HARBOR BANCORP INC, 424B3, 1999-11-15

HARBOR BANCORP INC
424B3, 1999-11-15
STATE COMMERCIAL BANKS

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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

NOTICE IS HEREBY GIVEN that, pursuant to call of its directors, a
Special Meeting of the Shareholders of Harbor Bancorp, Inc. will be held at
Harbor's main office, 300 East Market Street, Aberdeen, Washington, on
December 9, 1999, at 7:00 p.m., for the purpose of considering and voting
upon the following matters:

1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger, dated June 9, 1999 and as
amended and restated on September 2, 1999, between Harbor and Pacific
Financial Corporation, a copy of which is attached as Appendix 1 to
the accompanying Joint Proxy Statement/Prospectus. Under the terms of
the merger agreement (1) Pacific will be merged into Harbor and Harbor
will be the continuing corporation under the name "Pacific Financial
Corporation," and (2) each outstanding share of Pacific common stock
will be converted into 0.785 shares of common stock of the combined
corporation in accordance with the terms of the merger agreement; and

2. WHATEVER OTHER BUSINESS may properly be brought before the meeting or
any adjournment thereof.

Only those shareholders of record at the close of business on
November 1, 1999, will be entitled to notice of the meeting and to vote
at the meeting.

By Order of the Board of Directors

Aberdeen, Washington ROBERT J. WORRELL
November 10, 1999 President and Chief Executive Officer

SINCE AN AFFIRMATIVE VOTE OF THE HOLDERS OF TWO-THIRDS (2/3) OF THE
OUTSTANDING SHARES IS REQUIRED TO APPROVE THE MERGER AGREEMENT, WE URGE
YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO
ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. THE PROXY MAY BE
REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.

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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

NOTICE IS HEREBY GIVEN that, pursuant to call of its directors, a
Special Meeting of the Shareholders of Pacific Financial Corporation will be
held at Bank of the Pacific's main office, 1007 South Pacific, Long Beach,
Washington, on December 9, 1999, at 7:00 p.m., for the purpose of
considering and voting upon the following matters:

1. To consider and vote upon a proposal to approve Amended and
Restated Agreement and Plan of Merger, dated June 9, 1999 and as
amended and restated on September 2, 1999, between Harbor
Bancorp, Inc. and Pacific, a copy of which is attached as
Appendix 1 to the accompanying Joint Proxy Statement/Prospectus.
Under the terms of the merger agreement (1) Pacific will be
merged into Harbor with the combined corporation resulting from
the merger to be named "Pacific Financial Corporation," and (2)
each outstanding share of Pacific common stock will be converted
into 0.785 shares of common stock of the combined corporation in
accordance with the terms of the merger agreement; and

2. WHATEVER OTHER BUSINESS may properly be brought before the
meeting or any adjournment thereof.

Only those shareholders of record at the close of business on
November 1, 1999 will be entitled to notice of the meeting and to vote at
the meeting.

By Order of the Board of Directors

Long Beach, Washington DENNIS A. LONG
November 10, 1999 President and Chief Executive Officer

<PAGE>
JOINT PROXY STATEMENT
HARBOR BANCORP, INC. AND PACIFIC FINANCIAL CORPORATION
PROSPECTUS
HARBOR BANCORP, INC.
(TO BE RENAMED "PACIFIC FINANCIAL CORPORATION" AFTER THE MERGER)

TO OUR SHAREHOLDERS:

The Boards of Directors of Harbor Bancorp, Inc. and Pacific
Financial Corporation have agreed that Pacific will merge into Harbor, and
Harbor will be the continuing corporation under the name "Pacific Financial
Corporation."

If the merger is approved and completed, Pacific shareholders will
receive 0.785 shares of common stock of the combined corporation for each
share of Pacific common stock and cash for any fractional shares, based on a
price of $130 per share of combined corporation common stock. Each outstanding
share of Harbor common stock will remain outstanding as one share of the
combined corporation's common stock. The last reported sale price for Harbor
common stock was $135.00 per share, and the last reported sale price for
Pacific common stock was $85.00 per share. These sale prices are subject to
change, even after the merger is approved. The merger generally will be
tax-free to shareholders.

After the merger, Harbor shareholders will own approximately 54% of
the common stock of the combined corporation, and Pacific shareholders will
own approximately 46%. The common stock of the combined corporation will not
be listed on any stock exchange or traded on the over-the-counter market.

The Board of Directors and management of the combined corporation
will be drawn from both Harbor and Pacific. After the merger, our bank
subsidiaries initially will continue as separate

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businesses under their present names: The Bank of Grays Harbor and Bank of
the Pacific.

THE MERGER CANNOT BE COMPLETED UNLESS YOU APPROVE IT. We each will
hold a special meeting of shareholders to consider and vote on this merger
proposal. Whether or not you plan to attend the meeting, you are requested to
complete, date, sign and return your proxy in the return envelope provided. An
affirmative vote of at least two-thirds of the outstanding shares of common
stock of each of Harbor and Pacific is required to approve the merger.

YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTEREST OF THEIR COMPANY AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
APPROVAL OF THE MERGER.

Sincerely yours,

<TABLE>
<S> <C>
HARBOR BANCORP, INC. PACIFIC FINANCIAL CORPORATION

Jay M. Greene, Sidney R. Snyder,
Chairman of the Board Chairman of the Board
</TABLE>

This Joint Proxy Statement/Prospectus is first being mailed to our
shareholders on or about November 13, 1999.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.

THE SHARES OF COMBINED CORPORATION COMMON STOCK TO BE ISSUED IN THE
MERGER ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK AND
ARE NOT INSURED BY A BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY OR INSTRUMENTALITY.

<PAGE>

The date of this Joint Proxy Statement/Prospectus is November 10, 1999.

<PAGE>

TABLE OF CONTENTS

SUMMARY....................................................................................................... 1

The Merger................................................................................................. 1
Pacific Shareholders Will Receive 0.785 Shares of Common Stock of the
Combined Corporation for Each Share of Pacific Common Stock They Own.................................... 1
The Merger Will Be Generally Tax-Free to Shareholders...................................................... 1
You Can Dissent From the Merger............................................................................ 2
The Parties to the Merger.................................................................................. 2
Both Harbor and Pacific Have Scheduled Shareholders Meetings............................................... 3
We Recommend That You Approve the Merger................................................................... 4
Why We Are Proposing the Merger............................................................................ 4
Management After the Merger................................................................................ 4
Bank Subsidiaries Will Continue Their Separate Operations.................................................. 5
The Combined Corporation Will Have Amended Articles of Incorporation and Bylaws............................ 5
There Are Conditions to the Closing of the Merger.......................................................... 6
We May Not Seek Other Merger or Acquisition Proposals...................................................... 6
The Merger Agreement Can Be Amended or Terminated.......................................................... 6
Some of Our Officers and Directors Have Interests in the Merger That Are Different
From or in Addition to Their Interests as Shareholders.................................................. 7

A WARNING ABOUT FORWARD LOOKING INFORMATION................................................................... 8

STOCK PRICE AND DIVIDEND INFORMATION.......................................................................... 9

Harbor..................................................................................................... 9
Pacific.................................................................................................... 9
Combined Corporation.......................................................................................10

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA....................................................11

Selected Harbor Historical Financial Data..................................................................11
Selected Pacific Historical Financial Data.................................................................13
Unaudited Pro Forma Combined Financial Statements and Selected Financial Data..............................15

EQUIVALENT PER COMMON SHARE DATA..............................................................................19

HARBOR SPECIAL SHAREHOLDERS MEETING...........................................................................20

Date, Time and Place.......................................................................................20
Purpose of the Meeting.....................................................................................20
Shares Outstanding and Entitled to Vote; Record Date.......................................................20
Vote Required..............................................................................................20
Voting, Solicitation, and Revocation of Proxies............................................................21

PACIFIC SPECIAL SHAREHOLDERS MEETING..........................................................................23

Date, Time and Place.......................................................................................23
Purpose....................................................................................................23
Shares Outstanding and Entitled to Vote; Record Date.......................................................23
Vote Required..............................................................................................23
Voting, Solicitation and Revocation of Proxies.............................................................24

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BACKGROUND OF AND REASONS FOR THE MERGER......................................................................25

Background of the Merger...................................................................................25
Reasons for the Merger.....................................................................................26
Opinion of Our Financial Advisor...........................................................................28
Recommendations of the Boards of Directors.................................................................35

The Boards of Directors of Pacific and Harbor unanimously recommend that their
shareholders vote FOR the approval of the merger.....................................................35

THE MERGER....................................................................................................36

General....................................................................................................36
Basic Terms of the Merger..................................................................................36
Exchange of Stock Certificates.............................................................................37
Name Change of the Combined Corporation; New Articles of Incorporation and Bylaws..........................39
Separate Existence of Bank Subsidiaries to Continue........................................................39
Conditions to the Merger...................................................................................39
Regulatory Approvals.......................................................................................40
Waiver of Conditions; Amendment or Termination of the Merger Agreement.....................................41
Conduct Pending the Merger.................................................................................43
No Solicitation............................................................................................45
Management of the Combined Corporation.....................................................................46
Employee Benefit Plans.....................................................................................48
Some of Our Officers and Directors May Have Interests in the Merger that are
Different from Yours.................................................................................49
Federal Income Tax Treatment of the Merger.................................................................51
Anticipated Accounting Treatment of the Merger.............................................................51
Dissenters' Rights of Appraisal............................................................................52
Stock Resales by Our Affiliates............................................................................54
Expenses...................................................................................................54

INFORMATION CONCERNING HARBOR.................................................................................56

Business...................................................................................................56
Competition................................................................................................56
Facilities.................................................................................................57
Employees..................................................................................................57
Legal Proceedings..........................................................................................57

INFORMATION CONCERNING PACIFIC................................................................................57

Business...................................................................................................57
Competition................................................................................................58
Facilities.................................................................................................59
Employees..................................................................................................59
Legal Proceedings..........................................................................................59

HARBOR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................59

Six Months Ended June 30, 1999 and 1998....................................................................59
Financial Condition and Results of Operations for the Years ended December 31, 1998 and 1997...............60

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Loan Quality, Liquidity, Capital...........................................................................60
Lending....................................................................................................63
Summary of Loan Loss Experience............................................................................65
Asset and Liability Management.............................................................................66
Investment Activities......................................................................................67
Deposits...................................................................................................68
Return on Equity and Assets................................................................................69
Year 2000 Issues...........................................................................................69

PACIFIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................73

Six months ended June 30, 1999 and 1998....................................................................73
Financial Condition and Results of Operations for the Years ended December 31, 1998 and 1997...............73
Loan Quality, Liquidity, Capital...........................................................................73
Average Balances and Average Rates Earned and Paid.........................................................74
Lending....................................................................................................76
Summary of Loan Loss Experience............................................................................78
Asset and Liability Management.............................................................................80
Investment Activities......................................................................................80
Return on Equity and Assets................................................................................82
Deposits...................................................................................................82
Short-Term Borrowings......................................................................................83
Year 2000 Issues...........................................................................................83

MANAGEMENT OF THE COMBINED CORPORATION........................................................................87

Directors and Officers.....................................................................................87
Executive Compensation.....................................................................................89
Certain Relationships and Related Transactions.............................................................91

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS................................................93

BANK SUPERVISION AND REGULATION...............................................................................95

The Holding Companies......................................................................................95
General....................................................................................................95
Bank Holding Company Regulation............................................................................95
Transactions with Affiliates...............................................................................96
Regulation of Management...................................................................................96
Tie-In Arrangements........................................................................................96
State Law Restrictions.....................................................................................97
The Banks..................................................................................................97
General....................................................................................................97
Interstate Banking and Branching...........................................................................98
Deposit Insurance..........................................................................................98
Dividends..................................................................................................99
Capital Adequacy...........................................................................................99
Effects of Government Monetary Policy.....................................................................100
Changes in Banking Laws and Regulations...................................................................100

DESCRIPTION OF CAPITAL STOCK OF THE COMBINED CORPORATION.....................................................101

Voting Rights.............................................................................................101

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Dividends....................................................................................................101
Liquidation...............................................................................................101
Other Characteristics.....................................................................................101

AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BYLAWS OF THE COMBINED CORPORATION........................102

General...................................................................................................102
Amended and Restated Articles of Incorporation............................................................102
Bylaws....................................................................................................105

COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF COMMON STOCK OF HARBOR, PACIFIC AND THE COMBINED CORPORATION......106

General...................................................................................................106
Dividend Rights...........................................................................................106
Voting Rights.............................................................................................107
Preemptive Rights.........................................................................................107
Liquidation Rights........................................................................................107
Assessments...............................................................................................107
Stock Repurchases.........................................................................................108
Amendment of Articles and Bylaws..........................................................................108
Special Meetings; Actions Without a Meeting...............................................................108
Approval of Certain Transactions..........................................................................108
Dissenters' Rights........................................................................................109
Board of Directors........................................................................................109
Indemnification and Limitation of Liability...............................................................110
Potential Antitakeover Provisions.........................................................................110

CERTAIN LEGAL MATTERS........................................................................................110

EXPERTS .....................................................................................................110

WHERE YOU CAN FIND MORE INFORMATION..........................................................................111

OTHER MATTERS................................................................................................111

INDEX TO FINANCIAL STATEMENTS................................................................................F-1
</TABLE>

APPENDICES

APPENDIX 1. Agreement and Plan of Merger

APPENDIX 2. Fairness Opinion of Harbor Financial Advisor

APPENDIX 3. Fairness Opinion of Pacific Financial Advisor

APPENDIX 4. Dissenters' Rights of Appraisal

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SUMMARY

THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS WE HAVE
REFERRED YOU TO. SEE "WHERE YOU CAN FIND MORE INFORMATION."

THE MERGER

Our Boards of Directors have each unanimously approved the merger
and have each unanimously recommended that their shareholders vote to approve
the merger. Under the terms of the merger, Pacific will merge into Harbor,
and the name of the combined corporation resulting from the merger will be
"Pacific Financial Corporation." See "The Merger - Basic Terms of the
Merger." We expect that the merger will be completed during the fourth
quarter of 1999, although the timing is subject to the receipt of regulatory
approvals and the satisfaction of other conditions.

WE HAVE ATTACHED THE MERGER AGREEMENT TO THIS DOCUMENT AS APPENDIX
1. PLEASE READ THE MERGER AGREEMENT. IT IS THE DOCUMENT THAT GOVERNS THE
MERGER.

PACIFIC SHAREHOLDERS WILL RECEIVE 0.785 SHARES OF COMMON STOCK OF THE COMBINED
CORPORATION FOR EACH SHARE OF PACIFIC COMMON STOCK THEY OWN

Shares of Pacific common stock will be converted into shares of
combined corporation common stock at the rate of 0.785 shares of combined
corporation common stock for each share of Pacific common stock, with cash
being paid in lieu of issuing fractional shares of combined corporation
common stock. For information on how Pacific shareholders will be able to
exchange certificates representing shares of Pacific common stock, see "The
Merger - Exchange of Stock Certificates." Outstanding shares of Harbor common
stock will remain outstanding as shares of combined corporation common stock.

THE MERGER WILL BE GENERALLY TAX-FREE TO SHAREHOLDERS

The merger generally will be tax-free to you for federal income tax
purposes except for:

- the receipt by Pacific shareholders of cash instead of fractional
shares of combined corporation common stock; and

- cash received by any dissenting Harbor or Pacific shareholder.

A summary of the material federal tax consequences of the merger is
set forth at "The Merger - Federal Income Tax Treatment of the Merger."

We have received an opinion from Graham & Dunn PC as to the federal
tax consequences of the merger. You should note, however, that this legal
opinion is subject to certain limitations, and is not binding upon the
Internal Revenue Service. We filed a copy of the tax opinion with the
Securities and Exchange Commission as an exhibit to the registration
statement relating to this

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Joint Proxy Statement/Prospectus. For more information regarding the
registration statement, see "Where You Can Find More Information."

WE HAVE RECEIVED OPINIONS THAT THE MERGER IS FAIR TO OUR SHAREHOLDERS

Alex Sheshunoff & Co., the financial advisor to both Harbor and
Pacific in connection with the merger, has delivered opinions to both Harbor
and Pacific stating that the exchange ratio is fair from a financial point of
view to the Harbor and Pacific shareholders, respectively. A copy of the
opinion delivered to Harbor is included in this Joint Proxy
Statement/Prospectus as Appendix 2, and a copy of the opinion delivered to
Pacific is included as Appendix 3. For a more detailed description of the
fairness opinions, see "Background of and Reasons for the Merger - Opinion of
Our Financial Advisor."

STOCK PRICE AND DIVIDEND INFORMATION

Harbor common stock and Pacific common stock are not listed on any
stock exchange or traded in the over-the-counter market. We currently do not
intend to apply for listing of the combined corporation's stock on any
exchange or market. Stock price information in this Joint Proxy
Statement/Prospectus is based on stock sales reported to management of Harbor
and Pacific. As of October 9, 1999, the last sale price reported for Harbor
common stock was $135.00 and the last sale price reported for Pacific common
stock was $85.00. The market prices of Harbor common stock and Pacific common
stock will fluctuate prior to the merger, including after shareholder
approval of the merger, but will not affect the exchange ratio in the merger.
For further stock price information, see "Stock Price and Dividend
Information" and "Equivalent Per Common Share Data."

Harbor's Board of Directors declared a dividend of $3.75 per share
in December 1998. Pacific's Board of Directors declared a dividend of $4.80
per share in November 1998. We currently intend to declare per share
dividends on the combined corporation's common stock in an amount equivalent
to Pacific's current per share dividend. You should note that no dividend on
the combined corporation common stock has been declared, and that future
dividends will be determined by the combined corporation's Board of Directors
in light of a number of factors. See "Stock Price and Dividend Information"
for a more complete discussion.

YOU CAN DISSENT FROM THE MERGER

You are entitled to dissent from the merger if you follow certain
procedures and if the merger occurs. If you properly dissent, you will have
the right to obtain payment of the fair value of your Harbor or Pacific
common stock in cash, as provided by Washington law.

IF YOU FAIL TO FOLLOW EXACTLY THE PROCEDURES SPECIFIED UNDER THE
APPLICABLE WASHINGTON LAW, YOU WILL LOSE YOUR RIGHT TO DISSENT. IF YOU WISH
TO DISSENT, YOU SHOULD CAREFULLY READ "THE MERGER - DISSENTERS' RIGHTS OF
APPRAISAL" AND THE COPY OF THE APPLICABLE WASHINGTON STATUTE, WHICH IS
ATTACHED TO THIS DOCUMENT AS APPENDIX 4.

THE PARTIES TO THE MERGER

HARBOR. Harbor is a bank holding company whose only subsidiary is
The Bank of Grays Harbor. The Bank of Grays Harbor has five full-service
offices located in Grays Harbor County. The Bank of Grays Harbor was
organized in 1978 and opened for business in 1979 to meet the need for a
local community bank with local interests to serve the needs of small- to
medium-sized local businesses and

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professionals. Those services include commercial loans, installment loans,
real estate loans, and personal and business deposit products.

At June 30, 1999, Harbor had assets of $133 million, loans totaling
approximately $85 million, deposits of approximately $119 million and
shareholders' equity of approximately $13 million. For additional information
see "Information Concerning Harbor," "Harbor Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the
consolidated financial statements of Harbor included elsewhere in this Joint
Proxy Statement/Prospectus.

PACIFIC. Pacific Financial Corporation is a bank holding company
whose only subsidiary is Bank of the Pacific. Bank of the Pacific has five
full-service offices located in Pacific and Wahkiakum Counties. Bank of the
Pacific was organized and opened for business in 1971 to meet the need for a
local community bank with local interests to serve the needs of individuals
and small- to medium-sized local businesses. Services include commercial
loans, installment loans, real estate loans, and personal and business
deposit products.

At June 30, 1999, Pacific had assets of approximately $105 million,
loans totaling approximately $63 million, deposits of approximately $86
million and shareholders' equity of approximately $10 million. For additional
information see "Information Concerning Pacific," "Pacific Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
and the consolidated financial statements of Pacific included elsewhere in
this Joint Proxy Statement/Prospectus.

BOTH HARBOR AND PACIFIC HAVE SCHEDULED SHAREHOLDERS MEETINGS

Both Harbor and Pacific will have special shareholders meetings, in
order to consider and vote on the merger.

Harbor's Special Meeting of Shareholders will be held on December 9,
1999, at 7:00 p.m., at Harbor's main office, 300 East Market Street,
Aberdeen, Washington. Harbor has fixed November 1, 1999 as the record date
for determining the Harbor shares entitled to vote at the meeting. Holders of
two-thirds of the Harbor common stock must vote in favor of the merger in
order for it to be approved by Harbor.

The directors and executive officers of Harbor, who are entitled to
vote approximately [47%] of Harbor's common stock, have agreed to vote their
shares in favor of the merger. They agreed to vote in favor of the merger in
order to induce Pacific to enter into the merger agreement. These agreements
could discourage others from trying to acquire either Harbor or Pacific.

For additional information, see "Harbor Special Shareholders
Meeting."

Pacific's Special Meeting of Shareholders will be held on December 9,
1999, at 7:00 p.m., at Bank of the Pacific's main office, 1007 South Pacific,
Long Beach, Washington. Pacific has fixed November 1, 1999 as the record date
for determining the Pacific shares entitled to vote at the meeting. Holders

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of two-thirds of the Pacific common stock must vote in favor of the merger in
order for it to be approved by Pacific.

The directors and executive officers of Pacific, who are entitled to
vote approximately 30% of Pacific's common stock, have agreed to vote their
shares in favor of the merger. They agreed to vote in favor of the merger in
order to induce Harbor to enter into the merger agreement. These agreements
could discourage others from trying to acquire either Pacific or Harbor.

For additional information, see "Pacific Special Shareholders
Meeting."

WE RECOMMEND THAT YOU APPROVE THE MERGER

OUR BOARDS OF DIRECTORS HAVE UNANIMOUSLY RECOMMENDED THAT THEIR
SHAREHOLDERS APPROVE THE MERGER.

WHY WE ARE PROPOSING THE MERGER

We share a belief in community banking, which emphasizes
responsiveness to local markets and the delivery of personalized services to
customers through local autonomous banks. We believe that the proposed merger
will create a more diversified, stronger company with improved service to
customers and greater competitiveness in the changing banking environment.
For a more complete discussion of the reasons that our Boards of Directors
approved the merger, see "Background of and Reasons for the Merger."

MANAGEMENT AFTER THE MERGER

After the merger, the Board of Directors of the combined corporation will
consist of five of the current directors of Harbor and four of the current
directors of Pacific, as follows:

<TABLE>
<CAPTION>
Harbor Directors Pacific Directors
---------------- -----------------
<S> <C>
Gary C. Forcum Duane E. Hagstrom
Joseph A. Malik Robert A. Hall
Walter L. Westling Dennis A. Long
David L. Woodland Sidney R. Snyder
Robert J. Worrell
</TABLE>

The Officers of the combined corporation will be:

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- Robert J. Worrell, Chief Executive Officer;
- Dennis A. Long, President;
- Wayne D. Gale, Vice President;
- Patricia C. Nelson, Vice President;
- John Van Dijk, Treasurer; and
- Janice M. Pearce, Secretary.

See "The Merger - Management of the Combined Corporation."

BANK SUBSIDIARIES WILL CONTINUE THEIR SEPARATE OPERATIONS

The Bank of Grays Harbor, the sole bank subsidiary of Harbor, and
Bank of the Pacific, the sole bank subsidiary of Pacific, will continue to
exist and operate separately after the merger. The Boards of Directors of the
bank subsidiaries are expected to consist of their current members, except
that Mr. Worrell and Mr. Long will both be directors of each of the banks.
See "The Merger - The Bank Subsidiaries Will Continue Their Separate
Existence."

THE MERGER WILL CHANGE SOME OF YOUR RIGHTS AS A SHAREHOLDER

When you become a shareholder of the combined corporation, you will
have shareholder rights and corporate governance provisions that are
different in some respects from those you have now as a shareholder of Harbor
or Pacific.

The combined corporation will have a Board of Directors which is
divided into three classes, of which one class will be elected each year.
This makes it more difficult for a change in the control of the company to
occur. Harbor and Pacific currently elect their full boards of directors
annually.

Pacific shareholders will no longer be entitled to vote cumulatively
or to preemptive rights after the merger. Cumulative voting makes it easier
for minority shareholders to gain representation on the Board of Directors.
Preemptive rights entitle shareholders to purchase a proportionate share of
any new stock issued by the corporation. As a shareholder of the combined
corporation, you will not be entitled to either cumulative voting or
preemptive rights.

For a detailed description of these and other provisions of the
combined corporation Articles and Bylaws, see "Description of Capital Stock
of the Combined Corporation," "Amended and Restated Articles of Incorporation
and Bylaws of the Combined Corporation" and "Comparison of Certain Rights of
Holders of Common Stock of Harbor, Pacific and the Combined Corporation."

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In addition, the Board of Directors of the combined corporation will
not be allowed to take certain actions for three years after completion of
the merger unless they are approved by 60% or more of the Board. These
actions include amendment of the combined corporation's articles of
incorporation, certain changes in management and approval of specified
transactions. See "The Merger - Management of the Combined Corporation
Approval by 60% of the Board Required for Certain Actions."

THERE ARE CONDITIONS TO THE CLOSING OF THE MERGER

To complete the merger, we must satisfy a number of conditions in
addition to approval by our shareholders. These conditions include:

- we must have received necessary material approvals of the merger
by governmental regulatory agencies, including the Board of
Governors of the Federal Reserve System;

- we must have received a favorable tax opinion from Graham & Dunn
PC at closing;

- we must have received letters from Knight Vale & Gregory Inc.,
P.S. to the effect that the merger qualifies for
pooling-of-interests accounting treatment;

- the representations and warranties we made in the merger
agreement must continue to be true; and

- each of us must perform obligations specified in the merger
agreement.

We have received approval of the merger from the Federal Reserve
Board. See "The Merger - Regulatory Approvals."

The merger agreement allows us to waive some of the conditions
listed above. If we waive the requirement for receipt of a tax opinion at
closing we will resolicit approval of the merger by our shareholders. For a
more complete discussion of the conditions to the completion of the merger,
see "The Merger - Conditions to the Merger."

WE MAY NOT SEEK OTHER MERGER OR ACQUISITION PROPOSALS

Under the merger agreement, we may not seek or encourage any
proposals or offers with respect to a merger, acquisition, or a sale of all
of our company's assets, except under specified circumstances. If either
Harbor or Pacific violates this provision and the resulting transaction
occurs before June 30, 2000, that party will be required to pay $1,000,000 to
the other party.

The purpose of these provisions is to deter a third party from
preventing the completion of the merger. For a more complete discussion of
these provisions, see "The Merger - No Solicitation."

THE MERGER AGREEMENT CAN BE AMENDED OR TERMINATED

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The merger agreement may be amended at any time prior to the closing
if both of our Boards of Directors approve the amendment. However, after the
merger agreement is approved by our shareholders, we may not change the
amount or kind of consideration that shareholders will receive, or change the
tax consequences of the merger to shareholders, unless the change is approved
by our shareholders.

The merger agreement may be terminated and the merger abandoned at
any time, including after approval by our shareholders, if both of our Boards
of Directors agree to do so. Also, in certain circumstances either one of our
Board of Directors may terminate the merger agreement, without the other
Board's consent. If the merger agreement is terminated due to a breach of the
agreement by one of us, the breaching party may be required to pay a $250,000
termination fee to the other party. For a description of the various
circumstances under which the merger agreement may be amended or terminated,
see "The Merger - Waiver of Conditions; Amendment or Termination of the Merger
Agreement."

WE EXPECT "POOLING-OF-INTERESTS" ACCOUNTING TREATMENT

We expect the merger to qualify as a "pooling of interests." This
means that, for accounting and financial reporting purposes, we will treat
our companies as if they had always been combined. We will not be required to
complete the merger unless we receive a letter from our independent
accountants telling us that the merger will qualify as a pooling of interests.

SOME OF OUR OFFICERS AND DIRECTORS HAVE INTERESTS IN THE MERGER THAT ARE
DIFFERENT FROM OR IN ADDITION TO THEIR INTERESTS AS SHAREHOLDERS

Certain members of Harbor's and Pacific's management have interests
in the merger that are different from, or in addition to, their interests as
Harbor and Pacific shareholders. These interests exist because of employment
agreements that they have entered into which provide for payments to be made
to them upon any future change of control of the combined corporation and
because of the directors fees that they will receive. We estimate that the
new employment agreements will increase the total amount of the payment that
officers and employees could receive, if a change of control takes place in
the future, by approximately $892,472. We estimate that the total dollar
amount of the additional directors fees that would be paid to directors as a
result of the merger would be approximately $27,000 per year. For further
details, see "The Merger - Some of Our Officers and Directors May Have
Interests in the Merger that are Different From Yours."

7
<PAGE>
A WARNING ABOUT FORWARD-LOOKING INFORMATION
We have made forward-looking statements in this document that are
subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of the management of Harbor and Pacific, and on
information currently available to them or, in the case of information that
appears under the heading "Background of and Reasons for the Merger-Opinion
of Our Financial Advisor," information that was available to our financial
advisor of the dates of its opinions. Forward-looking statements include the
information concerning our possible or assumed future results of operations
set forth under "Background of and Reasons for the Merger" and statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions.
We have made statements in this document regarding expected cost
savings from the merger, estimated costs of the merger, the anticipated
accretive effect of the merger and the combined corporation's anticipated
performance in future periods. Any statements in this document about the
anticipated benefits of the merger and the combined corporation's anticipated
performance in future periods are subject to risks relating to, among other
things, the following:
1. expected cost savings from the merger may not be fully
realized or realized within the expected time frame;
2. competitive pressures among depository and other financial
institutions may increase significantly;
3. costs or difficulties related to the integration of our
businesses may be greater than expected;
4. changes in the interest rate environment may reduce margins;
5. general economic or business conditions, either nationally or
in the state or regions in which we do business, may be less favorable
than expected, resulting in, among other things, a deterioration in
credit quality or a reduced demand for credit;
6. legislative or regulatory changes may adversely affect the
businesses in which we are engaged; and
7. adverse changes may occur in the securities markets.
Management of each of Harbor and Pacific believes the
forward-looking statements about its company are reasonable; however, you
should not place undue reliance on them. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and
assumptions. The future results and shareholder values of the combined
corporation following completion of the merger may differ materially from
those expressed or implied in these forward-looking statements. Many of the
factors that will determine these results and values are beyond our ability
to control or predict.
8
<PAGE>

STOCK PRICE AND DIVIDEND INFORMATION

HARBOR

No broker makes a market in Harbor common stock, and trading has not
otherwise been extensive. The trades that have occurred cannot be
characterized as amounting to an established public trading market. Harbor
common stock is traded by individuals on a personal basis and is not listed
on any exchange or traded on the over-the-counter market, and the prices
reported reflect only the transactions known to Harbor management. Because
only limited information is available, the following data may not accurately
reflect the actual market value of Harbor common stock. The following data
includes trades between individual investors, as reported to Harbor as its
own transfer agent.

<TABLE>
<CAPTION>
HARBOR COMMON
NUMBER OF SHARES STOCK PRICES
REPORTED AS --------------------------
TRADED HIGH LOW
---------------- ---------- ----------
<S> <C> <C> <C>
1997
First quarter................................. 465 $72.00 $72.00
Second quarter................................ 520 75.00 72.00
Third quarter................................. 1,730 85.00 82.50
Fourth quarter................................ 112 85.00 85.00

1998
First quarter................................. 4,422 $115.00 $85.00
Second quarter................................ 663 125.00 100.00
Third quarter................................. 0 --- ---
Fourth quarter................................ 300 125.00 120.00

1999
First quarter................................. 1,195 $130.00 $120.00
Second quarter................................ 3,581 135.00 130.00
Third quarter................................. 200 135.00 135.00
Fourth quarter (through October 31, 1999)..... 74 135.00 135.00
</TABLE>

As of October 31, 1999, there were approximately 381 stockholders of
record of Harbor common stock.

Harbor's Board of Directors declared dividends on its common stock
in December 1998, 1997 and 1996 in the amounts per share of $3.75, $3.00 and
$2.50, respectively. No dividend has been declared to date in 1999. The
merger agreement places certain limitations on Harbor's ability to pay
dividends in 1999 as described under "The Merger - Conduct Pending the
Merger."

PACIFIC

No broker makes a market in Pacific common stock, and trading has
not otherwise been extensive. The trades that have occurred cannot be
characterized as amounting to an established public trading market. Pacific
common stock is traded by individuals on a personal basis and is not listed
on any exchange or traded on the over-the-counter market, and the prices
reported reflect only the transactions known to Pacific management. Because
only limited information is available, the following

9
<PAGE>

data may not accurately reflect the actual market value of Pacific common
stock. The following data includes trades between individual investors, as
reported to Pacific as its own transfer agent.

<TABLE>
<CAPTION>
PACIFIC COMMON
NUMBER OF SHARES STOCK PRICES
REPORTED AS ------------------------
TRADED HIGH LOW
---------------- --------- ---------
<S> <C> <C> <C>
1997
First quarter................................. 128 65.00 65.00
Second quarter................................ 310 65.00 65.00
Third quarter................................. 0 --- ---
Fourth quarter................................ 476 65.00 65.00

1998
First quarter................................. 2,157 65.00 65.00
Second quarter................................ 949 80.00 65.00
Third quarter................................. 820 80.00 65.00
Fourth quarter................................ 2343 85.00 85.00

1999
First quarter................................. 250 80.00 80.00
Second quarter................................ 1,539 85.00 85.00
Third quarter................................. 2,000 85.00 80.00
Fourth quarter (through October 31, 1999).....
</TABLE>

As of October 31, 1999, there were approximately 405 stockholders of
record of Pacific common stock.

Pacific's Board of Directors declared dividends on its common stock
in November 1998, 1997 and 1996 in the amounts per share of $4.80, $4.60 and
$4.30, respectively. No dividend has been declared to date in 1999. The
merger agreement places certain limitations on Pacific's ability to pay
dividends in 1999 as described under "The Merger - Conduct Pending the
Merger."

COMBINED CORPORATION

We currently intend to declare per share dividends on the combined
corporation's common stock in an amount at least equivalent to Pacific's
current per share dividend. You should note that no dividends have been
declared and that future dividends will be determined by the combined
corporation's Board of Directors in light of the growth plans, earnings and
financial condition of the combined corporation and its subsidiaries and
other factors, including applicable governmental regulations and policies.
See "Bank Supervision and Regulation - The Banks - Dividends."

10
<PAGE>

SELECTED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

SELECTED HARBOR HISTORICAL FINANCIAL DATA

The table below presents selected financial data of Harbor for the
years ended December 31, 1994 through 1998 derived from the audited
consolidated financial statements of Harbor. Knight, Vale & Gregory, Inc.,
P.S., independent auditors, audited Harbor's consolidated financial
statements. The selected financial data of Harbor for the six months ended
June 30, 1999 and 1998 have been derived from the unaudited consolidated
financial statements of Harbor. Harbor believes that these financial
statements include all adjustments necessary to present fairly Harbor's
results of operations for the periods then ended and the financial position
of Harbor as of those dates. The results of operations for the six months
ended June 30, 1999 do not necessarily indicate results which may be expected
for the remainder of 1999. You should read the selected financial data
together with Harbor's consolidated financial statements and related notes
included elsewhere in this Joint Proxy Statement/Prospectus and "Harbor
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Net interest income $ 3,147 $ 3,046 $ 6,273 $ 5,842 $ 5,041 $ 4,976 $ 4,473
Provision for loan losses 0 0 0 70 100 160 240
Noninterest income 302 307 644 588 668 662 800
Noninterest expense 1,938 1,901 3,917 3,503 3,163 3,032 2,939
Provision for income taxes 504 457 927 919 768 777 658
Net income 1,007 995 2,073 1,938 1,678 1,669 1,436
NET INCOME PER SHARE
Basic $ 3.90 $ 3.86 $ 8.03 $ 7.57 $ 6.58 $ 6.60 $ 5.88
Diluted 3.79 3.77 7.84 7.48 6.49 6.33 5.76

Dividends paid $ --- $ --- $ 969 $ 774 $ 637 $ 573 $ 438
Dividends paid ratio 0% 0% 47% 40% 38% 34% 31%

PERFORMANCE RATIOS
Net interest margin 4.65% 5.19% 5.09% 5.59% 5.26% 5.56% 5.62%
Efficiency ratio 56.19% 56.70% 56.63% 54.48% 55.40% 53.78% 55.74%
Return on average assets 1.51% 1.72% 1.68% 1.85% 1.75% 1.87% 1.81%
Return on average equity 16.80% 18.32% 17.93% 18.79% 18.47% 21.08% 21.45%

BALANCE SHEET DATA
Total assets $ 132,815 $ 125,805 $ 135,285 $ 111,784 $ 105,102 $ 94,288 $ 81,863
Loans, net 84,142 83,267 80,408 79,792 76,420 68,203 62,016
Total deposits 119,324 113,648 121,736 99,789 94,545 84,854 74,081
FHLB advances 0 0 0 0 0 0 0
Shareholders' equity 12,531 11,603 11,779 10,590 9,401 8,331 6,976
Book value per share 48.50 44.99 45.59 41.07 36.87 32.73 27.88
Equity to assets ratio 9.43% 9.22% 8.71% 9.47% 8.94% 8.84% 8.52%

11
<PAGE>

<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS
Nonperforming loans to loans 0.00% 1.33% 0.00% 0.17% 0.00% 0.22% 0.04%
Allowance for loan losses to
total loans 1.36% 1.37% 1.41% 1.40% 1.41% 1.39% 1.34%
Allowance for loan losses to
nonperforming loans --- 418.38% --- 823.91% --- 640.67% 3376.00%
Nonperforming assets to total
assets 0.00% 0.22% 0.00% 0.12% 0.00% 0.16% 0.03%

OTHER DATA
Number of banking offices 5 5 5 4 4 4 4
Number of full time
equivalent employees 47 48 47 50 42 42 41
</TABLE>

12
<PAGE>

SELECTED PACIFIC HISTORICAL FINANCIAL DATA

The table below presents selected financial data of Pacific for
years ended December 31, 1994 through 1998 derived from the consolidated
financial statements of Pacific. Knight, Vale & Gregory, Inc. P.S.,
independent auditors, audited Pacific's consolidated financial statements.
The selected financial data of Pacific for the six months ended June 30, 1999
and 1998 were derived from the unaudited consolidated financial statements of
Pacific. Pacific believes that these financial statements include all
adjustments necessary to present fairly Pacific's results of operations for
the periods then ended and the financial position of Pacific as of those
dates. The results of operations for the six months ended June 30, 1999 do
not necessarily indicate results which may be expected for the remainder of
1999. You should read the selected financial data together with Pacific's
consolidated financial statements and related notes included elsewhere in
this Joint Proxy Statement/Prospectus and "Pacific Management's Discussion
and Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Net interest income $ 2,413 $ 2,358 $ 4,827 $ 4,850 $ 4,776 $ 4,589 $ 4,193
Provision for loan losses 0 60 110 72 72 72 72
Noninterest income 339 326 637 561 404 397 375
Noninterest expense 1,475 1,365 2,770 2,685 2,412 2,439 2,409
Provision for income taxes 344 320 663 724 725 639 512
Net income 933 939 1,921 1,930 1,971 1,836 1,575
NET INCOME PER SHARE
Basic $ 3.18 $ 3.21 $ 6.57 $ 6.60 $ 6.74 $ 6.28 $ 5.39
Diluted 3.16 3.19 6.54 6.59 6.74 6.28 5.39

Dividends paid $ --- $ --- $ 1,410 $ 1,344 $ 1,257 $ 1,183 $ 1,111
Dividends paid ratio 0% 0% 73% 70% 64% 64% 71%

PERFORMANCE RATIOS
Net interest margin 5.12% 5.26% 5.26% 5.77% 6.06% 6.23% 6.20%
Efficiency ratio 53.60% 50.86% 50.70% 49.62% 46.56% 48.92% 52.74%
Return on average assets 1.85% 1.97% 1.95% 2.15% 2.38% 2.37% 2.20%
Return on average equity 19.11% 19.84% 19.33% 20.71% 23.27% 24.08% 22.28%

BALANCE SHEET DATA
Total assets $ 105,760 $ 97,286 $ 101,079 $ 96,767 $ 86,400 $ 9,518 $ 73,495
Loans, net 62,096 62,408 65,008 61,988 59,415 51,986 49,622
Total deposits 86,053 82,798 88,914 78,937 76,152 70,165 64,304
Short-term borrowings 9,050 3,720 86 6,625 172 33 1,150
Shareholders' equity 9,981 10,021 9,706 9,067 8,428 7,757 6,742
Book value per share 33.98 34.29 33.04 31.03 28.84 26.54 23.07
Equity to assets ratio 9.44% 10.30% 9.60% 9.37% 9.75% 9.76% 9.17%

13
<PAGE>

<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS
Nonperforming loans to loans 0.05% 0.50% 0.02% 0.45% 0.09% 0.30% 0.00%
Allowance for loan losses to
total loans 1.24% 1.07% 1.09% 1.27% 1.22% 1.26% 1.17%
Allowance for loan losses to
nonperforming loans 2443.75% 214.52% 4780.00% 281.69% 1334.55% 414.38% N/A
Nonperforming assets to
total assets 0.18% 0.32% 0.14% 0.32% 0.06% 0.20% 0.00%

OTHER DATA
Number of banking offices 5 5 5 5 5 5 5
Number of full time
equivalent employees 37 37 36 35 36 35 35
</TABLE>

14
<PAGE>

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS AND SELECTED FINANCIAL DATA

The following unaudited pro forma combined financial statements give
effect to the merger on a pooling-of-interests basis. The unaudited pro forma
combined balance sheet assumes that the merger took place on June 30, 1999.
The unaudited pro forma combined statements of income assume the merger was
completed as of the beginning of the first period presented.

You should read the unaudited pro forma combined financial
statements in conjunction with the historical financial statements and the
related notes of Harbor and Pacific included in this Joint Proxy
Statement/Prospectus.

The unaudited pro forma combined statements are not necessarily
indicative of operating results or financial position which would have
occurred had the merger become effective prior to the period indicated or
that will occur upon completion of the merger.

15
<PAGE>

HARBOR BANCORP, INC. AND PACIFIC FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1999

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
HARBOR PACIFIC ADJUSTMENTS(1) CORPORATION
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,292 $ 2,588 $ 8,880
Interest-bearing deposits 627 --- 627
Investment securities:
Held to maturity --- 1,626 1,626
Available for sale 32,579 34,255 66,834
Total investment securities 32,579 35,881 68,460

Federal funds sold 4,878 --- 4,878
Loans 85,290 62,878 148,168
Allowance for loan losses 1,148 782 1,930
Loans, net 84,142 62,096 146,238
Premises and equipment 2,267 1,277 3,544
Foreclosed real estate 162 162
Accrued interest receivable 1,238 1,007 2,245
Other assets 792 2,749 3,541

TOTAL ASSETS $ 132,815 $ 105,760 $ 238,575

LIABILITIES
Deposits
Noninterest-bearing $ 19,335 $ 12,621 $ 31,956
Interest-bearing 99,989 73,432 173,421
Total deposits 119,324 86,053 205,377
Federal funds purchased and other borrowings --- 9,050 9,050
Accrued interest payable 247 257 504
Other liabilities 713 419 1,132

TOTAL LIABILITIES $ 120,284 $ 95,779 $ 216,063

STOCKHOLDERS' EQUITY
Common stock $ 259 $ 294 $ (64) $ 489
Surplus 5,518 5,390 64 10,972
Undivided profits 6,878 4,718 11,596
Accumulated other comprehensive income (124) (421) (545)
Total stockholders' equity $ 12,531 $ 9,981 $ $ 22,512

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 132,815 $ 105,760 $ $ 238,575
</TABLE>

- ---------------
(1) Pro forma adjustment restates the combined corporation's capital accounts
to reflect the exchange of each share of Pacific common stock for 0.785
shares of combined corporation common stock.

