized gain (loss) on securities; available for sale, net of tax $ (1,118) $ 382 $ 712
========== ========== ==========

Unrealized gain on interest rate swap, net of tax $ (23) $ (127) $ 150
========== ========== ==========

Transfer from loans receivable to real estate acquired
through foreclosure $ 984 $ 1,192 $ 72
========== ========== ==========

Transfer from loans receivable to repossessed assets acquired
through repossession $ 117 $ 70 $ --
========== ========== ==========

Loans receivable charged to allowance for loan losses $ 698 $ 479 $ 203
========== ========== ==========

Financing of real estate sold $ 522 $ -- $ --
========== ========== ==========

See accompanying notes. F-10
- --------------------------------------------------------------------------------

Note 1 - Summary of Accounting Policies

Organization and principles of consolidation:
FirstBank NW Corp. (the Company) was organized as a Delaware corporation on
March 12, 1997, to acquire all of the capital stock of FirstBank Northwest (the
Bank) as part of the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank (the Conversion) and to
complete an initial public offering of the Company's common stock. On January
30, 1998, the Bank converted to a Washington chartered savings bank and on
September 1, 1999 the Company changed its state of incorporation from Delaware
to Washington. The Company is the parent company of the Bank and of Tri Star
Financial Corporation (Tri Star), and Pioneer Development Corp., which are
collectively referred to as the Company and constitute these consolidated
financial statements. All significant intercompany transactions and balances are
eliminated in consolidation.

Nature of business and concentration of credit risk:
The Company's principal business consists of the operations of the Bank and Tri
Star that operate in one business segment. The Bank's operations consist of
attracting deposits from the general public through a variety of deposit
products and investing these, together with funds from on-going operations, in
the origination of residential mortgage and commercial loans and, to a lesser
extent, construction, agricultural, consumer, and other loans. The Bank
primarily originates loans to customers located in northern and southwestern
Idaho, eastern Washington, and 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
estimates and assumptions that affect the reported assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are susceptible to significant change in the near-term, relate to
the determination of the allowance for loan losses, the calculation of the
deferred tax assets and liabilities, the valuation of the core deposit
intangible, and the valuation of mortgage servicing rights.

The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral.

The Company's loans are generally secured by specific items of collateral
including real property, business assets, and consumer assets. Although the
Company has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions.

F-11

Note 1 - Summary of Accounting Policies (Continued)

Use of estimates (continued):
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgments about information available to them at the time
of their examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change in the near term. However, the amount
of the change that is reasonably possible cannot be estimated.

Reclassifications:
Certain prior year amounts have been reclassified to conform to the current
presentation. These reclassifications had no impact on net income or on
stockholders' equity.

Cash and cash equivalents:
Cash equivalents are any highly liquid debt instrument with a remaining maturity
of three months or less at the date of purchase. Cash and cash equivalents are
on deposit with other banks and financial institutions in amounts that
periodically exceed the federal insurance limit. The Bank evaluates the credit
quality of these banks and financial institutions to mitigate its credit risk.
In addition, the Bank sells excess funds to financial institutions on an
overnight basis.

Investments and mortgage-backed securities:
The Company accounts for securities according to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 addresses the accounting
and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Investments
in securities are to be classified as either held-to-maturity,
available-for-sale or trading.

o Held-to-maturity - Investments in debt securities classified as
held-to-maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts using the effective interest method. The Company
has the ability and the intention to hold these investments and mortgage
backed securities to maturity and, accordingly, they are not adjusted for
temporary declines in their fair value.

o Available-for-sale - Investments in debt and equity securities classified as
available-for-sale are stated at fair value. Unrealized gains and losses are
recognized (net of tax effect) as a separate component of stockholders'
equity.

o Trading - Investments in debt and equity securities classified as trading
are stated at fair value. Realized and unrealized gains and losses for
trading securities are included in income.

F-12

Note 1 - Summary of Accounting Policies (Continued)

Investments and mortgage-backed securities (continued):
Purchase premiums and discounts are recognized in interest income using the
level yield method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.

Loans receivable:
The Company grants mortgage, commercial, consumer, and agricultural loans to
customers. A substantial portion of the loan portfolio is represented by loans
originated in northern and southwestern Idaho, eastern Washington, and eastern
Oregon.

The ability of the Company's debtors to honor their contracts is dependent upon
the general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Deferred loan
origination fees and discounts are amortized over the contractual life of the
loan using the level-yield method. Interest income is accrued on any unpaid
principal balances.

The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent based upon contractual terms unless the credit is well-secured and in
process of collection. Loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income or the loan loss reserve as
appropriate. The interest on these loans is accounted for on the cash basis or
cost recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured. Suspended
interest ultimately collected is credited to interest income in the period of
recovery.

Allowance for loan losses:
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

F-13

Note 1 - Summary of Accounting Policies (Continued)

Allowance for loan losses (continued):
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect a borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

The Company accounts for loan impairment according to the provisions of SFAS No.
114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, which amended SFAS No. 114. These statements define the recognition
criteria for loan impairment and the measurement methods for certain impaired
loans and loans for which terms have been modified in troubled-debt
restructurings (a restructured loan). Specifically, a loan is considered
impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments or principal or
interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.

Loans held for sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Market
values are determined by discounting future cash flows at current market rates.
Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income.

F-14

Note 1 - Summary of Accounting Policies (Continued)

Other real estate owned:
Assets acquired through loan foreclosure are held for sale and are initially
recorded at fair value at the date of foreclosure, establishing a new cost
basis. Subsequent to foreclosure, management periodically performs valuations
and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in other non-interest income or other non-interest
expense, respectively.

Stock in Federal Home Loan Bank:
Federal law requires a member institution of the Federal Home Loan Bank (FHLB)
System to hold common stock of its district FHLB according to predetermined
formulas. No readily determinable market exists for such stock and it has no
quoted market value. Accordingly, the Company reports its investment in FHLB
stock at cost.

Premises and equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to forty years. Expenditures for
new properties and equipment and major renewals or betterments are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon sale or retirement, the cost and related accumulated depreciation are
removed from the respective property or equipment accounts and the resulting
gains or losses are reflected in operations.

Bank-owned and cash surrender value of life insurance policies:
Bank-owned life insurance is carried at the cash surrender value net of any
loans against any policy and surrender charges expected to be incurred. The
policies are primarily in place to provide executive life insurance benefits to
the Bank and for investment purposes. Single premium life policies at March 31,
2005 and 2004 are $19.9 million and $18.9 million, respectively. Flexible
premium life policies at March 31, 2005 and 2004 are $3.4 million and $3.3
million, respectively. At March 31, 2005 and 2004 there were no loans offset
against the cash surrender values and no restrictions against the use of the
proceeds. Bank-owned and cash surrender value of life insurance policies at
March 31, 2005 and 2004 are $23.3 million and $22.2 million, respectively.

Income taxes:
The Company accounts for income taxes according to the provisions of SFAS No.
109, Accounting for Income Taxes, which requires the use of the liability method
of accounting for deferred income taxes. Under SFAS No. 109, deferred income
taxes are provided for temporary differences between the financial reporting and
tax basis of assets and liabilities using the enacted tax rate expected to apply
to the taxable income of the period in which the deferred tax liability or asset
is expected to be settled or realized. Tax credits are accounted for as a
reduction of income taxes in the year in which the credit originates.

F-15

Note 1 - Summary of Accounting Policies (Continued)

Mortgage servicing rights:
Servicing assets are recognized as separate assets when rights are acquired
through the purchase or sale of financial assets. Capitalized servicing rights
are reported separately in the statement of financial condition and are
amortized into non-interest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial assets.
Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights by predominant characteristics, such as interest rates and terms. Fair
value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized to the extent that the
capitalized amount for the stratum exceeds their fair value.

Securities Sold Under Agreements to Repurchase:
The Company enters into sales of securities under agreements to repurchase that
are treated as financing arrangements. Accordingly, the obligations to
repurchase securities sold are reflected as a liability in the consolidated
balance sheets, and the securities underlying the agreements remain in the asset
accounts.

Advertising Costs:
Advertising costs are charged to operations when incurred. Advertising expense
for the year ended March 31, 2005, 2004 and 2003 was $542,000, $506,000 and
$309,000, respectively.