16
<PAGE>

HARBOR BANCORP, INC. AND PACIFIC FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 6,840 $ 7,207 $ 14,366 $ 14,145 $ 12,770
Securities held to maturity 54 59 121 117 124
Securities available for sale 1,705 1,182 2,588 2,166 2,087
Deposits with banks and federal
funds sold 351 365 877 328 411
Total interest income 8,950 8,813 17,952 16,756 15,392

INTEREST EXPENSE
Deposits 3,294 3,238 6,586 6,012 5,556
Other borrowings 96 171 266 52 19
Total interest expense 3,390 3,409 6,852 6,064 5,575

NET INTEREST INCOME 5,560 5,404 11,100 10,692 9,817
Provision for credit losses --- 60 110 142 172
Net interest income after
provision for credit losses 5,560 5,344 10,990 10,550 9,645

NONINTEREST INCOME
Service charges and other fees 386 377 685 638 615
Mortgage loan origination fees 32 10 35 --- ---
Gain (loss) on sale of loans (3) 15 17 76 24
Gain on sales of securities
available for sale 7 --- 8 1 ---
Other operating income 219 231 536 434 433
Total noninterest income 641 633 1,281 1,149 1,072

NONINTEREST EXPENSE
Salaries and employee benefits 1,912 1,837 3,701 3,543 3,265
Occupancy and equipment 321 318 634 567 535
Other 1,180 1,111 2,352 2,078 1,775
Total noninterest expense 3,413 3,266 6,687 6,188 5,575

Income before income taxes 2,788 2,711 5,584 5,511 5,142
Provision for income taxes 848 777 1,590 1,643 1,493
NET INCOME $ 1,940 $ 1,934 $ 3,994 $ 3,868 $ 3,649

EARNINGS PER COMMON SHARE
Basic $ 3.97 $ 3.97 $ 8.19 $ 7.97 $ 7.53
Diluted 3.90 3.91 8.07 7.91 7.49

AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 488,969 488,466 487,583 485,324 484,298
Diluted 497,193 494,485 495,041 488,998 487,944
</TABLE>

17
<PAGE>

HARBOR BANCORP, INC. AND PACIFIC FINANCIAL CORPORATION
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA
Net interest income $ 5,560 $ 5,404 $ 11,100 $ 10,692 $ 9,817 $ 9,565 $ 8,666
Provision for credit losses --- 60 110 142 172 232 312
Noninterest income 641 633 1,281 1,149 1,072 1,059 1,175
Noninterest expense 3,413 3,266 6,687 6,188 5,575 5,471 5,348
Provision for income taxes 848 777 1,590 1,643 1,493 1,416 1,170
Net income 1,940 1,934 3,994 3,868 3,649 3,505 3,011
Net income per share:
Basic 3.97 3.97 8.19 7.97 7.53 7.27 6.36
Diluted 3.90 3.91 8.07 7.91 7.49 7.24 6.29

Dividends paid --- --- 2,379 2,118 1,895 1,756 1,549
Dividends paid ratio 0% 0% 60% 55% 52% 50% 51%

PERFORMANCE RATIOS
Net interest margin 5.05% 5.45% 5.37% 5.90% 5.86% 6.13% 6.18%
Efficiency ratio 55.04% 54.10% 54.01% 52.26% 51.20% 51.50% 54.34%
Return on average assets 1.65% 1.83% 1.80% 1.99% 2.04% 2.10% 1.99%
Return on average equity 17.78% 18.97% 18.57% 19.70% 20.79% 22.55% 21.88%

BALANCE SHEET DATA
Total assets $ 238,575 $ 223,091 $ 236,364 $ 208,551 $ 191,512 $173,806 $ 155,358
Loans, net 146,238 145,675 145,416 141,780 135,835 120,189 111,638
Total deposits 205,377 196,446 210,650 178,726 170,69 155,019 138,385
Short-term borrowings 9,050 3,720 86 6,625 172 33 1,150
Shareholders' equity 22,512 21,625 21,485 19,657 17,829 16,088 13,718
Book value per share $ 46.04 $ 44.38 $ 43.94 $ 40.34 $ 36.81 $ 33.24 $ 28.60
Equity to assets ratio 9.44% 9.69% 9.09% 9.43% 9.31% 9.26% 8.83%

ASSET QUALITY RATIOS
Nonperforming loans to
loans 0.02% 0.39% 0.01% 0.29% 0.04% 0.25% 0.02%
Allowance for loan losses
to total loans 1.30% 1.22% 1.27% 1.35% 1.33% 1.33% 1.27%
Allowance for loan losses
to nonperforming loans 6031.25% 309.79% 12426.67% 459.00% 3316.36% 523.87% 5728.00%
Nonperforming assets to
total assets 0.08% 0.38% 0.06% 0.22% 0.03% 0.18% 0.02%

OTHER DATA
Number of banking offices 10 10 10 9 9 9 9
Number of full-time
equivalent employees 84 85 83 85 78 77 76
</TABLE>

18
<PAGE>

EQUIVALENT PER COMMON SHARE DATA

The following table presents unaudited selected per common share
data for Harbor on a historical and pro forma combined basis and for Pacific,
on a historical and pro forma equivalent basis, after giving effect to the
merger using the pooling-of-interests method of accounting. For a description
of the pooling-of-interests method of accounting with respect to the merger,
see "The Merger -Accounting Treatment of the Merger." The pro forma combined
financial data are not necessarily indicative of actual or future operating
results or the financial position that would have occurred had the merger
become effective prior to the period indicated or that will occur upon
completion of the merger. You should read this data in conjunction with the
financial statements and other financial data included elsewhere in this
Joint Proxy Statement/Prospectus. See "The Merger - Basic Terms of the
Merger."

<TABLE>
<CAPTION>
Pro Forma Pro Forma
Combined Equivalent
Harbor Pacific Corporation(2) Pacific (3)
------ ------- -------------- -----------
<S> <C> <C> <C> <C>
BOOK VALUE AS OF (1)
June 30, 1999 $48.50 $33.98 $46.04 $36.14

BASIC NET INCOME PER SHARE (4)
Six months ended June 30, 1999 3.90 3.18 3.97 3.12
Year ended December 31, 1998 8.03 6.57 8.19 6.43
Year ended December 31, 1997 7.57 6.60 7.97 6.26

DILUTED NET INCOME PER SHARE (4)
Six months ended June 30, 1999 3.79 3.16 3.90 3.06
Year ended December 31, 1998 7.84 6.54 8.07 6.34
Year ended December 31, 1997 7.48 6.59 7.91 6.21

CASH DIVIDENDS DECLARED (5)
Six months ended June 30, 1999 --- --- --- ---
Year ended December 31, 1998 3.75 4.80 4.86 3.82
Year ended December 31, 1997 3.00 4.60 4.35 3.41
</TABLE>

- ----------------------
(1) Book value per share is calculated by dividing the total historical and
pro forma shareholders' equity as of the date indicated by the actual
historical and pro forma number of shares outstanding as of the same
date.

(2) The pro forma combined share data is computed based on the combined
share data and accounts of Harbor and Pacific. Pacific share data has
been adjusted to reflect an assumed exchange ratio of 0.785.

(3) The pro forma equivalent share data for Pacific represents the pro
forma combined amount described in Note 2 multiplied by an assumed
exchange ratio of 0.785.

(4) Net income per share is calculated by dividing total actual historical
and pro forma combined net income for the periods presented by the
actual historical and pro forma combined weighted average number of
shares of common stock outstanding for that period. Basic net income
per share excludes dilution and is computed by dividing net income by
the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects the potential dilution
that could occur if common shares were issued pursuant to the exercise
of options under Harbor's and Pacific's stock option plans.

(5) For a discussion of the proposed dividend policy of the combined
corporation, see "Stock Price and Dividend Information - Combined
Corporation."

19
<PAGE>

HARBOR SPECIAL SHAREHOLDERS MEETING

DATE, TIME AND PLACE

Harbor will hold a special shareholders meeting on December 9,
1999 at 7:00 p.m., local time, at Harbor's main office, 300 East Market
Street, Aberdeen, Washington.

PURPOSE OF THE MEETING

At the Harbor shareholders meeting, Harbor shareholders will:

(1) consider and vote upon a proposal to approve the merger;

(2) act upon any other matters which may properly come before the
Harbor shareholders meeting.

If Harbor's shareholders approve the merger, they will also be
approving:

- Amended Articles of Incorporation and Bylaws of the combined
corporation; and

- The election of directors of the combined corporation.

SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE

The Harbor Board has fixed the close of business on November 1,
1999, as the record date for determining the Harbor shareholders who are
entitled to notice of and to vote at the shareholders meeting. At the close
of business on the record date, there were 258,381 shares of Harbor common
stock outstanding held by approximately 376 holders of record.

Holders of record of Harbor common stock on the record date are
entitled to one vote per share, and are also entitled to exercise dissenters'
rights if certain procedures are followed. See "The Merger - Dissenters'
Rights of Appraisal" and Appendix 4.

VOTE REQUIRED

20
<PAGE>

The affirmative vote of TWO-THIRDS (2/3) of all shares of Harbor
common stock outstanding on the record date is required to approve the
merger. A majority of the outstanding shares of Harbor common stock must be
present, either in person or by proxy, in order to constitute a quorum for
the shareholders meeting. For this purpose, abstentions and broker nonvotes
will be counted in determining the shares present at the meeting. "Broker
nonvotes" are proxies from brokers or nominees indicating that they have not
received instructions from the beneficial owners or other persons entitled to
vote shares as to a matter upon which the broker or nominees do not have
discretionary power to vote.

For voting purposes, however, only shares actually voted "for" the
merger will be counted as votes approving the merger. As a result,
abstentions and broker nonvotes will have the same effect as votes AGAINST
approval of the merger.

On the record date, the directors and executive officers of Harbor
and their affiliates owned and were entitled to vote an aggregate of 121,900
shares of Harbor common stock. This represents approximately 47% of the
shares entitled to vote at the Harbor shareholders meeting. Each Harbor
director has agreed to vote all shares of Harbor common stock held or
controlled by him in favor of the merger.

VOTING, SOLICITATION, AND REVOCATION OF PROXIES

Harbor shareholders may vote either in person or by submitting a
properly executed proxy. If the enclosed proxy is properly executed and is
received by Harbor in time for the shareholders meeting, it will be voted in
accordance with the instructions given, unless it is revoked. If no
instructions are given, the proxy will be voted FOR the proposal to approve
the merger. FAILURE TO RETURN THE PROXY CARD OR TO VOTE IN PERSON AT THE
HARBOR SHAREHOLDERS MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER.

If any other matters are properly presented at the Harbor
shareholders meeting for consideration, the persons named in the proxy will
have discretion to vote on these matters in accordance with their best
judgement. However, no proxy which is voted against the proposal to approve
the merger will be voted in favor of any proposal to adjourn or postpone the
meeting. A proxy marked ABSTAIN on the proposal to approve the merger may be
voted in favor of a proposal to adjourn or postpone the meeting in the
discretion of the persons named in the proxy. As of the date of this
document, the Harbor Board knows of no other matters that will be considered
at the meeting.

21
<PAGE>

Any proxy given may be revoked by the person giving it at any time
before it is voted by:

(1) delivering to Janice M. Pearce, Harbor's Secretary, at 300 East
Market Street, Aberdeen, Washington 98520-5244 (telephone
360-533-8870), on or before the taking of the vote at the
shareholders meeting, either:

- a written notice of revocation bearing a later date than
the proxy; or

- a later dated proxy relating to the same shares of Harbor
common stock; or

(2) attending the shareholders meeting AND voting in person. Attending
the Harbor shareholders meeting will not by itself revoke a
previously given proxy.

Harbor is soliciting proxies for the Harbor shareholders meeting, on
behalf of the Harbor Board. The expense of soliciting proxies for the Harbor
shareholders meeting will be borne by Harbor. Harbor will solicit proxies
principally by mail, but the directors, officers, and other employees of
Harbor may also solicit proxies personally. Harbor's directors, officers, and
employees will receive no compensation for soliciting proxies in addition to
their regular compensation, but may be reimbursed for out-of-pocket expenses.
Brokers and others who hold Harbor common stock on behalf of another will be
asked to forward proxy material and related documents to the beneficial
owners of the stock, and Harbor will reimburse them for their expenses in
doing so.

22
<PAGE>

PACIFIC SPECIAL SHAREHOLDERS MEETING

DATE, TIME AND PLACE

Pacific will hold a special shareholders meeting on
December 9, 1999 at 7:00 p.m., local time, at Bank of the Pacific's
main office, 1007 South Pacific, Long Beach, Washington.

PURPOSE

At the Pacific shareholders meeting, Pacific's shareholders will:

(1) consider and vote upon approval of the merger; and

(2) act upon any matters which may properly come before the
shareholders meeting.

If Pacific's shareholders approve the merger, they will also be
approving:

- the Amended Articles of Incorporation and Amended Bylaws of the
combined corporation; and

- the election of directors of the combined corporation.

SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE

The Pacific Board has fixed the close of business on November 1,
1999, as the record date for determining the Pacific shareholders who are
entitled to vote at the shareholders meeting. At the close of business on the
record date, there were 293,743 shares of Pacific common stock issued and
outstanding held by approximately 405 holders of record.

Holders of record of Pacific common stock on the record date are
entitled to one vote per share, and are also entitled to exercise dissenters'
rights if certain procedures are followed. See "The Merger - Dissenters'
Rights of Appraisal" and Appendix 4.

VOTE REQUIRED

23
<PAGE>

The affirmative vote of TWO-THIRDS (2/3) of all shares of Pacific
common stock outstanding on the record date is required to approve the
merger. A majority of the outstanding shares of Pacific common stock must be
present, either in person or by proxy, to constitute a quorum for the
shareholders meeting. For this purpose, abstentions and broker nonvotes will
be counted in determining the shares present at the meeting. "Broker
nonvotes" are proxies from brokers or nominees indicating that they have not
received instructions from the beneficial owners or other persons entitled to
vote shares as to a matter upon which the broker or nominees do not have
discretionary power to vote.

On the record date, Pacific's directors and executive officers and
their affiliates owned and were entitled to vote 88,572 shares at the
shareholders meeting. This represents approximately 30% of the shares
entitled to vote at the Pacific shareholders meeting. Each Pacific director
has agreed to vote all shares of Pacific common stock held or controlled by
him in favor of the merger.

VOTING, SOLICITATION AND REVOCATION OF PROXIES

Pacific shareholders may vote either in person or by submitting a
properly executed proxy. If the enclosed proxy is properly executed and is
received by Pacific in time for the shareholders meeting, it will be voted in
accordance with the instructions given, unless it is revoked. If no
instructions are given, the proxy will be voted FOR the proposal to approve
the merger. FAILURE TO RETURN THE PROXY CARD OR TO VOTE IN PERSON AT THE
PACIFIC SHAREHOLDERS MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MERGER.

If any other matters are properly presented at the Pacific
shareholders meeting for consideration, the persons named in the proxy will
have discretion to vote on these matters in accordance with their best
judgement. However, no proxy which is voted against the proposal to approve
the merger will be voted in favor of any proposal to adjourn or postpone the
meeting. A proxy marked ABSTAIN on the proposal to approve the merger may be
voted in favor of a proposal to adjourn or postpone the meeting in the
discretion of the persons named in the proxy. As of the date of this
document, the Pacific Board knows of no other matters that will be considered
at the meeting.

24
<PAGE>

Any proxy given may be revoked by the person giving it at any time
before it is voted by:

(1) delivering to Barbara Gramps, Pacific's Secretary, at 1007 South
Pacific, Long Beach, Washington 98631 (telephone 360-642-3749),
on or before the taking of the vote at the shareholders meeting,
either:

- a written notice of revocation bearing a later date than
the proxy or

- a later dated proxy relating to the same shares of Pacific
common stock; or

(2) attending the shareholders meeting AND voting in person.
Attending the Pacific shareholders meeting will not by itself
revoke a previously given proxy.

Pacific is soliciting proxies for the Pacific shareholders meeting,
on behalf of the Pacific Board. The expense of soliciting proxies for the
Pacific shareholders meeting will be borne by Pacific. Pacific will solicit
proxies principally by mail, but the directors, officers, and other employees
of Pacific may also solicit proxies personally. Pacific's directors,
officers, and employees will receive no compensation for soliciting proxies
in addition to their regular compensation, but may be reimbursed for
out-of-pocket expenses. Brokers and others who hold Pacific common stock on
behalf of another will be asked to forward proxy material and related
documents to the beneficial owners of the stock, and Pacific will reimburse
them for their expenses in doing so.

BACKGROUND OF AND REASONS FOR THE MERGER

BACKGROUND OF THE MERGER

Harbor and Pacific are each well-established community banks, dating
back to 1979 and 1971, respectively. As is common in the banking industry,
particularly in recent years, we have discussed from time to time business
combinations and other strategic alliances with other community-oriented
banks, including each other.

In early 1998, Harbor and Pacific held informal and preliminary
discussions about the potential benefits of a merger of equals between the
two companies. Before any definitive terms for such a transaction had been
addressed, however, Harbor was approached by Heritage Financial Corporation
with an acquisition offer. Harbor's Board of Directors decided, in the light
of market conditions at the time, to pursue the merger with Heritage.
Consequently, the informal discussions with Pacific ended, and Harbor
proceeded to enter into an agreement to merge with Heritage on August 17,
1998.

25
<PAGE>

The agreement with Heritage gave Harbor the right to terminate the
merger if Heritage's stock price declined below a specified level. In
December of 1998, after Heritage's stock declined below the specified level,
Heritage and Harbor agreed to terminate the agreement on December 17, 1998.

Discussions between Harbor and Pacific were renewed in early 1999.
Realizing that there was a commonality of philosophy and approach between the
two companies, the Chief Executive Officers of Harbor and Pacific agreed that
they should renew their efforts towards a merger of equals. The Board of
Directors of each company concurred, and some of the directors and senior
management of the parties held a series of meetings to pursue the matter.
From the outset of these meetings, it was agreed that the combination of the
two companies would be at an exchange ratio that reflected the relative
contribution of Harbor and Pacific to the combined company, with no material
acquisition premium paid or received by either party.

The implications of the potential merger were reviewed in depth with
the Boards of Directors of Harbor and Pacific at Board meetings in March
1999, and both Boards unanimously decided to proceed with merger
negotiations. Legal and accounting advisors were engaged, and management and
certain Board members of each party met several times to discuss specific
terms of the proposed transaction, including the exchange ratio and the
composition of the management team and board of directors of the combined
company. In May, Alex Sheshunoff & Co. was engaged to provide a report to
Harbor and Pacific as to the fairness of the proposed transaction. Sheshunoff
did not participate in the negotiations between the parties.

On May 11, 1999 and May 15, 1999 respectively, our Boards of
Directors met independently and each approved proceeding with formal
negotiations towards a definitive merger agreement. After the due diligence
reviews, final negotiations and consultation with legal counsel and financial
advisors, on June 9, 1999, each of our Boards of Directors met independently
and unanimously approved the merger agreement.

REASONS FOR THE MERGER

In considering their decision to proceed with the merger, our Boards
of Directors each consulted with the management of their companies as well as
their legal, accounting and financial advisors. The decision to approve the
merger was based upon a number of factors, including the following:

1. The parties determined that the merger would best advance their
strategic plans by combining management philosophies, similar corporate
cultures and financial and business strategies. Each of our contributions to
the financial performance of the combined company are generally similar. The
banks serve contiguous but not overlapping markets, and the businesses and
communities served by each bank are similar. The product lines, operating
policies and business practices of both banks are compatible.

2. The parties believe that the merger will create a stronger
combined company with greater size, flexibility, breadth of services,
efficiency, capital strength and profitability than either company could
achieve on a stand-alone basis. The larger capital base of the combined
company would provide an increased lending limit with resulting increased
opportunities to grow the loan portfolios of each bank. Similarly, the larger
size of the combined company should enhance its ability to invest in
technology to better meet the needs of customers and operate more
efficiently. In addition, the merger would enhance opportunities for growth
and acquisitions, as a result of the larger capitalization of the combined

26
<PAGE>

corporation and anticipated improved liquidity of its stock. It is also
expected that the merger will result in other opportunities for revenue
enhancements and synergies for the combined company

We estimate that the merger will result in the following cost
savings for the combined company:

- $257,000 during the first year after closing;

- $470,000 during the second year after closing; and

- $560,000 during the third year after closing.

3. The parties believe that the merger would strengthen and deepen
the management team of the combined entity by:

(a) integrating the existing management teams at both Harbor and
Pacific;

(b) providing management succession for planned retirements; and

The intention is for Mr. Long to succeed Mr. Worrell as the Chief Executive
Officer of the Combined Company, in addition to his role as President, upon
Mr. Worrell's retirement. In addition, Harbor Chief Financial Officer John
Van Dijk, to become Chief Financial Officer of the combined company upon
completion of the merger in anticipation of the retirement of Pacific's Chief
Financial Officer, Patricia Nelson. Ms. Nelson will continue as Cashier of
Bank of the Pacific, and will be a Vice President of the combined
corporation, until her retirement.

4. Employee compensation and benefits of each company are similar
and equally favorable to the employees. The fact that there are no
overlapping business locations minimize the potential for job losses through
elimination of duplicative positions.

5. The Bank of Grays Harbor and Bank of the Pacific would
initially be operated as separate subsidiaries. This will allow each bank to
keep its name and local Board of Directors in place, thereby maintaining each
bank's established identity in the local communities in which the banks
conduct business.

6. Analysis of the pro forma earnings and financial condition of
the combined company indicated that the merger would be accretive to earnings
after the first year of combined operations. This analysis also indicated an
ability of the combined company to sustain a per share dividend payment
equivalent to that of Pacific's current per share dividend. Harbor indicated
a willingness to maintain an equivalent dividend payment to the extent it is
consistent with the planned growth, earnings and financial condition of the
combined company, as well as applicable governmental regulatory requirements.
See "Stock Price and Dividend Information - Combined Corporation."

In addition to these factors, each Board of Directors also
considered the following:

1. A review, based in part on a presentation by each company's
management, regarding its due diligence review of the other party, including
the business, operations, earnings, asset quality, financial condition, and
corporate culture of the other party on a historical, prospective and pro
forma basis;

2. The terms of the merger agreement and the other documents
executed in connection with the merger, which are generally reciprocal in
nature;

3. The opinion of Alex Sheshunoff & Co., discussed in the
following section of this Joint Proxy Statement/Prospectus, that as of June
9, 1999, the exchange ratio was fair, from a financial point of view, to the
holders of Harbor and Pacific common stock;

27
<PAGE>

4. The expectation that the merger would be tax-free for federal
income tax purposes to Harbor, Pacific and their shareholders, other than in
respect of cash paid for fractional shares and cash paid to dissenting
shareholders;

5. The expectation that the merger would be accounted for under
the pooling-of-interests method of accounting and therefore would not give
rise to goodwill; and

6. The current and prospective economic environment facing
financial institutions generally and Harbor and Pacific in particular.

The Harbor Board of Directors and the Pacific Board of Directors
each believes, for the reasons set forth above, that the merger would be in
the best interests of its company's shareholders. Our Boards of Directors did
not assign any specific or relative weight to the foregoing factors in the
course of their considerations.

OPINION OF OUR FINANCIAL ADVISOR

We each retained Sheshunoff to provide us with an opinion of the
fairness from a financial viewpoint of the merger exchange ratio. As part of
its investment banking business, Sheshunoff is regularly engaged in the
valuation of securities in connection with mergers and acquisitions and
valuations for estate, corporate, and other purposes. Our Boards of Directors
retained Sheshunoff based upon its experience as a financial advisor in
mergers and acquisitions of financial institutions and its knowledge of
financial institutions. Neither of us retained Sheshunoff to negotiate the
proposed transaction and the terms and conditions of the transaction were
negotiated directly by and between us. Accordingly, our Boards of Directors
determined that it was appropriate, and did not present a conflict, to retain
the same financial advisor.

Based on the results of the various analyses described below,
Sheshunoff concluded that the exchange ratio specified in the merger
agreement is fair, from a financial point of view, to our shareholders.

The following is a summary of the material valuation analyses
performed by Sheshunoff in connection with its opinions. The following
discussion contains financial information concerning Harbor and Pacific as of
June 30, 1999.

MERGER OF EQUALS. For a merger to be considered a merger of equals
rather than an acquisition of one party by the other, the two parties must be
of relatively equal size, based on assets, revenues, net income,
profitability, or some other relevant financial measure. Another primary
condition that differentiates a merger of equals from an acquisition is the
fact that neither merger partners' shareholders receive a premium for their
shares. Whether a premium has been paid in a

28
<PAGE>

merger between two companies with publicly-traded stocks that have well
established, reliable market prices can be easily assessed based on the stock
exchange ratio and relative market prices.
On the other hand, for closely-held companies or those lacking well
established markets for their stock, this assessment is commonly based on the
relative impact on the per share measures of book value and earnings for the
merger partners, expressed in terms of accretion/dilution. In this context,
accretion refers to an increase in the book value or earnings represented
by the shares of the new, combined entity over the book value or earnings
represented by the shares of the parties to be merged. Dilution is the term
used if the book value or earnings on an equivalent share basis is less in
the combined entity than in the separate parties to the merger.
EXCHANGE RATIO ANALYSIS. In a merger of equals between two
thinly-traded companies, it is not necessary to explicitly establish an
absolute dollar value for either of the two companies. The relevant value to
be determined is the relative value of one partner to the other. These values
are represented by the exchange ratio. Comparisons between mergers of equals
can be made based on the contributions the two partners make to the new
aggregate entity and the impact to the book value and earnings per share for
each group of shareholders, expressed in terms accretion or dilution.
A large range between the accretion to one merger partner and the
dilution to the other generally shows that there are factors to be considered
that are not reflected in the equity balances or in net income, such as an
expected material decline in future earnings or balance sheet growth. After a
due diligence review of Harbor and Pacific and consultation with their
managements, Sheshunoff did not discover any such factors that would
materially impact the exchange ratio.

ANALYSIS OF RELATING CONTRIBUTIONS OF PARTIES. Chart 1 depicts the
relative financial contributions of Harbor and Pacific to the merged entity
based on various items reported in their respective balance sheets and income
statements. Chart 2 presents the resulting impact (accretion and dilution) to
each company given the proposed exchange ratios of new shares for current
shares. Both charts present financial data as of June 30, 1999.

<TABLE>
<CAPTION>
CHART 1
(dollars in thousands)

ASSETS CONTRIBUTION LOANS CONTRIBUTION EARNING ASSETS CONTRIBUTION
------------------ -------------- ---------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ProForma $238,575 $146,238 $220,203
The Bank of Grays Harbor $132,815 55.7% $84,142 57.5% $122,226 55.5%
Bank of the Pacific $105,760 44.3% $62,096 42.5% $97,977 44.5%

<CAPTION>
DEPOSITS CONTRIBUTION EQUITY CONTRIBUTION NET INT. INCOME CONTRIBUTION
------------------ -------------- ---------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ProForma $205,377 $22,512 $10,964
The Bank of Grays Harbor $119,324 58.1% $12,531 55.7% $5,560 50.7%
Bank of the Pacific $86,053 41.9% $9,981 44.3% $5,404 49.3%

<CAPTION>
NONINTEREST INCOME CONTRIBUTION NONINTEREST EXP. CONTRIBUTION EARNINGS CONTRIBUTION
------------------ -------------- ---------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ProForma $1,274 $6,679 $3,874
The Bank of Grays Harbor $641 50.3% $3,413 51.1% $1,940 50.1%
Bank of the Pacific $633 49.7% $3,266 48.9% $1,934 49.9%
</TABLE>

29
<PAGE>
Each of these measures shows that the relative contributions of
Harbor and Pacific to the combined entity are very close.
Chart 2 depicts the range of accretion and dilution in for the
shareholders of Harbor and Pacific in the merger using the proposed exchange
ratios of 1:1 for Harbor shares and 0.785:1 for Pacific shares.
<TABLE>
<CAPTION>
CHART 2

(dollars in thousands except per share amounts)
HARBOR BANK OF THE
BANCORP PACIFIC COMBINED
------------ ------------- --------------
<S> <C> <C> <C>
ADJUSTMENTS FOR OPTIONS:
SHARES OUTSTANDING
Shares Oustanding 258,381 293,743
Shares Issued for Options (Treasury Method) 7,312 2,472
------------ -------------
TOTAL SHARES WITH OPTIONS 265,693 296,215
------------ -------------
------------ -------------

TOTAL EQUITY
Equity as of June 30, 1999 $12,531 $9,981 $22,512
Additional Equity from options 870 360 $1,230
------------ ------------- --------------
ADJUSTED EQUITY WITH OPTIONS 13,401 10,341 $23,742
------------ ------------- --------------
------------ ------------- --------------

EQUITY PER SHARE
Equity / Share Before Options $48.50 $33.98 $45.18
Equity / Share After Options $50.44 $34.91 $47.65

RESULTING SHARES GIVEN EXCHANGE RATIOS
Exchange Ratio 1.000 0.785
New Shares Based on Exchange Ratio 265,693 232,529 498,222
Proforma Percentage Ownership 53.33% 46.67%

RESULTING EARNINGS PER SHARE
Earnings $1,007 $933 $1,940
Earnings / Share After Options $3.79 $3.15
</TABLE>

<TABLE>
<CAPTION>
ACCRETION / DILUTION, WITH OPTIONS ABSOLUTE
DIFFERENCE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Current Book Value Per Share, with Options $50.44 $34.91
ProForma Book Value Per Share Post Merger $47.65 $37.41
Accretion/(Diludon) to Book Value -5.52% 7.15% 12.67%

Current Earnings Per Share, with Options $3.79 $3.15
Proforma Earnings Per Share Post Merger $3.89 $3.06
Accretion/(Dilution) to Earnings Per Share 2.74% -2.95% 5.69%
- ------------------------------------------------------------------------------------------------------
</TABLE>
For Harbor shareholders, the merger would result in a decrease in
book value per share of 5.52% and in an increase in earnings per share of
2.74%. For Pacific shareholders, the merger would result in an increase in
book value per share of 7.15%, and in a decrease in earnings per share of
2.95%. The accretion/dilution analysis shows that the impact of the exchange
ratio on both Harbor and Pacific shareholders is similar and that the
difference is very narrow as compared to similar transactions, particularly
with respect to earnings.
COMPARISION TO SELECTED TRANSACTIONS. After completing its analysis
of the exchange ratio based on the relative contributions of the parties,
Sheshunoff reviewed comparable transactions to validate its analysis.
Sheshunoff performed an analysis of selected pending or recently completed
mergers-of-equals of banking organizations in the United States with
comparable characteristics to the merger. Generally, the comparable
transactions reinforced Sheshunoff's opinion that the exchange ratio was fair.

Sheshunoff's initial selection of a guideline group yielded 20
transactions covering a period from January 1, 1998 to March 31, 1999. In
reviewing this selection Sheshunoff determined that a number of transactions
were acquisitions, not mergers of equals. Another group of transactions was
clearly not comparable to the subject transaction, generally due to size.
And, finally, in many cases the financial data were inadequate for purposes
of comparison. Therefore, only two transactions from the original group were
presented as being representative of the market. A third selection, the
merger between Sharon Bancshares and First NW Bancshares, was announced on
March 31, 1999 but had not been reported in the data base when the original
selection was made.

30
<PAGE>

These comparable transactions consisted of three mergers and
acquisitions of banks with assets of less than $300 million that were
announced or completed between January 1, 1998 and August 26, 1999 for which
complete data were available as shown in Chart 3 below:

<TABLE>
<CAPTION>
CHART 3
ANN'D
DEAL
ANNOUNCE VALUE EXCHANGE SHARES BUYER
BUYER SELLER DATE ($M) RATIO ISSUED SHARES
- --------------------- --------------------- ---------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sharon Bancshares First NW Bancshares 03/31/99 NA 15.16 80,691 84,190
Cortland First Finl Oneida Valley Bcshs 07/13/98 $47.4 1.80 1,625,179 1,969,776
Valley Natl Corp. First Natl Sylacauga 02/24/98 $13.7 13.00 1,312,935 1,018,748
</TABLE>

<TABLE>
<CAPTION>
SELLER FINANCIAL INFORMATION
-----------------------------------------------------------------------------------------
TOTAL TANG LTM TG EQ YTD YTD NPAS/
ASSETS EQUITY EQUITY INCOME ASSETS ROAA ROAE ASSETS
SELLER ST ($000) ($000) ($000) ($000) (%) (%) (%) (%)
- --------------------- ---- ----------- ---------- ---------- -------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First NW Bancshares TN $255,734 $18,410 $17,412 $2,276 6.84 0.91 13.18 0.53
Oneida Valley Bcshs NY 227,819 25,061 25,061 2,406 11.00 0.95 8.27 0.21
First Natl Sylacauga AL 134,923 15,355 13,851 1,516 10.38 1.21 9.83 0.74
</TABLE>

<TABLE>
<CAPTION>
BUYER FINANCIAL INFORMATION
-----------------------------------------------------------------------------------------
TOTAL TANG LTM TG EQ YTD YTD NPAS/
ASSETS EQUITY EQUITY INCOME ASSETS ROAA ROAE ASSETS
($000) ($000) ($000) ($000) (%) (%) (%) (%)
----------- ---------- ---------- -------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sharon Bancshares TN $261,733 $21,117 $19,805 $1,901 7.60 0.82 9.37 0.11
Cortland First Finl NY 224,584 25,299 25,299 2,527 11.26 1.02 9.07 0.33
Valley Natl Corp. AL 75,512 7,779 7,779 802 10.30 1.12 10.05 0.15
</TABLE>

Through the comparison of the merger to the comparable transactions
it became obvious that, for the merger of Harbor and Pacific, the range
between the book/income accretion to one entity versus the book/income
dilution to the other entity was relatively narrow and that the proposed
exchange ratio was fair to each party.

Chart 4 depicts the range of accretion and dilution in the selected
transactions.

31
<PAGE>

<TABLE>
<CAPTION>
CHART 4
(dollars in thousands, except per share amounts)
POST PRE
LTM SHARES PERCENT MERGER MERGER
EQUITY % INCOME % ASSETS % OUTSTANDING OWNERSHIP EPS EPS
--------- ------ ------- ------ -------- ------ ----------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sharon/First NW
Proforma 39,527 100.0% 4,177 100.0% 517,467 100.0% 164,881 100.0%
Sharon 21,117 53.4% 1,901 45.5% 261,733 50.6% 84,190 51.1% $25.33 $22.58
First NW 18,410 46.6% 2,276 54.5% 255,734 49.4% 80,691 48.9% $25.33 $28.21

Cortland/Oneida Valley
Proforma 50,360 100.0% 4,933 100.0% 452,403 100.0% 3,594,955 100.0%
Cortland 25,299 50.2% 2,527 51.2% 224,584 49.6% 1,969,776 54.8% $1.37 $1.28
Oneida Valley 25,061 49.8% 2,406 48.8% 227,819 50.4% 1,625,179 45.2% $1.37 $1.48

Valley Nat'l/FNB Sylacauga
Proforma 23,134 100.0% 2,318 100.0% 210,435 100.0% 2,331,683 100.0%
Valley National 7,779 33.6% 802 34.6% 75,512 35.9% 1,018,748 43.7% $0.99 $0.79
First Nat'l Sylacauga 15,355 66.4% 1,516 65.4% 134,923 64.1% 1,312,935 56.3% $0.99 $1.15
</TABLE>

<TABLE>
<CAPTION>
POST PRE
ACC/(DIL) MERGER MERGER ACC/(DIL)
EARNINGS BOOK BOOK BOOK
---------- ------- ------- ---------
<S> <C> <C> <C> <C>
Sharon/First NW
Proforma
Sharon 12.2% $239.73 $250.83 -4.4%
First NW -10.2% $239.73 $228.15 5.1%

Cortland/Oneida Valley
Proforma
Cortland 7.0% $14.01 $12.84 9.1%
Oneida Valley -7.3% $14.01 $15.42 -9.2%

Valley Nat'l/FNB Sylacauga
Proforma
Valley National 26.3% $9.92 $7.64 29.9%
First Nat'l Sylacauga -13.9% $9.92 $11.70 -15.2%
</TABLE>

<TABLE>
<CAPTION>
ABSOLUTE DIFFERENCE
-----------------------------
<S> <C> <C>
22.4 9.5
14.3 18.3
40.2 45.1
-----------------------------
</TABLE>

As illustrated in Chart 4, the comparable transactions showed much
wider ranges of accretion to dilution than the proposed merger between
Harbor and Pacific. If the results for the merger of Harbor and Pacific had
fallen outside range for the comparative transactions, the fairness of the
exchange ratio would have been questioned.

CONCLUSIONS. Based on the foregoing analysis, Sheshunoff concluded
that the narrow range of accretion to dilution in the proposed merger between
Harbor and Pacific supported an opinion that the exchange ratio was fair,
from a financial point of view, to shareholders. Sheshunoff's conclusion was
based on the following results of its comparison of the selected transactions
to the results for the merger between Harbor and Pacific:

1. The absolute difference between the accretion and dilution to
book value within a transaction ranged from 9.5% to 45.1% compared with the
absolute difference of the accretion and dilution implied in the subject
merger of 12.67% based on the June 30, 1999 book values for Harbor and
Pacific assuming the outstanding stock options of both companies are fully
exercised;

2. The absolute difference between the accretion and dilution to
earnings within a transaction ranged from 14.3% to 40.2% compared with the
absolute difference of the accretion and dilution implied in the subject
merger of 5.69% based on the six months earnings to June 30, 1999 for Harbor
and Pacific assuming the outstanding stock options of both companies are
fully exercised;

32
<PAGE>

3. Accretion to book value ranged from 5.1% to 29.9% compared to
accretion to Pacific book value implied in the subject merger of 7.15%.
Dilution to book value ranged from 4.4% to 15.2% compared to dilution to
Harbor book value implied in the subject merger of 5.52%. The analysis
assumes the outstanding stock options of both companies are fully exercised;
and

4. Accretion to earnings ranged from 7.0% to 26.3% compared to the
accretion to Harbor earnings implied in the subject merger of 2.74%. Dilution
to earnings ranged from 7.3% to 13.9% compared to dilution to Pacific
earnings implied in the subject merger of 2.95%. The analysis assumes the
outstanding stock options of both companies are fully exercised.

PROJECTIONS OF COMBINED OPERATIONS. In the course of completing the
analysis described above, Sheshunoff prepared projections for the first four
years of operations of the combined corporation. Although the projections
were not used in analyzing the exchange ratio, they were provided to the
Boards of Directors of Harbor and Pacific as an illustrative overview of the
proposed combined corporation. As discussed below, these projections are
based on assumptions, many of which are out of the control of Harbor and
Pacific, and actual results may differ from those presented. A summary of
Sheshunoff's projections is set forth in the following table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 2001 2002 2003
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Projected Average Total Assets $270,884 $293,731 $319,093 $346,754
Projected Average Total Loans, net 172,416 187,642 204,127 222,118
Projected Average Total Deposits 244,043 264,601 287,145 311,701
Projected Net Income 4,995 5,522 6,068 6,475
</TABLE>
In preparing its projections, Sheshunoff reviewed historical
financial statements of Harbor and Pacific for the past four years, and made
the following assumptions:
- an average growth rate of 8% for the total assets of the combined
company, based on Harbor's historical average growth rate of 9% and
Pacific's historical average growth rate of 7% over the past four
years; and
- estimated cost savings of $480,000 resulting from the merger; and
- that recent trends in interest rates earned and paid by both companies
as well as recent trends in loan loss provisions, non-interest income,
and non-interest expenses will continue. The resulting projected net
income varies from year to year as a result in the timing and
magnitude of changes in these components and growth in the related
assets and liabilities reflected in the balance sheets.
The projections assume that there will be no substantial shift in
future economic, financial market, competitive and regulatory conditions, all
of which are difficult or impossible to predict and largely beyond the
control of the parties. These projections and the underlying assumptions are
forward-looking statements that are inherently uncertain. For a discussion of
some of the factors which may impact these forward-looking statements, see "A
Warning About Forward-Looking Information."

FAIRNESS OPINIONS. On June 9, 1999, Sheshunoff rendered its written
opinions that, as of that date, the exchange ratio was fair, from a financial
point of view, to our shareholders. Sheshunoff rendered updated fairness
opinions as of September 7, 1999.

The full text of the fairness opinions are attached as Appendices 2
and 3 to this Joint Proxy Statement/Prospectus. The fairness opinions set
forth, among other things, assumptions made, procedures followed, matters
considered, and limitations on the review undertaken. You are urged to read
Sheshunoff's fairness opinions carefully and in their entirety. The fairness
opinions are addressed to our Boards of Directors, and do not constitute a
recommendation to any of our stockholders as to how a stockholder should vote
at the Harbor or Pacific special meetings.

In connection with the fairness opinions, Sheshunoff:

33
<PAGE>

1. reviewed the merger agreement;

** 1 2. reviewed certain publicly available financial statements
and regulatory information concerning Harbor and Pacific;

** 2 3. reviewed certain internal financial statements and other
financial and operating data of Harbor and Pacific provided to Sheshunoff by
the managements of Harbor and Pacific;

** 3 4. discussed the past and current operations, financial
condition, and future prospects of Harbor and Pacific with their executive
managements;

** 4 5. compared the relative contributions of assets,
liabilities, income, and expenses to the combined corporation by Harbor and
Pacific in the merger to those of certain other banks in the United States
which recently engaged in a merger-of-equals transaction;

** 5 6. analyzed the pro-forma results the combined corporation
could produce through the year 2003 based on assumptions provided by
management of Harbor and Pacific; and

7. performed other analyses and reviews as Sheshunoff deemed
appropriate.

** 6 In connection with its review, Sheshunoff relied upon and
assumed the accuracy and completeness of all of the foregoing information
provided to it or made publicly available, and Sheshunoff did not assume any
responsibility for independent verification of the information. Sheshunoff
assumed that internal confidential financial projections provided by Harbor
and Pacific were reasonably prepared, reflecting the best currently available
estimates and judgments of the future financial performance of the combined
corporation, and did not independently verify the validity of their
assumptions. Sheshunoff did not make any independent evaluation or appraisal
of the assets or liabilities of Harbor or Pacific, nor was Sheshunoff
furnished with any appraisals. Sheshunoff did not examine any individual loan
files of Harbor or Pacific. Sheshunoff is not an expert in the evaluation of
loan portfolios for the purposes of assessing the adequacy of the allowance
for loan losses and has assumed that these allowances are, in the aggregate,
adequate to cover the losses.

** 7 The fairness opinions are necessarily based on economic, market
and other conditions in effect on and the information made available to
Sheshunoff as of August 26, 1999.

** 8 In rendering the fairness opinions, Sheshunoff performed a
variety of financial analyses. The preparation of an opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular
circumstances. Consequently, the fairness opinions are not readily
susceptible to partial analysis or summary description. Moreover, the
evaluation of fairness, from a financial point of view, of the exchange ratio
is to some extent subjective, based on the experience and judgment of
Sheshunoff, and not merely the result of mathematical analysis of financial
data. Accordingly, notwithstanding the separate factors summarized above,
Sheshunoff believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create an incomplete view
of the evaluation process underlying its opinion. The ranges of valuations
resulting from any particular analysis described below should not be taken to
be Sheshunoff's view of the actual value of Harbor or Pacific.

34
<PAGE>

** 9 In performing its analyses, Sheshunoff made numerous assumptions
with respect to industry performance, business and economic conditions, and
other matters, many of which are beyond our control. The analyses performed
by Sheshunoff are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
these analyses, nor are they appraisals. In addition, Sheshunoff's analyses
should not be viewed as determinative of the opinions of our Boards of
Directors or management with respect to the exchange ratio or the value of
Harbor or Pacific.

The fairness opinions are directed only to the question of whether
the exchange ratio is fair from a financial perspective and do not constitute
recommendations to any Harbor or Pacific stockholder to vote in favor of the
merger. No limitations were imposed on Sheshunoff regarding the scope of its
investigation or otherwise by Harbor or Pacific.

INDEMNIFICATION. Under an engagement letter dated May 11, 1999,
between Harbor and Pacific and Sheshunoff, we agreed to pay Sheshunoff a
total fee of $35,000, plus expenses, split equally between the companies. We
also agreed to indemnify Sheshunoff and its officers and employees against
certain liabilities in connection with its services under the engagement
letter and the amendment, except for liabilities resulting from the
negligence, violation of law or regulation, or bad faith of Sheshunoff or any
matter for which Sheshunoff may have strict liability.

RECOMMENDATIONS OF OUR BOARDS OF DIRECTORS

THE BOARDS OF DIRECTORS OF PACIFIC AND HARBOR UNANIMOUSLY RECOMMEND
THAT THEIR SHAREHOLDERS VOTE FOR THE APPROVAL OF THE MERGER.

35
<PAGE>

THE MERGER

THIS DESCRIPTION HIGHLIGHTS MATERIAL INFORMATION ABOUT THE MERGER
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE MERGER, YOU ARE URGED TO READ THE MERGER AGREEMENT ATTACHED
HERETO AS APPENDIX 1 IN ITS ENTIRETY.

GENERAL

The merger agreement provides that, once specified conditions have
been met, Pacific will be merged into Harbor. Upon completion of the merger,
the separate corporate existence of Pacific will cease, and Harbor will be
the continuing corporation under the name "Pacific Financial Corporation."
Consequently, the shareholders of Pacific will become shareholders of the
combined corporation, and the shareholders of Harbor will, by virtue of their
ownership of Harbor common stock, remain shareholders of the combined
corporation.

BASIC TERMS OF THE MERGER

PACIFIC SHAREHOLDERS WILL RECEIVE 0.785 SHARES OF COMBINED
CORPORATION COMMON STOCK PER SHARE OF PACIFIC COMMON STOCK. Upon the
completion of the merger, each outstanding share of Pacific common stock will
be converted into 0.785 shares of combined corporation common stock. For a
description of your rights as holders of combined corporation common stock,
see "Description of Capital Stock of the Combined Corporation" and
"Comparison of Certain Rights of Holders of Common Stock of Harbor, Pacific
and the Combined Corporation."

COMMON STOCK HELD BY HARBOR SHAREHOLDERS WILL REMAIN OUTSTANDING AS
SHARES OF COMMON STOCK OF THE COMBINED CORPORATION. Upon the completion of
the merger, each outstanding share of Harbor common stock will continue as
one share of combined corporation common stock. For a description of your
rights as holders of combined corporation common stock, see "Description of
Capital Stock of the combined corporation" and "Comparison of Certain Rights
of Holders of Common Stock of Harbor, Pacific and the Combined Corporation."

WE WILL NOT ISSUE FRACTIONAL SHARES OF COMBINED CORPORATION COMMON
STOCK. We will not issue fractional shares of combined corporation common
stock in the merger. Instead, each Pacific shareholder who otherwise would
have been entitled to a fraction of a share of combined corporation common
stock will be paid the cash value of the fraction, based on a price of $130
per share of combined corporation common stock.

36
<PAGE>

COMPLETION OF THE MERGER. The merger will become completed when
Harbor files an appropriate certificate with, and the filing is accepted by,
the Secretary of State of the State of Washington. When the merger is
completed, Harbor will be the surviving corporation under the name of
"Pacific Financial Corporation" and the separate existence of Pacific will
cease.

If the merger agreement is not terminated in accordance with its
terms, we will complete the merger as promptly as practical after the date
upon which all the conditions to the merger are satisfied or duly waived or
at a time and date as Pacific and Harbor may agree. For a description of the
circumstances under which we may terminate the merger agreement, see " -
Waiver of Conditions; Amendment or Termination of the Merger Agreement."

We currently anticipate that the merger will be completed during the
fourth quarter of 1999, but, in any event, prior to March 31, 2000. See
"- Regulatory Approvals."

EXCHANGE OF STOCK CERTIFICATES

WE WILL PROVIDE YOU WITH INSTRUCTIONS FOR EXCHANGING YOUR PACIFIC
STOCK CERTIFICATES. We have selected Bank of the Pacific as exchange agent to
effect the exchange of certificates representing shares of Pacific common
stock in connection with the merger. Promptly after the merger is completed,
the exchange agent will mail to each holder of record of Pacific common stock
a notice advising the holder of the effectiveness of the merger, accompanied
by a certificate transmittal form. The certificate transmittal form will
contain instructions for delivering to the exchange agent certificates
representing Pacific common stock. When you deliver your Pacific stock
certificates and a properly completed certificate transmittal form to the
exchange agent, you will be entitled to receive in exchange a certificate or
certificates representing the appropriate number of shares of combined
corporation common stock and cash for any fractional share of combined
corporation common stock.

Pacific recently completed a holding company reorganization, in
which Bank of the Pacific became a subsidiary of Pacific Financial
Corporation, and holders of Bank of the Pacific common stock became holders
of Pacific Financial Corporation common stock. To date, new stock
certificates in the name of Pacific Financial Corporation have not been
issued, and shares of Pacific Financial Corporation common stock continue to
be represented by the Bank of the Pacific stock certificates.

Some of Pacific's shareholders have submitted their Bank of the
Pacific stock certificates to be exchanged for Pacific Financial Corporation
stock certificates. These Bank of the Pacific stock certificates will be held
by Bank of the Pacific pending completion of the merger. The certificate
transmittal form will provide instructions for holders whose shares are
already being held by Bank of the Pacific. The certificate transmittal form
will need to be signed and returned to the exchange agent by each holder of
the shares, even though the shares have already been delivered in connection
with the holding company reorganization.

37
<PAGE>

Under the merger agreement, the appointment of the exchange agent
will remain in effect until six months after the effective time of the
merger. At the end of the six-month period, any certificates and cash
remaining in the possession of the exchange agent, together with any
dividends or earnings, will be returned to the combined corporation. The
parties anticipate that as a matter of convenience, the appointment of the
exchange agent may be continued beyond the six-month period.

RIGHTS OF HOLDERS OF PACIFIC STOCK CERTIFICATES PRIOR TO SURRENDER.
Until you deliver your Pacific stock certificates, we will not pay to you any
dividends and other distributions declared or payable to holders of record of
combined corporation common stock after completion of the merger. Your other
rights as a shareholder of the combined corporation will continue. Once you
deliver your Pacific stock certificates to the exchange agent, you will
receive certificates for the shares of combined corporation common stock into
which the shareholder's shares of Pacific common stock were converted, cash
in lieu of fractional shares, and the dividends or other distributions that
have theretofore become payable with respect to those shares of combined
corporation common stock.

YOU MAY, BUT ARE NOT REQUIRED TO, EXCHANGE YOUR HARBOR STOCK
CERTIFICATES. All outstanding shares of Harbor common stock shall remain
issued and outstanding as shares of combined corporation common stock after
the merger. Your Harbor stock certificates will, after the completion of the
merger and with no action on your part, represent shares of the combined
corporation. At your election, you may surrender your Harbor stock
certificates to the exchange agent, during the six months following the
merger, or thereafter to the combined corporation, in exchange for new
certificates representing the same number of shares of combined corporation
common stock. If you do not exchange your old certificates of Harbor common
stock for new certificates representing shares of combined corporation common
stock, it will not in any way affect the rights of the holder of the shares,
including the right to vote and to receive dividends. No action is required
of any holder of Harbor common stock.

LOST CERTIFICATES. If any certificates representing Pacific common
stock or Harbor common stock have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to
be lost, stolen, or destroyed and, if required by the combined corporation,
the posting by that person of a bond in a reasonable amount as the combined
corporation shall require as indemnity against any claim that may be made
against it with respect to the certificate, the combined corporation shall in
exchange for the lost, stolen, or destroyed certificate, issue or cause to be
paid the shares and amounts which would be deliverable in respect thereof
under the merger agreement.

38
<PAGE>

NAME CHANGE OF THE COMBINED CORPORATION; NEW ARTICLES OF INCORPORATION AND
BYLAWS

At the effective time of the merger, Harbor, as the surviving
corporation in the merger, will change its name to "Pacific Financial
Corporation." As of the effective time of the merger, the Articles of
Incorporation and Bylaws of the surviving corporation will be amended and
restated as set forth in Exhibits 1 and 2 to the merger agreement, which is
attached at Appendix 1 to this Joint Proxy Statement/Prospectus. For a
description of the amended and restated Articles and Bylaws, see "Amended and
Restated Articles of Incorporation and Bylaws of the combined corporation."
Approval of the merger will constitute approval of the combined corporation's
Articles and Bylaws.

THE BANK SUBSIDIARIES WILL CONTINUE THEIR SEPARATE EXISTENCE

We expect that, when the merger is completed, The Bank of Grays
Harbor and Bank of the Pacific will continue to exist and operate as separate
subsidiaries of the combined corporation. We also anticipate that the
membership of the Board of Directors of each of the banks will continue to be
identical to the membership immediately prior to the closing of the merger,
except that Robert J. Worrell and Dennis A. Long will both be directors of
each of the banks.

CONDITIONS TO THE MERGER

The obligations of Pacific and Harbor to complete the merger are
subject to the satisfaction of certain conditions, including, but not limited
to, the following significant conditions, some of which may be waived:

(a) The merger must be approved by the shareholders of Pacific
and Harbor;

(b) We must receive all material approvals of governmental
agencies;

(c) We must obtain all consents or approvals of all persons
required for or in connection with the completion of the merger;

(d) Absence of any administrative or legal proceeding by any
federal or state court or agency which enjoins or prohibits completion
of the merger;

(e) The Registration Statement must be declared effective by
the Securities and Exchange Commission, and must not be subject to a
stop order or other proceedings which would suspend its effectiveness;

39
<PAGE>

(f) We must receive all permits and other authorizations under
the state securities laws and other authorizations necessary to
complete the merger and the issuance of the shares of the combined
corporation common stock;

(g) We must receive letters dated as of the effective time of
the merger, from Knight Vale & Gregory Inc., P.S., independent
auditors, to the effect that the merger will qualify for
pooling-of-interests accounting treatment;

(h) performance in all material respects of the agreements and
covenants required to be performed by the other party;

(i) the truth and correctness in all material respects of the
representations and warranties of the other party contained in the
merger agreement, except as expressly contemplated by the merger
agreement;

(j) We must receive a written opinion of Graham & Dunn PC
dated as of the closing date to the effect that (1) the merger will
be a tax-free "reorganization" under the Internal Revenue Code for
Harbor and Pacific, and (2) except for cash received in lieu of
fractional shares or paid to dissenting shareholders, the merger
will be tax-free to Harbor and Pacific shareholders; and

(k) Receipt by both Harbor and Pacific of a written fairness
opinion from Sheshunoff.

REGULATORY APPROVALS

We cannot complete the merger until we have received all necessary
regulatory approvals. The merger is subject to approval by the Federal
Reserve Board under Section 3 of the Bank Holding Company Act. Section 3 of
the Bank Holding Company Act requires that the Federal Reserve Board take
into consideration the financial and managerial resources and future
prospects of the existing proposed institutions on the convenience and needs
of the communities to be served.

The Federal Reserve Board has indicated that it will not approve a
significant acquisition unless the resulting institution has adequate
capitalization, taking into account, among other things, asset quality. The
Bank Holding Company Act prohibits the Federal Reserve Board from approving
the merger if:

40
<PAGE>

- it would result in a monopoly or be in furtherance of any
combination or conspiracy to monopolize the business of banking in
any part of the United States or

- its effect in any section of the country may substantially lessen
competition or tend to create a monopoly or would be in restraint
of trade in any other manner,

unless the Federal Reserve Board finds that any anticompetitive effects of
the merger are clearly outweighed in the public interest by the probable
effect of the transaction and meeting the convenience and needs of the
communities to be served. In addition, under the Community Reinvestment Act,
as amended, the Federal Reserve Board must take into account the records of
performance of the bank subsidiaries of Pacific and Harbor in meeting the
credit needs of each community, including low- and moderate-income
neighborhoods, served by the bank subsidiaries.

Under the Bank Holding Company Act, the merger may not be completed
until the 30th day following the date of Federal Reserve Board approval,
during which time the Department of Justice may challenge the merger on
antitrust grounds. However, in the case of our merger, the 30-day period was
reduced to 15 days at the discretion of the U.S. Department of Justice. The
commencement of an antitrust action by the Department of Justice would stay
the effectiveness of the Federal Reserve Board's approval, unless a court
specifically orders otherwise. We believe that antitrust concerns should not
interfere with the completion of the merger. Our application seeking the
approval of the Federal Reserve Board was approved on September 15, 1999.

WAIVER OF CONDITIONS; AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT

WAIVER. The merger agreement provides that either Pacific or Harbor
may waive in writing any condition precedent to that party's obligation under
the merger agreement, in whole or in part, to the extent permitted by
applicable law. If we waive the requirement for receipt of a tax opinion at
closing we will resolicit approval of the merger by our shareholders.

AMENDMENT. The merger agreement may be amended, at any time prior to
closing, by written agreement signed on behalf of both parties. If we make
any amendment to the merger agreement after you have approved the merger and
it would adversely affect the consideration you would receive, we would seek
shareholder approval of the amendment.

TERMINATION. The merger agreement may be terminated, and the merger
abandoned, at any time prior to the effective time of the merger as follows:

(a) By vote of a majority of the Board of Directors of each of
Pacific and Harbor for any reason;

(b) By a vote of the majority of the Board of Directors of either
Pacific or Harbor if:

(1) the merger has not been completed by March 31, 2000,

41
<PAGE>

(2) we fail to receive any approval or authorization of any
governmental agency required as a condition of closing
under the merger agreement, or

(3) the shareholders of either Pacific or Harbor fail to approve
the merger;

(1) there is a material breach by the other party of any that
party's representations, warranties, covenants, or
agreements contained in the merger agreement which would
result in or fail to satisfy any of the conditions or the
obligations of Pacific or Harbor, as the case may be, to
complete the merger as outlined in paragraphs (h) and (i)
under "- Conditions to the Merger," which breach cannot be
cured or has not been cured 30 days after notice to the
breaching party of the breach; or

(2) the Board of Directors of the other party has withdrawn or
modified in a manner adverse to the terminating party its
approval or recommendation of the merger agreement; or

(3) the Board of Directors of the other party has engaged in
certain negotiations described in the proviso to the first
sentence under "- No Solicitation" below; or

(d) By a vote of the majority of the Board of Directors of either
Pacific or Harbor before the approval of the merger agreement by
the shareholders of the other party if the Board of Directors of
the other party fails to recommend to its shareholders the
approval of the plan of merger contained in the merger agreement,
or has withdrawn or modified their recommendation in a manner
permitted by the merger agreement, if

(1) that party fails to receive a fairness opinion from its
financial advisor, or

(2) the Board of Directors determines, after consultation with
outside counsel, that to do otherwise would be a breach of
their fiduciary duties.

TERMINATION FEE. Either party may be required to pay a termination
fee of $250,000 if:

- that party did not use all reasonable efforts to complete the
merger in accordance with the terms of the merger agreement;

- that party terminates the merger agreement for any reason other
than as set forth in paragraph (c) above; or

- the other party terminates the merger agreement under paragraph (c)
above.

If this termination fee becomes payable, it will be payable on the
demand of the party to whom the termination fee is payable, and must be paid
within three business days of the date of the demand.

42
<PAGE>

The merger agreement also requires payment of a fee under certain
circumstances if the merger agreement is not approved and one of us is
acquired by a third party. See "- No Solicitation" below.

CONDUCT PENDING THE MERGER

GENERAL. The merger agreement contains certain restrictions, which
are reciprocal, on the conduct of the businesses of Pacific and Harbor
pending the completion of the merger. In particular, unless the prior written
consent of the other party is obtained, or as permitted by the merger
agreement, schedules attached to the merger agreement, or as noted in
disclosure letters delivered to each of Pacific and Harbor to the other under
the merger agreement. The merger agreement requires both Pacific and Harbor,
and their subsidiaries, to:

- conduct their businesses in the ordinary and usual course;

- preserve intact their business organizations and assets and
maintain their rights and franchises and existing relations with
customers, suppliers, employees, and business associates; and

The merger agreement prohibits both Harbor and Pacific, and their
subsidiaries, from taking any action which would materially adversely affect
their ability to:

- obtain any necessary approvals of governmental authorities required
for the transactions contemplated by the merger agreement or

- perform their obligations under the merger agreement.

The merger agreement also prohibits both Pacific and Harbor, and
their subsidiaries, from engaging in certain activities prior to the
effective time of the merger without the prior written consent of the other
party, which consent may not be unreasonably withheld. Specifically, without
that consent, except as provided by the merger agreement, neither Pacific or
Harbor, nor their subsidiaries, may:

(a) Sell or pledge, or agree to sell or pledge, or permit
any lien to exist on any stock owned by it of any of its material
subsidiaries;

(b) Amend its articles of incorporation or bylaws;

(d) Except as permitted by the merger agreement, declare,
set aside, or pay any dividend payable in cash, stock, or other
property with respect to any of its capital stock. Any dividend paid by
Pacific must not exceed by more than three percent the cash dividend
per share paid to Pacific's shareholders in the prior year, and Pacific
shareholders may not receive a dividend from both Pacific and the
combined corporation in the same year;

43
<PAGE>

(e) Repurchase, redeem, or otherwise acquire or permit any
subsidiary to purchase or otherwise acquire any shares of its capital
stock or any securities convertible into or exercisable for any shares
of its capital stock other than capital stock repurchased under any
existing plans as disclosed in the schedules to the merger agreement;

(f) Issue, sell, pledge, dispose of, or encumber, or
authorize or propose the issuance, sale, pledge, disposition, or
encumbrance of, any shares of, or securities convertible or
exchangeable for, or options, warrants, calls, commitments, or rights
of any kind to acquire, any shares of its capital stock of any class,
other than under the Pacific and Harbor stock plans;

(g) Transfer, lease, license, guarantee, sell, mortgage,
pledge, or dispose of any other material property or assets or encumber
any property or assets other than to a direct or indirect wholly owned
subsidiary of it other than in the ordinary and usual course of
business;

(h) Cancel, release, assign, or modify any material amount
of indebtedness of any other individual, corporation, or other entity
other than in the ordinary and usual course of business;

(i) Authorize capital expenditures other than in the
ordinary and usual course of business;

(j) Except for internal reorganizations involving existing
subsidiaries, make any material acquisition of, or investment in,
assets or stock of any other person not in the ordinary and usual
course of business, or make application for permission to take any of
the material steps to open a new branch or office except as listed on
the schedules attached to the merger agreement;

(k) Other than in the ordinary course of business
consistent with past practice, incur or permit any of its subsidiaries
to incur any indebtedness for borrowed money or assume, guarantee,
endorse, or otherwise as an accommodation become responsible for the
obligations of any person or make any loan or advance;

(l) Except as required by agreements or arrangements
disclosed in the schedules to the merger agreement,

(1) grant any increase in compensation or benefits to its
employees or to its officers, except for normal increases
consistent with past practices or as required by law;

(2) pay any bonus, except as consistent with past practice;

(3) grant any severance or termination pay to any director,
officer, or other of its employees, except as consistent
with past practices;

(4) enter into or amend any employment or severance agreement
with any director, officer, or other of its employees;

(5) grant any increase in fees or other increases in
compensation or other benefits to any of its present or
former directors; or

44
<PAGE>

(6) effect any change in retirement benefits for any class of
its employees or officers unless required by law or
advisable to maintain the tax qualification of any plan
under which the retirement benefits are provided;

(m) Except as may be required to satisfy contractual
obligations existing as of the date of the merger agreement and the
requirements of applicable law, establish, adopt, enter into, or make
any new, or amend any existing, collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, employee stock ownership, deferred compensation,
employment, termination, severance, or other plan, agreement, trust
fund, policy, or arrangement for the benefit of any directors,
officers, or employees; or

(n) Implement or adopt any change in its accounting
principles, practices or methods other than as may be required by
generally accepted accounting principles consistently applied or other
than may be required for tax purposes or to take advantage of any
beneficial tax or accounting methods.

NO SOLICITATION

The merger agreement provides that neither Pacific, Harbor, nor any
of their subsidiaries, may initiate, solicit, or encourage, directly or
indirectly, any inquiries for the making or implementation of any proposal or
offer with respect to a merger, acquisition, consolidation, or similar
transaction involving, or any purchase of all or any substantial part of, the
assets or any equity securities of it or any of its subsidiaries other than:

- nonperforming assets,

- securities of a subsidiary formed for the sole purpose of holding
for sale the assets,

- securities to be issued in connection with our stock plans, or

- as disclosed in any disclosure letter.

Neither Pacific nor Harbor may engage in any negotiations
concerning, provide any confidential information or data to, or have any
discussions with, any persons relating to an acquisition proposal; PROVIDED,
HOWEVER, that each of Pacific and Harbor may provide information and may
participate in these discussions and negotiations if its Board of Directors,
after having consulted with and considered the written advice of outside
counsel, has determined that the failure to provide the information or
participate in the negotiations and discussions would cause the members of
the Board of Directors to breach their fiduciary duties established under
Washington law. Each party will notify the other party immediately if any of
these inquiries or proposals are received by it, any information is requested
from it, or any negotiations or discussions are sought to be initiated or
continued with it.

If a proposal or offer described above occurs on or before the
Harbor shareholders meeting, the Harbor shareholders fail to approve the
merger, and a third party acquires control of Harbor or The Bank of Grays
Harbor prior to June 30, 2000, Harbor will be required to pay $1,000,000 to
Pacific unless Pacific was in material default of its obligations under the
merger agreement. Conversely, if a proposal or offer described above occurs
on or before the Pacific

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<PAGE>

shareholders meeting, the Pacific shareholders fail to approve the merger,
and a third party acquires control of Pacific or Bank of the Pacific prior to
June 30, 2000, Pacific will be required to pay $1,000,000 to Harbor unless
Harbor was in material default of its obligations under the merger agreement.

MANAGEMENT OF THE COMBINED CORPORATION

THE BOARD OF DIRECTORS OF THE COMBINED CORPORATION. The Board of
Directors of the combined corporation, as of the effective time of the
merger, will be divided into three classes, of three directors each, with the
initial terms of office of classes A, B and C expiring at the first, second,
and third annual meetings of shareholders of the combined corporation,
respectively. The merger agreement provides that the following individuals
will be designated to be directors of the combined corporation from and after
the effective time of the merger:

<TABLE>
<CAPTION>
NAME PRESENT BOARD AFFILIATION
---- -------------------------
<S> <C>
CLASS A DIRECTORS

Robert J. Worrell Harbor
Dennis A. Long Pacific
Joseph A. Malik Harbor

CLASS B DIRECTORS

Gary C. Forcum Harbor
Robert A. Hall Pacific
Sidney R. Snyder Pacific

CLASS C DIRECTORS

Duane E. Hagstrom Pacific
Walter L. Westling Harbor
David L. Woodland Harbor
</TABLE>

For additional information about the foregoing persons, including
their present occupations and business experience for the past five years,
see "Management of the Combined Corporation."

Under Washington law, approval of the merger agreement by the
shareholders of Pacific and Harbor constitutes approval of the above
directors of the combined corporation. If prior to the effective time of the
merger, any of the foregoing persons become unavailable to serve or if,
following the effective time of the merger and before the second annual
meeting of the combined corporation, a vacancy shall occur, then the
remaining members of the Board of Directors of the combined corporation shall
fill the vacancy in accordance with the combined corporation Bylaws and the
provisions of Washington law, and based on nominations by affirmative votes
of a majority of the remaining Pacific-related directors if the vacancy
relates to a Pacific-related director, or by Harbor-related directors if the
vacancy relates to a Harbor-related director.

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<PAGE>

COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMBINED CORPORATION.
The Board of Directors of the combined corporation will have an executive
committee composed of Messrs. Long, Worrell, Snyder and Malik. Mr. Malik will
be the Chairman of the Board. If he is unable or unwilling to serve, the
Chairman will be selected by a majority of the Harbor related directors. Mr.
Snyder will be the Vice-Chairman of the Board. If he is unable or unwilling
to serve; the Vice-Chairman will be selected by a majority of the Pacific
related directors. Prior to the effective time of the merger, the executive
committee may meet from time to time to formulate on an advisory basis
policies and procedures for various transitional matters and matters relating
to director and senior officer compensation and benefits for the combined
corporation.

CERTAIN OFFICERS OF THE COMBINED CORPORATION. At the effective time
of the merger, the officers of the combined corporation will be as follows:

- Robert J. Worrell, Chief Executive Officer;

- Dennis A. Long, President;

- Wayne D. Gale, Vice President;

- Patricia C. Nelson, Vice President;

- John Van Dijk, Treasurer; and

- Janice M. Pearce, Secretary.

During the terms of their employment agreements, the officers shall
have the powers, and perform the duties, set forth in each of their
employment agreements and in the Bylaws of the combined corporation. For
information regarding employment agreements for each of the executive
officers named above, which will be effective at the effective time of the
merger, see "The Merger - Some of Our Officers and Directors May Have
Interests in the Merger that are Different from Yours."

APPROVAL BY 60% OF THE BOARD REQUIRED FOR CERTAIN ACTIONS. Prior to
the third anniversary of the effective time of the merger, certain actions
will require the approval of at least 60% of the members of the Board of
Directors. For any annual or special meeting held prior to the first
anniversary of the effective time of the merger, any slate of nominees for
the election of directors at the combined corporation's annual shareholders
meeting must be approved by 60% of the directors. However, this voting
requirement will not apply as long as the Board uses its best efforts to
nominate Messrs. Worrell, Long and Malik.

In addition, during the first three years following the closing of
the merger, any of the following actions must be approved by 60% of the
directors of the combined corporation:

- any proposed amendment to the combined corporation's Articles of
Incorporation or Bylaws;

- any amendment to or the termination of Mr. Worrell's or Mr. Long's
employment agreement; and

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<PAGE>

- removal from office of any of the officers listed above under
"- Certain Officers of the Combined Corporation."

- a determination of what level, if any, of dividends will be paid by
the combined corporation to its shareholders;

- a decision to merge the combined corporation's subsidiary banks;

- a decision to change the number or composition of the Boards' of
Directors of the combined corporation's subsidiary banks; and

- any action on an item that must be approved by the combined
corporation's shareholders under the provisions of the Washington
Business Corporation Act.

EMPLOYEE BENEFIT PLANS

As of June 30, 1999, there were 6,000 unexercised options
outstanding under Pacific's stock option plan to purchase shares of Pacific
common stock at a price of $60.00 per share. As of that date, options to
purchase 1,500 shares were exercisable.

After the merger, the combined corporation will assume each option
outstanding immediately prior to the effective time of the merger, whether or
not then exercisable, under Pacific's stock option plan. Each option will
become an option of the combined corporation and remain outstanding in
accordance with the terms of Pacific stock option plan and any related stock
option agreement, except that:

- each option may be exercised only for combined corporation common
stock,

- each option will become an option to purchase the number of Shares
of combined corporation common stock equal to 0.785 multiplied by
the number of shares of Pacific common stock subject to the option
immediately prior to the effective time of the merger, with the
product rounded down to the next whole share, and

- the exercise price per share of combined corporation common stock
at which the option is exercisable will be an amount, rounded up
to the next whole cent, computed by dividing the exercise price
per share of Pacific common stock at which the option is
exercisable immediately prior to the effective time of the merger
by 0.785.

Each of Harbor's outstanding employee stock options will remain
outstanding, unaffected by the merger.

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<PAGE>

SOME OF OUR OFFICERS AND DIRECTORS MAY HAVE INTERESTS IN THE MERGER THAT ARE
DIFFERENT FROM YOURS

Some of our Management and our Boards of Directors have interests in
the merger in addition to any interests they have as shareholders of Pacific
or Harbor. We estimate that the total dollar amount of these interests is
approximately $919,472. Our Boards of Directors were aware of these factors and
considered them in approving the merger.

SOME OF OUR DIRECTORS AND EXECUTIVE OFFICERS WILL BE DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMBINED CORPORATION. The merger agreement also
provides that five of the current directors of Harbor and four of the current
directors of Pacific will be directors of the combined corporation. The
combined corporation's bylaws will provide that no director may be removed
from office without cause except by a vote of a majority of the shares then
entitled to vote. See "Comparison of Certain Rights of Holders of Common
Stock of Harbor, Pacific and the Combined Corporation." Unlike directors of
Harbor and Pacific, directors of the combined corporation will receive
directors fees of $250 per regular monthly meeting, and $100 per special
meeting. The total annual benefit to directors of the combined corporation,
assuming they attend all regular meetings and no special meetings are called,
would be $3,000 per director or $27,000 in the aggregate.

We intend that the membership of the Board of Directors of each of
our subsidiary banks will continue to be identical to their membership
immediately before the merger, except that Robert J. Worrell and Dennis A.
Long both will be directors of each of the subsidiary banks. Mr. Worrell and
Mr. Long will not receive additional compensation as a result of this
arrangement.

The merger agreement names certain officers of Harbor and Pacific as
officers of the combined corporation. See "- Management of the Combined
Corporation" above.

WE HAVE ENTERED INTO EMPLOYMENT AGREEMENTS

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<PAGE>

WITH SOME OF OUR EXECUTIVE OFFICERS AND OTHER EMPLOYEES. As a condition to
the merger, Pacific entered into an employment agreement with Dennis A. Long
and Harbor entered into an employment agreement with John Van Dijk. The
employment agreements for Messrs. Long and Van Dijk each have a term of three
years and will take effect at the effective time of the merger.

The employment agreement dated May 20, 1998 currently in effect for
Robert J. Worrell will remain in effect until its expiration on May 31, 2001.
Mr. Worrell's employment agreement has been amended to provide that: Mr.
Worrell will serve as Chief Executive Officer of the combined corporation. In
addition, the combined corporation may, at its option, extend Mr. Worrell's
agreement for one year.

Prior to closing of the merger:

- Harbor will enter into employment agreements with Wayne Gale and
Janice Pearce;

- Pacific will enter into an employment agreement with Patricia
Nelson;

- The Bank of Grays Harbor will enter into employment agreements with
Ty Palmer, Mike Sweeney, Randy Ross and Lynn Paylor; and

- Bank of the Pacific will enter into employment agreements with
Wendy Strange, Dian Barker, Ronald Nelson, Mavis Shucka, George
Butkus and Susan Madsen.

All of these employment agreements will take effect upon the closing
of the merger and will be in a form mutually agreed to by Harbor and Pacific.
The salaries of the officers and employees will be the same as their current
salaries. The new employment agreements provide that, under specified
conditions, payments will be made to them upon any future change in the
control of the combined corporation. We estimate that the new employment
agreements will increase the payments that officers and employees could
receive, if a change of control takes place in the future, by approximately
$892,472.

The employment agreements for Messrs. Palmer and Gale will have two
year terms; the remaining employment agreements will all have terms of one
year. Except for Ms. Nelson, the employment agreements provide that, if the
employee is terminated without cause or resigns with good reason or in
connection with a change in control of the combined corporation, the employee
will receive a payment equal to the employee's annual base salary at the time
of termination. Ms. Nelson's agreement provides that her termination payment
will be based upon her total salary, and further provides that she will also
receive the termination payment if she resigns in connection with a change in
control. Finally, all of the employment agreements provide that the employee
may not compete with the combined corporation or the subsidiary banks for a
period of two years after the termination of his or her employment.

OUR OFFICERS AND DIRECTORS WILL BE INDEMNIFIED BY THE COMBINED
CORPORATION AFTER THE MERGER. The merger agreement provides that the combined
corporation will indemnify the directors and officers of Pacific, Harbor, and
their subsidiaries against costs or liabilities to the same extent that they
would have been indemnified under Washington law and the applicable articles
of incorporation or bylaws as in effect on the date of the merger agreement.
In addition, for six years after the completion of the merger, the combined
corporation shall indemnify these persons against costs and liabilities in
connection with any claim relating to the merger to the fullest extent
permitted by applicable law.

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<PAGE>

FEDERAL INCOME TAX TREATMENT OF THE MERGER

We have received an opinion from Graham & Dunn PC that the merger
will constitute a tax-free reorganization for federal income tax purposes.
This opinion will not bind the Internal Revenue Service or preclude the
Internal Revenue Service from adopting a contrary position. The opinion is
based upon facts and assumptions and representations and assurances made by
Harbor and Pacific.

THE FEDERAL INCOME TAX DISCUSSION SET FORTH BELOW MAY NOT APPLY TO
PARTICULAR CATEGORIES OF HOLDERS OF HARBOR COMMON STOCK AND PACIFIC COMMON
STOCK SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL INCOME TAX LAWS, SUCH AS
FOREIGN HOLDERS, AND HOLDERS WHOSE STOCK MAY HAVE BEEN ACQUIRED AS
COMPENSATION. IN ADDITION, THERE MAY BE RELEVANT STATE, LOCAL OR OTHER TAX
CONSEQUENCES, NONE OF WHICH ARE DESCRIBED BELOW. YOU ARE URGED TO CONSULT
YOUR TAX ADVISORS TO DETERMINE THE SPECIFIC PERSONAL TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL, AND
OTHER TAX LAWS.

The Graham & Dunn PC opinion states that:

1. The merger of Pacific into Harbor will constitute a
tax-free reorganization.

2. No gain or loss will be recognized by Harbor or Pacific
as a result of the merger.

3. The tax basis and holding period for the Pacific assets
that are received by Harbor in the merger will be the same as the tax
basis and holding period of the assets held immediately before the
exchange by Pacific.

4. No gain or loss will be recognized by holders of Pacific
common stock upon the receipt of combined corporation common stock in
exchange for Pacific common stock in the merger.

5. The tax basis of the combined corporation common stock
received in the merger by Pacific shareholders will be the same as the
tax basis of the shares of Pacific common stock surrendered in the
exchange, reduced by any basis allocable to a fractional share interest
in combined corporation common stock for which cash is received. The
holding period for the shares of combined corporation common stock
received in the merger will include the holding period of Pacific
shares exchanged, provided that Pacific shares were held as capital
assets at the time of the merger.

6. Gain or loss will be recognized by Pacific shareholders
who receive cash in lieu of fractional shares of combined corporation
common stock. The amount of the gain or loss will be the difference
between the cash received and the basis of the fractional share
interest surrendered in the exchange. The gain or loss will be capital
gain or loss provided that the shares of Pacific common stock
surrendered were capital assets at the time of surrender, and will be
long-term capital gain or loss if the shares of Pacific have been held
for more than one year.

ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER

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<PAGE>

It is anticipated that the merger will be accounted for as a
pooling-of-interests for accounting and financial reporting purposes. Under
this method of accounting, recorded assets and liabilities of Harbor and
Pacific are carried forward at their previously recorded amounts; income of
the combined corporation will include income of Harbor and Pacific for the
entire year in which .the merger occurs; and the reported income of the
separate corporations for prior periods will be combined. No recognition of
goodwill arising from the merger is required of any party to the merger.
Under the merger agreement, it is a condition to our obligations to complete
the merger that we shall have received a letter from Knight Vale & Gregory
Inc., P.S. that the merger will qualify for pooling-of-interests treatment.

The unaudited pro forma combined financial information contained in
this Joint Proxy Statement/Prospectus has been prepared using the
pooling-of-interests accounting method to account for the merger. See
"Unaudited Pro Forma Combined Condensed Financial Statements and Selected
Financial Data," including the related notes.

DISSENTERS' RIGHTS OF APPRAISAL

In accordance with Washington law (RCW 23B.13), our shareholders
have the right to dissent from the merger and to receive payment in cash for
the "fair value" of their shares of Harbor or Pacific common stock, as the
case may be.

Harbor and Pacific shareholders electing to exercise dissenters'
rights must comply with the provisions of the Washington appraisal laws in
order to perfect their rights. The following is intended as a brief summary
of the material provisions of the procedures required to be followed by a
Harbor or Pacific shareholder in order to dissent from the merger and perfect
the shareholder's dissenters' rights. This summary, however, is not a
COMPLETE STATEMENT OF ALL APPLICABLE REQUIREMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE WASHINGTON APPRAISAL LAWS, THE FULL TEXT OF
WHICH IS SET FORTH IN APPENDIX 4 HERETO.

A shareholder who wishes to assert dissenters' rights must:

- deliver to Harbor or Pacific, as applicable, before the special
meeting written notice of the shareholder's intent to demand
payment for the shareholder's shares if the merger is effected,
AND

- not vote the shares in favor of the merger.

A shareholder wishing to deliver a notice asserting dissenters'
rights should hand deliver or mail the notice to at the following addresses:

To Pacific: Pacific Financial Corporation
1007 South Pacific
P.O. Box 738
Long Beach, Washington 98631
Attention: Barbara Gramps

To Harbor: Harbor Bancorp, Inc.
300 East Market Street
P.O. Box 1826
Aberdeen, Washington 98520-5244

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<PAGE>

Attention: Janice M. Pearce

A shareholder who wishes to exercise dissenters' rights generally
must dissent with respect to all of the shares the shareholder owns or over
which the shareholder has the power to direct the vote. However, if a record
shareholder is a nominee for several beneficial shareholders some of whom
wish to dissent and some of whom do not, then the record holder may dissent
with respect to all the shares beneficially owned by any one person by
notifying Harbor or Pacific in writing of the name and address of each person
on whose behalf the record shareholder asserts dissenters' rights. A
beneficial shareholder may assert dissenters' rights directly by submitting
to Pacific or Harbor the record shareholder's written consent and by
dissenting with respect to all the shares of which the shareholder is the
beneficial shareholder or over which the shareholder has power to direct the
vote.

A SHAREHOLDER WHO DOES NOT DELIVER TO HARBOR OR PACIFIC PRIOR TO THE
SPECIAL SHAREHOLDERS MEETING A WRITTEN NOTICE OF THE SHAREHOLDER'S INTENT TO
DEMAND PAYMENT FOR THE "FAIR VALUE" OF THE SHARES WILL LOSE THE RIGHT TO
EXERCISE DISSENTERS' RIGHTS. IN ADDITION, ANY SHAREHOLDER ELECTING TO
EXERCISE DISSENTERS' RIGHTS MUST EITHER VOTE AGAINST THE MERGER OR ABSTAIN
FROM VOTING.

If the merger is effected, the combined corporation will, within 10
days after the effective date of the merger, deliver a written notice to all
Harbor and Pacific shareholders who properly perfected their dissenters'
rights. The notice will, among other things:

- state where the payment demand must be sent and where and when
certificates for Pacific and Harbor shares must be deposited;

- supply a form for demanding payment; and

- set a date by which the combined corporation must receive the
payment demand, which date will be between 30 and 60 days after
notice is delivered.

A shareholder wishing to exercise dissenters' rights must at that
time file the payment demand and deliver share certificates as required in
the notice. Failure to do so will cause that person to lose their dissenters'
rights.

Within 30 days after the merger occurs or receipt of the payment
demand, whichever is later, Harbor will pay each dissenter with properly
perfected dissenters' rights the combined corporation's estimate of the "fair
value" of the shareholder's interest, plus accrued interest from the
effective date of the merger. With respect to a dissenter who did not
beneficially own shares of Harbor or Pacific common stock prior to the public
announcement of the merger, the combined corporation is required to make the
payment only after the dissenter has agreed to accept the payment in full
satisfaction of the dissenter's demands. "Fair value" means the value of the
shares immediately before the effective date of the merger, excluding any
appreciation in anticipation of the merger. The rate of interest is generally
required to be the rate at which the combined corporation can borrow money
from other banks.

A dissenter dissatisfied with our estimate of the fair value may
notify us of the dissenter's estimate of the fair value. If we do not accept
the dissenter's estimate and the parties do not otherwise settle on a fair
value, then we must within 60 days petition a court to determine the fair
value.

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<PAGE>

In view of the complexity of the Washington statutes governing
dissenters' rights of appraisal, shareholders of Pacific and Harbor who may
wish to dissent from the merger and pursue appraisal rights should consult
their legal advisors.

STOCK RESALES BY OUR AFFILIATES

The combined corporation common stock to be issued in the merger
will be transferable free of restrictions under the Securities Act, except
for shares received by persons, including our directors and executive
officers, who may be deemed to be "affiliates" of Pacific and Harbor, as that
term is used in (1) paragraphs (c) and (d) of Rule 145 under the Securities
Act and/or (2) Accounting Series Releases 130 and 135, as amended, of the
Securities and Exchange Commission. Affiliates may not sell their shares of
the combined corporation common stock acquired in the merger, except

- under an effective registration statement under the Securities Act
covering those shares;

- in compliance with Rule 145; or

- in the opinion of counsel reasonably satisfactory to the combined
corporation, under other applicable exemptions from the
registration requirements of the Securities Act.

Securities and Exchange Commission guidelines further indicate that
the pooling-of-interests method of accounting will generally not be
challenged on the basis of sales by affiliates of the acquiring or acquired
company if the affiliates do not dispose of any of the shares of the
acquiring or acquired company they owned prior to the completion of a merger
or shares of the acquiring corporation they receive in connection with the
merger during the period beginning 30 days before the merger and ending when
financial results covering at least 30 days of post-merger operations of the
combined entity have been published. Pacific and Harbor have obtained
customary agreements with all directors, officers, and affiliates of Pacific
and Harbor, under which those persons represent that they will not dispose of
their shares of the combined corporation received in the merger or the shares
of capital stock of Pacific or Harbor held by them prior to the merger,
except in compliance with the Securities Act and the rules and regulations
promulgated thereunder, and in a manner that would not adversely affect the
ability of the combined corporation to treat the merger as a
pooling-of-interests for financial reporting purposes. This Joint Proxy
Statement/Prospectus does not cover any resales of the combined corporation
common stock received by affiliates of Pacific or Harbor.