Employee Stock Ownership Plan:
The Company sponsors an Employee Stock Ownership Plan (the ESOP). The ESOP is
accounted for in accordance with the American Institute of Certified Pubic
Accountants Statement of Position No. 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 ESOP in the statements of financial condition. As
shares are released from collateral, compensation expense is recorded equal to
the then current market price of the shares, and the shares become outstanding
for earnings per share calculations.

Stock and cash dividends on allocated shares are recorded as a reduction of
retained earnings and paid or distributed directly to participants' accounts.
Stock and cash dividends on unallocated shares are recorded as a reduction of
debt and accrued interest.

Stock-based compensation:
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and to furnish the pro forma disclosures
required under SFAS No. 123. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.

F-16

Note 1 - Summary of Accounting Policies (Continued)

Stock-based compensation (continued):
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of Financial Accounting Standards
Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation at the years ended March 31, 2005 and 2004.

Year Ended March 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(In Thousands, except per share data)

Net income as reported $ 6,278 $ 4,358 $ 2,772
Pro forma adjustment for effect of fair value
accounting for stock options (9) (1) (26)
------------ ------------ ------------

Pro forma net income $ 6,269 $ 4,357 $ 2,746
============ ============ ============

Basic earnings per share:
As reported $ 2.17 $ 2.26 $ 2.15
============ ============ ============

Pro forma $ 2.16 $ 2.26 $ 2.13
============ ============ ============

Diluted earnings per share:
As reported $ 2.09 $ 2.12 $ 2.07
============ ============ ============

Pro forma $ 2.09 $ 2.12 $ 2.05
============ ============ ============

Earnings per share:
The Company reports earnings per share (EPS) in accordance with SFAS No. 128,
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. SFAS No. 128 also
requires presentation of EPS assuming dilution (diluted EPS). Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Stock options are the only potentially dilutive instruments issued by the
Company. ESOP shares that are unallocated and not yet committed to be released
are excluded from the weighted average shares outstanding calculation (see Note
16).

Comprehensive income:
SFAS No. 130, Reporting Comprehensive Income, requires that certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities and certain derivative instruments, are reported
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income.

F-17

Note 1 - Summary of Accounting Policies (Continued)

Off-balance-sheet financial instruments:
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received.

Derivative financial instruments designated as hedges:
As part of the Company's asset/liability management, the Company uses a swap
agreement to hedge interest rate risk. The derivative used as part of the
asset/liability management process is linked to specific assets and has a high
correlation between the contract and the underlying item being hedged, both at
inception and throughout the hedge period. The derivative is designated as a
cash flow hedge in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138. SFAS
No. 133 establishes accounting and reporting standards for financial
derivatives, including certain financial derivatives embedded in other
contracts, and hedging activities. The standard requires the recognition of all
financial derivatives as assets or liabilities in the Company's statement of
financial condition at fair value. The accounting treatment of changes in fair
value is dependent upon whether or not a financial derivative is designated as a
hedge and if so, the type of hedge.

In accordance with SFAS No. 133, the Company recognizes all derivatives on the
statement of financial condition at fair value. Fair value is based on dealer
quotes, or quoted prices from instruments with similar characteristics. The
Company uses financial derivatives designated for hedging activities as cash
flow hedges. For derivatives designated as cash flow hedges, changes in fair
value are recognized in other comprehensive income, until the hedge items are
recognized in earnings.

The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in cash flows of hedged items and whether those derivatives may be
expected to remain highly effective in future periods. The Company will
discontinue hedge accounting prospectively when it determines that the
derivative is no longer an effective hedge, the derivative expires or is sold,
or management discontinues the derivative's hedge designation. The Company had
entered into a swap agreement which terminated on May 29, 2004.

F-18

Note 1 - Summary of Accounting Policies (Continued)

New accounting pronouncements:
In December 2004, the FASB issued Statement No. 123(R), Share-Based Payment.
This Statement replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Statement No. 123(R) requires that the compensation cost relating to
share-based payment transactions (for example, stock options granted to
employees of the Company) be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments used.
Statement 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Public entities will be
required to apply Statement No. 123(R) as of the first interim or annual
reporting period that begins after December 15, 2005. The Company intends to
adopt the provisions of FASB Statement No. 123(R) effective January 1, 2006, and
is in the process of evaluating the impact on its consolidated financial
position and consolidated results of operations.

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions. The amendments made by Statement No. 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Statement No. 153 is the result of a broader
effort by the FASB to improve the comparability of cross-border financial
reporting by working with the International Accounting Standards Board toward
development of a single set of high-quality accounting standards. The Statement
is effective for nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company intends to adopt the provisions of
FASB Statement No. 153 effective June 15, 2005, and does not expect the initial
implementation to have a significant impact on its consolidated financial
position and consolidated results of operations.

In December 2003, the FASB issued Statement No. 132(R), Employers' Disclosures
about Pensions and Other Postretirement Benefits. Statement No. 132, as
originally issued, is effective until the provisions of Statement No. 132(R) are
fully adopted. All new disclosure requirements for the domestic plans of
publicly traded entities are effective for years ending after December 15, 2003.
Estimated future benefit payments, and all other new disclosure requirements for
foreign plans and nonpublic entities are effective for years ending after June
15, 2004. The Company adopted the provisions of FASB Statement No. 132(R)
effective March 31, 2005, and it did not have a significant impact on its
consolidated financial position and consolidated results of operations.

F-19

Note 2 - Securities

The amortized cost and fair value of securities, with gross unrealized gains and
losses, at March 31, 2005 and 2004 are as follows:

March 31, 2005
---------------------------------------------------------------------------
(In Thousands)

Gross Gross
Unrealized Unrealized
Gross Losses Less Losses
Amortized Unrealized Than 12 Greater Than
Cost Gains Months 12 Months Fair Value
------------ ------------ ------------ ------------ ------------

Securities Available-for-Sale
State, county, and municipal $ 15,261 $ 622 $ (3) $ (106) $ 15,774
Corporate bonds 1,008 50 -- -- 1,058
Other investments 615 -- (2) (18) 595
------------ ------------ ------------ ------------ ------------
Total investments securities 16,884 672 (5) (124) 17,427
Mortgage-backed securities 39,748 133 (439) (1) 39,441
------------ ------------ ------------ ------------ ------------
$ 56,632 $ 805 $ (444) $ (125) $ 56,868
============ ============ ============ ============ ============

Securities Held-to-Maturity
U.S. government and agency 14,122 -- (160) -- 13,962
State, county, and municipal 14,740 53 (21) (15) 14,757
Corporate bonds 2,045 105 -- -- 2,150
------------ ------------ ------------ ------------ ------------
Total investments securities 30,907 158 (181) (15) 30,869
Mortgage-backed securities 22,463 1 (313) (4) 22,147
------------ ------------ ------------ ------------ ------------
$ 53,370 $ 159 $ (494) $ (19) $ 53,016
============ ============ ============ ============ ============

F-20

Note 2 - Securities (Continued)

March 31, 2004
---------------------------------------------------------------------------
(In Thousands)

Gross Gross
Unrealized Unrealized
Gross Losses Less Losses
Amortized Unrealized Than 12 Greater Than
Cost Gains Months 12 Months Fair Value
------------ ------------ ------------ ------------ ------------

Securities Available-for-Sale
State, county, and municipal $ 16,135 $ 1,301 $ (37) $ -- $ 17,399
Corporate bonds 1,065 79 -- -- 1,144
Other investments 581 -- -- (8) 573
------------ ------------ ------------ ------------ ------------
Total investments securities 17,781 1,380 (37) (8) 19,116
Mortgage-backed securities 53,383 776 -- (31) 54,128
------------ ------------ ------------ ------------ ------------
$ 71,164 $ 2,156 $ (37) $ (39) $ 73,244
============ ============ ============ ============ ============

Securities Held-to-Maturity
U.S. government and agency 5,149 166 -- (3) 5,312
State, county, and municipal 12,421 83 -- -- 12,504
Corporate bonds 2,101 118 -- -- 2,219
------------ ------------ ------------ ------------ ------------
Total investments securities 19,671 367 -- (3) 20,035
Mortgage-backed securities 22,899 337 -- (14) 23,222
------------ ------------ ------------ ------------ ------------
$ 42,570 $ 704 $ -- $ (17) $ 43,257
============ ============ ============ ============ ============

Management does not believe that any individual unrealized loss as of March 31,
2005 represents an other-than-temporary impairment. The decline in fair market
value of these securities is generally due to changes in interest rates and
changes in market-desired spreads subsequent to their purchase. There were 67
and 23 available for sale securities with unrealized losses at March 31, 2005
and 2004, respectively.