EXPENSES

The merger agreement provides, in general, that Pacific and Harbor
will each pay its own expenses in connection with the merger agreement and
the transactions contemplated thereby, including fees and expenses of its own
financial and other consultants, investment bankers, accountants, and
counsel. However, Pacific and Harbor will divide equally the following
expenses:

- all fees and disbursements, including those of counsel and
accountants, but excluding those of financial advisers, incurred
in connection with the preparation of the Registration Statement
and other required government applications, and

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<PAGE>

- all listing, filing, and registration fees paid by or incurred on
behalf of the combined corporation, including fees paid to the
Securities and Exchange Commission and other government agencies.

55
<PAGE>

INFORMATION CONCERNING HARBOR

BUSINESS

Harbor is a bank holding company whose main and only subsidiary is
The Bank of Grays Harbor. The Bank of Grays Harbor has five full-service
offices located in Grays Harbor County. The Bank of Grays Harbor was
organized in 1978 and opened for business in 1979 to meet the need for a
local community bank with local interests to serve the small- to medium-sized
local businesses and professionals. Those services include commercial loans,
installment loans, real estate loans, and personal and business deposit
products.

On June 30, 1999, Harbor had assets of $133 million, loans totaling
approximately $85 million, and deposits of approximately $119 million.

COMPETITION

Competition in the banking industry is significant and has
intensified with interest rate deregulation. Furthermore, competition from
outside the traditional banking system from investment banking firms,
insurance companies and related industries offering bank-like products has
increased the competition for deposits and loans.

The banking industry in The Bank of Grays Harbor's primary market
area is characterized by well established thrifts which are headquartered in
the area along with branches of large banks and small community banks with
headquarters located outside the primary market area.

The Bank of Grays Harbor's traditional competition for deposits
comes from commercial banks, thrift associations, credit unions, and money
market funds, many of which have more locations or offer higher rates of
interest than Harbor. Competition for funds also comes from issuers of
corporate and governmental securities, insurance companies, mutual funds, and
other financial intermediaries. The Bank of Grays Harbor competes for
deposits by offering a variety of deposit accounts at rates generally
competitive with similar financial institutions in the area. The Bank of
Grays Harbor's principal competitive advantage with respect to the other
financial institutions in the area is its status as a local community bank,
offering products and services tailored to the needs of the community.

In competing for deposits, Harbor is subject to certain limitations
not applicable to non-bank competitors. Legislation enacted in the 1980's
authorized banks to offer deposit instruments with rates competitive with
money market funds, but subject to restrictions not applicable to those
funds. Legislation has also made non-bank financial institutions more
effective competitors. Thrift associations and credit unions are now
permitted to offer checking accounts and to make commercial loans with
certain limitations.

Harbor's competition for loans comes primarily from the same
financial institutions with which it competes for deposits. Harbor competes
for loan originations primarily through the level of interest rates and loan
fees charged, the variety of commercial and mortgage loan products offered,
and the efficiency and quality of services provided to borrowers. Factors
that affect loan competition include the availability of lendable funds,
local and national economic conditions, current interest rate levels, and
loan demand.

At present, there are five commercial banks, four thrifts, and four
credit unions operating in Harbor's market area that offer some of the
services offered by Harbor, and that may be in direct

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<PAGE>

competition for the customers Harbor seeks to attract. Because of the
extensive experience of Harbor's management in its market area and the
business contacts of its management and the directors, management believes
that Harbor has been able to compete effectively for business.

FACILITIES

The main office of Harbor is located at 300 East Market Street,
Aberdeen, Washington. Branch offices are located at:

- 405 8th Street Hoquiam, Washington;

- 145 Chance a la Mer NW, Ocean Shores, Washington;

- 4471 State Route 109, Pacific Beach, Washington; and

- 150 S. Main, Montesano, Washington.

All of the branch facilities are owned by Harbor, except that the land on
which the Montesano branch is sited is leased.

The Bank of Grays Harbor and IDC Parking Company are parties to a
lease dated July 8, 1997, under which the bank leases, with an option to
purchase, the property on which its Montesano branch office is located. Under
the terms of the lease, IDC Parking Company may exercise an option to receive
3,300 shares of Harbor stock if the bank exercises its option to purchase the
Montesano branch property.

EMPLOYEES

As of June 30, 1999, Harbor had 47 full-time equivalent employees.
The employees are not represented by a union organization or other collective
bargaining group, and management considers its relations with the employees
to be very good.

LEGAL PROCEEDINGS

Harbor is from time to time a party to various legal proceedings
arising in the ordinary course of its business. Management believes that
there are no threatened or pending proceedings against Harbor which, if
determined adversely, would have a material effect on its business or
financial position.

INFORMATION CONCERNING PACIFIC

BUSINESS

Pacific Financial Corporation is a bank holding company whose main
and only subsidiary is Bank of the Pacific. Bank of the Pacific has five full
service offices located in Pacific and Wahkiakum Counties. Bank of the
Pacific was organized and opened for business in 1971 to meet the need for a
local community bank with local interests to serve the needs of individuals
and small- to medium-sized local businesses. Services include commercial
loans, installment loans, real estate loans, and personal and business
deposit products.

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COMPETITION

Competition in the banking industry is significant and has
intensified with interest rate deregulation. Competition now comes from
outside the traditional banking system including investment banking firms,
insurance companies and related industries offering bank like products
competing for deposits and loans.

The banking industry in Pacific's primary market area is
characterized by well-established branches or subsidiary banks of large banks
with headquarters outside the primary market area, as well as local financial
institutions. At present there are three commercial banks, one thrift and one
credit union operating in Pacific's market area that offer some of the
services that are offered by Pacific and that may be in direct competition
for the customers of Pacific.

Pacific's traditional competition for deposits comes from commercial
banks, savings banks, credit unions and money market funds, many of which
have more locations or offer higher rates of interest than Pacific.
Competition for funds also comes from issuers of corporate and governmental
securities, insurance companies, mutual funds, as well as other financial
intermediaries. The Bank competes for deposits by offering a variety of
deposit accounts at rates generally competitive with similar financial
institutions in the area. The Bank's principal competitive advantage with
respect to the other financial institutions in the area is its status as a
local community bank, offering products and services tailored to the needs of
the community.

In competing for deposits, Bank of the Pacific is subject to certain
limitations not applicable to non-bank competitors. Legislation enacted in
the 1980's authorized banks to offer deposit instruments with rates
competitive with money market funds, but subject to withdrawal restrictions
not applicable to others. Legislation has also made non-bank financial
institutions more effective competitors. Thrift associations and credit
unions are now permitted to offer checking accounts and to make commercial
loans with certain limitations.

Bank of the Pacific's competition for loans comes primarily from the
same financial institutions with which it competes for deposits. Because of
recent low interest rates, competition has been strong for good quality
customers. Pacific management has focused on building strong customer loyalty
and as a result, few customers have moved their relationships to competitors.

The branches of the large financial institutions in Pacific's market
area have a competitive advantage over Pacific in that they have high public
visibility and are able to maintain advertising and marketing activity on a
much larger scale than Pacific can maintain economically. Because single
borrower lending limits imposed by law are dependent on the capital of the
institution, the branches of larger institutions with substantial capital
bases are also at an advantage with respect to applications for loans that
are in excess of Pacific's legal lending limits.

Although we cannot guarantee that it will continue to do so, Pacific
has been able to compete effectively for business in its market area because
of the extensive experience of management of Pacific and the business
contacts of management and the directors.

58
<PAGE>

FACILITIES

The main office of Pacific Financial is located at 1007 South
Pacific Highway, Long Beach, Washington. Branch offices are located at:

- 1802 Bay Avenue, Ocean Park, Washington;

- Second and Spruce, Ilwaco, Washington;

- 309 Knappton Road, Naselle, Washington; and

- 56 Main Street, Cathlamet, Washington.

All of the branch facilities are owned by Pacific.

EMPLOYEES

As of June 30, 1999, Pacific had 37 full-time equivalent employees.
They are not employees represented by a union organization or other
collective bargaining group, and management considers its relations with the
employees to be excellent.

LEGAL PROCEEDINGS

Pacific is from time to time a party to various legal proceedings
arising in the ordinary course of its business. Management believes that
there are no threatened or pending proceedings against Pacific which, if
determined adversely, would have a material effect on its business or
financial position.

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

GENERAL. Harbor operates five full-service offices in Grays Harbor
County. Harbor's primary source of revenue is derived from providing loans to
customers, who are predominately small and middle-market businesses.

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

OVERVIEW. Total assets of $132.8 million as of June 30, 1999
represent a 5.6% increase compared to total assets of $125.8 million as of
June 30, 1998. This growth is due to continued strong growth of core deposits.

NET INCOME. For the six months ended June 30, 1999 and 1998,
Harbor's net income was $1,007,000 and $995,000 respectively. Net income for
the six months ended June 30, 1999 increased $12,000 or 1.2% over the same
period in 1998. The increase in earnings is due to increased net interest
income achieved primarily from investment income. Diluted earnings per share
for the periods ended June 30, 1999 and 1998 were $3.79 and $3.77,
respectively.

NON-INTEREST EXPENSES. Non-interest expenses for the six months
ended June 30, 1999 increased $37,000 or 1.9% from the same period in 1998.
The increase in expenses is due primarily to costs associated with the Bank's
asset growth. Also contributing to the increase was increased compensation

59
<PAGE>

and employee benefit expenses, professional services costs, and costs
associated with business development.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 1998 AND 1997

OVERVIEW. Total assets of $135.3 million at December 31, 1998
represents a 21% increase over assets of $111.8 million at December 31, 1997.
This growth is attributed to the strong growth of core deposits.

NET INCOME. For the years ended December 31, 1998 and 1997, net
income was $2,073,000 and $1,938,000 respectively, an increase of $135,000 or
7.0%, from 1997 to 1998. Total revenue, which is defined as net interest
income plus non-interest income, increased to $6,917,000 in 1998 from
$6,430,000 million in 1997, an increase of 7.6%. The growth in revenue
resulted from increased loans and deposits and the resulting increase in net
interest income. Net interest margins remained well above peer group
performance based on the FDIC Uniform Bank Performance Report; management
believes that is due to effective management of the pricing of loan and
deposit products. Diluted earnings per share for the two years ended December
31, 1998 and 1997 were $7.84 and $7.48, respectively.

NON-INTEREST EXPENSES. Non-interest expenses for the year ended
December 31, 1998 increased $414,000, or 11.8% over the year ending 1997. The
1998 increase is attributed to the 21.0% growth in assets achieved in 1998
and to increased occupancy and equipment costs associated with the addition
of the Montesano Branch which opened in October 1997, along with increased
compensation and benefit expenses.

LOAN QUALITY, LIQUIDITY, CAPITAL

PROVISION FOR CREDIT LOSSES. The allowance for credit losses
represents management's current estimate of amounts required to absorb losses
on existing loans. The allowance of $1,148,000 at June 30, 1999 is an
increase of $1,000 or 0.1% from the December 31, 1998 allowance of
$1,147,000. The allowance represents 1.4% of total loans at June 30, 1999.
The $1,147,000 allowance at December 31, 1998 is an increase of $10,000 or
0.9% from the 1997 allowance of $1,137,000. The allowance represents 1.4% of
loans at December 31, 1998 and December 31, 1997.

Determination of the appropriate allowance level is based on, among
other things, an analysis of various factors including historical loss
experience based on volumes and types of loans, volumes and trends in
delinquencies and non-accrual loans, trends in portfolio volume, results of
internal and independent external credit reviews, and anticipated economic
conditions in the Bank's market area. The Bank determines the adequacy of its
loan loss reserves through a formula taking into consideration non-performing
loans, special mention credits and substandard loans. Bank management reviews
all loans classified as substandard, doubtful, loss or special mention on a
quarterly basis, and sets reserve levels commensurate with management's
assessment of the risk to loss and loans classification. Based on this
analysis, management considers the allowance for possible loan losses to be
adequate for the periods indicated.

LIQUIDITY AND SOURCES OF FUNDS. The Bank's primary sources of funds
are customer deposits, loan repayments, maturities of investment securities,
net income, advances from the Federal Home Loan Bank of Seattle, and short
term Federal Funds purchased from correspondent banks. Scheduled loan
repayments are relatively stable sources of funds while deposit inflows and
unscheduled loan prepayments are not. Deposit inflows and unscheduled loan
prepayments are influenced by general

60
<PAGE>

interest rate levels, interest rates on other investments, competition,
economic conditions and other factors.

Total deposits at June 30, 1999, December 31, 1998 and December 31,
1997 were $119.3 million, $121.7 million and $99.8 million respectively.
Deposit growth from December 31, 1997 to June 30, 1999 was 19.5%. The Bank
does not accept brokered deposits. A concerted effort has been made to
attract deposits in the market area the Bank serves through competitive
pricing and delivery of quality products.

Management anticipates that the Bank will continue to rely on
customer deposits, loan repayments, maturities of investment securities, net
income, Federal Home Loan Bank of Seattle borrowings, and short term Federal
Funds purchased from correspondent banks to provide liquidity. Although
deposit balances have shown historical growth, these balances may be
influenced by changes in the banking industry, interest rates available on
other investments, general economic conditions, competition and other
factors. Borrowings may be used on a short-term basis to compensate for
reductions in other sources of funds. Borrowings may also be used on a
long-term basis to support expanded lending activities and to match
maturities or repricing intervals on assets. The sources of these funds would
most likely be borrowings from the Federal Home Loan Bank of Seattle.

CAPITAL. The primary capital-to-asset leverage ratio for the Company
was 9.48% at June 30, 1999, as compared to 8.84% at December 31, 1998, and
9.47% at December 31, 1997. In 1989, the federal banking regulators adopted
risk based capital guidelines under which one of four risk weights is applied
to balance sheet assets, each with different capital requirements based on
the credit risk of the asset. Risk-adjusted total capital-to-asset ratios
were 13.94% at June 30, 1999, and 13.48% and 14.54% at December 31, 1998 and
1997 respectively. As of June 30, 1999, the Bank was considered "well
capitalized" per FDIC risk based guidelines.

AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID

For most financial institutions, the primary component of earnings
is net interest income. Net interest income is the difference between
interest income, principally from loan and investment securities portfolios,
and interest expense, principally on customer deposits and borrowings.
Changes in net interest income result from changes in volume, spread and
margin. For this purpose, volume refers to the average dollar level of
interest-earning assets and the average cost of interest-bearing liabilities,
spread refers to the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities, and margin
refers to net interest income divided by average interest-earning assets.
Changes in net interest income are influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.

The following table gives you information with regard to average
balances of assets and liabilities, as well as the total dollar amounts of
interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant yields or costs, net interest income
and net interest margin.

61
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
INTEREST INTEREST
AVERAGE INCOME AVERAGE AVERAGE INCOME AVERAGE
BALANCE (1) (EXPENSE)(2) RATE BALANCE (EXPENSE) RATE
----------- ------------ ------- ---------- ---------- ---------
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans $ 81,648 $ 8,190(3) 10.03% $ 79,404 $ 8,057 10.15%
Investment
securities:
Taxable 17,661 1,023 5.79 10,433 701 6.72
Tax-exempt 3,776 256(3) 6.78 2,539 192(3) 7.56
Total investment
securities 21,437 1,279 5.97 12,972 893 6.88
Federal funds sold
and deposits in banks 12,016 713 5.93 4,696 248 5.28
TOTAL EARNING ASSETS/INTEREST
INCOME 115,101 10,182 8.85% 97,072 9,198 9.48%

Cash and due from banks 5,412 5,089
Bank premises and equipment
(net) 2,466 2,342
Other assets 1,490 1,237
Allowance for credit losses (1,139) (1,141)
TOTAL ASSETS $123,330 $ 104,599

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Savings and interest-
bearing demand $ 66,903 (2,206) 3.30% $ 54,262 (1,914) 3.53%
Time 28,092 (1,555) 5.54% 24,467 (1,366) 5.58
TOTAL DEPOSITS 94,995 (3,761) 3.96% 78,729 (3,280) 4.17
Other borrowings --- --- 97 (6) 6.19
Total interest-bearing
liabilities/
interest expense 94,995 (3,761) 3.96% 78,826 (3,286) 4.17

Demand deposits 16,053 14,892
Other liabilities 718 568
Shareholders' equity 11,564 10,313
Total liabilities and
shareholders' equity $123,330 $ 104,599

NET INTEREST INCOME $ 6,421 $ 5,912

NET INTEREST INCOME AS A
PERCENTAGE OF AVERAGE EARNING ASSETS
Interest income 8.85% 9.48%
Interest expense 3.27% 3.39%
NET INTEREST INCOME 5.58% 6.09%
</TABLE>

- ---------------
(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding.

(2) Loan fees of $337,000 and $327,000 are included in interest income in 1998
and 1997, respectively.

(3) Tax equivalent basis.

62
<PAGE>

The following table shows the changes in consolidated net interest
income attributable to changes in volume and to changes in interest rates.
Changes attributable to the combined effect of volume and interest rate have
been allocated proportionately to the changes due to volume and the changes
due to interest rate.

<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
--------- -------- -------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Loans $ 226 $ (93) $ 133 $ 1,077 $ 39 $ 1,116
Investment securities:
Taxable 430 (108) 322 (46) 3 (43)
Tax-exempt 86 (22) 64 (8) (3) (11)
Total investment securities 516 (130) 386 (54) - (54)
Federal funds sold and deposits
in banks 430 35 465 (67) 2 (65)

Total interest income 1,172 (188) 984 956 41 997

INTEREST PAID ON
Savings and interest bearing demand
deposits 423 (131) 292 134 3 137
Time deposits 201 (12) 189 110 (48) 62
Total deposits 624 (143) 481 244 (45) 199
Other borrowings (6) (6) (2) (2)

Total interest expense 618 (143) 475 242 (45) 197

Net interest income $ 554 $ (45) $ 509 $ 714 $ 86 $ 800
</TABLE>

LENDING

GENERAL. The Bank's policy is to originate loans primarily in its
local market. The Bank's loan underwriting policies focus on assessment of
each borrower's ability to service and repay the debt, and the availability
of collateral that can be used to secure the loan. Depending on the nature of
the borrower and the purpose and amount of the loan, the Bank's loans may be
secured by a variety of collateral, including business assets, real estate,
and personal assets. Many business loans may also be dependent upon the
personal guarantees of the owners of the business. The Bank's loans are
generally classified by the ability of the borrower to repay and the
principal asset pledged as collateral to secure the loan.

The Bank's commercial loans consist primarily of secured revolving
operating lines of credit and business term loans. Commercial real estate
loans include loans for various purposes where the primary collateral is
commercial real estate. Real estate construction loans include loans made in
connection with custom and "spec" (build to sell) construction of residential
and commercial buildings and loans made to borrowers who build residential
and commercial buildings for resale. The majority of loans within the Bank's
portfolio have terms of five years or less or have adjustable interest rates.
These rates are principally tied to the prime rate, an internal base rate, or
a treasury based index.

63
<PAGE>

Consumer installment loans and other loans, while representing a
small percentage of total outstanding loans, include home equity loans, auto
loans, boat loans, Visa credit cards, and personal lines of credit.

TYPES OF LOANS. The composition of loans at June 30, 1999 and
December 31, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30, -----------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial $41,352 $37,296 $34,117
Real Estate Construction 566 1,303 964
Real Estate Mortgage 41,295 40,833 43,666
Installment 1,328 1,339 1,435
Credit Cards and overdrafts 749 784 747
Total $85,290 $81,555 $80,929
</TABLE>

LOAN MATURITIES AND SENSITIVITIES TO CHANGES IN INTEREST RATES. The
following table shows the maturity analysis of commercial and real estate
construction loans outstanding as of December 31, 1998. Also provided are the
amounts of all loans due after one year classified according to the
sensitivity to changes in interest rates:

<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $ 36,544 $ 752 $ --- $ 37,296
Real estate construction 1,303 --- --- 1,303
Total 37,847 752 --- 38,599

TOTAL LOANS MATURING AFTER ONE YEAR WITH
Predetermined interest rates (fixed) $ --- $ 9,736 $ 11,534 $ 21,270
Floating or adjustable rates (variable) --- 4,305 --- 4,305
Total --- 14,041 11,534 25,575
</TABLE>

RISK ELEMENTS

Non-accrual and past due loans were as follows at June 30, 1999 and
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual Loans $ --- $ --- $ 138
Accruing loans past due 90 days or more 188 --- ---
Restructured Loans --- --- ---
</TABLE>

64
<PAGE>

Interest income on non-accrual loans that would have been recorded
in the year ended December 31, 1998, had those loans performed in accordance
with their initial terms, was $30,000. Interest income on those loans that
was included in income in 1998 was $10,000.

Loans are generally placed on non-accrual status when, in
management's opinion, the borrower may be unable to meet payments as they
become due, or when they are past due 90 days as to either principal or
interest.

At December 31, 1998, there were no commitments to lend additional
funds to borrowers whose loans were classified as non-accrual. Harbor is not
aware of any loans continuing to accrue interest at December 31, 1998 that
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or
capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of these borrowers to comply with loan repayment terms.

SUMMARY OF LOAN LOSS EXPERIENCE

Transactions in the allowance for credit losses for the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------
JUNE 30, 1999 1998 1997
------------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $ 1,147 $ 1,137 $ 1,090
Charge-offs:
Commercial 9 5
Credit card 13 18 20
Installment 6
Total charge offs 13 27 31

Recoveries:
Commercial 34 6
Credit card 5 3 2
Installment 9
Total recoveries 14 37 8

Net charge offs (recoveries) (1) (10) 23
Provision charged to operations 0 0 70
Balance at end of period $ 1,148 $ 1,147 $ 1,137
Ratio of net charge-offs (recoveries) to
average loans outstanding during period 0.00% -0.01% 0.03%
Average loans outstanding during period $ 82,019 $ 81,648 $ 79,404
</TABLE>

The provision for credit losses charged to operating income and the
determination of the appropriate allowance level is based on, among other
things, on-going, quarterly analyses of various factors including historical
loss experience based on volumes and types of loans, volumes and trends in
delinquencies and non-accrual loans, trends in portfolio volume, results of
internal and independent external credit reviews, and anticipated economic
conditions in the Bank's market area. Harbor

65
<PAGE>

determines the adequacy of its loan loss reserves through a formula applying
risk factors to outstanding loans and certain unused commitments, in each
case based on the internal risk grade of those loans or commitments. Changes
in the risk grade of both performing and nonperforming loans affect the
amount of the allowance. Specific provisions are made where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the possibility that a loss may be incurred in
excess of the amount determined by application of the amount determined by
application of the formula allowance. Based on this analysis, management
considers the allowance for credit losses to be adequate for the periods
indicated. Harbor's allowance incorporates the results of measuring impaired
loans as provided in Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" and Statement of Financial
Accounting Standards No. 118 "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure."

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES.

Based on certain characteristics of the portfolio, potential losses
can be anticipated for major loan categories. In the following table, the
allowance for credit losses has been allocated among major loan categories
based primarily on their historical net charge off experience, along with
consideration of factors such as quality, volume, anticipated economic
conditions, and other business considerations.

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
% OF TOTAL % OF TOTAL
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans $ 516 45.00% $ 478 42.00%
Real estate loans 596 52.00% 625 55.00%
Consumer loans 35 3.00% 34 3.00%
------ ------
$1,147 100.00% $1,137 100.00%
</TABLE>

Historical net charge-offs are not necessarily accurate predictors
of future losses, since net charge-offs vary from period to period due to
economic conditions and other factors that cannot be accurately measured.
Thus, an evaluation based on historical loss experience of individual loan
categories will prove valuable in the future, but will only be one of many
factors considered by management in evaluating the adequacy of the overall
allowance and in determining the amount of the provision for credit losses.

ASSET AND LIABILITY MANAGEMENT

The Bank's results of operations depend substantially on net
interest income. Interest income and interest expense are affected by general
economic conditions, competition in the market place, market interest rates
and repricing and maturity characteristics of the Bank's assets and
liabilities. Exposure to interest rate risk is primarily a function of
differences between the maturity and repricing schedules of assets
(principally loans and investment securities) and liabilities (principally
deposits). Assets and liabilities are described as interest sensitive for a
given period of time when they mature or can reprice within that period. The
difference between the amount of interest sensitive assets and interest
sensitive liabilities is referred to as the interest sensitivity "GAP" for
any given period.

Certain shortcomings are inherent in the interest sensitivity GAP
method of analysis presented in the following table. For example, although
certain assets and liabilities may have similar repricing

66
<PAGE>

characteristics, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types may lag behind changes in market rates.

The following table shows the dollar amount of interest sensitive
assets and interest sensitive liabilities at June 30, 1999 and difference
between them for the maturity or repricing periods indicated.

<TABLE>
<CAPTION>
DUE IN DUE AFTER
ONE YEAR ONE THROUGH FIVE DUE AFTER
OR LESS YEARS FIVE YEARS TOTAL
---------- ----------------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Loans $60,915 $9,699 $14,676 $85,290
Investment securities 10,160 18,267 4,152 32,579
Fed Funds and interest
bearing balances with banks 5,505 5,505
Total interest earning assets $76,580 $27,966 $18,828 $123,374
INTEREST BEARING LIABILITIES
Interest bearing demand
deposits $8,178 $11,683 $3,505 $23,366
Savings deposits 47,338 --- --- 47,338
Time deposits 26,505 2,780 --- 29,285
Total interest bearing
liabilities $82,021 $14,463 $3,505 $99,989
Net interest rate
sensitivity GAP $(5,541) $13,503 $15,323 $23,385
</TABLE>

INVESTMENT ACTIVITIES

As of June 30, 1999, The Bank of Grays Harbor classified all of its
investment securities as "available for sale." Unrealized gains and losses on
investment securities classified as available for sale are excluded from
earnings and reported, net of federal income taxes, as a separate component
of stockholders' equity titled "Accumulated Other Comprehensive Income."

The Bank's investment policy is approved by its Board. It has been
the policy of the Bank to maintain relatively high levels of liquidity to
meet loan funding and deposit outflow and other liquidity needs.

ANALYSIS OF INVESTMENT SECURITIES. Debt and equity securities have
been classified as available for sale according to management's intent. The
carrying amount of securities and the approximate fair values at the dates
shown were as follows:

67
<PAGE>

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1999
U.S. Treasury securities $ 1,004 $ 1 $ 1,003
U.S. Government agencies 16,496 92 16,404
Obligations of states and political
subdivisions 3,957 13 3,970
Corporate bonds 8,748 112 8,636
Federal Home Loan Bank stock 2,566 2,566
$ 32,771 $ 13 $ 205 $ 32,579

DECEMBER 31, 1998
U.S. Treasury securities $ 985 $ 11 $ 996
U.S. Government agencies 16,274 41 2 16,313
Obligations of states and political
subdivisions 3,599 148 3,747
Corporate bonds 7,242 8 11 7,239
Federal Home Loan Bank stock 2,474 -- -- 2,474
$ 30,574 $ 208 $ 13 $ 30,769

DECEMBER 31, 1997
U.S. Treasury securities $ 2,493 $ 11 $ 2,504
U.S. Government agencies 4,627 11 1 4,637
Obligations of states and political
subdivisions 3,170 59 2 3,227
Corporate bonds 300 2 -- 302
Federal Home Loan Bank stock 2,292 -- -- 2,292
$ 12,882 $ 83 $ 3 $ 12,962
</TABLE>

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES. The scheduled
maturities of debt securities at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
DUE AFTER DUE AFTER
DUE IN ONE ONE THROUGH FIVE THROUGH
YEAR OR LESS FIVE YEARS TEN YEARS TOTAL
------------ ----------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>

U.S. Treasury securities $ 489 $ 507 $ --- $ 996
WEIGHTED AVERAGE YIELD 5.35% 6.41% ---% 5.89%
U.S. Government agencies 11,692 3,014 1,607 16,313
WEIGHTED AVERAGE YIELD 5.28% 5.72% 7.27% 5.55%
Obligations of states and
political subdivisions 288 1,313 2,146 3,747
WEIGHTED AVERAGE YIELD 5.67% 5.19% 5.05% 5.14%
Corporate bonds 4,968 1,964 307 7,239
WEIGHTED AVERAGE YIELD 5.30% 5.40% 6.29% 5.37%
</TABLE>

DEPOSITS

Following is a summary of the average amount of and average rate
paid on the following deposit categories for the periods indicated:

68
<PAGE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposits $ 16,053 0.00% $ 14,892 0.00%
Interest-bearing demand deposits 26,231 2.15% 21,336 2.37%
Savings deposits 40,672 4.03% 32,926 4.28%
Time deposits 28,092 5.54% 24,467 5.58%
Total $111,048 $ 93,621
</TABLE>

Certificates of deposit at December 31, 1998 are scheduled to mature
as follows:

<TABLE>
<CAPTION>
UNDER OVER
$100,000 $100,000 TOTAL
--------- --------- -----
<S> <C> <C> <C>
3 months or less $ 4,198 $ 6,605 $ 10,803
Over 3 through 6 months 4,436 2,478 6,914
Over 6 through 12 months 7,061 4,309 11,370
Over 12 months 2,337 688 3,025
Total $ 18,032 $ 14,080 $ 32,112
</TABLE>

RETURN ON EQUITY AND ASSETS

The following table shows consolidated operating and capital ratios
for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
------------------------------- ------------------------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets 1.51% 1.72% 1.68% 1.85%
Return on average equity 16.80% 18.32% 17.93% 18.79%
Dividend payout ratio 0.00% 0.00% 46.74% 39.94%
Equity to average assets 8.98% 9.45% 9.38% 9.86%
</TABLE>

YEAR 2000 ISSUES

The year 2000 ("Year 2000") issue is the result of the inability of
computers to distinguish "00" as 2000. Computer programs that were written
with only two-digit year may not function accurately or at all when the date
changes from 1999 to 2000. Year 2000 issues will potentially affect anything
that contains an embedded microchip.

The Bank operates an in-house computer system utilizing the "Liberty
Banking System" software provided by Jack Henry and Associates to perform its
most mission critical data processing functions relating to its loans,
deposits, general ledger and shareholder information applications. Jack Henry
and Associates has completed the renovation and validation phases of its Year
2000 plan, and has received Year 2000 certification for the Liberty Banking
System from the Information Technology Association of America (ITAA). The
Bank physically tested all applications of the Liberty Banking System at its
disaster recovery site in November 1998. The test results all proved
successful and were reviewed and audited by McGladrey & Pullen, an
independent audit and consulting firm.

69
<PAGE>

The Bank also performs item processing services for its customers
utilizing "VisualImpact" software provided by Unisys Corporation. The
VisualImpact software has been tested and certified Year 2000 compliant by
the vendor. The Bank successfully tested the software onsite in August.

PROJECT MANAGEMENT. The Bank initiated a Year 2000 Project early in
1997 to address year 2000 issues. The Bank's Year 2000 Project Plan has been
set up following the Federal Financial Institutions Examination Council
recommended five-phase format: Awareness; Assessment; Renovation; Validation;
Implementation. In addition to the recommended five phases, the Bank's plan
has been expanded to include Contingency Plans and year-end plans.

AWARENESS

AWARENESS PHASE STATUS. The awareness phase of the Bank's Year 2000
Plan continues to be the most active phase. The continuing need to
communicate the potential Year 2000 impact will last through the end of 1999.
The Bank will continue to communicate the status of its Year 2000 efforts and
the steps it is taking to insure the safety and accuracy of customer funds
and records.

ASSESSMENT

As of March 1, 1999, all of the Bank's loans of $100,000 or more
have been Year 2000-risk assessed. The review was designed to identify
borrowers that may experience potential disruptions as a result of a failure
of their systems, external systems or suppliers that in turn could impact
cash flow and affect their financial strength. There were no loans that were
rated as Year 2000 high-risk. All loans are being monitored on a quarterly
basis by the lenders per the Bank's policy.

The Bank has added to its loan criteria the requirement to evaluate
the applicant's Year 2000 compliance rating as another consideration in
determining the final decision on the loan application. A high Year 2000 risk
rating may not disqualify the applicant in and of itself. If the applicant
has a Year 2000 project plan, the plan is on schedule and the risk factors
have been addressed to the satisfaction of the Bank, the Year 2000 risk may
not disqualify the application.

The Bank's investment portfolio has been reviewed for maturity
dates. The money derived from the maturing of some bonds may become part of
the total cash plan for the bank. A contingency plan for cash has been
developed and addresses the level of cash the Bank will retain over the
Century Date Change weekend.

ASSESSMENT PHASE STATUS. The initial assessment of loans,
investments and large funds providers as well as the Bank's information
systems and environmental systems have been completed with positive results.
The main activity for the balance of the year will be monitoring the existing
accounts and reviewing the new ones.

RENOVATION

The Bank of Grays Harbor's automatic teller machines (ATM) and Bank
By Phone (VRU) Systems were successfully tested to be Year 2000 compliant.

RENOVATION PHASE STATUS. All new programs will be subjected to the
full range of Year 2000 testing prior to final acceptance and installation in
our production environment. Only new programs critical to the Bank's systems
will be installed prior to 2000.

70
<PAGE>

VALIDATION

As listed above, testing of the Bank's mission critical core
mainframe computer software was completed in November 1998. Following
extensive and exhaustive review of the output data by the Bank's technical
staff, internal audit and the users of the systems, the data was determined
to be accurate in all aspects. All non-critical software has been tested and
determined to be accurate in all respects.

VALIDATION PHASE STATUS. Year 2000 validation efforts have been
completed with positive results. Testing will continue in a maintenance mode.

IMPLEMENTATION

IMPLEMENTATION PHASE STATUS. The implementation phase of the Bank's
Year 2000 project is considered to be in an ongoing maintenance mode. The
Bank currently does not plan to install any new systems prior to the year
2000.

NON-TECHNICAL ISSUES

The Year 2000 also gives rise to non-technical issues that have the
potential to create problems. The Bank's environmental systems have been
reviewed and determined to be Year 2000 ready. Only limited changes were
required with minimal expense incurred. The Bank's mission critical equipment
such as vault doors and security systems have been evaluated and are
considered to be Year 2000 ready.

The Bank has evaluated its major third party vendors and its
borrowers. Management has determined that the majority of services provided
by vendors are either Year 2000 compliant, not date sensitive or are not
mission critical.

CONTINGENCY AND YEAR END PLANS

Contingency and year-end plans have been completed for all areas of
the Bank. Both plans are considered to be "living documents" and will be
refined and updated to reflect changes and conditions that evolve or develop
as time passes. The Bank has conducted, and continues to conduct, bank-wide
walkthrough tests.

Based on results of the tests to date, the walkthrough tests
successfully addressed the objectives of the exercise from several
directions. The plans themselves were well thought out and complete and the
process the Bank designed for handling the issues worked as expected. An
independent audit was performed on the test results.

The Bank has concluded, based on its review of information available
to it, that it cannot now accurately assess the most reasonably likely worst
case scenario in which the Bank could find itself as a result of Year 2000
issues. Indeed, the scope of the Year 2000 situation is the subject of
worldwide speculation, and there is no clear picture of the most reasonably
likely worst case scenario from any source. Management believes that the
"living document" approach described above, and the regular attention to
evolving Year 2000 issues and challenges that is necessary for this approach,
is the optimal way to approach the possible worst case scenarios at this
point in time. As noted above, the Bank has in place contingency and year-end
plans, which outline the steps to be taken to minimize the effect on
customers and losses to the bank if unforeseen circumstances beyond the
Bank's control adversely affect its ability to provide financial services to
customers.

71
<PAGE>

AUDIT

Knight, Vale & Gregory Inc., P.S., a public accounting firm, has
completed a review of the Bank's Year 2000 project and provided the Bank with
a report of its findings. The report indicated that Harbor's plan addressed
the Year 2000 issue as expected and was following the FFIEC guidelines.
Overall, the Bank is on schedule with its Year 2000 planning activities and
does not have any significant problems related to its Year 2000 compliance
efforts.

SUMMARY

The Bank continues to meet its Year 2000 plan milestones and move
toward its goal of becoming Year 2000 compliant. The Bank remains firm in its
commitment to provide the needed resources to address the Year 2000 issues
and continue to serve its customers into the next century.

ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES

The total financial effect that the Year 2000 issues may have on the
Bank cannot be predicted with any certainty at this time. The single largest
Year 2000 expenses involves the identification and upgrading of hardware.
Management expects the costs related to Year 2000 issues to amount to
approximately $200,000. The direct costs attributable to Year 2000 efforts
through July 1999 was approximately $25,000. Based upon the information
currently available to it, the Bank does not believe that the costs related
to Year 2000 issues will be material to the Bank's financial condition or
results of operations.

RISKS RELATED TO YEAR 2000 ISSUES

The Year 2000 poses certain risks to the Bank and its operations.
Like the operations of many other companies, the Bank's operations can be
adversely affected by the Year 2000-triggered failures of other companies
upon whom it depends for the functioning of its automated systems and other
services. Accordingly, the Bank's operations could be materially affected if
the operations of mission-critical third party service providers are
adversely affected. The Bank has identified all of its mission-critical
vendors and set up a process to carry out ongoing monitoring of their Year
2000 compliance efforts.

72
<PAGE>

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

GENERAL. Pacific Financial Corporation operates five full-service
offices in Pacific and Wahkiakum Counties. Pacific's primary source of
revenue is derived from providing loans to customers, who are predominantly
small and middle-market businesses.

SIX MONTHS ENDED JUNE 30, 1999 AND 1998

OVERVIEW. Pacific's total assets of $105.8 million as of June 30,
1999 represent a 4.6% increase compared to total assets of $101.0 million as
of June 30, 1998.

NET INCOME. For the six months ended June 30, 1999 and 1998,
Pacific's net income was $933,000 and $939,000 respectively. Net income for
the six months ended June 30, 1999 decreased $6,000 or 0.6% over the same
period in 1998. The decrease in earnings is due to increased noninterest
expenses offsetting increases in net interest income and non-interest income.
Diluted earnings per share for the periods ended June 30, 1999 and 1998 were
$3.16 and $3.19, respectively.

NON-INTEREST EXPENSES. Non-interest expenses for the six months
ended June 30, 1999 increased $110,000, or 8%, from the same period in 1998.
The increase is primarily attributed to increased compensation costs and
formation costs incurred by Pacific.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 1998 AND 1997

OVERVIEW. Total assets were $101.1 million at December 31, 1998,
representing a 4.4% increase over assets of $96.8 million at December 31,
1997. This growth is attributed to the growth of core deposits of the company.

NET INCOME. For the years ended December 31, 1998 and 1997, net
income was $1,921,000 and $1,930,000, respectively, a decrease of $9,000, or
0.5%, from 1997 to 1998. Total revenue (net interest income plus non-interest
income) increased to $5,464,000 in 1998 from 5,411,000 in 1997, an increase
of 1%. The growth in revenue resulted from increased non-interest income
centered in loan origination fees and service charges on accounts. Net
interest margins remained well above peer group performance based on the FDIC
Uniform Bank Performance Report. Management believes that is due to effective
management of the pricing of loan and deposit products. Diluted earnings per
share for the two years ended December 31, 1998 and 1997 were $6.54 and
$6.59, respectively.

NON-INTEREST EXPENSES. Non-interest expenses for the year ended
December 31, 1998 increased $85,000 or 3.2% over the year ending 1997. The
increase is largely due to nonrecurring loan collection costs along with
increased data processing expenses, offset partially by a decrease in
compensation costs.

LOAN QUALITY, LIQUIDITY, CAPITAL

PROVISION FOR CREDIT LOSSES. The allowance for credit losses
represents management's current estimate of amounts required to absorb losses
on existing loans. The allowance of $782,000 at June 30, 1999 is an increase
of $65,000, or 9.1%, from the December 31, 1998 allowance of $717,000. The
allowance represents 1.2% of total loans at June 30, 1999. The $717,000
allowance at December 31, 1998 was a decrease of $83,000 or 10.4% from the
December 31, 1997 allowance of $800,000. The allowance represents 1.1% of
loans at December 31, 1998, and 1.3% at December 31, 1997. Approximately
$10.0 million of Pacific's loan portfolio is 100% guaranteed by the U.S.

73
<PAGE>

government. Excluding those guaranteed loans, at December 31, 1998 the
allowance represents 1.3% of loans.

LIQUIDITY AND SOURCES OF FUNDS. The Bank's primary sources of funds
are customer deposits, loan repayments, maturity's of investment securities,
net income, advances from the Federal Home Loan Bank of Seattle, and short
term Federal Funds purchased from correspondent banks. Scheduled loan
repayments are relatively stable sources of funds, while deposit inflows and
unscheduled loan prepayments are not. Deposit inflows and unscheduled loan
prepayments are influenced by general interest rate levels, interest rates on
other investments, competition, economic conditions and other factors.

Total deposits at June 30, 1999, December 31, 1998 and December 31,
1997 were $86.1 million, $88.9 million and $78.9 million, respectively.
Deposit growth from December 31, 1997 to June 30, 1999 was 9.1%. The Bank
does not accept brokered deposits. A concerted effort has been made to
attract deposits in the market area the Bank serves through competitive
pricing and delivery of quality products.

Management anticipates that the Bank will continue to rely on
customer deposits, loan repayments, maturity of investment securities, net
income, Federal Home Loan Bank of Seattle borrowings, and short term Federal
Funds purchased from correspondent banks to provide liquidity. Although
deposit balances have shown historical growth, these balances may be
influenced by changes in the banking industry, interest rates available on
other investments, general economic conditions, competition and other
factors. Borrowings may be used on a short-term basis to compensate for
reductions in other sources of funds. Borrowings may also be used on a
long-term basis to support expanded lending activities and to match
maturities or repricing intervals on assets. The sources of these funds would
most likely be borrowings from the Federal Home Loan Bank of Seattle.

The primary capital-to-asset leverage ratio for the Company was
9.96% at June 30, 1999, as compared to 9.37% at December 31, 1998, and 9.58%
at December 31, 1997. The federal banking regulators have adopted risk based
capital guidelines under which one of four risk weights is applied to balance
sheet assets, each with different capital requirements based on the credit
risk of the asset. Total risk-adjusted capital-to-asset ratios were 17.99% at
June 30, 1999, and 14.0% and 16.04% at December 31, 1998 and 1997,
respectively. As of June 30, 1999, the Bank was considered "well capitalized"
per FDIC risk based guidelines.

AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID

74
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
INTEREST INTEREST
AVERAGE INCOME AVERAGE AVERAGE INCOME AVERAGE
BALANCE (1) (EXPENSE)(2) RATE BALANCE (1) (EXPENSE)(2) RATE
----------- ------------ ------- ----------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning assets:
Loans $ 63,845 $ 6,237 9.77% $ 59,316 $ 6,098 10.28%
Investment securities:
Taxable 14,325 933 6.51 12,938 861 6.65
Tax-exempt 10,819 885(3) 8.18 10,435 892(3) 8.55
Total investment
securities 25,144 1,818 7.23 23,373 1,753 7.50
Federal funds sold and
deposits in banks 2,744 164 5.98 1,330 80 6.02
TOTAL EARNING
ASSETS/INTEREST INCOME 91,733 8,219 8.96% 84,019 7,931 9.44%
Cash and due from banks 1,099 1,036
Bank premises and equipment
(net) 1,320 1,282
Other assets 5,065 4,202
Allowance for credit losses (724) (768)
TOTAL ASSETS $ 98,493 $ 89,771

LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing
liabilities:
Deposits:
Savings and
interest-bearing
demand $ 36,260 (1,001) 2.76% $ 35,249 (1,049) 2.98%
Time 33,565 (1,824) 5.43 30,859 (1,683) 5.45
TOTAL DEPOSITS 69,825 (2,825) 4.05 66,108 (2,732) 4.13
Other borrowings 4,505 (266) 5.90 653 (46) 7.04
Total interest-bearing
liabilities/interest
expense 74,330 (3,091) 4.16% 66,761 (2,778) 4.16
Demand deposits 13,201 12,968
Other liabilities 1,022 724
Shareholders' equity 9,940 9,318
Total liabilities and
shareholders' equity $ 98,493 $ 89,771

NET INTEREST INCOME $ 5,128 $ 5,153

NET INTEREST INCOME AS A
PERCENTAGE OF AVERAGE EARNING
ASSETS
Interest income 8.96% 9.44%
Interest expense 3.37% 3.31
NET INTEREST INCOME 5.59% 6.13%
</TABLE>

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

75
<PAGE>

(1) For purposes of these computations, non-accrual loans are included in the
average loan balance outstanding.

(2) Loan fees of $225,000 and $390,000 are included in interest income in 1998
and 1997.

(3) Tax equivalent basis

<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Loans $ 451 $(312) $ 139 $ 345 $ (82) $ 263
Investment securities:
Taxable 90 (18) 72 163 (7) 156
Tax-exempt 32 (39) (7) (18) (53) (35)
Total investment securities 122 (57) 65 145 (42) 103
Federal funds sold and deposits
in banks 85 (1) 84 (27) 9 (18)

Total interest income 658 (370) 288 463 (115) 348

INTEREST PAID ON
Savings and interest bearing
demand deposits 30 (78) (48) 32 7 39
Time deposits 147 (6) 141 218 -- 218
Total deposits 177 (84) 93 250 7 257

Other borrowings 228 220
(8) 30 5 35

Total interest expense 405 (92) 313 280 12 292

Net interest income $ 253 $(278) $ (25) $ 183 $(127) $ 56
</TABLE>

LENDING

GENERAL. The Bank's policy is to originate loans primarily in its
local market. The Bank's loan underwriting policies focus on assessment of
each borrower's ability to service and repay the debt, and the availability
of collateral that can be used to secure the loan. Depending on the nature of
the borrower and the purpose and amount of the loan, the Bank's loans may be
secured by a variety of collateral, including business assets, real estate
and personal assets. Many business loans may also be dependent upon the
personal guarantees of the owners of the business. The Bank's loans are
generally classified by the ability of the borrower to repay and the
principal asset pledged as collateral to secure the loan.

Real estate mortgage loans comprise the largest segment of Pacific's
loan portfolio. The Bank's residential real estate mortgage loans consist
primarily of loans with terms of 15 to 20 years, with an average loan to
value ratio of approximately 75%. Recently, the Bank began offering 30 year
residential real estate loans. The Bank's residential real estate loans are
made at fixed and variable rates.

76
<PAGE>

Commercial real estate loans include loans for various purposes where the
primary collateral is commercial real estate, and generally have a loan to
value ratio of 65% or less and terms of 15 to 20 years. These loans are
generally made at variable rates tied to the prime rate.

The Bank's commercial loans consist primarily of secured revolving
operating lines of credit and business term loans generally with terms of
five years or less and adjustable interest rates tied to the prime rate. Real
estate construction loans represent a small percentage of outstanding loans
and include loans made in connection with custom and "spec" (build to sell)
construction of residential and commercial buildings and loans made to
borrowers who build residential and commercial buildings for resale.
Approximately 15% of the Bank's portfolio is comprised of loans 100%
guaranteed by the Small Business Administration of the U.S. Department of
Agriculture.

Consumer installment loans and other loans represent a small
percentage of total outstanding loans and include home equity loans, auto
loans, boat loans and personal lines of credit.

TYPES OF LOANS. The composition of loans at June 30, 1999 and
December 31, 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial and agricultural $ 10,590 $ 11,159 $10,968
Real estate construction 1,957 3,626 3,294
Real estate mortgage 48,283 49,175 46,965
Installment 2,048 1,765 1,841
Total $ 62,878 $ 65,725 $62,798
</TABLE>

<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
-------------- ------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $ 7,811 $ 1,344 $ 1,435 $ 10,590
Real estate construction 1,015 362 580 1,957
Total $ 8,826 $ 1,706 $ 2,015 $ 12,547

Total loans maturing after one year with:
Predetermined interest rates (fixed) $ 4,265 $ 30,614 $ 34,879
Floating or adjustable rates (variable) 2,770 28 2,798
Total $ 7,035 $ 30,642 $ 37,677
</TABLE>

RISK ELEMENTS. Non-accrual and past-due loans were as follows at
June 30, 1999 and December 31, 1998 and 1997.

77
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans $ 32 $ 15 $ 284
Accruing loans past due 90 days
or more 272 4 184
Restructured Loans --- --- ---
</TABLE>
Interest income on non-accrual loans that would have been recorded
in the year ended December 31, 1998 had those loans performed in accordance
with their initial terms was $38,000. No interest income on those loans was
included in income in 1998.

At December 31, 1998, there were no commitments to lend additional
funds to borrowers whose loans were classified as non-accrual. Pacific is not
aware of any loans continuing to accrue interest at December 31, 1998 that
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or
capital resources, or represent material credits about which management is
aware of any information which causes management to have serious doubts as to
the ability of these borrowers to comply with loan repayment terms.

SUMMARY OF LOAN LOSS EXPERIENCE

Transactions in the allowance for credit losses for the six months
ended June 30, 1999 and the years ended December 31, 1998 and 1997 are as
follows:

<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, -------------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $ 717 $ 800 $ 734
Charge-offs:
Commercial 3 --- ---
Real estate --- 194 ---
Credit card --- --- ---
Installment --- --- 10
Total charge offs 3 194 10

Recoveries:
Commercial --- --- 1
Real estate 67 --- ---
Credit card --- --- ---
Installment --- 1 3
Total recoveries 67 1 4

Net charge offs (recoveries) (64) 193 6
Provision charged to operations --- 110 72
Balance at end of period $ 781 $ 717 $ 800

78
<PAGE>

Ratio of net charge-offs (recoveries) to average loans (0.10%) 0.30% 0.01%
outstanding during period

Average loans outstanding during period $63,386 $ 63,845 $ 59,316
</TABLE>

The provision for credit losses charged to operating income and the
determination of the appropriate allowance level is based on, among other
things, on-going, quarterly analyses of various factors including historical
loss experience, adverse situations that may affect borrowers' ability to
repay, the estimated value of any underlying collateral, economic conditions
in its market area, the results of examination of individual loans, the
evaluation of the overall portfolio by senior credit personnel and federal
and state regulatory agencies, and trends in delinquencies and non-accrual
loans. Pacific determines the adequacy of its loan loss reserves through a
formula applying risk factors to outstanding loans and certain unused
commitments, in each case based on the internal risk grade of those loans or
commitments. Changes in the risk grade of both performing and nonperforming
loans affect the amount of the allowance. Specific provisions are made where
management has identified significant conditions or circumstances related to
a credit that management believes indicate the possibility that a loss may be
incurred in excess of the amount determined by application of the amount
determined by application of the formula allowance. Based on this analysis,
management considers the allowance for credit losses to be adequate for the
periods indicated. Pacific's allowance incorporates the results of measuring
impaired loans as provided in Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure."

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES. Based on certain
characteristics of the portfolio, potential losses can be anticipated for
major loan categories. In the following table, the allowance for credit
losses has been allocated among major loan categories based primarily on
their historical net charge off experience, along with consideration of
factors such as quality, volume, anticipated economic conditions, and other
business considerations.

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
-------------------------------- ------------------------------
% OF TOTAL % OF TOTAL
ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial loans $194 27% $320 40%
Real estate loans 495 69% $464 58%
Consumer loans 28 4% 16 2%
Total $717 100% $800 100%
</TABLE>

79
<PAGE>

ASSET AND LIABILITY MANAGEMENT

The Bank's results of operations depend substantially on net
interest income. Interest income and interest expense is affected by general
economic conditions, competition in the market place, market interest rates
and repricing and maturity characteristics of the Bank's assets and
liabilities. Exposure to interest rate risk is primarily a function of
differences between the maturity and repricing schedules of assets,
principally loans and investment securities, and liabilities, principally
deposits. Assets and liabilities are described as interest sensitive for a
given period of time when they mature or can reprice within that period. The
difference between the amount of interest sensitive assets and interest
sensitive liabilities is referred to as the interest sensitivity "GAP" for
any given period.

Certain shortcomings are inherent in the interest sensitivity GAP
method of analysis presented in the following table. For example, although
certain assets and liabilities may have similar repricing characteristics,
they may react in different degrees to changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates.

<TABLE>
<CAPTION>
DUE IN DUE AFTER
ONE YEAR ONE THROUGH DUE AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $25,208 $7,037 $30,633 $62,878
Investment Securities 2,291 12,482 21,108 35,881
Fed Funds & interest bearing balances with banks --- --- --- ---
Total interest earning assets $27,499 $19,519 $51,741 $98,759

INTEREST BEARING LIABILITIES:
Interest earning demand deposits $7,720 --- --- $7,720
Savings deposits 30,266 567 --- 30,833
Time deposits 26,444 8,435 --- 34,879
Total interest bearing liabilities $64,430 $9,002 $--- $73,432

Net interest rate sensitivity GAP $(36,931) $10,517 $51,741 $25,327
</TABLE>

INVESTMENT ACTIVITIES

As of June 30, 1999, Pacific classified all of its investment
securities as "available for sale" with the exception of certain local
municipal obligations which are classified as investments held to maturity.
Unrealized gains and losses on investment securities classified as
available-for-sale are excluded from earnings and reported, net of federal
income taxes, as a separate component of stockholders' equity titled
"Accumulated Other Comprehensive Income." Investment securities that are
held-to-maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts, which are recognized in interest income over the
period to maturity.

80
<PAGE>

ANALYSIS OF INVESTMENT SECURITIES. Debt and equity securities have
been classified as available for sale and held to maturity according to
management's intent. The carrying amount of securities and the approximate
fair values at the dates shown were as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 30, 1999
AVAILABLE FOR SALE
U.S. Government and agency securities $ 19,424 $ --- $ (482) $ 18,942
State and municipal securities 9,074 65 --- 9,139
Corporate bonds 5,935 --- (220) 5,715
Federal Home Loan Bank stock 459 --- --- 459
Total available for sale 34,892 65 (702) 34,255
HELD TO MATURITY
State and municipal securities 1,626 --- --- 1,626
Total investment securities $ 36,518 $ 65 $ (702) $ 35,881

DECEMBER 31, 1998
AVAILABLE FOR SALE
U.S. Government and agency securities $ 9,663 $ 30 $ (11) $ 9,682
State and municipal securities 7,820 347 --- 8,167
Corporate bonds 4,087 26 (33) 4,080
Federal Home Loan Bank stock 427 --- --- 427
Total available for sale 21,997 403 (44) 22,356
HELD TO MATURITY
State and municipal securities 1,725 --- --- 1,725
total investment securities $ 23,722 $ 403 $ (44) $ 24,081

DECEMBER 31, 1997
AVAILABLE FOR SALE:
U.S. Government and agency securities $ 12,670 $ 45 $ (14) $ 12,701
State and municipal securities 9,230 251 --- 9,481
Corporate bonds 1,828 20 --- 1,848
Federal Home Loan Bank stock 280 --- --- 280
Total available for sale 24,008 316 (14) 24,310
HELD TO MATURITY
State and municipal securities 1,795 --- --- 1,795
total investment securities $ 25,803 $ 316 $ (14) $ 26,105
</TABLE>

MATURITY DISTRIBUTION OF INVESTMENT SECURITIES. The scheduled
maturities of debt securities at December 31, 1998 are as follows:

81
<PAGE>

<TABLE>
<CAPTION>
DUE AFTER DUE AFTER
DUE IN ONE ONE THROUGH FIVE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
------------ ----------- ------------ --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government and agency securities $ 252 $ 4,548 $ 4,877 $ 5 $ 9,682
Weighted average yield 6.54% 6.28% 6.12% 8.50%
State and municipal securities 1,230 3,026 3,809 102 8,167
Weighted average yield 8.32% 7.98% 7.60% 6.85%
Corporate bonds 201 3,126 753 --- 4,080
Weighted average yield 5.99% 6.33% 6.17% ---
Total available for sale 1,683 10,700 9,439 107 21,929
HELD TO MATURITY
State and municipal securities --- 181 792 752 1,725
Weighted average yield --- 6.26% 6.55% 6.69%
Total investment securities $ 1,683 $ 10,881 $ 10,231 $ 859 $ 23,654
</TABLE>

Note: Yields on tax exempt obligations have been computed on a tax
equivalent basis.

RETURN ON EQUITY AND ASSETS

The following table shows consolidated operating and capital ratios
for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
---------------------------- ----------------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets 1.85% 1.97% 1.95% 2.15%
Return on average equity 19.11% 19.84% 19.33% 20.71%
Dividend payout ratio 0.00% 0.00% 73.40% 69.64%
Equity to average assets 9.68% 9.94% 10.09% 10.38%
</TABLE>

DEPOSITS

Following is a summary of the average amount of and average rate
paid on the following deposit categories for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Demand deposits $ 13,201 0.00% $12,968 0.00%
Interest-bearing demand deposits 12,264 2.98% 6,567 3.22%
Savings deposits 23,996 2.20% 28,682 2.41%
Time deposits 33,565 5.43% 30,859 5.45%

Total $ 83,026 $79,076
</TABLE>

82
<PAGE>

Certificates of deposit at December 31, 1998 are scheduled to mature
as follows:

<TABLE>
<CAPTION>
UNDER OVER
$100,000 $100,000 TOTAL
--------- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
3 months or less $ 10,066 $ 3,165 $13,231
Over 3 through 6 month 6,551 1,095 7,646
Over 6 through 12 months 7,938 1,141 9,079
Over 12 months 3,714 1,317 5,031

$ 28,269 $ 6,718 $34,987
</TABLE>

SHORT-TERM BORROWINGS

Following is information regarding Pacific's short-term borrowings
for the years ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Amount outstanding at end of period $ 86 $ 6,625
Weighted average interest rate thereon 5.15% 5.65%
Maximum amount outstanding at any month end during period 2,550 6,625
Average amounts outstanding during period 4,505 653
Weighted average interest rate during period 5.90% 7.04%
</TABLE>

YEAR 2000 ISSUES

The Year 2000 issue is the result of the inability of computers to
distinguish "00" as 2000. Computer programs that were written with only
two-digit year may not function accurately or at all when the date changes
from 1999 to 2000. Year 2000 issues will potentially affect anything that
contains an embedded microchip.

Bank of the Pacific has completed all phases of testing for Year
2000 readiness and determined that all mission critical systems are Year 2000
compliant. We have specifically tested our loans, deposits, and general
ledger, all processed transactions and accruals accurately. In addition we
have tested our ACH processing and our FED Line with no exceptions. Laser
Pro, which is used to produce loan documents, was also tested for compliance,
and no problems were encountered. We have also tested our telephone-banking
module and found it compliant.

All critical hardware, specifically, the A-7 mainframe including the
operating software, the NDP500 which is used to prove and capture our items
and our S600 proof machines have been tested and determined to be Year 2000
ready.

The Bank operates an in-house system utilizing the "Information
Technology" software, which is run on Unisys hardware. Information Technology
was independently tested by the FFIEC and was determined to be in compliance.
Unisys provided financial institutions with a list of all compliant and

83
<PAGE>

non-compliant hardware. Although assured of compliance we nevertheless tested
all critical Unisys equipment and found it to be ready.

The Bank has prepared a business resumption plan, which has been
accepted by the FDIC with very positive comments. The liquidity plan and the
communication plan are in place and will be reviewed at least monthly and
adjusted as necessary through the first quarter of 2000.

A generator has been purchased to operate the critical hardware
should we have a power outage. The Bank has had a switch installed that will
move from electrical to generator power in the computer room should it be
needed. The generator has been tested, and it successfully operated all
mission-critical computer equipment.

PROJECT MANAGEMENT. The Bank initiated a Year 2000 Project late in
1997 to address Year 2000 issues. The Bank's Year 2000 Project Plan has been
set up following the Federal Financial Institutions Examination Council
recommended five-phase format: Awareness; Assessment; Renovation; Validation;
and Implementation. In addition to the recommended five phases, the Bank's
plan has been expanded to include contingency plans and year-end plans.

AWARENESS

ASSESSMENT

The Bank's loan portfolio has been Year 2000 risk assessed, with a
focus on the Bank's largest loans and loans to companies that are computer
reliant. The review was designed to identify borrowers that may experience
potential disruptions as a result of a failure of their systems, external
systems or suppliers that in turn could impact cash flow and affect their
financial strength. These relationships are being monitored on a quarterly
basis per the Bank's policy and the Bank has addressed customers with
potential Year 2000 issues to test and identify any Year 2000 problems.

The Bank has added to its loan criteria the requirement to evaluate
the applicant's Year 2000 compliance rating as another consideration in
determining the final decision on the loan application. A high Year 2000 risk
rating may not disqualify the applicant in itself. If the applicant has a
Year 2000 project plan, the plan is on schedule and the risk factors have
been addressed to the satisfaction of the Bank, the Year 2000 risk may not
disqualify the application.

84
<PAGE>

RENOVATION

RENOVATION PHASE STATUS. The renovation phase of the Bank's project
has been completed for Year 2000 purposes. No renovations were found
necessary for mission-critical systems. All new programs will be subjected to
the full range of Year 2000 testing prior to final acceptance and
installation in our production environment.

VALIDATION

Testing of the Bank's mission critical core mainframe computer
software was completed in March 1999. Following extensive review of the
output data by the Bank's staff, the data was determined to be accurate. All
non-critical software has been tested and determined to be accurate.

VALIDATION PHASE STATUS. Year 2000 validation efforts have been
completed with positive results. Testing will continue in a maintenance mode.

IMPLEMENTATION

IMPLEMENTATION PHASE STATUS. The Bank's Telebanc System, which is
not mission-critical, was upgraded to be Year 2000 compliant and any new
systems installed in the Bank will be validated as Year 2000 compliant prior
to their implementation. The Bank's report retrieval system will be upgraded
in the fourth quarter of 1999.

NON-TECHNICAL ISSUES

The Bank has not tested, and has no current plans to independently
test, the Year 2000 compliance of its mission critical vendors generally.

CONTINGENCY AND YEAR END PLANS

Contingency and year-end plans have been completed for all areas of
the Bank. Both plans will be refined and updated to reflect changes and
conditions that evolve or develop as time passes. A bank-wide walkthrough
test of the plans will be conducted in October 1999.

The tests will address all aspects of the plans and adjustments to
the plans will be made, as necessary. Management believes the plans are well
thought out and complete.

85
<PAGE>

optimal way to approach the possible worst case scenarios at this point in
time. As noted above, the Bank has in place contingency and year-end plans,
which outline the steps to be taken to minimize the effect on customers and
losses to the bank if that unforeseen circumstances beyond the Bank's control
adversely affect its ability to provide financial services to customers.

AUDIT

Fred Mobeus, an independent auditor focusing on Year 2000 issues,
has completed a review of the Bank's Year 2000 project and provided the Bank
with a report of his findings. The report indicated that Pacific's plan
addressed the Year 2000 issue as expected and was following the FFIEC
guidelines. Overall, the Bank is on schedule with its Year 2000 planning
activities and does not have any significant problems related to its Year
2000 compliance efforts.

SUMMARY

ESTIMATED COSTS TO ADDRESS YEAR 2000 ISSUES

The total financial effect that the Year 2000 issues may have on the
Bank cannot be predicted with any certainty at this time. The single largest
Year 2000 expenses involves the identification and upgrading of hardware. The
budget for Year 2000 expenses is $54,000. Because the majority of our
hardware is compliant, very little replacement costs have been incurred.
Based upon the information currently available to it, the Bank does not
believe that the costs related to Year 2000 issues will be material to the
Bank's financial condition or results of operations.

RISKS RELATED TO YEAR 2000 ISSUES

The Year 2000 poses certain risks to the Bank and its operations.
Like the operations of many other companies, the Bank's operations can be
adversely affected by the Year 2000 triggered failures of other companies
upon whom it depends for the functioning of its automated systems and other
services. Accordingly, the Bank's operations could be materially affected if
the operations of mission-critical third party service providers are
adversely affected. The Bank has identified all of its mission-critical
vendors and set up a process to carry out ongoing monitoring of their Year
2000 compliance efforts.

86
<PAGE>

MANAGEMENT OF THE COMBINED CORPORATION

DIRECTORS AND OFFICERS

The following table presents certain information with respect to the
directors and executive officers of the combined corporation, including their
age, positions to be held with the combined corporation, and current
affiliations.

<TABLE>
<CAPTION>
NAME AGE POSITION PRESENT AFFILIATION
---- --- -------- -------------------
<S> <C> <C> <C>
Robert J. Worrell 60 Director and Chief Executive Officer Harbor
Dennis A. Long 50 Director and President Pacific
Wayne D. Gale 43 Vice President Harbor
Patricia C. Nelson 54 Vice President Pacific
John Van Dijk 52 Treasurer Harbor
Janice M. Pearce 35 Secretary Harbor
Gary C. Forcum 54 Director Harbor
Duane E. Hagstrom 62 Director Pacific
Robert A. Hall 70 Director Pacific
Joseph A. Malik 62 Director Harbor
Sidney R. Snyder 73 Director Pacific
Walter L. Westling 65 Director Harbor
David L. Woodland 69 Director Harbor

</TABLE>

During the past five years, the business experience of each person who is to
be a director or executive officer of the combined corporation is as follows:

ROBERT J. WORRELL has been a director and the President and Chief
Executive Officer of The Bank of Grays Harbor since 1982. He has served
as the President and Chief Executive Officer and a director of Harbor
Bancorp, Inc. since 1997.

DENNIS A. LONG has been a director of Pacific since May 1997. He became
President and Chief Executive Officer of Pacific at that time, upon the
retirement of Mr. Hagstrom. Mr. Long previously served as President of
the Southern Puget Sound District of Key Bank, N.A., Tacoma, Washington
from July 1996 to April 1997. From April 1995 to July 1996 Mr. Long
served as Retail Project Lender for KeyCorp, the parent company of Key
Bank, N.A. He served as Executive Vice President and Retail Banking
Manager of Key Bank of Washington, Seattle, Washington, from September
1993 to April 1995.

WAYNE D. GALE was named Executive Vice President and Chief Operating
Officer of The Bank of Grays Harbor in December 1995, and has been
employed with the Bank in various capacities since 1990. He has served
as Vice President of Harbor Bancorp, Inc. since 1997.

PATRICIA C. NELSON, has been a director of Pacific since 1987, having
served in various capacities with Pacific since she joined the company
in 1974. She currently serves as Executive Vice President and Chief
Financial Officer of Pacific.

JOHN VAN DIJK has served as Senior Vice President and Chief Financial
Officer of The Bank of Grays Harbor since May 1996 and Treasurer of
Harbor Bancorp, Inc. since 1997. Previously,

87
<PAGE>

Mr. Van Dijk was employed in the Thrift industry for 18 years. He
served as Senior Vice President, Chief Financial Officer of Olympia
Federal Savings, Olympia, WA from May 1991 to May 1996. From
November 1988 to May 1991 he served as Vice President, Controller
for Sterling Financial Group, Spokane, WA. Mr. Van Dijk served as
Senior Vice President, Chief Operating Officer of Central Evergreen
Savings Bank, Chehalis, WA from March 1978 to November 1988.

JANICE M. PEARCE is the Assistant Vice President and Corporate
Secretary of The Bank of Grays Harbor and has worked for the Bank since
1986. She was appointed Corporate Secretary of Harbor Bancorp, Inc. in
1997.

GARY C. FORCUM has been a director of The Bank of Grays Harbor since
1998 and a director of Harbor Bancorp, Inc. since 1998. He was the
President of Pettit Oil Company, a fuel service company, until he
retired in January 1999. Mr. Forcum continues to serve as a director of
Pettit Oil Company.

DUANE E. HAGSTROM has been a director of Pacific since 1985. He was
named Chief Executive Officer of Pacific in 1985 and President of
Pacific in 1986, in which capacities he served until his retirement in
August 1997. Prior to joining Pacific, he spent 30 years at Rainier
National Bank and its predecessor, where he served in various
capacities, including management positions, having last served as Vice
President and Manager of their Centralia branch.

ROBERT A. HALL has been a director of Pacific since 1979. Mr. Hall, who
is retired, has been a private investor and owner of three convalescent
homes in Washington. He currently serves as the Vice Chairman of
Pacific.

JOSEPH A. MALIK has been a director of Harbor Bancorp, Inc. since 1997,
and has been a director of The Bank of Grays Harbor since 1979. He
served as the President of Grays Harbor Community College from 1972
until June 1989, and as the Executive Director of the Commission on
Colleges until his retirement in 1997.

SIDNEY R. SNYDER has been Chairman of the Board and principal
shareholder of Pacific since 1971. Mr. Snyder was one of the organizers
of Bank of the Pacific. He has been the owner of Sid's Food Market in
Seaview, Washington since 1953. Mr. Snyder has been a member of the
Washington State Senate since 1990, currently serving as Senate
Majority Leader. He is also a director of Columbia Banking System, Inc.
and Columbia State Bank, Tacoma, Washington.

WALTER L. WESTLING has been a director of The Bank of Grays Harbor
since 1979 and a director of Harbor Bancorp, Inc. since 1997. He is the
President of Schaben & Westling, a trucking company.

DAVID L. WOODLAND has been a director of The Bank of Grays Harbor since
1979 and a director of Harbor Bancorp, Inc. since 1997. He was the
President of Earl C. Woodland, Inc., Real Estate & Insurance from 1957
until 1991, when he retired.

There are no arrangements or understandings among any of the
directors, officers or any other persons under which any of the above
directors or officers have been selected as directors or officers except for
the merger agreement. See "The Merger - Management of the Combined
Corporation."

88
<PAGE>

EXECUTIVE COMPENSATION

HARBOR

The following table gives compensation information concerning those
executive officers of Harbor who will serve as executive officers of the
combined corporation and who received aggregate cash compensation in excess
of $100,000 during the last fiscal year. The table covers compensation paid
or accrued during the fiscal years ended December 31, 1998, 1997 and 1996.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------
ANNUAL COMPENSATION(1) ALL OTHER COMPENSATION
-----------------------------------------------------------------------------------------------------
SAVINGS
AND
NAME AND PRINCIPAL RETIREMENT
POSITION YEAR SALARY ($) BONUS ($) PLAN ($) OTHER($)(2)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert J. Worrell 1998 $115,000 $81,469 $7,940 $7,200
President & Chief 1997 $110,000 $77,364 $7,279 $7,200
Executive Officer 1996 $105,000 $70,058 $7,400 $7,200

Wayne D. Gale 1998 $87,000 $40,734 $7,626 ---
Executive Vice 1997 $84,000 $38,682 $7,248 ---
President and Chief 1996 $80,000 $33,029 $7,125 ---
Operating Officer

John Van Dijk 1998 $85,000 $31,512 $6,941 ---
Senior Vice President 1997 $82,000 $19,749 $3,141 ---
and Chief Financial 1996 $52,788
Officer
</TABLE>

- --------------------------------------
(1) None of the Harbor Named Executives received perquisites or other personal
benefits, in any of the years shown, in an aggregate amount equal to or
exceeding the lesser of (1) $50,000 or (2) 10% of the executive's total
annual salary and bonus for each year.

(2) Amounts shown reflect fees paid to Mr. Worrell as a director of The Bank
of Grays Harbor.

OPTION GRANTS IN 1998. Under Harbor's Option Plan, from time to
time, options to acquire shares of common stock have been granted to some of
the Harbor Named Executives. No options were granted to any of the Harbor
Named Executives during 1998.

OPTION EXERCISES AND YEAR-END OPTION VALUES. This table includes the
number of shares covered by both exercisable and non-exercisable stock
options held by each of the Harbor Named Executives as of December 31, 1998.
Also reported are the values for "in-the-money" options which represent the
positive spread between the exercise price of any existing stock options and
the year-end price of the common stock.

89
<PAGE>

<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
NO. OF SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert J. Worrell --- --- 0/4,000 $0/$240,000

Wayne D. Gale --- --- 0/3,000 $0/$180,000

John Van Dijk --- --- 0/3,500 $0/$192,500

- -------------------------------------------------------------------------------------------------------------------
</TABLE>

In accordance with applicable rules of the Securities and Exchange
Commission, values are calculated by subtracting the exercise price from the
fair market value of the underlying stock. For purposes of this table, fair
market value is deemed to be $120.00, the last sale price of Harbor's common
stock in 1998.

DIRECTOR COMPENSATION. Directors of Harbor do not receive any fees
for their services as directors; however, directors of The Bank of Grays
Harbor do receive compensation. Directors of The Bank of Grays Harbor are
entitled to receive $600 per meeting of the Board of Directors. A director
who misses more than one meeting will be paid for the first meeting missed,
but not for subsequent absences. Directors are also paid $50 per Board
committee meeting.

PACIFIC

The following table gives the aggregate compensation paid or accrued
by Pacific for the fiscal years ended December 31, 1998, 1997 and 1996 to
each person serving as an executive officer of Pacific whose aggregate cash
and cash equivalent forms of compensation exceeded $100,000 (the "Pacific
Named Executives").

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
ALL OTHER COMPENSATION
ANNUAL COMPENSATION(1) LONG TERM
COMPENSATION AWARDS
-------------------------------------------------------------------------------------------------
SAVINGS
SECURITIES AND
NAME AND PRINCIPAL UNDERLYING RETIREMENT
POSITION YEAR SALARY ($) BONUS ($)(2) OPTIONS PLAN ($) (3) OTHER($)(4)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dennis A. Long 1998 $97,200 $105,795 --- $2,293 $9,121
President & Chief 1997 $60,393 $55,696 7,500 $945 $5,200
Executive Officer(5)

Patricia C. Nelson 1998 $73,860 $57,605 --- $5,890 $9,646
Executive Vice 1997 $68,820 $60,495 --- $13,041 $9,503
President and Chief 1996 $64,920 $55,580 --- $1,910 $6,000
Operating Officer
</TABLE>

- --------------------------------------
(1) None of the Pacific Named Executives received perquisites or other personal
benefits, in any of the years shown, in an aggregate amount equal to or
exceeding the lesser of (1) $50,000 or (2) 10% of the executive's total
annual salary and bonus for each year.

(2) Includes amount accrued during 1998 but paid in January 1999.

(3) Amounts disclosed in this column include matching contributions under
Pacific's 401(k) and profit sharing plans.

(4) Includes the expense related to Pacific's Director Emeritus Plan described
below as well as paid and deferred director fees for Mr. Long and Ms.
Nelson.

(5) Mr. Long became President and Chief Executive Officer of Pacific in April
1997.

90
<PAGE>

OPTION GRANTS IN 1998. Under Pacific's Option Plan, from time to
time, options to acquire shares of Pacific common stock have been granted to
come of the Pacific Named Executives. No options were granted to any of the
Pacific Named Executives during 1998.

OPTION EXERCISES AND YEAR -END OPTION VALUES. The following table
summarizes option exercises by and the value of unexercised options granted
to Pacific Named Executives:

In accordance with applicable rules of the Securities and Exchange
Commission, values are calculated by subtracting the exercise price from the
fair market value of the underlying stock. For purposes of this table, fair
market value is deemed to be $80.00, the last sale price of Pacific's common
stock in 1998.

DIRECTOR COMPENSATION. Directors of Pacific do not receive any fees
for their services as directors; however, directors of Bank of the Pacific do
receive compensation. Directors of Bank of the Pacific are entitled to
receive $650 per month, provided that if a director misses three of the
monthly Board meetings, that director will not be paid for subsequent monthly
meetings that he misses. Directors who are not officers are also paid $25 per
Board committee meeting and special Board meeting.

Pacific has two deferred compensation plans for directors, a
Director Emeritus Plan and a Director Deferred Compensation Plan. The
Director Emeritus Plan provides retirement income benefits for all current
directors. Benefits will be paid to each director for ten years after his
retirement from the Board and are accrued over a period beginning on that
director's appointment as a director (or the original adoption of the plan,
whichever is later) to his director's anticipated retirement date. The
Director Deferred Compensation Plan is optional. Participating directors have
the payment of their directors fees deferred until their retirement from the
Board. The deferred fees plus interest are accrued until the director's
retirement. Pacific has purchased life insurance policies on certain
directors participating in these plans which may be used to fund payments to
those directors under these plans.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

HARBOR. During fiscal year 1998, certain directors and executive
officers of Harbor and The Bank of Grays Harbor, and their associates, were
customers of The Bank of Grays Harbor, and it is anticipated that these
individuals will continue to be customers of The Bank of Grays Harbor in the
future. All transactions between Harbor, The Bank of Grays Harbor, and their
executive officers and directors, and their associates, were made in the
ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and, in the opinion of management, did not
involve more than the normal risk of collectability or present other
unfavorable features.

91
<PAGE>

PACIFIC. During fiscal year 1998, certain directors and executive
officers of Pacific and Bank of the Pacific, and their associates, were
customers of Bank of the Pacific, and it is anticipated that these
individuals will continue to be customers of Bank of the Pacific in the
future. All transactions between Pacific, Bank of the Pacific, and their
executive officers and directors, and their associates, were made in the
ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and, in the opinion of management, did not
involve more than the normal risk of collectability or present other
unfavorable features.

92
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

HARBOR. The following table provides information regarding
beneficial ownership of Harbor common stock at August 31, 1999 by (1) each
director and executive officer of Harbor, (2) all directors and executive
officers as a group, and (3) each person known by Harbor to be the beneficial
owner of more than 5% of the outstanding shares of Harbor common stock,
respectively.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF SHARES
NAME AND ADDRESS(1) OWNED (2) OUTSTANDING (2)
------------------- --------- ---------------
<S> <C> <C>
Lynn W. Daneker 6,936 (3) 2.68%

Daniel T. Earley 1,440 (3) *

Gary C. Forcum 6,667 2.58%

Jay M. Greene 8,914 (3) 3.45%

Ervin A. Johnson 7,194 (3) 2.78%

Vernon L. Lindskog 11,559 (3) 4.47%

Joseph A. Malik 5,188 2.01%

Wayne W. Rognlin 19,462 (3)(4) 7.53%

Jack R. Thompson 5,605 (3)(5) 2.17%

Wallace C. Waugh 15,299 (3) 5.92%

Walter L. Westling 12,358 (3) 4.78%

David L. Woodland 5,400 2.09%

Robert J. Worrell 18,098 (3) (6) 6.90%

Wayne D. Gale 5,300 (7) 2.03%

Janice M. Pearce 320 (8) *

All directors and executive officers
as a group (15 persons) 129,150 (9) 48.62%
</TABLE>

- ---------------------------
* Less than 1%.

(1) Unless otherwise noted, the address for all of the named persons is 300
East Market Street, Aberdeen, Washington 98520.

(2) Unless otherwise indicated, represents shares over which each
individual exercises sole voting or investment power. Shares of common
stock subject to options that are currently exercisable or exercisable
within 60 days of the date of the table are deemed to be outstanding
and to be beneficially owned by the person holding the options for the
purposes of calculating the percentage ownership of that person, but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.

(3) Includes 59 shares held by BGH Partnership, in which Lynn W. Daneker,
Daniel T. Earley, Jay M. Greene, Ervin A. Johnson, Vernon L. Lindskog,
Wayne W. Rognlin, Jack R. Thompson, Wallace C. Waugh, Walter L.
Westling and Robert J. Worrell are partners. Each of the listed
partners disclaims beneficial ownership of the shares owned by BGH
Partnership.

93
<PAGE>

(4) Includes 18,687 shares held by Rognlin Limited Partnership, of which
Wayne Rognlin is the General Partner.

(5) Includes 662 shares held by Thompson's, Inc., of which Jack Thompson is
the President.

(6) Includes 4,000 shares subject to options which are currently
exercisable.

(7) Includes 3,000 shares subject to options which are currently
exercisable.

(8) Includes 250 shares subject to options which are currently exercisable.

(9) Includes 7,250 shares subject to options which are currently
exercisable, as described in footnotes 6 through 8 above.

PACIFIC. The following table provides information regarding
beneficial ownership of Pacific common stock at August 31, 1999 (1) each
director and executive officer of Pacific, (2) all directors and executive
officers as a group, and (3) each person known by Pacific to be the
beneficial owner of more than 5% of the outstanding shares of Pacific common
stock, respectively.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT OF CLASS
NAME AND ADDRESS(1) OWNED BEFORE THE MERGER (2) BEFORE THE MERGER(2)
------------------- --------------------------- --------------------
<S> <C> <C>
K. David Aase 915 *

Frank O. Glenn, III 440 *

Duane E. Hagstrom 15,500 5.28%

Robert A. Hall 6,490 2.21%

Dennis A. Long 4,100 (3) 1.39%

William T. (Tracy) Moore, Jr. 12,300 4.19%

Patricia C. Nelson 9,879 3.36%

Sidney R. Snyder 31,606 10.76%

Gustave A. Wiegardt, Jr. 2,080 *

Kenneth Wirkkala 4,262 1.45%

All directors and executive officers
as a group (10 persons) 87,572 (3) 30.32%

Templin Foundation 15,657 5.33%

</TABLE>

- -----------------------------
* Less than 1%

(1) Unless otherwise noted, the address for all of the named persons is
1007 South Pacific, Long Beach, Washington 98631.

(3) Includes 1,500 shares subject to options which are currently
exercisable.

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BANK SUPERVISION AND REGULATION

The following generally refers to certain significant statutes and
regulations affecting the banking industry. These references are only
intended to provide brief summaries and, therefore, are not complete and are
qualified by the statutes and regulations referenced. Changes in applicable
laws or regulations may have a material effect on the business and prospects
of the Harbor, Pacific or the Combined Corporation. The operations of the
Harbor, Pacific or the combined corporation may also be affected by changes
in the policies of banking and other government regulators. We cannot
accurately predict the nature or extent of the effects on the business and
earnings of Harbor, Pacific or the combined corporation that fiscal or
monetary policies, or new federal or state laws, may have in the future.

The discussion in this section regarding regulatory considerations
affecting the combined corporation and its subsidiaries is also generally
applicable, prior to the effective time of the merger, to Harbor and Pacific
and, where appropriate, their subsidiaries.

THE HOLDING COMPANIES

GENERAL

As a bank holding company, the combined corporation will be subject
to the Bank Holding Company Act, which places them under the supervision of
the Board of Governors of the Federal Reserve. The combined corporation must
file annual reports with the Federal Reserve and must provide it with any
additional information it may require. In addition, the Federal Reserve will
periodically examine the combined corporation and its subsidiaries, including
the subsidiary banks.

BANK HOLDING COMPANY REGULATION

In general, the Bank Holding Company Act limits bank holding company
business to owning or controlling banks and engaging in other banking-related
activities. Bank holding companies must obtain the Federal Reserve Board's
approval before they:

- acquire direct or indirect ownership or control of any voting
shares of any bank that results in total ownership or control,
directly or indirectly, of more than 5% of the voting shares
of the bank;

- merge or consolidate with another bank holding company; or

- acquire substantially all of the assets of any additional
banks. Subject to certain state laws, such as age and
contingency laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of
both in-state and out-of-state banks.

CONTROL OF NONBANKS. With certain exceptions, the Bank Holding
Company Act prohibits bank holding companies from acquiring direct or
indirect ownership or control of voting shares in any company that is not a
bank or a bank holding company unless the Federal Reserve Board determines
that the activities of the company are incidental or closely related to the
business of banking. If a bank holding company is well-capitalized and meets
certain criteria specified by the Federal Reserve Board, it

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may engage de novo in certain permissible nonbanking activities without prior
Federal Reserve Board approval.

CONTROL TRANSACTIONS. The Change in Bank Control Act requires a
person, or group of persons acting in concert, acquiring "control" of a bank
holding company to provide the Federal Reserve Board with 60 days' prior
written notice of the proposed acquisition. Following receipt of this notice,
the Federal Reserve Board has 60 days within which to issue a notice
disapproving the proposed acquisition, but the Federal Reserve Board may
extend this time period for up to another 30 days. An acquisition may be
completed before expiration of the disapproval period if the Federal Reserve
Board issues written notice of its intent not to disapprove the transaction.
In addition, any "company" must obtain the Federal Reserve Board's approval
before acquiring 25% or more of the outstanding shares of, or otherwise
obtaining control over, the combined corporation. If the "company" is a bank
holding company, it must obtain the Federal Reserve Board's approval before
acquiring over 5% of the outstanding shares of the combined corporation.

TRANSACTIONS WITH AFFILIATES

The combined corporation and the subsidiary banks will be deemed
affiliates within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Accordingly, they
must comply with Sections 23A and 23B of the Federal Reserve Act. Generally,
Sections 23A and 23B:

- limit the extent to which a financial institution or its
subsidiaries may engage in "covered transactions" with an
affiliate, as defined, to an amount equal to 10% of that
institution's capital and surplus and an aggregate limit on
all these transactions with all affiliates to an amount equal
to 20% of capital and surplus, and

- require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same,
or at least as favorable to the institution or subsidiary, as
those provided to a non-affiliate.

The term "covered transaction" includes the making of loans, purchase of
assets, issuance of a guarantee and other similar types of transactions.

REGULATION OF MANAGEMENT

Federal law:

- lists the circumstances under which officers or directors of a
financial institution may be removed by the institution's
federal supervisory agency;

- places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and
their related interests; and

- prohibits management personnel from serving as a director or
in other management positions with another financial
institution which has assets exceeding a specified amount or
which has an office within a specified geographic area.

TIE-IN ARRANGEMENTS

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The combined corporation and the subsidiary banks cannot engage in
certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, neither of the combined corporation nor the subsidiary banks may
condition an extension of credit on either (1) a requirement that the
customer obtain additional services provided by it or (2) an agreement by the
customer to refrain from obtaining other services from a competitor.

The Federal Reserve Board has adopted significant amendments to its
anti-tying rules that:

- removed Federal Reserve Board-imposed anti-tying restrictions
on bank holding companies and their non-bank subsidiaries;

- allow banks greater flexibility to package products with their
affiliates; and

- establish a safe harbor from the tying restrictions for
certain foreign transactions.

These amendments were designed to enhance competition in banking and
nonbanking products and to allow banks and their affiliates to provide more
efficient, lower cost service to their customers. However, the impact of the
amendments on the combined corporation and the subsidiary banks is unclear at
this time.

STATE LAW RESTRICTIONS

As a Washington business corporation, the combined corporation may
be subject to certain limitations and restrictions as provided under
applicable Washington corporate law. In addition, Washington banking law
restricts and governs certain activities of the subsidiary banks.