For the year ended March 31, 2005 and 2003, there were no proceeds from sales of
securities available-for-sale. For the year ended March 31, 2004, the proceeds
from sales of securities available-for-sale amounted to approximately $24.4
million. There were no gross realized gains for the years ended March 31, 2005,
2004 and 2003.

F-21

Note 2 - Securities (Continued)

The amortized cost and fair value of U.S. government, federal agency, and
mortgage-backed securities by contractual maturity at March 31, 2005, are as
follows:

March 31, 2005
---------------------------------------------------------------
Held-to-Maturity Available-for-Sale
----------------------- -----------------------
Weighted Amortized Fair Amortized Fair
Yield Cost Value Cost Value
---------- ---------- ---------- ---------- ----------
(In Thousands)

Amounts maturing in:
One year or less 2.90% $ -- $ -- $ 452 $ 450
After one year through five years 3.78 14,233 14,072 157 155
After five years through ten years 7.73 3,442 3,437 2,288 2,436
After ten years 7.69 13,232 13,360 13,987 14,386
---------- ---------- ---------- ---------- ----------

6.49 30,907 30,869 16,884 17,427
Mortgage-backed securities 5.00 22,463 22,147 39,748 39,441
---------- ---------- ---------- ---------- ----------

5.65% $ 53,370 $ 53,016 $ 56,632 $ 56,868
========== ========== ========== ========== ==========

Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.

F-22

Note 2 - Securities (Continued)

The amortized cost and market value of securities pledged to secure obligations
or pledged as collateral by obligor at March 31, 2005 and 2004 are as follows:

March 31,
-------------------------------------------------
2005 2004
----------------------- -----------------------
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
(In Thousands)

Obligations under repurchase agreements $ 15,270 $ 15,876 $ 20,867 $ 21,994
Public deposits 8,901 8,855 7,773 7,863
Deposits over $100,000 25,579 25,445 20,047 20,315
Federal Home Loan Bank advances 50,363 49,832 4,156 4,465
Treasury, taxes and loans 462 463 -- --
Oregon Trail Consumer Cooperative 2,973 2,939 3,153 3,176
---------- ---------- ---------- ----------

$ 103,548 $ 103,410 $ 55,996 $ 57,813
========== ========== ========== ==========

Note 3 - Equity Securities

Equity securities carried at cost at March 31, 2005 and 2004 consisted of the
following:

March 31,
------------------------
2005 2004
---------- ----------
(In Thousands)

Federal Home Loan Bank stock $ 12,785 $ 12,501
FarmerMac stock 4 5
---------- ----------

Equity securities $ 12,789 $ 12,506
---------- ----------

F-23

Note 3 - Equity Securities (Continued)

The FHLB revised its capital structure from the issuance of one class of stock
to two, B(1) and B(2) stock. B(1) stock can be sold back to the FHLB at cost,
but is restricted as to purchase, sale, and redemption based on the level of
business activity the Company is doing with the FHLB. Class B(2) is not a
required investment for institutions and is not restricted as to purchase and
sale, but has the same redemption restrictions as class B(1). The Company had
$12.5 million in B(1) stock and $251,000 in B(2) stock at March 31, 2005. Stock
is a required investment for institutions that are members. The required
investment in the common stock is based on a predetermined formula and is
carried at cost on the consolidated statement of financial condition. Interest
income from FHLB dividends, in other interest-earning assets, was $284,000,
$398,000, and $351,000 for the years ended March 31, 2005, 2004 and 2003,
respectively.

Note 4 - Loans Receivable

Loans receivable at March 31, 2005 and 2004 consisted of the following:

March 31,
-----------------------
2005 2004
---------- ----------
(In Thousands)
Real estate loans:
Residential $ 117,541 $ 113,016
Commercial 173,757 122,132
Agricultural 19,434 18,567
Construction 69,148 44,536
Other loans:
Commercial (nonreal estate) 92,780 75,878
Other consumer 38,724 43,425
Home equity 37,806 24,530
Agricultural operating 22,625 24,876
---------- ----------

Total loans receivable 571,815 466,960
Less:
Unearned loan fees and discounts 2,460 1,532
Allowance for loan losses 7,254 6,314
---------- ----------

Loans receivable, net $ 562,101 $ 459,114
========== ==========

F-24

Note 4 - Loans Receivable (Continued)

At March 31, 2005, the contractual principal payments due on outstanding loans
receivable are shown below. Actual payments may differ from expected payments
because borrowers have the right to prepay loans, with or without prepayment
penalties.

Year Ending March 31,
(In Thousands)
2006 $ 154,743
2007 36,811
2008 27,122
2009 17,425
2010 31,397
Thereafter 304,317
-----------

$ 571,815
===========

The following summarizes the changes in the allowance for loan losses at March
31, 2005, 2004 and 2003:

March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)

Allowance for loan losses, beginning of year $ 6,314 $ 3,414 $ 2,563
Addition through acquisition -- 2,863 --
Provision for loan losses 1,528 395 1,033
Charge offs, net (588) (358) (182)
---------- ---------- ----------

Allowance for loan losses, end of year $ 7,254 $ 6,314 $ 3,414
========== ========== ==========

As of March 31, 2005 and 2004, loans on a nonaccrual status totaled
approximately $719,000 and $2.9 million, respectively. The effect of not
recognizing interest income on nonaccrual loans in accordance with the original
terms totaled approximately $68,000 during 2005, $126,000 during 2004, and
$61,000 during 2003. The following information at March 31, 2005, 2004 and 2003
relates to the Bank's impaired loans which include troubled debt restructurings
that meet the definition of impaired loans:

F-25

Note 4 - Loans Receivable (Continued)

March 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)

Impaired loans with a specific allowance $ 363 $ 1,119 $ 51
Impaired loans with no specific allowance 1,406 816 1,952
---------- ---------- ----------

Total impaired loans $ 1,769 $ 1,935 $ 2,003
========== ========== ==========

Total allowance related to impaired loans $ 279 $ 424 $ 161
========== ========== ==========

Average aggregate balance of impaired
loans for the year $ 1,977 $ 2,989 $ 1,613
========== ========== ==========

Interest income recognized on impaired
loans for cash payments received $ 203 $ 57 $ 106
========== ========== ==========

Loans 90 days or more past due and
still accruing $ 377 $ -- $ --
========== ========== ==========

Outstanding commitments of the Bank to originate loans as of March 31, 2005,
were as follows:

Fixed Rate Variable Rate Total
------------- ------------- -------------
(In Thousands)

First mortgage loans $ 16,043 $ 37,658 $ 53,701
Other loans 16,263 55,303 71,566
------------- ------------- -------------

Outstanding Loan
Commitments $ 32,306 $ 92,961 $ 125,267
============= ============= =============

F-26

Note 4 - Loans Receivable (Continued)

Interest rates on fixed rate loan commitments range from 4.09% to 8.50% and are
committed through July 1, 2005. Fees received in connection with these
outstanding loan commitments are deferred and will be recognized in income over
the life of the related loan after funding of the loan. In addition, the Bank
had commitments to fund outstanding credit lines of approximately $63.4 million,
commitments to fund standby letters of credit of $4.8 million, and commitments
to fund credit card lines of approximately $10.3 million at March 31, 2005.
Commitments to extend credit may involve elements of interest rate risk in
excess of the amount recognized in the balance sheets. Interest rate risk on
commitments to extend credit results from the possibility that interest rates
may have changed since the time the commitment was made.

The Bank remains contingently liable for $28,000 of loans sold with recourse as
of March 31, 2005. At March 31, 2005, the Bank had indemnification agreements
with the Federal Housing Administration ("FHA") for five residential mortgage
loans insured by FHA. The agreements require the Bank to reimburse FHA for any
loss incurred upon foreclosure of these loans and subsequent liquidation of the
homes held as collateral. Recently, the Bank has been notified that two the five
loans were satisfied with no loss incurred by FHA.