THE BANKS

GENERAL

The subsidiary banks, as non-Federal Reserve member FDIC-insured
institutions, are subject to regulation and examination by the FDIC. The
federal laws that apply to the subsidiary banks regulate, among other things,
the scope of their businesses, their investments, their reserves against
deposits, the timing of the availability of deposited funds and the nature
and amount of and collateral for loans. The laws and regulations governing
the banks generally have been promulgated to protect depositors and not to
protect stockholders of the bank or its holding company.

COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
jurisdiction, the FDIC evaluates the record of the financial institutions in
meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation
of those banks. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility.

INSIDER CREDIT TRANSACTIONS. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related
interests of those persons. Extensions of credit (1) must be made on
substantially the same terms, including interest rates and collateral, and
follow credit underwriting procedures that are not less stringent than those
prevailing at the time for comparable transactions with persons not covered
above

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and who are not employees; and (2) must not involve more than the normal risk
of repayment or present other unfavorable features. Banks are also subject to
certain lending limits and restrictions on overdrafts to those persons. A
violation of these restrictions may result in the assessment of substantial
civil monetary penalties on the affected bank or any officer, director,
employee, agent, or other person participating in the conduct of the affairs
of that bank, the imposition of a cease and desist order, and other
regulatory sanctions.

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT. Under the
Federal Deposit Insurance Corporation Improvement Act, each federal banking
agency has prescribed, by regulation, noncapital safety and soundness
standards for institutions under its authority. These standards cover
internal controls, information systems, and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits, any other operational and managerial
standards that the agency determines to be appropriate, and standards for
asset quality, earnings and stock valuation. An institution which fails to
meet these standards must develop a plan acceptable to the agency, specifying
the steps that the institution will take to meet the standards. Failure to
submit or implement such a plan may subject the institution to regulatory
sanctions. Harbor and Pacific believe that The Bank of Grays Harbor and Bank
of the Pacific, respectively, meet all these standards, and therefore, do not
believe that these regulatory standards will materially affect the combined
corporation's business operations.

INTERSTATE BANKING AND BRANCHING

The Riegle-Neal Interstate Banking and Branching Efficiency Act
permits nationwide interstate banking and branching under certain
circumstances. This legislation generally authorizes interstate branching and
relaxes federal law restrictions on interstate banking. Currently, bank
holding companies may purchase banks in any state, and states may not
prohibit these purchases. Additionally, banks are permitted to merge with
banks in other states as long as the home state of neither merging bank has
"opted out." The act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch
in a low-income area.

Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has
accordingly implemented a loan-to-deposit ratio screen to ensure compliance
with this prohibition.

With regard to interstate bank mergers, Washington has "opted in" to
the Riegle-Neal Interstate Banking and Branching Efficiency Act and allows
in-state banks to merge with out-of-state banks subject to certain aging
requirements. Washington law generally authorizes the acquisition of an
in-state bank by an out-of-state bank through merger with a Washington
financial institution that has been in existence for at least 5 years prior
to the acquisition. With regard to interstate bank branching, out-of-state
banks that do not already operate a branch in Washington may not establish de
novo branches in Washington or establish and operate a branch by acquiring a
branch in Washington.

DEPOSIT INSURANCE

The deposits of the subsidiary banks are currently insured to a
maximum of $100,000 per depositor through the Bank Insurance Fund
administered by the FDIC. All insured banks are required to pay semi-annual
deposit insurance premium assessments to the FDIC.

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The Federal Deposit Insurance Corporation Improvement Act included
provisions to reform the Federal Deposit Insurance System, including the
implementation of risk-based deposit insurance premiums. The Federal Deposit
Insurance Corporation Improvement Act also permits the FDIC to make special
assessments on insured depository institutions in amounts determined by the
FDIC to be necessary to give it adequate assessment income to repay amounts
borrowed from the U.S. Treasury and other sources, or for any other purpose
the FDIC deems necessary. The FDIC has implemented a risk-based insurance
premium system under which banks are assessed insurance premiums based on how
much risk they present to the Bank Insurance Fund. Banks with higher levels
of capital and a low degree of supervisory concern are assessed lower
premiums than banks with lower levels of capital or a higher degree of
supervisory concern.

DIVIDENDS

The principal source of the combined corporation's cash revenues
will be dividends received from the subsidiary banks. The payment of
dividends is subject to government regulation, in that regulatory authorities
may prohibit banks and bank holding companies from paying dividends which
would constitute an unsafe or unsound banking practice. In addition, a bank
may not pay cash dividends if that payment could reduce the amount of its
capital below that necessary to meet minimum applicable regulatory capital
requirements. Other than the laws and regulations noted above, which apply to
all banks and bank holding companies, neither the combined corporation nor
either Bank is currently subject to regulatory restrictions on its dividends.

CAPITAL ADEQUACY

Federal bank regulatory agencies use capital adequacy guidelines in
the examination and regulation of bank holding companies and banks. If
capital falls below minimum guideline levels, the holding company or bank may
be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities.

The FDIC and Federal Reserve use risk-based capital guidelines for
banks and bank holding companies. These are designed to make the capital
requirements more sensitive to differences in risk profiles among banks and
bank holding companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance
sheet items are assigned to broad risk categories, each with appropriate
weights. The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance sheet items. The guidelines are
minimums, and the Federal Reserve has noted that bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of
the minimum. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier I capital. Tier I
capital for bank holding companies includes common shareholders' equity,
certain qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, less intangibles except as described
above.

The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
companies and for bank holding companies seeking to expand, the Federal
Reserve expects an additional cushion of at least 1% to 2%.

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The Federal Deposit Insurance Corporation Improvement Act created a
statutory framework of supervisory actions indexed to the capital level of
the individual institution. Under regulations adopted by the FDIC, an
institution is assigned to one of five capital categories depending on its
total risk-based capital ratio, Tier I risk-based capital ratio, and leverage
ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. We
do not believe that these regulations have any material effect on their
operations.

EFFECTS OF GOVERNMENT MONETARY POLICY

The earnings and growth of the combined corporation will be affected
not only by general economic conditions, but also by the fiscal and monetary
policies of the federal government, particularly the Federal Reserve. The
Federal Reserve can and does implement national monetary policy for such
purposes as curbing inflation and combating recession, but its open market
operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of
reserve requirements against certain deposits, influence the growth of bank
loans, investments and deposits, and also affect interest rates charged on
loans or paid on deposits. The nature and impact of future changes in
monetary policies and their impact on the combined corporation and the
subsidiary banks cannot be predicted with certainty.

CHANGES IN BANKING LAWS AND REGULATIONS

The laws and regulations that affect banks and bank holding
companies are currently undergoing significant changes. In 1998 and again
this year, legislation was proposed in the U.S. Congress which contained
proposals to alter the structure, regulation, and competitive relationships
of the nation's financial institutions. Although the legislation was not
passed in the 1998 general session of Congress, similar legislation is
pending in both houses of Congress. If enacted into law, this legislation (or
similar legislation which may be proposed in the coming years) could have the
effect of increasing or decreasing the cost of doing business, limiting or
expanding permissible activities (including activities in the insurance and
securities fields), or affecting the competitive balance among banks, savings
associations, and other financial institutions. Some of these bills may
reduce the extent of federal deposit insurance, broaden the powers or the
geographical range of operations of bank holding companies, alter the extent
to which banks could engage in securities activities, and change the
structure and jurisdiction of various financial institution regulatory
agencies. Whether or in what form such legislation may be adopted, or the
extent to which the business of the combined corporation and the subsidiary
banks might be affected thereby, cannot be predicted with certainty.

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DESCRIPTION OF CAPITAL STOCK OF THE COMBINED CORPORATION

The combined corporation is authorized to issue 5,000,000 shares of
common stock, par value $1.00 per share. The common stock of the combined
corporation will not be listed for trading on any stock exchange or quoted on
any automated quotation system. Each share of common stock of the combined
corporation will have the same relative rights and will be identical in all
respects with every other share of common stock of the combined corporation.
The following summary describes the material aspects of the common stock of
the combined corporation, but does not purport to be a complete description
of the applicable provisions of the combined corporation's Articles of
Incorporation and Bylaws or of applicable statutory or other law, and is
qualified in its entirety by reference to these documents. See "Where You Can
Find More Information."

VOTING RIGHTS

The holders of common stock of the combined corporation will possess
exclusive voting rights in the combined corporation. Each holder of common
stock of the combined corporation will be entitled to one vote for each share
held of record on all matters submitted to a vote of holders of common stock
of the combined corporation. Holders of shares of common stock of the
combined corporation are not entitled to cumulate votes for the election of
directors.

DIVIDENDS

The holders of common stock of the combined corporation are entitled
to the dividends that the Board of Directors may declare from time to time
out of funds legally available therefor. Dividends from the combined
corporation will depend upon the receipt by the combined corporation of
dividends from the subsidiary banks because the combined corporation has no
source of income other than dividends from its subsidiary banks. Accordingly,
the dividend restrictions imposed on the combined corporation's subsidiary
banks by statute or regulation may effectively limit the amount of dividends
the combined corporation can pay. See "Supervision and Regulation - The Banks -
Dividends."

LIQUIDATION

If there is a liquidation, dissolution or winding up of the combined
corporation, the holders of shares of combined corporation common stock will
be entitled to share ratably in all assets remaining after payment of all
debts and other liabilities of the combined corporation.

OTHER CHARACTERISTICS

Holders of common stock of the combined corporation will not have
any preemptive, conversion or other subscription rights with respect to any
additional shares of combined corporation common stock which may be issued.
Therefore, the Board of Directors may authorize the issuance and sale of
shares of capital stock of the combined corporation without first offering
them to existing stockholders of the combined corporation. The common stock
of the

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combined corporation is not subject to any redemption or sinking fund
provisions. The outstanding shares of common stock of the combined
corporation will be fully paid and non-assessable.

The Articles of Incorporation and Bylaws of the combined corporation
will contain provisions that may have the effect of discouraging persons from
acquiring large blocks of common stock of the combined corporation or
delaying or preventing a change in control of the combined corporation. These
provisions include the classification of the Board of Directors into three
classes with the term of only one class expiring each year and requirements
for the approval of certain business combinations. See "Comparison of Certain
Rights of Holders of Common Stock of Harbor, Pacific and the Combined
Corporation."

AMENDED AND RESTATED ARTICLES OF INCORPORATION AND BYLAWS
OF THE COMBINED CORPORATION

GENERAL

Under Washington law, adoption by our shareholders of the merger
Agreement containing the combined corporation Amended and Restated Articles
of Incorporation and the combined corporation Bylaws as annexes to the merger
agreement constitutes the adoption of the combined corporation Amended and
Restated Articles and combined corporation Bylaws as the articles of
incorporation and bylaws of the combined corporation as the surviving
corporation in the merger. For a period of three years following the
effective time of the merger, amendment of the combined corporation Articles
and Bylaws will require approval by at least 60% of the combined
corporation's Board of Directors.

AMENDED AND RESTATED ARTICLES OF INCORPORATION

The following summary is intended to highlight certain important
provisions of the combined corporation Amended and Restated Articles of
Incorporation. This summary is not intended to be complete and is qualified
in its entirety by reference to the more detailed information contained in
the combined corporation Articles, a copy of which is included as Annex 1 to
the merger agreement attached as Appendix 1 hereto.

NUMBER OF SHARES OF AUTHORIZED CAPITAL STOCK. The combined
corporation Articles authorize 5,000,000 shares of combined corporation
common stock.

Of the 5,000,000 authorized shares of combined corporation common
stock, approximately 258,381 shares are currently issued as Harbor common
stock, approximately 230,588 shares will be issued in connection with the
merger in respect of the Pacific common stock, approximately 3,300 shares
will be reserved for issuance in connection with the lease option purchase of
the Montsano branch site and 14,000 shares will be reserved for issuance of
outstanding options under the Harbor's stock option plan, and approximately
4,710 shares will be reserved for issuance for outstanding options under the
Pacific stock option plan, which will be assumed by the combined corporation
in the merger. See "The Merger - Employee Benefit Plans." No other shares of
combined corporation common stock

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will be issued in connection with the merger. Therefore, upon completion of
the merger, the combined corporation will have approximately 4,489,021 shares
of combined corporation common stock available for issuance from time to time
as may be necessary in connection with future financings, additional employee
or director stock options, acquisitions of other companies, stock dividends,
stock splits, other distributions, or other corporate purposes.

We believe that it is advisable to have these additional authorized
but unissued shares in order to enable the combined corporation, as the need
may arise, to take prompt advantage of market conditions and the availability
of favorable business opportunities without the delay and expense incident to
holding a special meeting of the combined corporation shareholders. The
issuance of the additional shares that would be authorized under the combined
corporation Articles in future acquisitions or other transactions may dilute
the present equity ownership position of current holders of Harbor common
stock and Pacific common stock, could have a dilutive effect on the book
value and earnings per share of combined corporation common stock, and could
affect the relative voting rights of combined corporation shareholders.
Further, additional shares could be issued by the combined corporation in a
private placement to a holder that would, among other things, vote against a
business combination. The issuance shares to a holder that would vote against
a business combination could dilute the ownership of a person attempting to
gain control of the combined corporation. Accordingly, a possible effect of
adoption of the combined corporation Articles may be to deter potential
acquirors from attempts to take control of the combined corporation.

TERMS OF COMBINED CORPORATION COMMON STOCK. The terms of the
combined corporation common stock are discussed under the heading
"Description of Common Stock of the Combined Corporation."

VOTING. The combined corporation Articles do not provide for
cumulative voting, and consequently, no holders of shares of any class of
combined corporation stock will be entitled to cumulate their voting power.

RIGHT TO CALL SPECIAL MEETING OF SHAREHOLDERS. The Secretary of the
combined corporation will be required to call a special meeting of
shareholders upon written demand of a person or persons holding more than 25%
of the voting power of all shareholders.

DIRECTORS. The combined corporation Articles provide that the Board
of Directors of the combined corporation will be divided into three classes
having as equal a number of directors as possible. The terms of the three
classes are staggered so that at any time the term of one class will expire
at the next annual meeting of shareholders thereafter occurring, the term of
the second class will expire at the second annual meeting of shareholders
thereafter occurring, and the term of the third class will expire at the
third annual meeting of shareholders thereafter occurring. At each annual
meeting of shareholders of the combined corporation, the successors to the
directors of the class whose term will expire in that year will be elected to
hold office for a term expiring at the annual meeting of shareholders
occurring in the third year after the date of their election.

The effect of the combined corporation having a classified Board of
Directors is that only approximately one-third of the Board members of the

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combined corporation will be elected each year and, as a result, two annual
meetings will be required for the combined corporation shareholders to change
the majority of the members constituting the Board of Directors. The combined
corporation Articles provide that the Board of Directors may change the
number of directors to a total number of no fewer than five directors and no
more than 20 directors. The Board of Directors of the combined corporation
may fill vacancies on the Board caused by resignation, death, or otherwise.

DIRECTOR LIABILITY AND INDEMNIFICATION. The combined corporation
Articles provide that directors of the combined corporation shall not be
liable to the combined corporation or its shareholders for monetary damages
for conduct as directors except to the extent that the Washington Business
Corporation Act prohibits elimination or limitation of director liability.
The Washington Business Corporation Act provides that a Washington
corporation's articles of incorporation may not eliminate or limit the
liability of a director for any breach of the director's duty of loyalty to
the corporation or its shareholders, acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, any
unlawful distribution under the Washington Business Corporation Act, or any
transaction from which the director derived an improper personal benefit.

The combined corporation Articles also provide that the combined
corporation must indemnify each of its directors to the fullest extent
permitted under the Washington Business Corporation Act against all
liabilities incurred by the director because the director is or was a
director of the combined corporation, or is or was serving at the request of
the combined corporation as a director, officer, partner, trustee, employee,
or agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise.

The Washington Business Corporation Act permits a corporation to
indemnify an individual made a party to a proceeding because the individual
is or was a director, officer, employee, or agent of the corporation against
liability incurred in the proceeding if the conduct of the individual was in
good faith, the individual reasonably believed that the individual's conduct
was in the best interests of the corporation, or at least not opposed to its
best interests, and in the case of any criminal proceeding, the individual
had no reasonable cause to believe the individual's conduct was unlawful. A
corporation may not indemnify an individual under the Washington Business
Corporation Act in connection with a proceeding by or in the right of the
corporation in which the individual was adjudged liable to the corporation,
or in connection with any other proceedings charging improper personal
benefit to the individual in which the individual was adjudged liable on the
basis that personal benefit was improperly received by the individual. The
Washington Business Corporation Act contains other restrictions and
procedures with respect to indemnification of directors, officers, employees,
and agents of Washington corporations.

The combined corporation Articles permit the combined corporation to
provide further indemnification rights to its directors, officers, employees,
and agents as permitted by law. The combined corporation has provided
additional indemnification rights to its directors, officers, employees, and
agents in the combined corporation Bylaws. See "- Bylaws."

See "Comparison of Certain Rights of Holders of Common Stock of
Harbor, Pacific, and the Combined Corporation - Potential Antitakeover
Provisions."

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BYLAWS

The following summary is intended to highlight selected provisions
of the combined corporation Bylaws. This summary is not intended to be
complete and is qualified in its entirety by reference to the combined
corporation Bylaws, a copy of which is included as Annex 2 to the merger
agreement attached as Appendix I hereto.

SPECIAL MEETINGS OF SHAREHOLDERS. The combined corporation Bylaws
provide that a special meeting of shareholders of the combined corporation
may be called by the President, the Board of Directors, or as otherwise
provided by the combined corporation Articles. See " - Amended and Restated
Articles of Incorporation - Right to Call Special Meeting of Shareholders"
above.

DIRECTOR NOMINATIONS. The combined corporation Articles provide that
nominations for elections to the combined corporation Board of Directors may
be made by the Board of Directors or by any shareholder of any outstanding
class of capital stock of the combined corporation entitled to vote for
directors. Nominations other than those made by the Board of Directors may be
made only if advance written notice of intent to make the nomination is
received by the Chairman of the combined corporation not less than 14 or more
than 60 days prior to the date of the meeting. However, if less than 21 days
notice of the meeting is given to shareholders, nominations must be mailed or
delivered not later than the close of business on the seventh day following
the date on which notice of the meeting is first given to shareholders. The
Bylaws do provide that, prior to the first anniversary of the effective time
of the merger, vacancies on the Board of Directors will be filled as set
forth in the merger agreement.

VOTE REQUIRED FOR DIRECTOR ACTION. The combined corporation Bylaws
provide that a majority of the entire authorized Board of Directors
constitutes a quorum for the transaction of business, and that the
affirmative vote of a majority of directors present at any meeting at which a
quorum is present will be the act of the Board unless a greater requirement
is imposed by law, the combined corporation Articles, or the combined
corporation Bylaws. In addition, until the third anniversary of the effective
time of the merger, certain actions will require approval by at least 60% of
the Board of Directors. See "The Merger - Management of the Combined
Corporation - Approval by 60% of the Board Required for Certain Actions."

BOARD OF DIRECTOR COMMITTEES. The combined corporation Bylaws
provide that the Board of Directors, by resolution adopted by a majority of
the full Board of Directors, will designate from among its members an
Executive Committee and an Audit Committee, and may designate other Board
committees. Each committee must consist of two or more persons. The
committees are governed by the same rules regarding meetings, notices, and
voting requirements that apply to the Board of Directors. The committees have
the authority of the Board of Directors as may be specified in the resolution
of the Board of Directors designating the committee, subject to limitations
specified in the combined corporation Bylaws and other limitations imposed by
Washington law.

REMOVAL OF DIRECTORS. The combined corporation Bylaws provide that
combined corporation directors may be removed from office, with or without
cause, by a vote of the holders of a majority of the shares of combined
corporation common stock then entitled to vote at an election of directors.

105
<PAGE>

INDEMNIFICATION. The combined corporation Bylaws permit the combined
corporation to provide indemnification consistent with its Articles and
applicable law.

AMENDMENT OF COMBINED CORPORATION BYLAWS. The combined corporation
Bylaws provide that the Board of Directors may amend or repeal the combined
corporation Bylaws at any regular or special meeting of the Board of
Directors, as long as notice of the proposed change is contained in the
notice of meeting; provided, however, that the Board of Directors may not
change the bylaws in any way which would alter the qualifications,
classification, term of office or compensation of directors. During the first
three years following the effective time of the merger, however, any proposed
amendment to the combined corporation's Bylaws must be approved by 60% of the
directors of the combined corporation. The shareholders may amend or repeal
the combined corporation Bylaws even though the combined corporation Bylaws
may also be amended and repealed by the combined corporation Board of
Directors.

COMPARISON OF CERTAIN RIGHTS OF HOLDERS OF COMMON STOCK OF
HARBOR, PACIFIC AND THE COMBINED CORPORATION

GENERAL

Harbor is incorporated under the laws of the State of Washington
and, accordingly, the rights of Harbor's stockholders are governed by
Harbor's Articles of Incorporation and Bylaws and the Washington Business
Corporation Act. Pacific, likewise, is incorporated under the laws of the
State of Washington and, accordingly, the rights of Pacific's stockholders
are governed by Pacific's Articles of Incorporation, Bylaws and the
Washington Business Corporation Act.

Upon completion of the merger, stockholders of Pacific will become
stockholders of the combined corporation, and their rights will be governed
by the combined corporation's Articles of Incorporation and Bylaws and the
Washington Business Corporation Act. The following is a summary of material
differences between the Articles of Incorporation and Bylaws of Harbor,
Pacific and the combined corporation. This discussion is not intended to be a
complete statement of the differences affecting the rights of stockholders
and is qualified in its entirety by reference to the governing laws and the
Articles and Bylaws of each entity.

DIVIDEND RIGHTS

HARBOR. Under Washington law, dividends may be paid only if, after
giving effect to the dividend, Harbor will be able to pay its debts as they
become due in the ordinary course of business and Harbor's total assets will
not be less than the sum of its total liabilities plus the amount that would
be needed, if Harbor were to be dissolved at the time of the dividend, to
satisfy the preferential rights of persons whose right to payment is superior
to those receiving the dividend.

PACIFIC. Pacific's ability to pay dividends, and the limits imposed
by Washington law, are the same as those applicable to Harbor.

COMBINED CORPORATION. The combined corporation's ability to pay
dividends, and the limits imposed by Washington law, are the same as those
applicable to Harbor.

106
<PAGE>

VOTING RIGHTS

HARBOR. Harbor's Articles of Incorporation eliminate cumulative
voting. Cumulative voting entitles each shareholder to cast a number of votes
in the election of directors equal to the number of the shareholder's shares
of common stock multiplied by the number of directors to be elected, and to
distribute the votes among one or more of the nominees to be elected. The
absence of cumulative voting rights limits the ability of minority
shareholders to obtain representation on the Harbor Board of Directors. All
voting rights are vested in the holders of Harbor common stock, with each
share being entitled to one vote.

PACIFIC. All voting rights are vested in the holders of Pacific
common stock with each share being entitled to one vote. Pacific's
shareholders have cumulative voting rights.

COMBINED CORPORATION. All voting rights will be vested in the
holders of combined corporation common stock, with each share being entitled
to one vote. The combined corporation's Articles of Incorporation will
eliminate cumulative voting rights.

PREEMPTIVE RIGHTS

HARBOR. Harbor's shareholders do not have preemptive rights to
subscribe to any additional securities that may be issued.

PACIFIC. The holders of Pacific common stock have preemptive rights
that give them the right of first refusal to acquire shares offered by
Pacific to acquire pro rata unissued shares of capital stock if the Board of
Directors decides to issue additional shares to subscribe to any additional
securities that Pacific may issue.

COMBINED CORPORATION. The combined corporation's shareholders will
not have preemptive rights to subscribe to any additional securities that may
be issued.

LIQUIDATION RIGHTS

HARBOR. If Harbor is liquidated, the holders of Harbor common stock
are entitled to share, on a pro rata basis, Harbor's remaining assets after
payment of or provision for all debts and other liabilities of Harbor.

PACIFIC. Similarly, if Pacific is liquidated, holders of Pacific
common stock are entitled to share, on a pro rata basis, Pacific's remaining
assets after payment of or provision for all debts and other liabilities of
Pacific.

COMBINED CORPORATION. If the combined corporation is liquidated,
holders of combined corporation common stock will similarly be entitled to
share, on a pro rata basis, the combined corporation's assets after payment
of or provision for all debts and other liabilities of the combined
corporation.

ASSESSMENTS

All outstanding shares of Harbor common stock and of Pacific common
stock are fully paid and nonassessable. When duly authorized and issued in
accordance with the terms of the merger agreement,

107
<PAGE>

all outstanding shares of combined corporation common stock will be fully
paid and nonassessable.

STOCK REPURCHASES

Under Washington law, a corporation may acquire shares of its own
stock. Therefore, each of the combined corporation, Harbor and Pacific may
repurchase shares of their own capital stock.

AMENDMENT OF ARTICLES AND BYLAWS

HARBOR. Harbor's Articles of Incorporation may be amended by the
vote of the holders of a majority of the outstanding shares of Harbor common
stock. The Bylaws of Harbor may be amended by a majority vote of the Board of
Directors or by the holders of at least a majority of the outstanding shares
of Harbor.

PACIFIC. Pacific's Articles of Incorporation may be amended only
upon the affirmative vote of the holders of two-thirds (2/3) of Pacific's
outstanding voting stock. The Pacific Board may make certain amendments, as
listed in the Washington Business Corporation Act, to the Articles of
Incorporation without shareholder approval. Pacific's Articles provide that
shareholders may vest authority to make bylaws in Pacific's Board of
Directors subject to the power of the shareholders to change and repeal the
bylaws.

COMBINED CORPORATION. The combined corporation's Articles of
Incorporation may be amended by the vote of the holders of a majority of the
outstanding shares of combined corporation common stock. The combined
corporation's bylaws may be amended by a majority vote of the Board of
Directors or by holders of at least a majority of the outstanding shares of
combined corporation common stock; PROVIDED, HOWEVER, that until the third
anniversary of the effective time of the merger, any amendment will require
the approval by 60% of the combined corporation's directors.

SPECIAL MEETINGS; ACTIONS WITHOUT A MEETING

HARBOR. The Bylaws of Harbor provide that special meetings of
stockholders may be called by the president, the Board of Directors or by
holders of not less than a majority of the voting stock of the corporation.
This restriction on the calling of special stockholders' meetings may deter
hostile takeovers of Harbor by making it more difficult for a person or
entity to obtain immediate control of Harbor between one annual meeting and
the next.

PACIFIC. The Bylaws of Pacific provide that special meetings of
stockholders may be called by the president, the Board of Directors or by
holders of not less than a majority of the voting stock of the corporation.
This restriction on the calling of special stockholders' meetings may deter
hostile takeovers of Pacific by making it more difficult for a person or
entity to obtain immediate control of Pacific between one annual meeting and
the next.

COMBINED CORPORATION. The Bylaws of the combined corporation will
contain provisions identical to those described above for Harbor and Pacific.

APPROVAL OF CERTAIN TRANSACTIONS

108
<PAGE>

HARBOR. Under the Washington Business Corporation Act, unless the
articles of incorporation provide for a lesser vote (but not less than a
majority), approval by at least two-thirds (2/3) of the outstanding shares
entitled to vote or by two-thirds (2/3) of each voting group is required for
mergers, sales of all or substantially all assets, and dissolutions. Separate
voting by voting groups is required (1) on a plan of share exchange, and (2)
on a plan of merger, if the plan contains provisions that would require
separate voting if contained in an amendment to articles of incorporation.
Harbor's Articles of Incorporation do not reduce the shareholder vote
otherwise required under the Washington Business Corporation Act for mergers,
asset sales, and dissolutions to less than two-thirds (2/3) of the
outstanding shares entitled to vote or of each voting group.

PACIFIC. Pacific's Articles of Incorporation do not reduce the
shareholder vote otherwise required under the Washington Business Corporation
Act (as described above) for mergers, asset sales, and dissolutions to less
than two-thirds (2/3) of the outstanding shares entitled to vote or of each
voting group.

COMBINED CORPORATION. The combined corporation's Articles of
Incorporation do not reduce the shareholder vote otherwise required under the
Washington Business Corporation Act for mergers, asset sales, and
dissolutions to less than two-thirds (2/3) of the outstanding shares entitled
to vote or of each voting group. The merger agreement also provides that,
until the third anniversary of the effective date of the merger, certain
actions will require the approval of at least 60% of the combined
corporation's Board of Directors. See "The Merger - Management of the
Combined Corporation - Approval by 60% of the Board Required for Certain
Actions."

DISSENTERS' RIGHTS

HARBOR. Under the Washington Business Corporation Act, shareholders
of Harbor will generally have dissenter's appraisal rights in connection with
(1) a plan of merger to which Harbor is a party; (2) a plan of share exchange
to which Harbor is a party as the corporation whose shares will be acquired;
(3) certain sales or exchanges of all, or substantially all, of Harbor's
property other than in the regular course of business; and (4) amendments to
Harbor's Articles of Incorporation effecting a material reverse stock split.
However, shareholders generally will not have dissenters' rights if
shareholder approval is not required by the Washington Business Corporation
Act for the corporate action. Therefore Harbor's shareholders are entitled to
exercise dissenters' rights in connection with the proposed merger.

PACIFIC. Similarly, Pacific's shareholders are entitled to exercise
dissenters' rights in connection with the proposed merger.

COMBINED CORPORATION. Holders of combined corporation will have
dissenter's rights in connection with future transactions as described above.

BOARD OF DIRECTORS

HARBOR. Harbor's articles provide that the Board shall consist of
not fewer than 9 nor more than 20 individuals. The exact number will be
determined by resolution of the Board of Directors. Currently, the Harbor
Board has thirteen (13) directors. The directors are elected by ballot by the
stockholders to serve until the next annual meeting. A Harbor director may
not be removed without cause before his or her term expires, unless
two-thirds of the shareholders entitled to vote on the matter vote in favor
of removal.

109
<PAGE>

PACIFIC. Pacific's Bylaws provide that each member of its Board
serves for a one-year term (or until the next annual shareholders' meeting
and until the director's successor is elected and qualified). Pacific's Board
must consist of at least five (5) but no more than fifteen (15) directors;
the Pacific Board sets the exact number by resolution. Currently, the Pacific
Board has ten (10) directors. Pacific shareholders, by an affirmative
majority vote, may remove any director from office with or without cause
before his or her term expires.

COMBINED CORPORATION. The combined corporation's Board of Directors
will be divided into three classes of three, of which one class will be up
for re-election each year.

INDEMNIFICATION AND LIMITATION OF LIABILITY

To the fullest extent permissible by the Washington Business
Corporation Act, as it may be amended from time to time, a director of
Harbor, Pacific or the combined corporation shall not be personally liable to
the corporation or its shareholders for monetary damages for conduct as a
director.

POTENTIAL ANTITAKEOVER PROVISIONS

HARBOR. The Harbor Articles of Incorporation do not include a
classified Board of Directors or a super-majority vote requirement for
certain transactions. However, the Bylaws contain restrictions on the calling
of special meetings of shareholders and the Articles do not lessen the vote
required on certain transactions, as permitted by the Washington Business
Corporation Act. See " - Special Meetings; Actions Without a Meeting" and " -
Approval of Certain Transactions."

PACIFIC. The Pacific Articles of Incorporation do not include a
classified Board of Directors or a super-majority vote requirement for
certain transactions. However, the Bylaws contain restrictions on the calling
of special meetings of shareholders and the Articles do not lessen the vote
required on certain transactions, as permitted by the Washington Business
Corporation Act. See " - Special Meetings; Actions Without a Meeting" and " -
Approval of Certain Transactions."

COMBINED CORPORATION. In addition to the anti-takeover provisions
described above, the combined corporation will also have a classified Board
of Directors with only one class expiring each year.

CERTAIN LEGAL MATTERS

The validity of the combined corporation common stock to be issued
in the merger is being passed upon for Harbor by Graham & Dunn PC, Seattle,
Washington. Graham & Dunn PC will also deliver an opinion concerning certain
federal income tax consequences of the merger.

EXPERTS

The consolidated statements of financial condition of Harbor as of
December 31, 1998 and December 31, 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years in the period ended December 31, 1998 have been audited by Knight Vale
& Gregory, Inc., P.S., independent auditors, as set forth in their report
with respect thereto appearing elsewhere in this Joint Proxy
Statement/Prospectus, and are included herein in reliance upon the report
given upon the authority of that firm as experts in accounting and auditing.

110
<PAGE>

The audited consolidated financial statements of Pacific as of
December 31, 1998 and 1997, and for each of the two years in the period ended
December 31, 1998, included in this Joint Proxy Statement/Prospectus, have
been audited by Knight Vale & Gregory, Inc., P.S., independent auditors, as
indicated in their report with respect thereto appearing elsewhere in this
Joint Proxy Statement/Prospectus, and are included herein in reliance upon
the authority of that firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

Harbor has filed a Registration Statement on Form S-4 under the
Securities Act of 1933, as amended, to register with the Securities and
Exchange Commission the combined corporation common stock to be issued to
Pacific stockholders in the merger. This Joint Proxy Statement/Prospectus is
part of that Registration Statement and constitutes a prospectus of Harbor in
addition to being a proxy statement of Harbor for the Harbor Special Meeting
of Shareholders and of Pacific for the Pacific Special Meeting of
Shareholders. As allowed by Securities and Exchange Commission rules, this
Joint Proxy Statement/Prospectus does not contain all of the information that
you can find in the Registration Statement or the exhibits to the
Registration Statement.

In addition, the combined corporation will be required to file
annual, quarterly and current reports, proxy statements, and other
information with the Securities and Exchange Commission. You may read and
copy the Registration Statement and its exhibits as well as any reports,
statements, or other information that the combined corporation files, at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. You can request copies of the filed documents, upon
payment of a duplicating fee, by writing to the Public Reference Section of
the Securities and Exchange Commission, 450 Fifth Street, Room 1024,
Washington, D.C. 20549. Harbor's Securities and Exchange Commission filings
are also available to the public on the Securities and Exchange Commission
Internet site (http://www.sec.gov).

OTHER MATTERS

HARBOR SPECIAL MEETING OF SHAREHOLDERS. The Harbor Board of
Directors is not aware of any business to come before the Harbor special
shareholders meeting other than those matters described above in this proxy
statement/prospectus. However, if any other matters should properly come
before the Harbor special shareholders meeting, it is intended that proxies
in the accompanying form will be voted in respect thereof in accordance with
the judgment of the person or persons voting the proxies.

PACIFIC SPECIAL MEETING OF SHAREHOLDERS. The Pacific Board of
Directors is not aware of any business to come before the Pacific special
shareholders meeting other than those matters described above in this proxy
statement/prospectus. However, if any other matters should properly come
before the Pacific special shareholders meeting, it is intended that proxies
in the accompanying form will be voted in respect thereof in accordance with
the judgment of the person or persons voting the proxies.

111
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
HARBOR FINANCIAL STATEMENTS

Report of Independent Auditors..................................................................................F-2

Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998...........................................F-3

Consolidated Statements of Income for the Six Months Ended June 30, 1999 and 1998
and the Years Ended December 31, 1998 and 1997..................................................................F-4

Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 1999
and 1998 and the Years Ended December 31, 1998 and 1997.........................................................F-5

Consolidated Statements of Cash Flow for the Six Months Ended June 30, 1999 and 1998
and the Years Ended December 31, 1998 and 1997..................................................................F-7

Notes to Consolidated Financial Statements......................................................................F-8

PACIFIC FINANCIAL STATEMENTS

Report of Independent Auditors.................................................................................F-27

Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998..........................................F-28

Consolidated Statements of Income for the Six Months Ended June 30, 1999 and 1998
and the Years Ended December 31, 1998 and 1997.................................................................F-29

Notes to Consolidated Financial Statements.....................................................................F-33
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
HARBOR BANCORP, INC.
Aberdeen, Washington

We have audited the accompanying consolidated balance sheet of HARBOR
BANCORP, INC. AND SUBSIDIARY as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for
the years ended December 31, 1998 and 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HARBOR
BANCORP, INC. AND SUBSIDIARY as of December 31, 1998, and the results of
their operations and their cash flows for the years ended December 31, 1998
and 1997, in conformity with generally accepted accounting principles.

KNIGHT, VALE & GREGORY INC., P.S.

February 4, 1999
Tacoma, Washington

F-2
<PAGE>

CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Harbor Bancorp, Inc. and Subsidiary
June 30, 1999 and December 31, 1998

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(Unaudited)

<S> <C> <C>
ASSETS
Cash and due from banks $ 6,292 $ 6,345
Interest bearing deposits in banks 627 4,889
Federal funds sold 4,878 9,145
Securities available for sale 32,579 30,769

Loans 85,290 81,555
Allowance for credit losses 1,148 1,147
LOANS - NET 84,142 80,408

Premises and equipment 2,267 2,337
Accrued interest receivable 1,238 1,020
Other assets 792 372

TOTAL ASSETS $132,815 $135,285

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 19,335 $ 19,415
Savings and interest-bearing demand 70,704 70,209
Time 29,285 32,112
TOTAL DEPOSITS 119,324 121,736

Accrued interest payable 247 213
Other liabilities 713 1,557

TOTAL LIABILITIES 120,284 123,506

COMMITMENTS AND CONTINGENT LIABILITIES -- --

SHAREHOLDERS' EQUITY
Common stock (par value $1); authorized 1,000,000 shares;
258,381 shares issued 259 259
Surplus 5,518 5,518
Retained earnings 6,878 5,871
Accumulated other comprehensive income (124) 131
TOTAL SHAREHOLDERS' EQUITY 12,531 11,779

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $132,815 $135,285
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)

Harbor Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1999 and 1998, and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $3,912 $4,103 $ 8,129 $8,047
Federal funds sold and deposits in banks 337 297 713 248
Securities available for sale:
Taxable 752 414 1,023 705
Tax exempt 94 74 169 128
TOTAL INTEREST INCOME 5,095 4,888 10,034 9,128

INTEREST EXPENSE
Deposits 1,948 1,842 3,761 3,280
Other borrowings -- -- -- 6
TOTAL INTEREST EXPENSE 1,948 1,842 3,761 3,286

NET INTEREST INCOME 3,147 3,046 6,273 5,842

PROVISION FOR CREDIT LOSSES -- -- -- 70

NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 3,147 3,046 6,273 5,772

NON-INTEREST INCOME
Service charges on deposit accounts 216 208 355 343
Gain on sale of loans -- -- -- 40
Other operating income 86 99 289 205
TOTAL NON-INTEREST INCOME 302 307 644 588

NON-INTEREST EXPENSE
Salaries 885 860 1,803 1,642
Employee benefits 209 200 368 313
Occupancy 121 122 245 218
Equipment 182 190 388 343
Other 541 529 1,113 987
TOTAL NON-INTEREST EXPENSE 1,938 1,901 3,917 3,503

INCOME BEFORE INCOME TAXES 1,511 1,452 3,000 2,857

INCOME TAXES 504 457 927 919

NET INCOME $1,007 $ 995 $ 2,073 $1,938

EARNINGS PER SHARE
Basic $3.90 $3.86 $8.03 $7.57
Diluted 3.79 3.77 7.84 7.48
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Harbor Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1999 and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $255 $5,446 $3,603 $ 97 $ 9,401

Comprehensive income:
Net income -- -- 1,938 -- 1,938
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- (42) (42)
COMPREHENSIVE INCOME 1,896

Options and stock bonuses exercised 3 64 -- -- 67
Dividends on common stock
($3.00 per share) -- -- (774) -- (774)

BALANCE, DECEMBER 31, 1997 258 5,510 4,767 55 10,590

Comprehensive income:
Net income -- -- 2,073 -- 2,073
Other comprehensive income,
net of tax:
Unrealized loss on securities -- -- -- 76 76
COMPREHENSIVE INCOME 2,149

Options and stock bonuses exercised 1 8 -- -- 9
Dividends on common stock
($3.75 per share) -- -- (969) -- (969)

BALANCE, DECEMBER 31, 1998 259 5,518 5,871 131 11,779

Comprehensive income:
Net income (unaudited) -- -- 1,007 -- 1,007
Other comprehensive income,
net of tax:
Unrealized loss on securities
(unaudited) -- -- -- (255) (255)
COMPREHENSIVE INCOME (UNAUDITED) 752

BALANCE, JUNE 30, 1999 (UNAUDITED) $259 $5,518 $6,878 ($124) $12,531
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Harbor Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1999 and 1998, and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,007 $ 995 $ 2,073 $1,938
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 167 160 320 304
Provision for credit losses -- -- -- 70
Deferred income tax -- -- 57 2
Stock dividends received (93) (89) (181) (168)
Gain on sale of loans -- -- -- (40)
Increase in interest receivable (218) (79) (246) (7)
Increase in interest payable 34 52 46 19
Other - net (282) (335) (332) (24)
NET CASH PROVIDED BY OPERATING ACTIVITIES 615 704 1,737 2,094

CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing
deposits in banks 4,262 1,457 (264) 169
Net (increase) decrease in Federal funds sold 4,267 (3,330) (4,450) (2,420)
Purchase of securities available for sale (21,541) (11,857) (31,450) (3,643)
Proceeds from maturities of securities
available for sale 19,533 5,689 14,272 3,335
Proceeds from sales of securities available for sale -- -- -- 947
Proceeds from sales of loans -- -- -- 1,567
Net increase in loans (3,734) (3,475) (616) (4,970)
Purchases of premises and equipment (74) (90) (121) (451)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 2,713 (11,606) (22,629) (5,466)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and
interest-bearing demand deposits 415 11,698 15,439 2,127
Net increase (decrease) in time deposits (2,827) 2,161 6,508 3,117
Net proceeds from exercise of stock
options and bonuses -- -- 9 67
Cash dividends paid (969) (774) (774) (638)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,381) 13,085 21,182 4,673

NET CHANGE IN CASH AND DUE FROM BANKS (53) 2,183 290 1,301

CASH AND DUE FROM BANKS
Beginning of period 6,345 6,055 6,055 4,754

END OF PERIOD $ 6,292 $ 8,238 $ 6,345 $6,055
</TABLE>

(CONTINUED)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(CONCLUDED) (Dollars in Thousands)

Harbor Bancorp, Inc. and Subsidiary
Six Months Ended June 30, 1999 and 1998, and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $1,914 $1,790 $3,715 $3,267
Income taxes 515 420 935 856

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES
Fair value adjustment of securities
available for sale, net ($255) $36 $76 ($42)
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-7
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

ALL AMOUNTS SHOWN IN THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND
FOR THE PERIODS ENDED JUNE 30, 1999 AND 1998 ARE UNAUDITED.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Harbor Bancorp,
Inc. (the Company) and its wholly owned subsidiary, The Bank of Grays Harbor
(the Bank). All significant intercompany transactions and balances have been
eliminated.

NATURE OF OPERATIONS

The Company is a holding company which operates primarily through its
subsidiary, the Bank. The Bank operates five branches in Aberdeen and nearby
communities in Grays Harbor County. The Bank's primary source of revenue is
providing loans to customers, who are predominantly small- and middle-market
businesses and middle-income individuals.

CONSOLIDATED FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the
date of the balance sheet, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.

Certain prior year amounts have been reclassified to conform to the 1998
presentation. All dollar amounts, except per share information, are stated
in thousands.

SECURITIES AVAILABLE FOR SALE

Securities available for sale consist of debt securities which may be sold to
implement the Company's asset/liability management strategies, and in
response to changes in interest rates and similar factors, and certain equity
securities. Securities available for sale are reported at fair value.
Unrealized gains and losses, net of the related deferred tax effect, are
reported as a net amount in a separate component of shareholders' equity.
Realized gains and losses on securities available for sale, determined using
the specific identification method, are included in earnings. Amortization
of premiums and accretion of discounts are recognized in interest income over
the period to maturity.

(CONTINUED)

F-8
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

LOANS

Loans are stated at the amount of unpaid principal, reduced by an allowance
for credit losses. Interest on loans is accrued daily based on the principal
amount outstanding.
Generally the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when they are past due 90 days as to either principal or
interest. When interest accrual is discontinued, all unpaid accrued interest
is reversed against current income. If management determines that the
ultimate collectibility of principal is in doubt, cash receipts on nonaccrual
loans are applied to reduce the principal balance. Loans 90 days and more
past due continuing to accrue interest must be well secured and in the
process of collection.
ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged
off, net of recoveries. The allowance is based on management's periodic
evaluation of potential losses in the loan portfolio after consideration of
historical loss experience, adverse situations that may affect the borrowers'
ability to repay, the estimated value of any underlying collateral, economic
conditions, the results of examination of individual loans, the evaluation
of the overall portfolio by senior credit personnel and federal and state
regulatory agencies, and other risks inherent in the portfolio. This
evaluation requires the use of current estimates, which may vary from the
ultimate collectibility experienced in the future. The estimates used are
reviewed periodically, and, as adjustments become necessary, they are charged
to operations in the period in which they become known.

When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, when the primary
source of repayment is provided by real estate collateral, at the fair value
of the collateral less estimated selling costs. The amount of impairment
and any subsequent charges are recorded through the provision for credit
losses as an adjustment to the allowance for credit losses.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation, which
is computed on a straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is less.
Gains or losses on dispositions are reflected in earnings.

(CONTINUED)

F-9
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FORECLOSED REAL ESTATE

Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at the fair value of the properties less
estimated costs of disposal. Any write-down to fair value at the time of
transfer to other real estate owned is charged to the allowance for credit
losses. Properties are evaluated regularly to ensure that the recorded
amounts are supported by their current fair values, and that valuation
allowances to reduce the carrying amounts to fair value less estimated costs
to dispose are recorded as necessary. Additions to or reductions from
valuation allowances are recorded in income.

INCOME TAXES

Deferred tax assets and liabilities result from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. The deferred tax provision represents the
difference between the net deferred tax asset/liability at the beginning and
end of the year. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.

The Bank provides for income taxes on a separate company basis and remits to
the Company amounts currently due.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method, in accordance with APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, the required
pro forma disclosures have been provided in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
the fair values of financial instruments disclosed in these financial
statements:

CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.

SECURITIES AVAILABLE FOR SALE
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.

(CONTINUED)

F-10

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUES OF FINANCIAL INSTRUMENTS (CONCLUDED)

LOANS
For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.

DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term
money market accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed rate certificate of
deposit are estimated using a discounted cash flow calculation based on
interest rates currently being offered on similar certificates.

CASH AND CASH EQUIVALENTS

The Company considers all amounts due from depository institutions to be cash
equivalents.

The Company maintains balances in depository institution accounts, which, at
times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.

EARNINGS PER SHARE

Basic earnings per share exclude dilution and are computed by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share reflect the potential dilution that could occur if common
shares were issued pursuant to the exercise of options under the Company's
stock option plans.

COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No. 130),
which was effective for years beginning after December 15, 1997. SFAS No. 130
requires that an entity report and display comprehensive income in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. With regard to the Company, comprehensive income
includes net income as reported in the statement of income, and changes in
the fair value of its securities available for sale, reported as a component
of shareholders' equity. There was no effect on previously reported net
income as a result of this reporting change.

(CONTINUED)

F-11

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This
statement is effective for all fiscal years beginning after June 15, 1999.
The Bank had no derivatives as of December 31, 1998, nor does the Bank engage
in any hedging activities. The Bank does not anticipate that the adoption of
SFAS No. 133 will have a material effect on its financial position or results
of operations.

NOTE 2 - RESTRICTED ASSETS

Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances on deposit with the Federal Reserve Bank. The
average amounts of such balances for the six months ended June 30, 1999 and
for the year ended December 31, 1998 were approximately $826 and $902,
respectively.

NOTE 3 - DEBT AND EQUITY SECURITIES

Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and their approximate fair values
are as follows:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE

JUNE 30, 1999
U.S. Treasury securities $ 1,004 $-- $ 1 $ 1,003
U.S. Government agencies 16,496 -- 92 16,404
Obligations of states and political subdivisions 3,957 13 -- 3,970
Corporate bonds 8,748 -- 112 8,636
Federal Home Loan Bank stock 2,566 -- -- 2,566

$32,771 $13 $205 $32,579
</TABLE>

F-12
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 3 - DEBT AND EQUITY SECURITIES (CONCLUDED)

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE

DECEMBER 31, 1998
U.S. Treasury securities $ 985 $ 11 $-- $ 996
U.S. Government agencies 16,274 41 2 16,313
Obligations of states and political subdivisions 3,599 148 -- 3,747
Corporate bonds 7,242 8 11 7,239
Federal Home Loan Bank stock 2,474 -- -- 2,474

$30,574 $208 $13 $30,769
</TABLE>

The scheduled maturities of debt securities available for sale at June 30,
1999 and December 31, 1998 are as follows:

JUNE 30, DECEMBER 31,
1999 1998

AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 8,763 $ 8,738 $17,431 $17,437
Due after one year through five years 17,290 17,140 6,729 6,798
Due from five to ten years 4,152 4,135 3,940 4,060

$30,205 $30,013 $28,100 $28,295
</TABLE>

Securities carried at approximately $7,110 and $10,168 at June 30, 1999 and
December 1998, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.

F-13
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 4 - LOANS

Loans at June 30, 1999 and December 31, 1998 consist of the following:

JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Commercial and agricultural $41,352 $37,296
Real estate:
Construction 566 1,303
1-4 family residential 8,247 7,320
Multi-family residential 604 628
Commercial 32,417 32,751
Farmland 27 134
Consumer 2,077 2,123

TOTAL LOANS $85,290 $81,555
</TABLE>

Changes in the allowance for credit losses for the six months ended June 30,
1999 and 1998, and for the years ended December 31, 1998 and 1997 are as
follows:

SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997

<S> <C> <C> <C> <C>
Balance at beginning of period $1,147 $1,137 $1,137 $1,090
Provision for credit losses -- -- -- 70

Charge-offs (13) (4) (27) (31)
Recoveries 14 5 37 8
NET (CHARGE-OFFS) RECOVERIES 1 1 10 (23)

BALANCE AT END OF PERIOD $1,148 $1,138 $1,147 $1,137
</TABLE>

There were no impaired loans at June 30, 1999 or December 31, 1998. The
average recorded investment in impaired loans during and the year ended
December 31, 1998 was $199. There was no interest income recognized on
impaired loans in 1999 or 1998.

(CONTINUED)

F-14

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 4 - LOANS (CONCLUDED)

At June 30, 1999 and December 31, 1998, there were no commitments to lend
additional funds to borrowers whose loans have been modified. At June 30,
1999, loans 90 days and over still accruing interest totaled $188. There were
no loans 90 days and over past due and still accruing interest at December
31, 1998.

As of December 31, 1998, government guaranteed loans with a carrying value of
$1,725 were pledged as collateral to secure public deposits and borrowings
with the Federal Reserve Bank.

Certain related parties of the Bank, principally Bank directors and their
associates, were loan customers of the Bank in the ordinary course of
business during 1998 and 1997. Total loans outstanding at December 31, 1998
and 1997 to key officers and directors were $1,802 and $2,086, respectively.
During 1998, new loans of $2,595 were made, and repayments totaled $2,879.

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment at June 30, 1999 and December 31, 1998 are:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Land $ 476 $ 476
Premises 2,257 2,217
Equipment, furniture and fixtures 1,976 1,945
Leasehold improvements 18 18
TOTAL COST 4,727 4,656
Accumulated depreciation and amortization 2,460 2,319

$ 2,267 $ 2,337
</TABLE>

The Company has a three-year lease for the property on which the Montesano
Branch is located. The monthly payments required by the lease beginning in
July 1997 are $1. The lease agreement contains an option to purchase the
property at any time prior to the expiration of the lease for $250 in cash
or, at the lessor's option, 3,300 shares of the Company's stock. Rental
expense under this lease was $6 for the six months ended June 30, 1999 and
1998, and $12 and $6 for the years ended December 31, 1998 and 1997,
respectively, which is included in occupancy expenses.

Remaining minimum rental commitments under this lease are as follows for
future years ending December 31:

F-15
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 6 - DEPOSITS

The aggregate amount of certificates of deposit with balances in excess of
one hundred thousand dollars was approximately $11,538 and $14,080 at June
30, 1999 and December 31, 1998, respectively.

At June 30, 1999 and December 31, 1998, the scheduled maturities of
certificates of deposit are as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
1999 $15,121 $29,087
2000 13,379 2,479
2001 785 546

$29,285 $32,112
</TABLE>

NOTE 7 - INCOME TAXES

Income taxes are comprised of the following for the six months ended June 30,
1999 and 1998, and for years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Current $504 $457 $870 $840
Deferred -- -- 57 79

TOTAL INCOME TAXES $504 $457 $927 $919
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at June 30, 1999 and December
31, 1998 are:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses $353 $353
Unrealized loss on securities available for sale 68 --
TOTAL DEFERRED TAX ASSETS 421 353

DEFERRED TAX LIABILITIES
Depreciation 68 68
Unrealized gain on securities available for sale -- 64
Deferred revenue 344 344
TOTAL DEFERRED TAX LIABILITIES 412 476

NET DEFERRED TAX ASSETS (LIABILITIES) $ 9 ($123)

</TABLE>

(CONTINUED)

F-16
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 7 - INCOME TAXES (CONCLUDED)

The following is a reconciliation between the statutory and effective federal
income tax rate for the six months ended June 30, 1999 and 1998 years ended
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,

1999 PERCENT 1998 PERCENT
OF PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rate $ 514 34.0% $ 494 34.0%
Adjustments resulting from:
Tax-exempt income (32) (2.1) (25) (1.7)
Other 22 1.5 (12) (.8)

TOTAL INCOME TAXES $ 504 33.4% $ 457 31.5%

<CAPTION>
YEARS ENDED DECEMBER 31,

1998 PERCENT 1997 PERCENT
OF PRE-TAX PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rate $ 1,020 34.0% $ 971 34.0%
Adjustments resulting from:
Tax-exempt income (76) (2.5) (45) (1.6)
Other (17) (.6) (7) (.2)

TOTAL INCOME TAXES $ 927 30.9% $ 919 32.2%
</TABLE>

NOTE 8 - EMPLOYEE BENEFITS

PROFIT SHARING PLAN

The Company has established a 401(k) profit sharing plan for those employees
who meet the eligibility requirements set forth in the plan. Eligible
employees may contribute up to 15% of their compensation. Matching
contributions by the Bank are at the discretion of the Board of Directors.
Company contributions totaled $75 and $66 for the years ended December 31,
1998 and 1997, respectively. No contributions were made for the six months
ended June 30, 1999 or 1998.

DIRECTOR AND EMPLOYEE DEFERRED COMPENSATION PLANS

The Company has director and employee deferred compensation plans. Under
the terms of the plans, a director or employee may participate in the plan
upon approval by the Board. The participant may elect to defer a portion of
his or her earnings (directors' fees or salary) as designated at the
beginning of each plan year. Payments begin upon retirement, termination,
death or permanent disability, sale of the Company, the ten-year anniversary
of the participant's participation date, or at the discretion of the Company.
There are currently two participants in the plans, and total deferrals plus
earnings are $438 and $132 at June 30, 1999 and December 31, 1998,
respectively.

(CONTINUED)

F-17
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 8 - EMPLOYEE BENEFITS (CONCLUDED)

INCENTIVE COMPENSATION PLAN

The Company has a plan which provides incentive compensation to key employees
if the Company meets certain performance criteria established by the Board of
Directors. The cost of this plan was $105, $105, $290 and $246 for the six
months ended June 30, 1999 and 1998, and for the years ended December 31, 1998
and 1997, respectively.

NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES

The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby
letters of credit, and involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheets.

The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A
summary of the Bank's commitments at June 30, 1999 and December 31, 1998 is
as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Commitments to extend credit $ 17,920 $12,999
Standby letters of credit 1,408 1,403
</TABLE>

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank's experience has been that approximately 62% of loan
commitments are drawn upon by customers. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential
real estate, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. Collateral held
varies as specified above, and is required in instances where the Bank deems
necessary.

(CONTINUED)

F-18
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 9 - COMMITMENTS AND CONTINGENT LIABILITIES (CONCLUDED)

Certain executive officers have entered into employment contracts with the
Bank which provide for contingent payments subject to future events.

The Bank has agreements with commercial banks for lines of credit totaling
$5,400, none of which was used at December 31, 1998, and a credit line with
the Federal Home Loan Bank totaling 10% of assets, none of which was also
used at December 31, 1998.

Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these
claims, if any, will not have a material effect on the financial position of
the Company.

NOTE 10 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

Most of the Bank's business activity is with customers and governmental
entities located in the State of Washington, including investments in state
and municipal securities. As of December 31, 1998, the Bank's loans to
companies in the forest products and hotel/motel industries totaled $11,639
and $9,986, respectively (net of government loan guarantees). Standby letters
of credit were granted primarily to commercial borrowers. The Bank, as a
matter of practice, generally does not extend credit to any single borrower
or group of borrowers in excess of $2 million.

NOTE 11 - STOCK OPTION PLANS

At December 31, 1998, the Company has three stock-based option plans, which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for these plans. Accordingly, no compensation
cost has been recognized for the plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards granted subsequent to December 31, 1995 under these
plans, consistent with the method of SFAS No. 123, the Company's net income
and earnings per share would have been reduced to these pro forma amounts:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ 1,007 $ 2,073 $ 1,938
Pro forma 2,068 1,929

Earnings per share:
Basic:
As reported $ 3.90 $ 8.03 $ 7.57
Pro forma 3.89 8.01 7.54
Diluted:
As reported 3.79 $ 7.84 $ 7.48
Pro forma 3.77 7.83 7.46
</TABLE>

(CONTINUED)

F-19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 11 - STOCK OPTION PLANS (CONCLUDED)

The Company's three incentive stock option plans provide for granting
incentive stock options, as defined under current tax laws, to key personnel.
Under the first plan, options are exercisable 90 days from the date of grant.
These options terminate if not exercised within ten years from the date of
grant. If after six years from the date of grant fewer than 20% of the
options have been exercised, they will expire at a rate of 20% annually.
Under the second plan, the options are exercisable one year from the date of
grant, at a rate of 10% annually. Options terminate if not exercised when
they become available. Under the third plan, options become exercisable four
years from the grant date. These options terminate if not exercised between
the sixth and the tenth years. Upon reaching the sixth year from the date of
grant, if less than 20% of the options have been exercised, at least 20% of
the options must be exercised within 90 days, and 20% of the options must be
exercised every anniversary thereafter. Under the plans, the Company may
grant up to 25,000 shares of its common stock to certain key employees.

The fair value of each option granted in 1997 was estimated on the date of
grant, based on the Black-Scholes option-pricing model and using the
following weighted-average assumptions: dividend yield of 3.82%; risk-free
interest rates of 5%; and expected lives of ten years. The weighted average
fair value of options granted during 1997 was $5.29. There were no new
options granted during 1998.

A summary of the status of the Company's stock option plans for the six
months ended June 30, 1999 and for the year ended December 31, 1998, and
changes during the years ending on those dates, is presented below:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,

1999 WEIGHTED 1998 WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of period 14,000 $ 62.11 14,500 $ 60.48
Exercised -- -- (500) 15.00

OUTSTANDING AT END OF PERIOD 14,000 62.11 14,000 62.11

Exercisable at end of period 9,500 --
</TABLE>

The following information summarizes information about stock options
outstanding at June 30, 1999 and December 31, 1998:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 WEIGHTED 1998 WEIGHTED
AVERAGE AVERAGE
REMAINING REMAINING
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL
PRICE OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING LIFE (YEARS)
<S> <C> <C> <C> <C> <C>
$ 60 9,500 5 $ 60 9,500 6
65 3,500 5 65 3,500 6
72 1,000 7 72 1,000 8

14,000 14,000
</TABLE>

F-20
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 12 - REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines of the regulatory framework for prompt corrective
action, the Bank must meet specific capital adequacy 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 classification is 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 Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios as
set forth in the table.

As of December 31, 1998, the most recent notification from the Bank's
regulator 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 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.

The Company and the Bank's actual capital amounts and ratios are also
presented in the table. Management believes, as of December 31, 1998, that
the Bank meets all capital requirements to which it is subject.

<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1999
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $ 12,654 9.48% $ 5,341 4.00% N/A N/A
The Bank of Grays Harbor 12,590 9.43 5,340 4.00 $ 6,675 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 12,654 12.78 3,960 4.00 N/A N/A
The Bank of Grays Harbor 12,590 12.72 3,959 4.00 5,939 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 13,802 13.94 7,921 8.00 N/A N/A
The Bank of Grays Harbor 13,728 13.88 7,918 8.00 9,898 10.00
</TABLE>

(CONTINUED)

F-21
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 12 - REGULATORY MATTERS (CONCLUDED)

<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $ 11,648 8.84% $ 5,272 4.00% N/A N/A
The Bank of Grays Harbor 11,569 8.78 5,271 4.00 $ 6,589 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 11,648 12.27 3,796 4.00 N/A N/A
The Bank of Grays Harbor 11,569 12.17 3,795 4.00 5,693 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 12,795 13.48 7,592 8.00 N/A N/A
The Bank of Grays Harbor 12,716 13.40 7,590 8.00 9,488 10.00
</TABLE>

RESTRICTIONS ON RETAINED EARNINGS

The Bank is restricted from paying dividends to the Company in an amount that
would violate the most restrictive capital requirement shown above. At
December 31, 1998, there were no regulatory dividend restrictions on the
Bank's retained earnings.

NOTE 13 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company's financial instruments at June 30,
1999 and December 31, 1998 were as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks,
interest-bearing deposits with
banks, and federal funds sold $ 11,797 $ 11,797 $ 20,379 $ 20,379
Securities available for sale 32,579 32,579 30,769 30,769
Loans receivable 84,142 83,937 80,408 81,531

FINANCIAL LIABILITIES
Deposits $119,324 $119,404 $121,736 $122,862
</TABLE>

F-22
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 14 - EARNINGS PER SHARE DISCLOSURES

Following is information regarding the calculation of basic and diluted
earnings per share for the years indicated.

<TABLE>
<CAPTION>
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Basic earnings per share:
Net income $1,007 258,381 $3.90
Effect of dilutive securities:
Options -- 7,046 (.11)
Diluted earnings per share:
NET INCOME $1,007 265,427 $3.79

SIX MONTHS ENDED JUNE 30, 1998
Basic earnings per share:
Net income $995 257,869 $3.86
Effect of dilutive securities:
Options -- 5,737 (.09)
Diluted earnings per share:
NET INCOME $995 263,606 $3.77

YEAR ENDED DECEMBER 31, 1998
Basic earnings per share:
Net income $2,073 258,007 $8.03
Effect of dilutive securities:
Options -- 6,281 (.19)
Diluted earnings per share:
NET INCOME $2,073 264,288 $7.84

YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income $1,938 255,917 $7.57
Effect of dilutive securities:
Options -- 3,328 (.09)
Diluted earnings per share:
NET INCOME $1,938 259,245 $7.48
</TABLE>

The number of shares shown for "options" is the number of incremental shares
that would result from the exercise of options and use of the proceeds to
repurchase shares at the average market price during the year.

F-23
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 15 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

CONDENSED BALANCE SHEETS -- JUNE 30, 1999 AND DECEMBER 31, 1998

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
ASSETS
Cash $ 45 $ 1,021
Investment in the Bank 12,467 11,677
Other assets 19 50

TOTAL ASSETS $12,531 $12,748

LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ -- $ 969
Shareholders' equity 12,531 11,779

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,531 $12,748
</TABLE>

CONDENSED STATEMENTS OF INCOME - SIX MONTHS ENDED JUNE 30, 1999 AND 1998,
AND YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Dividend Income from the Bank $ -- $ -- $1,040 $ 815

Expenses (38) (6) (81) (7)

Equity in Undistributed Income of Subsidiary 1,045 1,001 1,114 1,130

NET INCOME $1,007 $ 995 $2,073 $1,938
</TABLE>

(CONTINUED)

F-24
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 15 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)

CONDENSED STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 1999 AND
1998, AND YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,007 $ 995 $2,073 $1,938
Adjustments to reconcile net income to
net cash provided:
Equity in undistributed income of subsidiary (1,045) (1,001) (1,114) (1,130)
Other - net 31 (15) 4 (52)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7) (21) 963 756

FINANCING ACTIVITIES
Net proceeds from exercise of stock options
and bonuses -- 2 9 67
Dividends paid (969) (774) (774) --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (969) (772) (765) 67

NET INCREASE (DECREASE) IN CASH (976) (793) 198 823

CASH
Beginning of period 1,021 823 823 --

END OF PERIOD $ 45 $ 30 $1,021 $ 823
</TABLE>
NOTE 16 - TERMINATION OF DEFINITIVE AGREEMENT

On August 17, 1998, the Company entered into a definitive merger agreement
with Heritage Financial Corporation (Heritage) whereby Heritage would acquire
all of the outstanding common stock of the Company. Under the agreement,
Heritage would exchange sufficient shares of its common stock at an exchange
ratio (based on Heritage's average stock price prior to the consummation of
the transaction) that provided a value of $155 per share for each outstanding
share and option to acquire the Company's common stock. The transaction price
was to remain fixed at an exchange ratio of 11.273 shares of Heritage stock
for each share of the Company's stock as long as Heritage's average stock
price remained between $12.25 and $13.75 per share. If the price averaged
below $12.25 and above $11.25, the exchange ratio was fixed at 12,653
shares. If the average price of Heritage's stock fell below $11.25, the
Company had the right to terminate the transaction provided that Heritage did
not add additional shares to bring the transaction back to the $11.25 level.

The Board of Directors of the Company, together with their financial
advisors, met on December 15, 1998 to discuss the price of the Heritage stock
and the merits of continuing with the merger. At the date of the meeting the
market price for Heritage's stock was at the $10 level, significantly below
the $11.25 floor, and based on the stock price of similar thrifts that had
recently gone public, it appeared unlikely that the average price for 45
business days before closing would get back to the $11.25 level. Heritage's
Board of Directors declined to issue any additional shares to bring the
transaction back to the $11.25 price. On December 15, the Board of Directors
of the Company unanimously voted for this and other reasons to terminate the
definitive agreement with Heritage. Heritage's Board of Directors concurred,
and the definitive agreement was officially terminated on December 17, 1998.

F-25
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Harbor Bancorp, Inc. and Subsidiary

NOTE 17 - YEAR 2000 ISSUES

As the year 2000 approaches, business issues are emerging regarding how
existing computer software programs and operating systems can accommodate the
date value. Many software systems are designed to recognize only a two-digit
date field, and may read the year 2000 as the year 1900. Thus computations of
interest and other similar calculations may be based on wrong dates, or the
systems may not be able to process information at all.

The Bank primarily utilizes software maintained by a third-party vendor for
processing the mission-critical data that might be affected by this problem.
The software provider is in the process of testing, updating, and modifying
its software to ensure year 2000 compliance. The first phase of testing that
software was successfully completed before December 31, 1998. Internally, the
Bank has implemented a year 2000 compliance program, which is aggressively
reviewing year 2000 issues that may be faced by its outside vendors and
customers, and that affect its internal computer systems. In the event that
significant suppliers or customers do not successfully and timely achieve
year 2000 compliance, the Bank's business could be adversely affected.
However, management believes that the Bank's own internal systems, networks
and resources would allow the Bank to effectively operate and service its
customers. To the extent necessary, the Bank will engage alternative vendors
and suppliers to facilitate normal operations after January 1, 2000. The
costs incurred to date on year 2000 compliance issues have not been material.
While it is impossible to estimate the potential impact on the Bank's
business after January 1, 2000, management estimates that the costs the Bank
will incur prior to that date in its activities necessary to ensure year 2000
compliance will not have a significant effect on its financial position or
results of operations.

F-26
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
PACIFIC FINANCIAL CORPORATION
Long Beach, Washington

We have audited the accompanying consolidated balance sheet of PACIFIC
FINANCIAL CORPORATION AND SUBSIDIARY as of December 31, 1998, and the related
consolidated statements of income, shareholders' equity and cash flows for
the years ended December 31, 1998 and 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PACIFIC
FINANCIAL CORPORATION AND SUBSIDIARY as of December 31, 1998, and the results
of their operations and their cash flows for the years ended December 31,
1998 and 1997, in conformity with generally accepted accounting principles.

KNIGHT, VALE & GREGORY INC., P.S.

January 26, 1999
Tacoma, Washington
F-27
<PAGE>

CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(Dollars in Thousands)

PACIFIC FINANCIAL CORPORATION AND SUBSIDIARY
June 30, 1999 and December 31, 1998

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,588 $ 2,289
Interest bearing deposits in banks -- 1,500
Federal funds sold -- 3,450
Securities available for sale 34,255 22,356
Securities held to maturity 1,626 1,725

Loans 62,878 65,725
Allowance for credit losses 782 717
NET LOANS 62,096 65,008

Premises and equipment 1,277 1,331
Foreclosed real estate 162 131
Accrued interest receivable 1,007 844
Cash surrender value of life insurance 2,278 2,226
Other assets 471 219

TOTAL ASSETS $105,760 $101,079

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
Deposits:
Demand $ 12,621 $ 12,573
Savings and interest-bearing demand 38,553 41,354
Time 34,879 34,987
TOTAL DEPOSITS 86,053 88,914

Accrued interest payable 257 270
Federal funds purchased and other borrowings 9,050 86
Other liabilities 419 2,103

TOTAL LIABILITIES 95,779 91,373

SHAREHOLDERS' EQUITY
Common stock (par value $1.00); 300,000 shares authorized;
293,743 shares issued and outstanding 294 294
Surplus 5,390 5,390
Retained earnings 4,718 3,785
Accumulated other comprehensive income (421) 237
TOTAL SHAREHOLDERS' EQUITY 9,981 9,706

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,760 $101,079
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-28
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)

Pacific Financial Corporation and Subsidiary
Six Months Ended June 30, 1999 and 1998, and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $2,928 $3,104 $6,237 $6,098
Federal funds sold and deposits in banks 14 68 164 80
Securities available for sale 859 694 1,396 1,333
Securities held to maturity 54 59 121 117
TOTAL INTEREST INCOME 3,855 3,925 7,918 7,628

INTEREST EXPENSE
Deposits 1,346 1,396 2,825 2,732
Federal funds purchased and
other borrowings 96 171 266 46
TOTAL INTEREST EXPENSE 1,442 1,567 3,091 2,778

NET INTEREST INCOME 2,413 2,358 4,827 4,850

PROVISION FOR CREDIT LOSSES -- 60 110 72

NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 2,413 2,298 4,717 4,778

NON-INTEREST INCOME
Service charges on deposit accounts 170 169 330 295
Mortgage loan origination fees 32 10 35 --
Gain on sales of securities available for sale 7 -- 8 1
Gain (loss) on sale of loans (3) 15 17 36
Loss on sale of foreclosed real estate -- (5) (21) --
Other operating income 133 137 268 229
TOTAL NON-INTEREST INCOME 339 326 637 561

NON-INTEREST EXPENSE
Salaries 531 511 1,347 1,335
Employee benefits 287 266 183 253
Occupancy 65 72 134 127
Furniture and equipment 135 124 255 222
Other 457 392 851 748
TOTAL NON-INTEREST EXPENSE 1,475 1,365 2,770 2,685

INCOME BEFORE INCOME TAXES 1,277 1,259 2,584 2,654

INCOME TAXES 344 320 663 724

NET INCOME $ 933 $ 939 $1,921 $1,930

EARNINGS PER SHARE DATA
Basic earnings per share $3.18 $3.21 $6.57 $6.60
Diluted earnings per share 3.16 3.19 6.54 6.59
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS

F-29
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
Six Months Ended June 30, 1999 and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $292 $5,302 $2,688 $146 $8,428

Comprehensive income:
Net income -- -- 1,930 -- 1,930
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- 53 53
COMPREHENSIVE INCOME 1,983

Cash dividends declared ($4.60 per share) -- -- (1,344) -- (1,344)

BALANCE, DECEMBER 31, 1997 292 5,302 3,274 199 9,067

Comprehensive income:
Net income -- -- 1,921 -- 1,921
Other comprehensive income,
net of tax:
Unrealized gain on securities -- -- -- 38 38
COMPREHENSIVE INCOME 1,959

Stock options exercised 2 88 -- -- 90

Cash dividends declared ($4.80 per share) -- -- (1,410) -- (1,410)

BALANCE, DECEMBER 31, 1998 294 5,390 3,785 237 9,706

Comprehensive income:
Net income -- -- 933 -- 933
Other comprehensive income,
net of tax (unaudited):
Unrealized loss on securities
(unaudited) -- -- -- (658) (658)
COMPREHENSIVE INCOME (UNAUDITED) 275

BALANCE, JUNE 30, 1999 (UNAUDITED) $294 $5,390 $4,718 ($421) $9,981
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-30
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
Six Months Ended June 30, 1999 and 1998, and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 933 $ 939 $ 1,921 $ 1,930
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 105 99 198 166
Net amortization of investments 10 5 14 14
Provision for credit losses -- 60 110 72
Deferred Federal income tax benefit -- -- (40) --
Stock dividends received (33) (15) (30) (27)
(Gain) loss on sale of foreclosed
real estate -- (5) 21 --
(Gain) loss on sale of loans 3 (15) (17) (36)
(Increase) decrease in interest receivable (163) (16) 22 (102)
Increase (decrease) in interest payable (13) 31 27 12
Other - net (241) (549) (119) 193
NET CASH PROVIDED BY OPERATING ACTIVITIES 601 534 2,107 2,222

CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in Federal funds sold 3,450 -- (3,450) --
(Increase) decrease in interest bearing
deposits in banks 1,500 (1,900) 500 (1,150)
Purchases of securities held to maturity (198) (270) (295) (215)
Purchases of securities available for sale (19,461) (117) (10,524) (11,408)
Proceeds from maturities of securities
held to maturity and available for sale 6,886 3,705 12,916 7,269
Proceeds from sale of loans -- 1,125 2,657 --
(Increase) decrease in loans made to
customers, net of principal collections 2,880 (1,848) (6,029) (2,623)
Acquisition of premises and equipment (52) (69) (93) (255)
Proceeds from sales of foreclosed real estate -- 34 151 --
Purchase of life insurance -- -- -- (1,850)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (4,995) 660 (4,167) (10,232)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings
and interest-bearing demand deposits (2,753) 887 6,681 977
Net increase (decrease) in time deposits (108) 2,974 3,296 1,808
Net increase (decrease) in other borrowings 8,964 (2,905) (6,539) 6,453
Stock options exercised -- -- 90 --
Cash dividends paid (1,410) (1,344) (1,344) (1,256)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,693 (388) 2,184 7,982

NET INCREASE (DECREASE) IN
CASH AND DUE FROM BANKS 299 806 124 (28)

CASH AND DUE FROM BANKS
Beginning of period 2,289 2,165 2,165 2,193

END OF PERIOD $ 2,588 $ 2,971 $ 2,289 $ 2,165
</TABLE>

(CONTINUED)

F-31
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(CONCLUDED) (Dollars in Thousands)

Pacific Financial Corporation and Subsidiary
Six Months Ended June 30, 1999 and 1998, and
Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 1,455 $ 1,536 $ 3,064 $ 2,766
Income taxes paid 418 365 705 665

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES
Fair value adjustment of securities
available for sale ($658) $ 16 $ 38 $ 53
Foreclosed real estate acquired in
settlement of loans -- 274 274 --
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-32

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

All amounts shown in the Notes to Consolidated Financial Statements as of and
for the periods ended June 30, 1999 and 1998 are unaudited.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Pacific
Financial Corporation (the Company) and its wholly owned subsidiary, Bank of
the Pacific (the Bank). All significant intercompany transactions and
balances have been eliminated.

On March 24, 1999, the Company acquired all of the outstanding common stock
of the Bank by exchanging one share of its common stock for each one share of
the Bank's common stock. The exchange was accounted for as a pooling of
interests. The only effect of this transaction on prior year financial
statements previously reported by the Bank was to conform common stock and
surplus to amounts reported by the Company. There was no effect on total
shareholders' equity.

NATURE OF OPERATIONS

The Company is a bank holding company which operates primarily through its
subsidiary, the Bank. The Bank operates five branches in Pacific and
Wahkiakum Counties. The Bank's primary source of revenue is providing loans
to customers, who are predominantly small and middle-market businesses and
middle-income individuals.

CONSOLIDATED FINANCIAL STATEMENT PRESENTATION

Certain prior year amounts have been reclassified to conform to the 1998
presentation. All dollar amounts, except per share information, are stated
in thousands.

CASH AND CASH EQUIVALENTS

The Company considers all amounts included in the balance sheets caption
"Cash and due from banks" to be cash equivalents.

(CONTINUED)

F-33

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SECURITIES AVAILABLE FOR SALE

Securities available for sale consist of debt securities, which may be sold
to implement the Company's asset/liability management strategies, and in
response to changes in interest rates, prepayment rates and similar factors,
and certain equity securities. Securities available for sale are reported at
fair value. Unrealized gains and losses, net of the related deferred tax
effect, are reported as a net amount in a separate component of
shareholders' equity. Realized gains and losses on securities available for
sale, determined using the specific identification method, are included in
earnings. Premiums are amortized over the period to maturity or call date,
whichever is earlier, and discounts are accreted over the period to maturity.

Declines in the fair value of individual securities held to maturity and
available for sale below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. Such
write-downs are included in earnings as realized losses.

SECURITIES HELD TO MATURITY

Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums
over the period to maturity or call date, whichever is earlier, and accretion
of discounts over the period to maturity.

LOANS

Loans are stated at the amount of unpaid principal, reduced by an allowance
for credit losses. Interest on loans is accrued daily based on the principal
amount outstanding.
Generally, the accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due, or when they are past due 90 days or more as to either principal
or interest. When interest accrual is discontinued, all unpaid accrued
interest is reversed against current income. Interest income is subsequently
recognized only to the extent cash payments are received. If management
determines that the ultimate collectibility of principal is in doubt, cash
receipts on nonaccrual loans are applied to reduce the principal balance.
Loans 90 days and more past due continuing to accrue interest must be well
secured and in the process of collection.
ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged
off, net of recoveries. The allowance is based on management's periodic
evaluation of potential losses in the loan portfolio after consideration of
historical loss experience, adverse situations that may affect the borrowers'
ability to repay, the estimated value of any underlying collateral, economic
conditions, the results of examination of individual loans, the evaluation of
the overall portfolio by senior credit personnel and federal and state
regulatory agencies, and other risks inherent in the portfolio. This
evaluation requires the use of current estimates, which may vary from the
ultimate collectibility experienced in the future. The estimates used are
reviewed periodically, and, as adjustments become necessary, they are charged
to operations in the period in which they become known.

(CONTINUED)

F-34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ALLOWANCE FOR CREDIT LOSSES (CONCLUDED)

When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, when the primary
source of repayment is provided by real estate collateral, at the fair value
of the collateral less estimated selling costs. The amount of impairment and
any subsequent charges are recorded through the provision for credit losses
as an adjustment to the allowance for credit losses.

PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation,
which is computed on the straight-line method over the estimated useful lives
of the assets. Gains or losses on dispositions are reflected in earnings.

INCOME TAXES

Deferred income taxes and liabilities result from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are reflected at currently enacted income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. The deferred tax provision represents the
difference between the net deferred tax asset/liability at the beginning and
end of the year. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.

The Bank provides for income taxes on a separate company basis and remits to
the Company amounts currently due.

FORECLOSED REAL ESTATE

Real estate properties acquired through, or in lieu of, foreclosure are to be
sold and are initially recorded at fair value of the properties less
estimated costs of disposal. Any write-down to fair value at the time of
transfer to foreclosed real estate is charged to the allowance for credit
losses. Properties are evaluated regularly to ensure that the recorded
amounts are supported by their current fair values, and that valuation
allowances to reduce the carrying amounts to fair value less estimated costs
to dispose are recorded as necessary. Additions to or reductions from
valuation allowances are recorded in income.

(CONTINUED)

F-35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating
the fair values of financial instruments disclosed in these financial
statements:

CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate
their fair value.

SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.

DEPOSIT LIABILITIES
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed term money
market accounts and certificates of deposit are estimated using a
discounted cash flow calculation based on interest rates currently being
offered on similar certificates.

SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method, in accordance with APB No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, any required
pro forma disclosures have been provided in accordance with SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.

(CONTINUED)

F-36

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)

EARNINGS PER SHARE

COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS No. 130),
which was effective for years beginning after December 15, 1997. SFAS No. 130
requires that an entity report and display comprehensive income in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. With regard to the Company, comprehensive income
includes net income as reported in the statement of income, and changes in
the fair value of its securities available for sale, reported as accumulated
other comprehensive income, a component of shareholders' equity. There was
no effect on previously reported net income as a result of this reporting
change.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issues SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in its balance sheet and measure those instruments at fair value.
Under this statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This
statement is effective for all fiscal years beginning after June 15, 2000.
The Company had no derivatives as of December 31 1998, nor does the Company
engage in any hedging activities. The Company does not anticipate that the
adoption of SFAS No. 133 will have a material effect on its financial
position or results of operations.

NOTE 2 -- RESTRICTED ASSETS

Federal Reserve Board regulations require that the Bank maintains certain
minimum reserves in the form of cash on hand or balances on deposit with the
Federal Reserve Bank equal to a percentage of its reservable deposits. The
average amounts of such balances for the six months ended June 30, 1999 and
for the year ended December 31, 1998 were approximately $786 and $423,
respectively.

F-37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 3 -- DEBT AND EQUITY SECURITIES

Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and their approximate fair values
at June 30, 1999 and December 31, 1998 were as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE

JUNE 30, 1999
U.S. Government and agency securities $19,424 $ -- ($482) $18,942
State and municipal securities 9,074 65 -- 9,139
Corporate bonds 5,935 -- (220) 5,715
Federal Home Loan Bank stock 459 -- -- 459

$34,892 $ 65 ($702) $34,255

DECEMBER 31, 1998
U.S. Government and agency securities $ 9,663 $ 30 ($11) $ 9,682
State and municipal securities 7,820 347 -- 8,167
Corporate bonds 4,087 36 (33) 4,080
Federal Home Loan Bank stock 427 -- -- 427

$21,997 $403 ($44) $22,356

SECURITIES HELD TO MATURITY

JUNE 30, 1999
State and municipal securities $1,626 $ -- $-- $1,626

DECEMBER 31, 1998
State and municipal securities $1,725 $ -- $-- $1,725
</TABLE>

(CONTINUED)

F-38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 3 -- DEBT AND EQUITY SECURITIES (CONCLUDED)

The scheduled maturities of debt securities held to maturity and available
for sale at June 30, 1999 and December 31, 1998 were as follows:

<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE

AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
JUNE 30, 1999
Due in one year or less $ 45 $ 45 $ 2,247 $ 2,246
Due from one year to five years 74 74 12,560 12,408
Due from five to ten years 769 769 19,225 18,741
Due after ten years 738 738 401 401

TOTAL $1,626 $1,626 $34,433 $33,796

DECEMBER 31, 1998
Due in one year or less $ -- $ -- $ 1,661 $ 1,683
Due from one year to five years 181 181 10,580 10,700
Due from five to ten years 792 792 9,224 9,439
Due after ten years 752 752 105 107

TOTAL $1,725 $1,725 $21,570 $21,929
</TABLE>

Securities, carried at approximately $932 and $978 at June 30, 1999 and
December 31, 1998, were pledged to secure public deposits and for other
purposes required or permitted by law. In addition, the Bank has pledged
various securities to collateralize borrowings, as disclosed in Note 8.

NOTE 4 -- LOANS

Loans at June 30, 1999 and December 31, 1998 consisted of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Commercial and agricultural $10,590 $11,159
Real estate:
Construction 1,957 3,626
1-4 family residential 19,990 21,972
Commercial 26,472 25,208
Agricultural 1,821 1,995
Consumer 2,048 1,765

TOTAL LOANS $62,878 $65,725
</TABLE>

(CONTINUED)

F-39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 4 -- LOANS (CONCLUDED)

Changes in the allowance for credit losses for the six months ended June 30,
1999 and 1998, and for the years ended December 31, 1998 and 1997
are as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Balance at beginning of period $717 $800 $800 $734
Provision for credit losses -- 60 110 72

Charge-offs (3) (195) (194) (10)
Recoveries 67 1 1 4
NET (CHARGE-OFFS) RECOVERIES 64 (194) (193) (6)

BALANCE AT END OF PERIOD $781 $666 $717 $800
</TABLE>

The recorded investment in impaired loans was $32 and $15 at June 30, 1999
and December 31, 1998, respectively. No allocation of the allowance for
credit losses was considered necessary for these impaired loans. The average
recorded investment in impaired loans during the six months ended June 30, 1999
and the year ended December 31, 1998 was $5 and $353, respectively. No
interest income was recognized on these loans in 1999 or 1998.

At June 30, 1999 and December 31, 1998, there were no commitments to lend
additional funds to borrowers whose loans have been modified. Loans 90 days
and over past due still accruing interest were $272 and $4 at June 30, 1999
and December 31, 1998, respectively.

Certain related parties of the Company, principally directors and their
associates, were loan customers of the Bank in the ordinary course of
business during 1998 and 1997. Total loans outstanding at December 31, 1998
and 1997 to key officers and directors were $721 and $836, respectively.
During 1998, loan advances totaled $410, and loan repayments totaled $525 on
these loans.

NOTE 5 -- PREMISES AND EQUIPMENT

The components of premises and equipment at June 30, 1999 and December 31,
1998 are as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Land $ 236 $ 236
Buildings 1,385 1,382
Equipment, furniture and fixtures 1,461 1,432
TOTAL COST 3,082 3,050
Less accumulated depreciation and amortization 1,805 1,719

TOTAL PREMISES AND EQUIPMENT $1,277 $1,331
</TABLE>

F-40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 6 -- DEPOSITS

The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of one hundred thousand dollars, was approximately
$7,952 and $6,718 at June 30, 1999 and December 31, 1998, respectively.

At June 30, 1999 and December 31, 1998, the scheduled maturities of
certificates of deposit are as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
1999 $13,330 $29,956
2000 16,839 2,843
2001 2,815 574
2002 601 320
2003 and thereafter 1,294 1,294

$34,879 $34,987
</TABLE>

NOTE 7 -- FEDERAL FUNDS PURCHASED

Federal funds purchased generally mature within one to four days from the
transaction date. Information concerning federal funds purchased is
summarized as follows for the six months ended June 30, 1999 and for the year
ended December 31, 1998:

<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Average balance during the period $1,626 $698
Average interest rate during the period 5.40% 5.99%
Maximum month-end balance during the period $1,025 $2,550
Balance outstanding at period-end $1,025 $--
</TABLE>

NOTE 8 -- OTHER

At June 30, 1999 and December 31, 1998, the Bank had direct investments
deposited by the U.S. Treasury of $225 and $86, respectively.