Note 5 - Loan Servicing

Loans serviced for others (including contract collections) are not included in
the consolidated statements of financial condition. The unpaid principal
balances of these loans at March 31, 2005 and 2004 are as follows:

March 31,
------------------------
2005 2004
---------- ----------
(In Thousands)
Loan portfolios serviced for:
FNMA $ 4,560 $ 6,188
FHLMC 58,517 74,852
Others 4,141 4,536
---------- ----------

$ 67,218 $ 85,576
========== ==========

The balance of capitalized mortgage servicing rights at March 31, 2005 and 2004
was $614,000 and $710,000, respectively. The fair value of mortgage servicing
rights was determined using discount rates ranging from 9.50% to 14.00% and
prepayment speeds ranging from 10.47% to 44.62%, depending upon the
stratification of the specific mortgage servicing right. The allowance for
impairment on mortgage servicing rights for the years ended March 31, 2005, 2004
and 2003 was $346,000, $427,000 and $306,000, respectively.

F-27

Note 5 - Loan Servicing (Continued)

Estimates of fair value on the mortgage servicing rights portfolio are based on
the objective characteristics of the servicing portfolio and are derived through
a discounted cash flow analysis. This analysis takes into consideration existing
conditions in the secondary servicing markets (levels of supply and demand), as
well as recently executed servicing transactions. Published values represent
gross price levels, with deductions that would net gross proceeds varying
dependent upon transaction composition and levels of supply and demand in the
marketplace. Deductions are most often associated with foreclosures. The
delinquent loans, loans in litigation, and potential loss associated with
foreclosures. The gross price levels assume that standard industry
representations and warranties related to the servicing and origination of the
loans would be offered by the seller (and acceptable to the buyer), and that the
financial strength of the seller would be acceptable to the buyer. The Company
outsources this analysis of the mortgage servicing rights portfolio to Phoenix
Analytic Services, Incorporated.

The following summarizes mortgage servicing rights activity for the years ended
March 31, 2005, 2004 and 2003:

March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)

Mortgage servicing asset, beginning of year $ 710 $ 826 $ 1,017
Capitalized 29 199 279
Amortization (206) (194) (164)
Impairment recovery/(charge) 81 (121) (306)
---------- ---------- ----------

Mortgage servicing asset, end of year $ 614 $ 710 $ 826
========== ========== ==========

F-28

Note 6 - Premises and Equipment

Premises and equipment at March 31, 2005 and 2004 consisted of the following:

March 31,
------------------------
2005 2004
---------- ----------
(In Thousands)

Land, buildings, and building improvements $ 19,950 $ 19,953
Furniture, fixtures, and equipment 11,709 10,488
Construction in progress 523 166
---------- ----------

32,182 30,607
Accumulated depreciation (13,494) (12,333)
---------- ----------

Premises and equipment, net $ 18,688 $ 18,274
========== ==========

Depreciation expense for the years ended March 31, 2005, 2004 and 2003, was $1.4
million $1.0 million, and $622,000, respectively.

Note 7 - Goodwill and Other Intangible Assets

Goodwill will be periodically evaluated for impairment. No impairment loss on
goodwill was recorded for the year ended March 31, 2005 because there were no
impairment indicators during the period. Goodwill continues to decrease due to
the tax benefits on exercises of stock options purchased in the acquisition of
Oregon Trail. Goodwill at March 31, 2005 was $16.7 million.

Core deposits are a dependable, long-term source of funds for the Company. The
core deposit intangible asset will be amortized under the straight line method
over the estimated life of the depositor relationships of 5.5 years. Core
deposit intangible at March 31, 2005 was $2.9 million, net of accumulated
amortization of $1.0 million. Amortization expense for the years ended March 31,
2005 and 2004 was $715,000 and $297,000, respectively. There was no amortization
expense for the year ended March 31, 2003. Amortization expense for the net
carrying amount of the core deposit intangible at March 31, 2005 is estimated to
be as follows:

F-29

Note 7 - Goodwill and Other Intangible Assets (Continued)

For the year ended March 31,
(In Thousands)
2006 $ 715
2007 715
2008 715
2009 715
2010 67
-------------
Estimated total core deposit intangible amortization expense $ 2,927
=============

Note 8 - Foreclosed Real Estate

Foreclosed real estate of $603,000 and $552,000 was included in other assets on
the consolidated statement of financial condition at March 31, 2005 and 2004,
respectively.

F-30

Note 9 - Deposits

Deposits and securities sold under agreements to repurchase and the related
weighted-average interest rates at March 31, 2005 and 2004 consisted of the
following:

March 31,
-----------------------
2005 2004
---------- ----------
(In Thousands)
Transaction accounts:
NOW accounts and securities sold under
aggreements to repurchase (0.22% and 0.08%) $ 157,397 $ 145,959
Statement savings accounts (0.25% and 0.50%) 41,189 39,822
Money market accounts (1.63% and 1.09%) 118,881 104,612
---------- ----------

Total transaction accounts 317,467 290,393
---------- ----------

Certificates of deposit:
0.00% to 1.99% 55,533 81,195
2.00% to 2.99% 62,238 28,580
3.00% to 3.99% 47,069 30,501
4.00% to 4.99% 33,841 35,777
5.00% to 5.99% 16,144 18,728
6.00% to 6.99% 2,407 4,944
7.00% to 7.99% -- 917
---------- ----------

Total certificates of deposit 217,232 200,642
---------- ----------

Total deposits and securities sold
under agreements to repurchase $ 534,699 $ 491,035
========== ==========

F-31

Note 9 - Deposits (Continued)

The scheduled maturities of certificates of deposit at March 31, 2005 are as
follows:

Year ending March 31,
(In Thousands)
2006 $ 124,463
2007 37,065
2008 32,648
2009 6,963
2010 11,570
Thereafter 4,523
-------------

Total certificates of deposit $ 217,232
=============

Interest expense on deposits and securities sold under agreements to repurchase
for the years ended March 31, 2005, 2004 and 2003 consisted of the following:

Year Ended March 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)

NOW and money market $ 2,116 $ 1,028 $ 347
Securities sold under agreements to repurchase 119 48 128
Statements savings 127 110 59
Certificates of deposit 4,993 4,115 4,109
---------- ---------- ----------

Interest expense $ 7,355 $ 5,301 $ 4,643
========== ========== ==========

Certificates of deposit in excess of $100,000 totaled approximately $89.0
million and $71.9 million at March 31, 2005 and 2004, respectively. Deposit
balances in excess of $100,000 totaled approximately $233.1 million and $160.9
million at March 31, 2005 and 2004, respectively, are not insured by the Federal
Deposit Insurance Corporation (FDIC).

F-32

Note 10 - FHLB Advances and Other Borrowed Funds

FHLB advances and other borrowings had weighted average interest rates at March
31, 2005 and 2004 of 4.28% and 4.78%, respectively. Maturity dates of advances
at March 31, 2005 and 2004 were as follows:

March 31,
-----------------------
2005 2004
---------- ----------
(In Thousands)
Advances from FHLB and other borrowings due:
Less than one year $ 109,681 $ 36,641
After one year through two years 12,697 23,658
After two years through three years 10,475 10,447
After three years through four years 3,174 10,607
After four years through five years 5,000 826
More than five years 44,310 49,877
---------- ----------

$ 185,337 $ 132,056
========== ==========

Advances are collateralized by all FHLB stock owned by the bank, deposits with
the FHLB- Seattle, and certain mortgages or deeds of trust securing such
properties.

The Bank has available credit with FHLB for up to 30% of total assets, or $240.3
million, at March 31, 2005. On March 31, 2005 the FHLB borrowings are
collateralized by $310.7 million in investment securities, residential real
estate loans, and commercial real estate loans. Interest is charged at the
market rate for federal funds purchased. There was $180.4 million and $128.4
million outstanding of FHLB advances, gross of merger premium of $2.8 million
and $3.7 million, at March 31, 2005 and 2004, respectively.

The Bank has an unsecured operating line of credit with US Bank for $20.0
million. There was no outstanding balance at March 31, 2005 and 2004. The
Holding Corporation has an unsecured operating line of credit with US Bank for
$3.5 million. There was an outstanding balance of $2.2 million under the line of
credit at March 31, 2005 and no outstanding balance at March 31, 2004. Interest
expense recognized for the year ended March 31, 2005 for the US Bank borrowing
was $61,000.

Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date. Securities underlying the agreements are
presented in Note 2.

F-33

Note 10 - FHLB Advances and Other Borrowed Funds (Continued)

Information concerning securities sold under agreements to repurchase at March
31, 2005, 2004 and 2003 are summarized as follows:

March 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(In Thousands)

Average balance during the year $ 12,808 $ 10,465 $ 10,740
============ ============ ============

Average interest rate during the year 0.93% 0.46% 1.19%
============ ============ ============

Maximum month-end balance during the year $ 16,023 $ 11,272 $ 13,535
============ ============ ============

Note 11 - Income Taxes

The components of income tax expense for the years ended March 31, 2005, 2004
and 2003 are summarized as follows:

Year Ended March 31,
-------------------------------------
2005 2004 2003
---------- ---------- ----------
(In Thousands)
Current tax expense $ 1,414 $ 1,834 $ 1,343
Deferred tax expense (benefit) 953 (352) (289)
---------- ---------- ----------

Income tax expense $ 2,367 $ 1,482 $ 1,054
========== ========== ==========

F-34

Note 11 - Income Taxes (Continued)

Deferred tax liabilities and assets at March 31, 2005 and 2004 consisted of the
following:

March 31,
------------------------
2005 2004
---------- ----------
(In Thousands)

Deferred tax assets:
Unearned loan fees $ 7 $ 8
Allowance for loan losses 2,834 2,397
Deferred compensation 433 504
Change of control payments 206 435
Premium on FHLB advances 1,063 1,523
Premium on certificates of deposits 336 834
Other 137 145
---------- ----------

Total deferred tax assets 5,016 5,846
---------- ----------

Deferred tax liabilities:
Federal Home Loan Bank stock dividends (2,642) (2,559)
Mortgage servicing rights (240) (278)
Depreciation (705) (532)
Unrealized gain on securities available-for-sale (426) (753)
Unrealized gain on cash flow hedge -- (15)
Core deposit intangible (1,103) (1,487)
Loan fees (443) --
---------- ----------

Total deferred tax liabilities (5,559) (5,624)
---------- ----------

Net deferred income tax asset (liability) $ (543) $ 222
========== ==========

At March 31, 2005 and 2004, an income tax receivable of $2.4 million and $1.3
million, respectively, was included in other assets on the Consolidated
Statements of Financial Condition.

F-35

Note 11 - Income Taxes (Continued)

A reconciliation of the statutory federal income tax rate to the effective
income tax rate for the years ended March 31, 2005, 2004 and 2003 follows:

March 31,
-------------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)

Income tax expense at statutory rates $ 2,939 34.0 % $ 1,986 34.0 % $ 1,301 34.0 %
Effect of permanent differences (949) (11.0) (749) (12.8) (368) (9.6)
Effect of state income taxes, net of
federal benefit 377 4.4 245 4.2 214 5.6
Other -- 0 -- 0 (93) (2.4)
--------- --------- --------- --------- --------- ---------

$ 2,367 27.4 % $ 1,482 25.4 % $ 1,054 27.6 %
========= ========= ========= ========= ========= =========

Note 12 - Equity

The Company is not subject to capital adequacy requirements by its primary
regulator, the Office of Thrift Supervision. The Bank, however, is subject to
various regulatory capital requirements administered by the Washington
Department of Financial Institutions (the Department) and the FDIC,
(collectively referred to as the regulators). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by the 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
classifications 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 (set forth in the table
below) of total and Tier I capital to risk-weighted assets and of Tier I capital
to average assets all as defined in the regulations. Management believes, as of
March 31, 2005, that the Bank meets all capital adequacy requirements to which
it is subject.

As of October 5, 2004, the most recent notification from the FDIC 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, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since the most
recent notification that management believes have changed the Bank's
categorization.

F-36

Note 12 - Equity (Continued)

The Bank's actual regulatory capital amounts and ratios for the years ended
March 31, 2005 and 2004 are presented in the table below:

To Be Well Capitalized
Capital Adequacy Under Prompt Corrective
Purposes Action Provisions
----------------- ----------------
Actual Actual Actual
March 31, 2005 Amount Ratio Amount Rate Amount Rate
-------- -------- -------- ------- -------- ------
(Dollars in Thousands)

Tier 1 capital (to average assets) $ 51,006 6.7% $ 30,451 4.0% $ 38,064 5.0%
Tier 1 capital (to risk-weighted assets) 51,006 9.0% 22,669 4.0% 34,004 6.0%
Total capital (to risk-weighted assets) 58,063 10.3% 45,097 8.0% 56,372 10.0%

March 31, 2004

Tier 1 capital (to average assets) $ 43,483 6.5% $ 26,728 4.0% $ 33,410 5.0%
Tier 1 capital (to risk-weighted assets) 43,483 9.2% 18,815 4.0% 28,222 6.0%
Total capital (to risk-weighted assets) 49,368 10.5% 37,629 8.0% 47,037 10.0%

Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends, which may be paid at any date, is generally limited to the retained
earnings of the Bank.

The payment of dividends to the Holding Company by the Bank is subject to
various federal and state regulatory limitations. Under current guidelines, at
March 31, 2005, the Bank could have declared approximately $1.7 million of
aggregate dividends in addition to amounts previously paid.

Dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
capital requirements.

On April 21, 2005, the Board of Directors declared a cash dividend of $0.17 per
common share to shareholders of record as of May 20, 2005. The dividend was paid
on June 3, 2005.

The Corporation authorized a 5% stock repurchase plan, or 146,432 shares, on
November 21, 2003. In August 2004, repurchases under this plan were completed.
On August 27, 2004, the Corporation authorized a 5% stock repurchase plan, or
147,866 shares. As of March 31, 2005, 52,500 shares had been repurchased under
this program leaving 95,366 shares available for repurchase. The intent of the
stock repurchase program is to enhance trading liquidity and stock value. The
shares are purchased on the open market at market value through an authorized
broker.

F-37

Note 13 - Related Party Transactions

The following schedule summarizes the activity in loans to directors and
officers at or for the years ended March 31, 2005 and 2004:

March 31,
------------------------
2005 2004
---------- ----------
(In Thousands)

Balance, beginning of year $ 1,786 $ 1,370
Additional advances on loans 1,084 848
Repayments and sales proceeds (1,062) (432)
---------- ----------

Balance, end of year $ 1,808 $ 1,786
========== ==========

The Bank also accepts deposits from its executive officers, directors, and
affiliated companies on substantially the same terms as unrelated persons. The
aggregate amount of deposits from such related parties at March 31, 2005 and
2004 was $571,000 and $616,000, respectively.

Note 14 - Employee Benefit Plans

The Company has entered into a salary continuation agreements with certain
employees. This program was funded by purchasing single premium life insurance
contracts. The program provides for aggregate continued annual compensation for
all participants totaling $144,000 for life on the insured and a guarantee
period ranging from 15 to 20 years for the beneficiaries. Participants vest
ratably each plan year until retirement, termination, death, or disability. The
Company is recording the salary obligation over the estimated remaining service
lives of the participants. Expenses related to this program were approximately
$233,000, $194,000, and $202,000 for the years ended March 31, 2005, 2004 and
2003, respectively. At March 31, 2005 and 2004, an obligation of $1.1 million
and $876,000, respectively, was included in accrued expenses and other
liabilities. The Bank retained bank-owned life insurance policies of Pioneer
Bank through the acquisition of Oregon Trail Financial Corporation with a cash
value of $14.3 million at October 31, 2003. At March 31, 2005 and 2004, cash
value of life insurance of $23.3 million and $22.2 million, respectively, was
recorded. Net earnings on the life insurance contracts were $1.1 million,
$620,000, and $423,000 for the years ended March 31, 2005, 2004 and 2003,
respectively.

The Company entered into three-year employment agreements with certain officers,
which may be extended by the Board for an additional year at each anniversary
date. The agreements provide for severance payments and other benefits in the
event of termination without cause and termination of employment in connection
with any change in control of the Company of up to 2.99 times the officer's
average annual compensation during the preceding five years. The employment
agreements provide for termination by the Company for cause at any time.

F-38

Note 14 - Employee Benefit Plans (Continued)

During 1995, the Bank established a profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code of 1986, as amended (Code), whereby
participants may contribute a percentage of compensation, but not in excess of
the maximum allowed under the Code. The plan was amended during 1998, making
Bank contributions discretionary. Approximately $263,000, $148,000, and $113,000
were contributed by the Company to the plan for the years ended March 31, 2005,
2004 and 2003, respectively.

Note 15 - Employee Stock Ownership Plan

The Bank established for eligible employees an ESOP and related trust in
connection with the Conversion. Eligible employees of the Bank as of June 30,
1997 and eligible employees of the Company and the Bank employed after such date
who have been credited with at least 1,000 hours during a 12-month period will
become participants. The ESOP borrowed $1.6 million from the Company in order to
purchase 158,700 shares of common stock of the Company. The loan will be repaid
principally from the Bank's contributions to the ESOP over a period of 25 years,
as amended during fiscal 1999, and the collateral for the loan is the
unreleased, restricted common stock purchased by the ESOP. Contributions to the
ESOP are discretionary; however, the Bank intends to make annual contributions
to the ESOP in an aggregate amount at least equal to the principal and interest
requirements of the debt. The stated interest rate for the loan is 8.5%.

The cost of shares acquired by the ESOP is considered unearned compensation and
as such, is recorded as a reduction of the Company's stockholders' equity.
Shares purchased by the ESOP are held in a suspense account for allocation among
participants as the loan is repaid. Shares are released based on the ratio of
total ESOP loan payments made during the period to the remaining total payments
due on the loan. Contributions to the ESOP and shares released from the suspense
account are allocated among the participants on the basis of compensation in the
year of allocation. Participants generally become 100% vested in their ESOP
account after five years of credited service or if their service was terminated
due to death, permanent disability or a change in control. Prior to the
completion of four years of credited service, a participant who terminates
employment for reasons other than death, disability, or change in control of the
Company will not receive any benefit. Forfeitures will be reallocated among
remaining participating employees, in the same proportion as contributions.
Benefits are payable upon death, retirement, disability, or separation from
service. The contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.

F-39

Note 15 - Employee Stock Ownership Plan (Continued)

Compensation expense is recorded equal to the fair value of shares held by the
ESOP which are deemed committed to be released. ESOP compensation expense was
approximately $235,000, $221,000, and $168,000 for the years ended March 31,
2005, 2004 and 2003, respectively. As of March 31, 2005, the Company has
allocated 85,818 shares to participant accounts and has 72,882 unallocated
shares. The Company has committed to release 2,089 shares of stock resulting in
70,793 unallocated, restricted shares remaining to be released. The market value
of unallocated, restricted shares held by the ESOP trust was approximately $2.0
million at March 31, 2005.

Note 16 - Stock Award Plans

Stock Option Plans:
On July 22, 1998, the shareholders of the Company voted to approve the 1998
Stock Option Plan (the SOP) for employees, officers and directors of the
Company. The SOP is administered by the Board of Directors. Under the SOP, a
maximum of 198,375 shares were available for grant. Generally, the SOP provides
that the terms under which options may be granted are to be determined by a
Committee subject to certain requirements as follows: (1) the exercise price
will not be less than 100% of the market price per share of the common stock of
the Company at the time stock option is granted; and (2) the option purchase
price will be paid in full on the date of purchase. Generally, options vest over
a period of five years. The SOP provides that options may be transferred only by
will or by laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee or by the optionee's guardian or legal
representative.

On November 4, 2003, the Company adopted the Oregon Trail 1998 Stock Option Plan
(the SOP) for employees, officers and directors of Oregon Trail. All of the
Oregon Trail options were vested as of the date the merger was completed. The
SOP is administered by the Board of Directors. Under the SOP, a maximum of
400,729 shares were available for grant. The SOP provides that options may be
transferred only by will or by laws of descent and distribution and may be
exercised during the optionee's lifetime only by the optionee or by the
optionee's guardian or legal representative.

F-40

Note 16 - Stock Award Plans (Continued)

Stock option transactions for the above described plan are summarized as
follows:

Weighted-
Average Fair
Value of
Weighted- Options
Average Granted
Exercise Options During the
Shares Price Exercisable Year
------------ ------------ ------------ ------------

Outstanding options at March 31, 2002 151,200 $ 15.81
Granted -- --
Exercised (4,200) 15.81
Forfeited -- --
------------ ------------ ------------ ------------
Outstanding options at March 31, 2003 147,000 $ 15.81 111,720 $ --
============ ============ ============
Granted as a result of merger 400,729 12.25
Exercised (246,973) 11.39
Forfeited (150) 15.81
------------ ------------ ------------ ------------
Outstanding options at March 31, 2004 300,606 $ 14.69 296,406 $ --
============ ============ ============
Granted 14,000 26.81
Exercised (152,480) 14.06
Forfeited -- --
------------ ------------ ------------ ------------
Outstanding options at March 31, 2005 162,126 $ 16.33 145,326 $ 4.45
============ ============ ============ ============

F-41

Note 16 - Stock Award Plans (Continued)

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for the fiscal grant:

March 31,
2005
-----------
Dividend yield 2.61 %
Expected volatility 15.11 %
Risk free interest rates 3.94 %
Expected option lives 7 years

The following table presents information about the options as of March 31, 2005:

Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Price Number of Exercise Price
Range of Exercise Price Shares Life Per Share Shares Per Share
- ----------------------- ------------ ------------ ------------ ------------ ------------

$10.92-$11.48 16,018 4.02 $ 10.97 16,018 $ 10.97
$11.49-$15.82 115,540 3.89 15.81 112,740 15.81
$15.83-$26.81 30,568 8.06 21.12 16,568 16.31
------------ ------------ ------------ ------------ ------------

162,126 4.69 $ 16.33 145,326 $ 15.33
============ ============ ============ ============ ============

Restricted stock:
During fiscal 1999, the shareholders of the Company approved the Management
Recognition and Development Plan (MRDP). Under the MRDP, the Company is
authorized to grant up to 79,350 shares of restricted stock to employees,
officers and directors of the Company. During fiscal 1999, 79,350 shares of
restricted stock were awarded to the deferred compensation plan. The fair market
value at the date of award was $15.81 per share. These awards vest ratably over
a five-year period. Deferred compensation resulting from these awards is
amortized as a charge to expense over the five-year period; expense recognized
by the Company was $157,000 and $236,000 for the year ending March 31, 2004 and
2003, respectively. There was no expense recognized for the year ending March
31, 2005. The balance of deferred compensation is shown as a reduction of
stockholders' equity.

F-42

Note 17 - Earnings per Share

The Company reports earnings per share (EPS) in accordance with SFAS No. 128,
Earnings per Share. SFAS No. 128 establishes standards for computing and
presenting EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. SFAS No. 128 also
requires presentation of EPS assuming dilution (diluted EPS). Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Stock options are the only potentially dilutive instruments issued by the
Company. ESOP shares that are unallocated and not yet committed to be released
are excluded from the weighted average shares outstanding calculation (see Note
16).

Information used to calculate earnings per share for the years ended March 31,
2005, 2004 and 2003 was as follows:

Year Ended March 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
(Dollars in Thousands,
except Per Share Data)

Net income $ 6,278 $ 4,358 $ 2,772
============ ============ ============

Basic weighted-average number of
common shares outstanding 2,896,307 1,925,804 1,287,967
Dilutive effect of potential common shares 101,323 129,831 53,144
------------ ------------ ------------

Dilutes weighted-average
number of shares outstanding 2,997,630 2,055,635 1,341,111
============ ============ ============

Net income per common share
Basic $ 2.17 $ 2.26 $ 2.15
============ ============ ============

Diluted $ 2.09 $ 2.12 $ 2.07
============ ============ ============

Note 18 - Fair Values of Financial Instruments

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate that
value. SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value estimates presented do not reflect the underlying fair value of the
Company.

F-43

Note 18 - Fair Values of Financial Instruments (Continued)

Although management is not aware of any factors that would materially affect the
estimated fair value amounts presented, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and, therefore, estimates of fair value subsequent to that date may differ
significantly from the amounts presented as follows.

March 31,
-------------------------------------------------
2005 2004
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In Thousands)

Financial Assets:
Cash and cash equivalents $ 41,801 $ 41,801 $ 38,397 $ 38,397
Investment securities held-to-maturity 30,907 30,869 19,671 20,036
Investment securities available-for-sale 17,427 17,427 19,116 19,116
Mortgage-backed securities held-to-maturity 22,463 22,147 22,899 23,222
Mortgage-backed securities available-for-sale 39,441 39,441 54,128 54,128
Loans held for sale 3,999 3,999 5,254 5,254
Loans receivable 562,101 563,307 459,114 470,111
Equity securities 12,789 12,789 12,506 12,506
Cash surrender value of life
insurance 23,318 23,318 22,192 22,192

Financial Liabilities:
Deposits $ 518,676 $ 517,278 $ 480,548 $ 484,357
Securities sold under agreements to repurchase 16,023 16,023 10,487 10,487
Advances from borrowers for
taxes and insurance 913 913 960 960
FHLB advances and other borrowings 185,337 188,159 132,056 138,877

The following methods and assumptions were used to estimate the fair value of
financial instruments:

Cash and cash equivalents:
The carrying amount of these items is a reasonable estimate of their fair value.

Investment securities and mortgaged-backed securities available for sale and
held to maturity:
The fair value of investment securities is based on quoted market prices or
dealer estimates. Estimated fair value for mortgage-backed securities issued by
quasi-governmental agencies is based on quoted market prices. The fair value of
all other mortgage-backed securities is based on dealer estimates.

F-44

Note 18 - Fair Values of Financial Instruments (Continued)

Loans held for sale:
The fair value of loans held for sale is estimated by discounting the future
cash flows at current rates.

Loans receivable:
For certain homogeneous categories of loans, such as fixed and variable rate
residential mortgages, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other loan types is estimated by discounting
the future cash flows and estimated prepayments using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining term. Some loan types were valued at carrying value because of
their floating rate or expected maturity characteristics.

Cash surrender value of bank owned and other life insurance policies:
The carrying amount of these policies approximates their fair value.

Equity securities:
The fair value is based upon the redemption value of the stock which equates to
its carrying value.

Deposits:
The fair value of demand deposits, savings accounts, and money market accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting the estimated
future cash flows using the rates currently offered for deposits with similar
remaining maturities.

Securities sold under agreements to repurchase:
The fair value of securities sold under agreements to repurchases is the amount
payable on demand at the reporting date.

Advances to borrowers for taxes and insurance:
The fair value of advances to borrowers for taxes and insurance is the amount
payable on demand at the reporting date.

FHLB Advances:
The fair value of FHLB advances and other borrowings is estimated by discounting
the estimated future cash flows using rates currently available to the Bank for
debt with similar remaining maturities.

F-45

Note 18 - Fair Values of Financial Instruments (Continued)

Off-balance sheet instruments:
The fair value of a loan commitment is determined based on the fees currently
charged to enter into similar agreements, taking into account the remaining
length of the commitment period and the present creditworthiness of the
counterparties. Neither the fees earned during the year on these instruments nor
their value at year end is significant to the Company's consolidated financial
position.

Note 19 - Liquidation Account

At the time of the Bank's conversion from mutual to stock form the Bank
established a liquidation account in an amount equal to its equity as reflected
in the latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who continue
to maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying deposits as
of each anniversary date. Subsequent increases will not restore an eligible
account holder's or supplemental eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.

Note 20 - Commitments and Contingencies

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
Company and the Bank are not a party to any pending legal proceedings that they
believe would have a material adverse effect on the financial condition or
operations of the Company.

F-46

Note 20 - Commitments and Contingencies (Continued)

The Company rents branch and office space under various operating leases. Total
rent expense recognized during the years ended March 31, 2005, 2004 and 2003,
was $201,000, $194,000, and $186,000, respectively. Future minimum rental
payments under the operating lease agreements are:

Year Ending March 31,
(In Thousands)
2006 $ 207
2007 168
2008 133
2009 30
Thereafter 30
--------------

$ 568
==============

The Company subleases portions of its branch facilities under noncancelable
operating lease agreements. Total sublease income recognized during the years
ended March 31, 2005, 2004 and 2003 was $98,000, $113,000, and $108,000,
respectively. Future minimum rental payments due to the Company under subleases
are as follows:

Year Ending March 31,
(In Thousands)
2006 $ 99
2007 66
--------------

$ 165
==============

F-47

Note 21 - Subsequent Events

On June 10, 2005, FirstBank Northwest (the "Bank") entered into a Subordinated
Debenture Purchase Agreement (the "Agreement"), under which the Bank issued an
aggregated principal amount of $3.0 million in floating rate unsecured
subordinated debt. All amounts due under the subordinated debenture must be
repaid in full on June 10, 2015. The subordinated debenture currently bears
interest at one-month LIBOR plus 150 basis points, payable quarterly in arrears.
If the subordinated debenture ceases to qualify as Tier 2 capital for capital
reporting purposes, or at any time after June 10, 2010, the Bank may, after
receiving approval from the Federal Deposit Insurance Corporation, prepay all or
a portion of the outstanding amount of the subordinated debenture. In addition,
if the subordinated debenture no longer qualifies as Tier 2 capital, the Bank
and the lender may restructure the debt as a senior unsecured obligation of the
Bank or the Bank may repay the debt. The Agreement contains certain covenants,
including a requirement that the Bank maintain its regulatory "well-capitalized"
status and limitations on the Bank's ability to incur additional debt and sell
assets, other than assets, including loans, sold in the ordinary course of
business. Additional restrictions apply if an event of default occurs, including
prohibitions on dividends paid by the Bank to the Company and payments by the
Bank on debt that ranks equally with or junior to the subordinated debenture.

Note 22 - Selected Quarterly Financial Data

Year ended March 31, 2005
---------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In Thousands, Except Share Data)

Total interest income $ 9,510 $ 9,912 $ 10,369 $ 10,840
Total interest expense 2,982 3,193 3,366 3,778
------------ ------------ ------------ ------------

Net interest income 6,528 6,719 7,003 7,062
Provision for loan losses 376 194 470 488
------------ ------------ ------------ ------------

Net interest income after provision 6,152 6,525 6,533 6,574

Noninterest income 1,718 1,428 1,431 1,433
Noninterest expense 5,690 5,708 5,896 5,855
------------ ------------ ------------ ------------

Income before income taxes 2,180 2,245 2,068 2,152
Provision for income taxes 628 619 542 578
------------ ------------ ------------ ------------

Net income $ 1,552 $ 1,626 $ 1,526 $ 1,574
============ ============ ============ ============

Basic earnings per share $ 0.54 $ 0.56 $ 0.53 $ 0.54
------------ ------------ ------------ ------------

Diluted earnings per share $ 0.52 $ 0.54 $ 0.51 $ 0.52
------------ ------------ ------------ ------------

Cash dividends declared $ 0.17 $ 0.17 $ 0.17 $ 0.17
------------ ------------ ------------ ------------

F-48

Note 22 - Selected Quarterly Financial Data (Continued)

Year ended March 31, 2004
---------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In Thousands, Except Share Data)

Total interest income $ 5,098 $ 5,007 $ 8,011 $ 9,299
Total interest expense 2,057 2,014 2,795 3,068
------------ ------------ ------------ ------------

Net interest income 3,041 2,993 5,216 6,231
Provision for loan losses 177 78 163 (23)
------------ ------------ ------------ ------------

Net interest income after provision 2,864 2,915 5,053 6,254

Noninterest income 1,390 1,158 1,226 1,742
Noninterest expense 3,147 3,148 4,721 5,746
------------ ------------ ------------ ------------

Income before income taxes 1,107 925 1,558 2,250
Provision for income taxes 328 231 277 646
------------ ------------ ------------ ------------

Net income $ 779 $ 694 $ 1,281 $ 1,604
============ ============ ============ ============

Basic earnings per share $ 0.61 $ 0.54 $ 0.56 $ 0.56
------------ ------------ ------------ ------------

Diluted earnings per share $ 0.58 $ 0.51 $ 0.52 $ 0.55
------------ ------------ ------------ ------------

Cash dividends declared $ 0.15 $ 0.15 $ 0.15 $ 0.17
------------ ------------ ------------ ------------

Year ended March 31, 2003
---------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In Thousands, Except Share Data)

Total interest income $ 5,075 $ 5,153 $ 5,266 $ 5,081
Total interest expense 2,227 2,250 2,191 2,042
------------ ------------ ------------ ------------

Net interest income 2,848 2,903 3,075 3,039
Provision for loan losses 210 228 359 236
------------ ------------ ------------ ------------

Net interest income after provision 2,638 2,675 2,716 2,803

Noninterest income 975 1,083 1,148 1,486
Noninterest expense 2,773 2,861 2,881 3,184
------------ ------------ ------------ ------------

Income before income taxes 840 897 983 1,105
Provision for income taxes 209 252 264 328
------------ ------------ ------------ ------------

Net income $ 631 $ 645 $ 719 $ 777
============ ============ ============ ============

Basic earnings per share $ 0.48 $ 0.50 $ 0.56 $ 0.61
------------ ------------ ------------ ------------

Diluted earnings per share $ 0.47 $ 0.48 $ 0.55 $ 0.57
------------ ------------ ------------ ------------

Cash dividends declared $ 0.12 $ 0.12 $ 0.15 $ 0.15
------------ ------------ ------------ ------------

F-49

Note 23 - Business Combination

On October 31, 2003, the Company completed the acquisition of Oregon Trail
Financial Corp. and its wholly-owned subsidiary, Pioneer Bank, for approximately
$36.5 million in cash and 1,480,064 shares of FirstBank common stock for
consideration of the 3,108,657 shares of Oregon Trail common stock outstanding
as of the completion date of the acquisition. The value of the 1,480,064 shares
of corporate stock issued was based on the closing price of $22.45 on February
24, 2003, resulting in a purchase price of $35.5 million. Common stock increased
$14,800 and additional paid in capital increased $33.2 million as a result of
the issuance of common stock for the acquisition. Additional paid in capital
increased by $4.6 million as a result of the purchase of the fair value of
Oregon Trail's unexercised stock options as of the completion date of the
acquisition. The statement of operations includes operations of the acquired
entity, Oregon Trail, for the five month period ended March 31, 2004.

It has been the Company's strategic objective to utilize capital to support
growth, and growth through acquisition was also a longer term strategy. Oregon
Trail complements the Company's operations and business strategies. Oregon Trail
was a potential acquisition candidate because of its market area that is
geographically contiguous to the Company's existing market areas with no
overlapping branches. Oregon Trail was also considered to be a potential
candidate because of its stable deposit markets, sizable asset base, strong
asset quality, and its community banking philosophy, which is shared by the
Company. In addition, Oregon Trail and the Company have common backgrounds as
converted thrift institutions, and the board of directors and management of the
Company believed that a combination of the two companies would enhance the
Company's competitiveness, with a minimal impact on Oregon Trail's employees. In
fiscal year 2005, the integration for the core processing system platform was
completed and now the entire bank is operating on one operating system. This
completes the system integrations. The acquisition doubled the Company's asset
size and the common stock outstanding. The Company is the surviving holding
company with 100% ownership of the Bank, and the Bank is the surviving thrift
subsidiary.

F-50

Note 23 - Business Combination (Continued)

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.

At October 31, 2003
(In Thousands)

Cash and cash equivalents $ 61,207
Securities 72,686
Loans, net 196,559
Premises and equipment, net 8,411
FHLB Stock 6,378
Bank-owned and cash surrender value of life insurance policies 14,299
Other assets 4,701
Core deposit intangible 3,876
Goodwill 18,147
----------

Total assets acquired $ 386,264
==========

Deposits 258,487
Borrowings 50,969
Other liabilities 3,518
----------

Total liabilities assumed $ 312,974
==========

Net assets acquired $ 73,290

Issuance of corporate stock 33,227
Fair value of stock options 4,563
----------

Aggregate purchase price $ 35,500
==========

At October 31, 2003, the goodwill asset recorded in connection with the Oregon
Trail acquisition was $18.1 million. None of the goodwill is expected to be
deductible for tax purposes.

F-51

Note 23 - Business Combination (Continued)

The following table sets forth the supplemental pro forma condensed combined
statement of income for the years ended March 31, 2004 and 2003, reflecting the
acquisition of Oregon Trail by the Company as if it had occurred at the
beginning of the periods shown.

FirstBank NW Corp.
Oregon Trail Financial Corp.
Pro Forma Condensed Combined Statements of Income
(Dollars in Thousands, except Per Share Data)

Year Ended March 31,
----------------------------
2004 2003
------------ ------------

Total interest income $ 39,917 $ 45,419
Total interest expense 13,083 16,987
------------ ------------
Net interest income 26,834 28,432
Provision for loan losses 1,248 1,354
------------ ------------
Net interest income after provision for loan losses 25,586 27,078
Total non-interest income 7,391 8,143
Total non-interest expense (25,187) (23,679)
------------ ------------
Income before income tax expense 7,790 11,542
Income tax expense 2,006 3,498
------------ ------------
Net income $ 5,784 $ 8,044
============ ============

Pro Forma earnings per share:
Pro Forma net income per share - basic $ 2.07 $ 2.91
------------ ------------
Pro Forma net income per share - diluted $ 1.91 $ 2.70
------------ ------------
Pro Forma weighted average
shares outstanding - basic 2,793,568 2,768,031
------------ ------------
Pro Forma weighted average
shares outstanding - diluted 3,053,195 2,977,739
------------ ------------

F-52

Note 24 - Parent Company Financial Information

First Bank NW Corp.
Statements of Financial Condition
(Dollars in Thousands)

Year Ended March 31,
-----------------------
2005 2004
---------- ----------

Assets
Cash and cash equivalents $ 124 $ 453
Investment securities; available-for-sale 1,058 1,144
Loan receivable from ESOP 800 862
Investment in subsidiaries 70,901 65,938
Income taxes receivable 1,966 1,692

Deferred federal and state taxes 154 349
Other assets 67 48
---------- ----------

TOTAL ASSETS $ 75,070 $ 70,486
========== ==========

Liabilities and Stockholders' Equity
Deferred change of control payments $ 537 $ 1,134
Borrowing 2,162 --
Other liabilities 60 20
Stockholders' equity 72,311 69,332
---------- ----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 75,070 $ 70,486
========== ==========

F-53

Note 24 - Parent Company Financial Information (Continued)

First Bank NW Corp.
Statements of Income
(Dollars in Thousands)

Year Ended March 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------

Interest income:
ESOP loan $ 70 $ 77 $ 81
Cash and cash equivalents 1 3 1
Investment securities 14 7 --
Other income:
Equity in undistributed income of
subsidiaries, net of taxes 6,541 4,574 2,940
Other 3 -- --
---------- ---------- ----------

6,629 4,661 3,022
---------- ---------- ----------

Interest expense:
Borrowing 61 67 --
Other expense:
Compensation, payroll taxes, and fringe benefits 157 206 194
Other expense 303 160 165
---------- ---------- ----------

521 433 359
---------- ---------- ----------

Income before income tax expense 6,108 4,228 2,663

Income tax benefit 170 130 109
---------- ---------- ----------

NET INCOME $ 6,278 $ 4,358 $ 2,772
========== ========== ==========

F-54

Note 24 - Parent Company Financial Information (Continued)

First Bank NW Corp.
Statements of Cash Flows
(Dollars in Thousands)

Year Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,278 $ 4,358 $ 2,772
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed earnings of subsidiaries, net of taxes (6,541) (4,573) (2,940)
Amortization of securities 64 26 --
Amortization of deferred compensation -- 157 236
Changes in assets and liabilities:
Other assets (19) 982 (220)
Income taxes receivable 537 (24) (58)
Deferred federal and state taxes 195 103 --
Deferred change of control liability (597) (334) --
Liabilities 40 20 (1)
---------- ---------- ----------

Net cash provided (used) by operating activities (43) 715 (211)
---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities; available-for-sale -- 937 --
Dividends received from subsidiaries -- 33,600 1,910
Net cash in acquisition, net -- (31,222) --
Principal repayments on ESOP loan 62 56 52
---------- ---------- ----------

Net cash provided by investing activities 62 3,371 1,962
---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock (2,647) (5,123) (1,150)
Proceeds from the exercise of stock options 2,144 2,813 66
Cash dividends paid on common stock (1,952) (1,296) (703)
Cash dividends paid on unallocated ESOP Shares to reduce debt (55) (53) (50)
Advances from borrowing 3,837 36,692 --
Repayments on advances from borrowing (1,675) (36,692) --
---------- ---------- ----------

Net cash used by financing activities (348) (3,659) (1,837)
---------- ---------- ----------

NET CHANGE IN CASH AND CASH EQUIVALENTS (329) 427 (86)

Cash and cash equivalents, beginning of year 453 26 112
---------- ---------- ----------

Cash and cash equivalents, end of year $ 124 $ 453 $ 26
========== ========== ==========

Supplemental disclosure for cash flow information:
Cash paid during the year for:
Interest $ 61 $ 67 $ --
========== ========== ==========
Income taxes $ 2,067 $ 1,628 $ 1,539
========== ========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES
ESOP shares released $ 236 $ 220 $ 168
========== ========== ==========
Unrealized gain (loss) on securities available-for-sale, net of tax $ (1,118) $ 382 $ 712
========== ========== ==========
Unrealized gain on interest rate swap, net of tax $ (23) $ (127) $ 150
========== ========== ==========

F-55