F-41
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 9 -- EMPLOYEE BENEFIT PLANS

QUALIFIED NON-CONTRIBUTORY DEFINED BENEFIT PLAN

The Company maintains a non-contributory defined benefit plan covering
substantially all employees. The Bank makes annual contributions to the plan
equal to the amount accrued for pension expenses, which are invested in a
group annuity contract with a life insurance company. Contributions of $13,
$2, $2, and $49 were made for the six months ended June 30, 1999 and
1998, and for the years ended December 31, 1998 and 1997, respectively.

NON-QUALIFIED DEFERRED COMPENSATION PLAN

The Company has a non-qualified deferred compensation plan to cover selected
employees. The Bank makes annual contributions to the plan; such
contributions totaled $10, $9, $18, and $33 for the six months ended June 30,
1999 and 1998, and for the years ended December 31, 1998 and 1997,
respectively. Covered employees may also contribute to the plan.

DEFERRED DIRECTOR COMPENSATION PLANS

In 1997, the Board adopted two deferred compensation plans for directors.
One, the Director Emeritus Plan, provides retirement income benefits for all
current directors. Benefits will be paid to directors for ten years after
their retirement from the Board, and are accrued over the period to each
director's anticipated retirement date. The second plan, the Director
Deferred Compensation Plan, covers only those directors who have chosen to
participate in the plan. The participating directors have elected to defer
the payment of current directors fees until their retirement from the Board,
which amounts, including an interest factor, are accrued until the director's
retirement. The Company has purchased life insurance policies on certain
directors participating in both plans which may be used to fund payments to
them under these plans. Cash surrender values on these purchases were $2,278
and $2,225 at June 30, 1999 and December 31, 1998, respectively. The net cost
(income) related to these plans, including the cost of the related life
insurance, was ($2), $1, $15, and $34 for the six months ended June 30, 1999
and 1998, and for the years ended December 31, 1998 and 1997, respectively.

401(k) DEFERRED COMPENSATION PLAN

Under the Company's 401(k) deferred contribution plan, all qualified
employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length-of-service requirements. Company
contributions are made at the discretion of its Board of Directors.
Contributions totaled $15 and $34 in the years ended December 31, 1998 and
1997, respectively.

INCENTIVE COMPENSATION PLAN

The Company has a plan which provides incentive compensation to key employees
if the Bank meets certain performance criteria established by the Board of
Directors. The cost of this plan was $162, $162, $309, and $318 for the six
months ended June 30, 1999 and 1998, and for the years ended December 31,
1998 and 1997, respectively.

F-42
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 10 - INCOME TAXES

Income taxes are comprised of the following for the six months ended June 30,
1999 and 1998, and for years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1999 1998 1998 1997
<S> <C> <C> <C> <C>
Current $344 $320 $703 $724
Deferred benefit -- -- (40) --

TOTAL INCOME TAXES $344 $320 $663 $724
</TABLE>

The following is a reconciliation between the statutory and the effective
federal income tax rates for the six months ended June 30, 1999 and 1998, and
for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,

1999 PERCENT 1998 PERCENT
OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rates $434 34.0% $ 428 34.0%

Decrease resulting from:
Tax-exempt income (91) (7.1) (101) (8.0)
Net earnings on life insurance policies (18) (1.4) (15) (1.2)
Other 19 1.4 8 .6

TOTAL INCOME TAX EXPENSE $344 26.9% $ 320 25.4%
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,

1998 PERCENT 1997 PERCENT
OF PRE-TAX OF PRE-TAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rates $ 877 34.0% $ 902 34.0%

Decrease resulting from:
Tax-exempt income (175) (6.8) (178) (6.7)
Net earnings on life insurance policies (28) (1.1) (14) (.5)
Other (11) (.4) 14 .5

TOTAL INCOME TAX EXPENSE $ 663 25.7% $ 724 27.3%
</TABLE>

(CONTINUED)

F-43
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 10 - INCOME TAXES (CONCLUDED)

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at June 30, 1999 and December 31, 1998
are:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for credit losses $184 $184
Deferred compensation 117 117
Unrealized loss on securities available for sale 216 --
Other 1 1
TOTAL DEFERRED TAX ASSETS 518 302

DEFERRED TAX LIABILITIES
Accumulated depreciation 43 43
Deferred income 242 242
Federal Home Loan Bank stock dividends 35 35
Unrealized gain on securities available for sale -- 122
TOTAL DEFERRED TAX LIABILITIES 320 442

NET DEFERRED TAX ASSETS (LIABILITIES) $198 ($140)
</TABLE>

NOTE 11 - COMMITMENTS AND CONTINGENCIES

The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheets.

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A
summary of the Company's commitments at June 30, 1999 and December 31, 1998
is as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
<S> <C> <C>
Commitments to extend credit $4,284 $2,968
Credit card arrangements 68 152
Standby letters of credit 103 61

$4,455 $3,181
</TABLE>

(CONTINUED)

F-44
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank's experience has been that approximately 96% of loan
commitments are drawn upon by customers. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, crops, inventory, property and equipment,
residential real estate, and income-producing commercial properties.

The Bank has agreements with commercial banks for lines of credit totaling
$3,500, none of which was used at December 31, 1998, and a credit line with
the Federal Home Loan Bank totaling 20% of assets, none of which was used at
December 31, 1998.

NOTE 12 - SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, related to loans as disclosed in Notes 4 and 11. The ultimate
collectibility of a substantial portion of the loan portfolio is susceptible
to changes in economic and market conditions in the region. The Bank
generally requires collateral on all real estate exposures, and typically
maintains loan-to-value ratios of no greater than 75%.

Investments in state and municipal securities involve governmental entities
primarily within the State of Washington. The distribution of commitments to
extend credit approximates the distribution of loans outstanding. Standby
letters of credit were granted primarily to commercial borrowers. The Bank,
as a matter of practice, generally does not extend credit to any single
borrower or group of related borrowers in excess of one million five hundred
thousand dollars.

NOTE 13 - STOCK OPTIONS

At June 30, 1999 and December 31, 1998, the Company has a stock-based option
plan, which is described below. The Bank applies APB Opinion No. 25 and
related interpretations in accounting for this plan. Accordingly, no
compensation cost has been recognized for this plan. Had compensation cost
for the Company's stock option plan been determined based on the fair value
at the grant dates for awards granted in 1997 under this plan, consistent
with the method of SFAS No. 123, there would have been no change to the
Company's reported net income and earnings per share.

(CONTINUED)

F-45
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 13 - STOCK OPTIONS (CONCLUDED)

Under the Company's incentive stock option plan, the Company may grant
options for up to 10% of the outstanding shares (29,224) of its common stock
to certain key employees. The exercise price of each option approximates the
fair market value of the Company's stock on the date of grant, and an
option's maximum term is ten years. Options vest 20% per year from the date
of grant.

The fair value of each option grant is estimated on the date of grant, based
on the Black-Scholes option-pricing model and using the following
weighted-average assumptions: dividend yield of 7.67%; risk-free interest
rates of 5.75%; and expected lives of ten years. The fair value of options
granted during 1997 was zero.

A summary of the status of the Company's stock option plan for the six months
ended June 30, 1999 and for the years ended December 31, 1998 and 1997, and
changes during the years ending on those dates, is presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,

1999 WEIGHTED 1998 WEIGHTED 1997 WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 6,000 $60 7,500 $60 -- $--
Granted -- -- -- -- 7,500 60
Exercised -- -- (1,500) 60 -- --

OUTSTANDING AT END OF PERIOD 6,000 60 6,000 60 7,500 60

Exercisable at end of period 1,500 -- --

</TABLE>

NOTE 14 - REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines of the regulatory framework for prompt corrective
action, the Bank must meet specific capital adequacy 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 classification is also subject to qualitative judgements
by the regulators about components, risk weightings and other factors.

(CONTINUED)

F-46

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 14 - REGULATORY MATTERS (CONCLUDED)

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations)
to total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the
regulatory framework for prompt corrective action, the Bank must maintain
minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios as
set forth in the table.

The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.

TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO

<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1999
TIER 1 CAPITAL (TO AVERAGE ASSETS):
Consolidated $10,402 9.96% $4,176 4.00% N/A N/A
Bank of the Pacific 10,309 9.87 4,176 4.00 $5,220 5.00%
TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 10,402 16.74 2,486 4.00 N/A N/A
Bank of the Pacific 10,309 16.59 2,486 4.00 3,729 6.00
TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS):
Consolidated 11,179 17.99 4,971 8.00 N/A N/A
Bank of the Pacific 11,086 17.84 4,971 8.00 6,214 10.00

DECEMBER 31, 1998
Tier 1 capital
(to average assets) $ 9,469 9.37% $4,041 4.00% $5,051 5.00%
Tier 1 capital
(to risk-weighted assets) 9,469 13.11 2,890 4.00 4,335 6.00
Total capital
(to risk-weighted assets) 10,186 14.10 5,780 8.00 7,224 10.00

</TABLE>

Management believes, as of December 31, 1998, that the Bank meets all capital
requirements to which it is subject.

RESTRICTIONS ON RETAINED EARNINGS

The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1998, there
were no regulatory restrictions on the payment of dividends to the Company.

F-47

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair values of the Bank's financial instruments at June 30,
1999 and December 31, 1998 were as follows:

JUNE 30, 1999 DECEMBER 31, 1998
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks,
interest bearing deposits with
banks, and federal funds sold $ 2,588 $ 2,588 $ 7,239 $ 7,239
Securities available for sale 34,225 34,225 22,356 22,356
Securities held to maturity 1,626 1,626 1,725 1,725
Loans receivable 62,096 60,745 65,008 63,955

FINANCIAL LIABILITIES
Deposits $86,053 $85,993 $88,914 $89,047
Short-term borrowings 9,050 9,050 86 86
</TABLE>

NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

CONDENSED BALANCE SHEET - JUNE 30, 1999

<TABLE>

<S> <C>
ASSETS
Cash $ 14
Investment in the Bank 9,888
Due from the Bank 50
Federal income tax receivable 29

TOTAL ASSETS $9,981

LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity $9,981

</TABLE>

(CONTINUED)

F-48

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 16 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONCLUDED)

<TABLE>

<S> <C>
CONDENSED STATEMENT OF INCOME - SIX MONTHS ENDED JUNE 30, 1999

Dividend Income from the Bank $150

Expenses 86

INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARY 64

Income Tax Benefit 29

INCOME BEFORE UNDISTRIBUTED INCOME OF SUBSIDIARY 93

Equity in Undistributed Income of Subsidiary 840

NET INCOME $933

CONDENSED STATEMENT OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 1999

OPERATING ACTIVITIES
Net income $933
Adjustments to reconcile net income to net cash provided:
Equity in undistributed income of subsidiary (840)
Other - net (79)
NET CASH PROVIDED BY OPERATING ACTIVITIES 14

CASH
Beginning of period --

End of period $ 14

</TABLE>

F-49

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 17 - EARNINGS PER SHARE DISCLOSURES

Following is information regarding the calculation of basic and diluted
earnings per share for the years indicated.

NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Basic earnings per share:
Net income $ 933 293,743 $3.18
Effect of dilutive securities:
Options -- 1,500 (.02)
Diluted earnings per share:
NET INCOME $ 933 295,243 $3.16

SIX MONTHS ENDED JUNE 30, 1998
Basic earnings per share:
Net income $ 939 292,238 $3.21
Effect of dilutive securities:
Options -- 1,875 (.02)
Diluted earnings per share:
NET INCOME $ 939 294,113 $3.19

YEAR ENDED DECEMBER 31, 1998
Basic earnings per share:
Net income $1,921 292,453 $6.57
Effect of dilutive securities:
Options -- 1,500 (.03)
Diluted earnings per share:
NET INCOME $1,921 293,953 $6.54

YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Net income $1,930 292,238 $6.60
Effect of dilutive securities:
Options -- 441 (.01)
Diluted earnings per share:
NET INCOME $1,930 292,679 $6.59

</TABLE>

The number of shares shown for "options" is the number of incremental shares
that would result from exercise of options and use of the proceeds to
repurchase shares at the average market price during the year.

F-50

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------

Pacific Financial Corporation and Subsidiary

NOTE 18 - YEAR 2000 ISSUES

As the year 2000 approaches, business issues are emerging regarding how
existing computer software programs and operating systems can accommodate the
date value. Many software systems are designed to recognize only a two-digit
date field, and may read the year 2000 as the year 1900. Thus computations of
interest and other similar calculations may be based on wrong dates, or
the systems may not be able to process information at all.

The Bank primarily utilizes software developed and maintained by a
third-party vendor for processing the mission critical data might be affected
by this problem. The vendor is in the process of testing, updating, and
modifying its software to ensure year 2000 compliance. The first phase of
testing was successfully completed before December 31, 1998. Internally, the
Bank has implemented a year 2000 compliance program, which is aggressively
reviewing year 2000 issues that may be faced by its other outside vendors and
customers, and that affect its internal computer systems. In the event that
significant suppliers or customers do not successfully and timely achieve
year 2000 compliance, the Bank's business could be adversely affected.
However, management believes that the Bank's own internal systems, networks
and resources would allow the Bank to effectively operate and service its
customers. To the extent necessary, the Bank will engage alternative vendors
and suppliers to facilitate normal operations after January 1, 2000. The
costs incurred to date on year 2000 compliance issues have not been material.
While it is impossible to estimate the potential impact on the Bank's
business after January 1, 2000, management estimates that the costs the Bank
will incur prior to that date in its activities necessary to ensure year 2000
compliance will not have a significant effect on its financial position or
results of operations.

F-51
<PAGE>

APPENDIX 1

AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

<PAGE>

EXECUTION COPY

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

AMENDED AND RESTATED

AGREEMENT AND PLAN OF MERGER

DATED AS OF THE 9TH DAY OF JUNE, 1999

(AND AMENDED AND RESTATED AS OF SEPTEMBER 2, 1999)

BETWEEN

HARBOR BANCORP, INC.

AND

PACIFIC FINANCIAL CORPORATION

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

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - The Merger; Effective Time; Closing........................................3

1.1 The Merger....................................................................3
1.2 Effective Time................................................................3
1.3 Closing.......................................................................3

ARTICLE II - Governing Documents of the Combined Corporation and the Banks.............4

2.1 Articles of Incorporation of the Combined Corporation.........................4
2.2 Bylaws of the Combined Corporation............................................4
2.3 Charter and Bylaws of The Bank of Grays Harbor and Bank of the Pacific........4

ARTICLE III - Directors and Officers of the Combined Corporation.......................4

3.1 Directors of the Combined Corporation.........................................4
3.2 Vote Upon Major Decisions.....................................................7
3.3 Certain Officers of the Combined Corporation..................................7
3.4 Other Officers of the Combined Corporation....................................8
3.5 Directors of the Banks........................................................8
3.6 Survival of Article III.......................................................8

ARTICLE IV - Conversion or Cancellation of Shares......................................8

4.1 Conversion or Cancellation of Shares..........................................8
4.2 Exchange of Old Certificates for New Certificates.............................9
4.3 Payment to Dissenting Stockholders...........................................11

ARTICLE V - Representations and Warranties............................................11

5.1 Representations and Warranties of Harbor and Pacific.........................11
5.2 Recitals True................................................................11
5.3 Exceptions to Representations and Warranties.................................23

ARTICLE VI - Covenants................................................................23

6.1 Conduct of Business Pending the Effective Time...............................23
6.2 Dividends....................................................................25
6.3 Acquisition Proposals........................................................27
6.4 Stockholder Approvals; Election of Directors.................................28
6.5 Filings; Other Actions.......................................................28
6.6 Information Supplied.........................................................29
6.7 Accountants' Letters, Tax and Fairness Opinions..............................30
6.8 Access.......................................................................30
6.9 Notification of Certain Matters..............................................31
6.10 Publicity....................................................................31
6.11 Options, Warrants and Benefit Plans..........................................31

1-i
<PAGE>

6.12 Expenses.....................................................................32
6.13 Indemnification; Directors' and Officers' Insurance..........................32
6.14 Anti-takeover Provisions.....................................................33
6.15 Affiliate Agreements.........................................................33
6.16 Efforts to Consummate........................................................34
6.17 Reports......................................................................34
6.18 Accounting and Tax Treatment.................................................34

ARTICLE VII - Conditions..............................................................34

7.1 Conditions to Each Party's Obligation to Effect the Merger...................34
7.2 Conditions to Obligation of Pacific..........................................36
7.3 Conditions to Obligation of Harbor...........................................37

ARTICLE VIII - Termination............................................................37

8.1 Termination by Mutual Consent................................................37
8.2 Termination by Either Harbor or Pacific......................................37
8.3 Termination by Pacific.......................................................38
8.4 Termination by Harbor........................................................38
8.5 Effect of Termination and Abandonment........................................38
8.6 Termination Fee..............................................................39

ARTICLE IX - Miscellaneous............................................................39

9.1 Survival.....................................................................39
9.2 Modification or Amendment....................................................39
9.3 Waiver of Conditions.........................................................40
9.4 Counterparts.................................................................40
9.5 Governing Law................................................................40
9.6 Notices......................................................................40
9.7 Entire Agreement and Non-Assignability.......................................41
9.8 Captions.....................................................................41
9.9 Severability.................................................................41
9.10 No Third Party Beneficiaries.................................................41
</TABLE>

1-ii
<PAGE>

ANNEXES AND SCHEDULES

<TABLE>
<CAPTION>
ANNEXES
<S> <C>
Exhibit 1 - Articles of Incorporation of the Combined Corporation
(Section 2.1)

Exhibit 2 - Bylaws of the Combined Corporation (Section 2.2)

Exhibit 3 - Affiliate Agreement (Section 6.15)

Exhibit 4 - Director Agreement (Recital E)

Exhibit 5 - Shareholder Noncompetition Agreement (Recital E)

<CAPTION>
SCHEDULES
<S> <C>
Schedule 1 - Subsidiaries (Section 5.1(c))

Schedule 2 - Stock Option and Other Stock Plans (Section 5.1(d))

Schedule 3 - Consents of Third Parties (Section 5.1(f)(ii))

Schedule 4 - Asset Classification (Section 5.1(h))

Schedule 5 - Properties (Section 5.1(j))

Schedule 6 - Branches and Offices of the Banks (Section 5.1(j))

Schedule 7 - Compliance with Laws (Section 5.1(k))

Schedule 8 - Litigation (Section 5.1(l))

Schedule 9 - Insurance Policies (Section 5.1(n))

Schedule 10 - Compensation Plans (Section 5.1(p))

Schedule 11 - Environmental Issues (Section 5.1(q))

Schedule 12 - Investments (Section 5.1 (v))

Schedule 13 - Employment Agreements (Section 7.1(i))
</TABLE>

1-iii
<PAGE>

INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
<S> <C>
Acquisition Proposal................ Section 6.3

Affiliates.......................... Section 6 and 15

Agreement........................... Caption

Anti-takeover Provisions............ Section 6.14

Articles of Incorporation........... Section 2.1

Articles of Merger.................. Section 1.2(a)

Asset Classification................ Section 5.1(h)

Banks............................... Section 2.3

Bylaws.............................. Section 2.2

Closing............................. Section 1.3

Closing Date........................ Section 1.3

Combined Corporation................ Recital B

Compensation Plans.................. Section 5.1(p)(ii)

Confidentiality Agreements.......... Section 6.8

Contracts........................... Section 5.1(F)(II)

Corporation Plans................... Section 5.1(p)(i)

Costs............................... Section 6.13(a)

Disclosure Letter................... Section 5.1

Dissenting Shares................... Section 4.3

Effective Time...................... Section 1.2(a)

Employees........................... Section 5.1(p)(i)

Employment Agreement................ Section 3.2(e)

Environmental Law................... Section 5.1(q)

ERISA............................... Section 5.1(p)(i)

Exception Shares.................... Section 4.1(a)

Exchange Act........................ Section 5.1(f)(i)

Exchange Agent...................... Section 4.2(a)

Exchange Ratio...................... Section 4.1(a)

Executive Committee................. Section 3.1(c)
</TABLE>

1-iv
<PAGE>

<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
<S> <C>
FDIA................................ Section 5.1(c)

FDIC................................ Section 5.1(c)

Financial Statements................ Section 5.1(g)(iv)

Former Pacific Employees............ Section 6.11(d)

GAAP................................ Section 6.1(h)

Governmental Entity................. Section 5.1(f)(i)

Harbor.............................. Caption

Harbor Common Stock................. Section 5.1(d)(i)

Harbor Exchange Ratio............... Section 4.1(a)

Harbor Meeting...................... Section 6.4

Harbor Option....................... Section 6.11(a)

Harbor Stock Plans.................. Section 5.1(d)(i)

Harbor-Related Director............. Section 3.1(a)

Hazardous Substances................ Section 5.1(q)

Indemnified Parties................. Section 6.13(a)

Internal Revenue Code............... Recital G

Joint Proxy Statement............... Section 6.5(a)

Liens............................... Section 5.1(d)(i)

Major Decision...................... Section 3.2

Material Adverse Effect............. Section 5.2(b)

Merger.............................. Recital B

NASD................................ Section 4.2(c)

New Certificate..................... Section 4.1(b)

New Common Stock.................... Section 4.1(a)

Old Certificate..................... Section 4.1(b)

Old Shares.......................... Section 4.1(b)

Pacific............................. Caption

Pacific Common Stock................ Section 5.1(d)(iii)

Pacific Meeting..................... Section 6.4

Pacific Stock Plans................. Section 5.1(d)(ii)

Pacific-Related Director............ Section 3.1(a)
</TABLE>

1-v
<PAGE>

<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
<S> <C>
Pension Plan........................ Section 5.1(p)(iii)

Person.............................. Section 6.1(c)

RCW................................. Section 1.2(b)

Registration Statement.............. Section 6.5(a)

Regulatory Approvals................ Recital C

Reports............................. Section 5.1(g)(ii)

Representatives..................... Section 6.8

SEC................................. Section 5.1(g)(i)

Securities Act...................... Section 5.1(f)(i)

Subject Property.................... Section 5.1(q)

Subsidiary.......................... Section 9.8(a)

Tax................................. Section 5.1(m)(i)

Washington Director................. Recital C
</TABLE>

1-vi

<PAGE>

This Amended and Restated Agreement and Plan of Merger (the
"Agreement"), dated as of June 9, 1999 (and amended and restated as of
September 2, 1999), is between HARBOR BANCORP, INC. ("Harbor") and PACIFIC
FINANCIAL CORPORATION ("Pacific").

PREAMBLE

The management and boards of directors of Harbor and Pacific,
respectively, believe that the merger of equals between Harbor and Pacific,
on the terms and conditions set forth in this Agreement, is in the best
interests of Harbor's and Pacific's stockholders, employees, customers, and
creditors, and the communities in which they do business.

RECITALS

A. THE PARTIES. Harbor and Pacific are corporations duly organized and
validly existing under Washington law and are registered bank holding
companies under the Bank Holding Company Act of 1956, as amended ("BHCA").
Harbor's principal office is located in Aberdeen, Washington. Harbor owns all
of the outstanding common stock of The Bank of Grays Harbor. Pacific's
principal office is located in Long Beach, Washington. Pacific owns all of
the outstanding common stock of the Bank of the Pacific.

B. THE MERGER. At the Effective Time, (i) Pacific will be merged with
and into Harbor (the "Merger") so that Harbor will be the surviving
corporation under the name Pacific Financial Corporation (the "Combined
Corporation"), and (ii) except as provided in Sections 4.2(c) and 4.3 of
this Agreement, the outstanding shares of the capital stock of Pacific will
be converted into shares of the capital stock of the Combined Corporation and
the outstanding shares of capital stock of Harbor will remain outstanding as
shares of the Combined Corporation.

C. APPROVALS. The Merger is subject to the approvals of the shareholders
of Harbor and the shareholders of Pacific, the approvals (the "Regulatory
Approvals") of the Board of Governors of the Federal Reserve System ("FRB"),
the Director of the Washington Department of Financial Institutions (the
"Washington Director"), as well as any other regulators with jurisdiction
over the Merger, and the satisfaction of certain other conditions described
in this Agreement.

D. EMPLOYMENT AGREEMENTS.

1. As a condition of the parties' execution of this Agreement, (i)
Pacific has entered into an employment agreement with Dennis
Long, which agreement has a term of three years and will take
effect at the Effective Time; and (ii) Harbor has entered into an
employment agreement with John Van Dijk, which agreement has a
term of three years and will take effect at the Effective Time.

2. It is the parties' intention that the employment agreement dated
May 20, 1998 currently in effect for Robert Worrell will remain
in full force and

1-1
<PAGE>

effect following the Effective Date until its expiration on
May 31, 2001. Mr. Worrell's employment agreement has been
amended to provide that (1) Mr. Worrell will serve as the chief
executive officer of the Combined Corporation; and (2) at the
option of the parties, Mr. Worrell's agreement may be extended
for one year.

3. Prior to the Closing Date, (i) Harbor will enter into employment
agreements with Wayne Gale and Janice Pearce; (ii) Pacific will
enter into an employment agreement with Patricia Nelson; (iii)
The Bank of Grays Harbor will enter into employment agreements
with Ty Palmer, Mike Sweeney, Randy Ross and Lynn Paylor; and
(iv) the Bank of the Pacific will enter into employment
agreements with Wendy Strange, Dian Barker, Ronald Nelson, Mavis
Shucka, George Butkus and Susan Madsen. All such employment
agreements will take effect at the Effective Time and will be in
a form mutually agreed to by the parties to this Agreement.

E. DIRECTOR AGREEMENTS. In association with the parties' execution of
this Agreement, the directors and officers of Harbor and Pacific have entered
into agreements, substantially in the form attached to this Agreement as
EXHIBIT 4, pursuant to which, among other things, each such individual has
agreed to vote his or her shares of Harbor or Pacific common stock, as the
case may be, in favor of the actions contemplated by this Agreement. In
addition, all such directors-officers will have entered into non-competition
agreements, substantially in the form attached to this Agreement as EXHIBIT 5.

F. FAIRNESS OPINION. Harbor and Pacific have each received from Alex
Sheshunoff & Co. ("Sheshunoff") and delivered to each other opinions to the
effect that the financial terms of the Merger are financially fair to
Harbor's and Pacific's stockholders. As a condition to Closing of the Merger,
Sheshunoff will update these fairness opinions immediately before the parties
mail the Joint Prospectus/Proxy Statement to their stockholders.

G. INTENTION OF THE PARTIES--ACCOUNTING AND TAX TREATMENT. The parties
intend the Merger to qualify, for accounting purposes, as a "pooling of
interests." The parties intend the Merger to qualify, for federal income tax
purposes, as a tax-free reorganization under Section 368 of the Internal
Revenue Code of 1986, as amended ("IRC").

1-2
<PAGE>

AGREEMENT

Harbor and Pacific agree as follows:

ARTICLE I
THE MERGER; EFFECTIVE TIME; CLOSING

1.1 THE MERGER. Subject to the terms and conditions of this Agreement,
at the Effective Time, Harbor and Pacific will consummate the Merger, in
which Pacific will be merged with and into Harbor under the name Pacific
Financial Corporation, and the separate corporate existence of Pacific will
cease. The Combined Corporation will continue to be governed by the laws of
the State of Washington.

1.2 EFFECTIVE TIME.

(a) Subject to the terms and conditions of this Agreement, the parties
to this Agreement will cause articles of merger to be filed with the
Secretary of State of the State of Washington (the "Articles of Merger").
The Merger will become effective at such time as the Articles of Merger
have been filed with the Secretary of State of the State of Washington, or
at such other time as may be specified in the Articles of Merger in
accordance with applicable law. The date and time when the Merger will
become effective is referred to in this Agreement as the "Effective Time."

(b) Harbor and Pacific each will use reasonable efforts to cause the
Effective Time to occur at or prior to the close of business on the first
business day after the date on which satisfaction or waiver of the last of
the conditions specified in Sections 7.1(a) and (b) of this Agreement has
occurred. Notwithstanding anything to the contrary in this Section 1.2,
Harbor and Pacific may cause the Effective Time to occur on such earlier or
later day following the satisfaction or waiver of such conditions as they
may mutually agree, consistent with the provisions of the Revised Code of
Washington ("RCW").

1.3 CLOSING. The closing of the Merger (the "Closing") will take place
at Knight, Vale & Gregory, Inc., P.S., 1145 Broadway Plaza, Suite 900,
Tacoma, WA 98402 or such other place as Harbor and Pacific will agree, at
10:00 a.m. on the date when the Effective Time is to occur. The date upon
which the Closing will occur is herein referred to as the "Closing Date".

ARTICLE II
GOVERNING DOCUMENTS OF THE
COMBINED CORPORATION AND THE BANKS

2.1 ARTICLES OF INCORPORATION OF THE COMBINED CORPORATION. At the
Effective Time, the articles of incorporation of Harbor, as then in effect,
will by virtue of the Merger, be amended and restated to read as set forth in
EXHIBIT 1; such articles of incorporation, as so amended and restated, will
be the articles of incorporation of the Combined Corporation (the "Articles
of Incorporation"), until duly amended in accordance with their terms and the
RCW. For a period

1-3
<PAGE>

of three years following the Effective Date, such Articles will not be
amended (or recommended to the shareholders for amendment) without the
approval of sixty percent (60%) of the directors of the Combined Corporation.

2.2 BYLAWS OF THE COMBINED CORPORATION. At the Effective Time, the
bylaws of Harbor, as then in effect, will be amended and restated to read as
set forth in Exhibit 2, and such bylaws, as so amended, will be the bylaws of
the Combined Corporation (the "Bylaws"), until duly amended in accordance
with their terms, the Articles of Incorporation and the RCW. For a period of
three years following the Effective Date, such Bylaws will not be amended
without the approval of sixty percent (60%) of the directors of the Combined
Corporation.

2.3 CHARTER AND BYLAWS OF THE BANK OF GRAYS HARBOR AND BANK OF THE
PACIFIC. Prior to the Effective Time, Harbor and Pacific will consult as to
what amendments (including provisions relating to director and officer
indemnification and exculpation, and duties of officers), if any, should be
made in the Articles of Incorporation or Bylaws of The Bank of Grays Harbor
and Bank of the Pacific (collectively, the "Banks"), in order to ensure that
they are consistent with those of the Combined Corporation and will cause
such amendments as Harbor and Pacific will mutually agree upon to become
effective on or before the Effective Time.

ARTICLE III
DIRECTORS AND OFFICERS OF THE COMBINED CORPORATION

3.1 DIRECTORS OF THE COMBINED CORPORATION.

(a) It is the intention of Harbor and Pacific, and their respective
Boards of Directors, that, until the third annual meeting of the
shareholders following the Closing Date, the Board of Directors of the
Combined Corporation will consist of nine directors and will consist of
five (5) persons serving as directors of Harbor (each, a "Harbor Related
Director") and four (4) persons serving as directors of Pacific (each, a
"Pacific Related Director"), in each case as of immediately prior to the
Effective Time.

(b) The Board of Directors of the Combined Corporation, as of the
Effective Time, will be divided into three classes, three of three
directors each, with the initial terms of office of the first, second, and
third classes expiring at the first, second, and third annual meetings of
shareholders of the Combined Corporation, respectively. At the Effective
Time, subject to the provisions of paragraph (c) below, the Board of
Directors of the Combined Corporation will consist of the persons indicated
below, who will serve for the terms specified and until their successors
will have been elected and qualified:

1. Class A directors (term expiring at the first annual meeting of
shareholders of the Combined Corporation following the Effective
Time):

Messrs. Worrell, Long and Malik.

2. Class B directors (term expiring at the second annual meeting of
shareholders of the Combined Corporation following the Effective
Time):

1-4
<PAGE>

Messrs. Snyder, Forcum and Hall.

3. Class C directors (term expiring at the third annual meeting of
shareholders of the Combined Corporation following the Effective
Time):

Messrs. Woodland, Westling and Hagstrom.

(c) If, prior to the Effective Time, any of the persons named above
will become unavailable to serve or if, following the Effective Time but
prior to the third annual meeting of the Combined Corporation following the
Effective Time, any of such persons will have retired, resigned, been
removed, or otherwise ceased to be a director or become unavailable as a
director, then:

(i) If such event occurs prior to the first shareholder meeting
to vote upon this Agreement, then such person will be replaced by a
person designated by a majority of the other Harbor Related Directors
(if the vacancy relates to a Harbor Related Director) or of the other
Pacific-Related Directors (if the vacancy relates to a Pacific Related
Director), and such substitute person will be named in the joint proxy
statement/prospectus (as discussed in Section 6.5(a) of this
Agreement) as a prospective director.

(ii) If such event occurs after the first shareholder meeting to
vote upon this Agreement, then as promptly as practicable following
the Effective Time, the remaining members of the Board of Directors of
the Combined Corporation will fill the vacancy in accordance with the
bylaws of the Combined Corporation and the provisions of applicable
law; provided, however, that any person selected to fill the vacancy
will have been nominated by affirmative votes of a majority of the
remaining Harbor Related Directors (if the vacancy relates to a Harbor
Related Director) or Pacific Related Directors (if the vacancy relates
to a Pacific Related Director).

(d) At any annual or special shareholder meeting held prior to the
first anniversary of the Effective Time, the Board of Directors will use
their best efforts to re-nominate Messrs. Worrell, Long and Malik and no
nominees for director will be proposed on behalf of the Board of Directors
(or any committee thereof) or management unless (i) the nominees (if
elected), together with the directors then in office, are the persons
identified in paragraph (b) above or (ii) the slate of nominees has been
approved by sixty percent (60%) or more of the members of the Board of
Directors. At any annual or special shareholder meeting held after the
first anniversary and prior to the third anniversary of the Effective Time,
no nominees for director will be proposed on behalf of the Board of
Directors (or any committee thereof) or management unless the slate of
nominees has been approved by sixty percent (60%) or more of the members of
the Board of Directors.

(e) The Board of Directors of the Combined Corporation will have an
Executive Committee (the "Executive Committee") (in addition to such other
committees

1-5
<PAGE>

as the Board will establish in accordance with Section 2.16 of the Bylaws
of the Combined Corporation) as follows: Messrs. Dennis Long, Robert
Worrell, Sidney Snyder and Joe Malik. Mr. Malik will be the Chairman of
the Board unless he is unable or unwilling to serve; in such event, the
Chairman will be selected by a majority of the Harbor Related Directors.
Mr. Snyder will be the Vice-Chairman of the Board, unless he is unable or
unwilling to serve; in such event, the Vice-Chairman will be selected by a
majority of the Pacific Related Directors. Prior to the Effective Time, the
Executive Committee may meet from time to time to formulate on an advisory
basis policies and procedures for various transitional matters. The
Executive Committee will propose a form of employment agreement for those
employees who are listed on SCHEDULE 13 to this Agreement. Each such form
of agreement will be conditioned upon and will only become effective upon
the Effective Time of the Merger, and will provide that any previous form
of employment and/or severance agreement to which the employee is a party
will be canceled concurrently with the effectiveness of the new agreement.
Each of the respective employers will, subject to the fiduciary duties of
its board of directors, offer to enter into the employment agreement with
the affected employees prior to the filing with the SEC of the Registration
Statement on Form S-4 pursuant to Section 6.5(a).

(f) The provisions of paragraph (c) will apply to the Committee
members designated in paragraphs (e) and (f).

3.2 VOTE UPON MAJOR DECISIONS. Prior to the third anniversary of the
Effective Date, no Board action on a Major Decision will be valid unless
action on such Major Decision has been approved by sixty percent (60%) or
more of the members of the Board of Directors. For the purposes of this
Agreement, "Major Decision" means the following: (a) a determination of what
level, if any, of dividends will be paid by the Continuing Corporation to its
shareholders; (b) a decision to merge the Combined Corporation's subsidiary
banks; (c) a decision to change the number or composition of the boards' of
directors of the Continuing Corporation's subsidiary banks; and (d) any
action on an item that must be approved by the Continuing Corporation's
shareholders pursuant to the provisions of the RCW.

3.3 CERTAIN OFFICERS OF THE COMBINED CORPORATION.

(a) At the Effective Time, the officers of the Combined Corporation
will be as follows, subject to the removal in accordance with the bylaws of
the Combined Corporation and the provisions of Section 3.6.

(i) Mr. Worrell will be Chief Executive Officer of the Combined
Corporation.

(ii) Mr. Long will be President of the Combined Corporation.

(iii) Mr. Van Dijk will be Treasurer of the Combined Corporation.

(iv) Ms. Nelson will be Vice President of the Combined
Corporation.

(v) Mr. Gale will be Vice President of the Combined Corporation.

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(vi) Ms. Pearce will be Secretary of the Combined Corporation.

(b) If the Board of Directors of the Combined Corporation will have a
Nominating Committee, then neither Mr. Worrell nor Mr. Long will be a
member.

(c) During the terms of their respective Employment Agreements,
Messrs. Worrell and Long will have the respective powers, and perform the
respective duties set forth in each of their respective Employment
Agreements and in the Bylaws. Subject to the foregoing, Messrs. Worrell and
Long will determine between themselves those areas of which each will have
primary responsibility, it being understood that both of them will be
involved in and be responsible for all major policy decisions and both of
them will have general oversight over the business and affairs of the
Combined Corporation. Subject to the foregoing, Mr. Long, in his capacity
as President, will oversee on a full-time basis the day-to-day operations
of the Combined Corporation. Mr. Long will report to Mr. Worrell, the CEO.
Any matters upon which the CEO and President are unable to agree may be
referred to the Executive Committee.

Any modification or amendment of either of such Employment Agreements
at any time during their respective terms from and after the Effective Time
will require, in addition to the consent of the affected executive, the
affirmative vote of sixty percent (60%) of the Board of Directors of the
Combined Corporation.

3.4 OTHER OFFICERS OF THE COMBINED CORPORATION. Any employment decisions
made to replace any officer listed on SCHEDULE 13 who is no longer employed
by the Continuing Corporation or its subsidiary banks will require the
affirmative vote of sixty percent (60%) of the Board of Directors of the
Combined Corporation.

3.5 DIRECTORS OF THE BANKS. At the Effective Time, it is the intention
of the parties that the membership of the Board of Directors of each of the
Banks, to the extent lawful, will continue to be identical to such membership
immediately prior to the Effective Time, except that Messrs. Worrell and Long
will both be directors of each of the Banks.

3.6 SURVIVAL OF ARTICLE III. The provisions of this Article III will
survive the Effective Time and, subject to repeal or amendment by a vote of
not less than 60 percent of the directors of the Combined Corporation, remain
in effect until the third anniversary of the Effective Time (unless an
earlier termination date is specified), at which time they will terminate.
The provisions of this Section 3.6 will not affect the rights of the parties
to any employment or salary continuation agreements entered into pursuant to
Section 3.1(e), it being understood that the rights of the parties to such
agreements will be governed by the terms of the respective agreements.

ARTICLE IV
CONVERSION OR CANCELLATION OF SHARES

4.1 CONVERSION OR CANCELLATION OF SHARES. At the Effective Time, by
virtue of the Merger, and without any action on the part of any stockholder:

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(a) Subject to Sections 4.2(b) and (d), each share of Pacific Common
Stock issued and outstanding immediately prior to the Effective Time, other
than the Exception Shares, will be converted at the Effective Time into
.785 (the "Exchange Ratio") newly issued, fully paid and nonassessable
shares of Common Stock, $1.00 par value ("New Common Stock") of the
Combined Corporation. Exception Shares means Pacific Common Stock owned,
other than in a bona fide fiduciary capacity, by Harbor or a subsidiary of
Harbor. In the event that, subsequent to the date of this Agreement but
prior to the Effective Time, the shares of Harbor Common Stock or Pacific
Common Stock issued and outstanding will, through a reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar change in the capitalization of Harbor or
Pacific, as the case may be, increase or decrease in number or be changed
into or exchanged for a different kind or number of securities, then as
appropriate the proportionate adjustment will be made to the Exchange
Ratio.

(b) All shares of Pacific Common Stock issued and outstanding
immediately prior to the Effective Time and referred to in Section 4.1(a)
(the "Old Shares") will cease to be outstanding, will be cancelled and
retired and will cease to exist, and each holder of a certificate (an "Old
Certificate") formerly representing the Old Shares will thereafter cease to
have any rights with respect to such shares, except the right to receive,
without interest, upon exchange of such Old Certificate in accordance with
Section 4.2, a certificate representing the shares of New Common Stock (a
"New Certificate") and any payment to which such holder is entitled
pursuant to this Article IV.

(c) With regard to the Phase II environmental assessment on one of
Pacific's properties, if the estimated cost of environmental cleanup and
related expenses is greater than $200,000, the Exchange Ratio will be
reduced by .00010 for every $3,500 of expenses on a tax-affected basis
estimated to clean up the site (i.e. if the tax-affected costs for clean-up
are $203,500 the Exchange Ratio will be .7849 instead of .785 as stated in
this Agreement).

4.2 EXCHANGE OF OLD CERTIFICATES FOR NEW CERTIFICATES.

(a) APPOINTMENT OF EXCHANGE AGENT. From and after the Effective Time
until the end of the six-month period following the Effective Time, the
Combined Corporation will make available or cause to be made available to
an exchange agent (which may be one of the Banks) appointed prior to the
Effective Time by Harbor and Pacific jointly on behalf of the Combined
Corporation (the "Exchange Agent") New Certificates and cash in amounts
sufficient to allow the Exchange Agent to make all deliveries of New
Certificates and payments that may be required in exchange for Old
Certificates or Old Pacific Certificates pursuant to this Article IV. At
the end of such six-month period, any such New Certificates and cash
remaining in the possession of the Exchange Agent (together with any
dividends or earnings in respect thereof) will be returned to the Combined
Corporation. Any former holders of Old Shares who have not exchanged their
Old Certificates for New Certificates and cash pursuant to this Article IV
will thereafter be entitled to look exclusively to the Combined Corporation
and only as general creditors thereof for the shares of New Common Stock
and any cash to which they become entitled

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<PAGE>

upon exchange of their Old Certificates pursuant to this Article IV.
Notwithstanding the foregoing, neither the Exchange Agent nor any party
hereto will be liable to any former holder of Old Shares for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.

(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, the
Combined Corporation will cause the Exchange Agent to mail or deliver to
each person who was, at the Effective Time, a holder of record of Old
Shares (other than Exception Shares) a form (mutually agreed upon by Harbor
and Pacific) of a letter of transmittal containing instructions for use in
effecting the surrender of Old Certificates in exchange for New
Certificates and any payments pursuant to this Article IV. Upon surrender
to the Exchange Agent of an Old Certificate for cancellation together with
such letter of transmittal, duly executed and completed in accordance with
its instructions, the holder of such Old Certificate will be entitled to
receive in exchange therefor a New Certificate representing the shares of
New Common Stock, and a check in the amount, if any, to which such holder
is entitled pursuant to this Article IV, and the Old Certificate so
surrendered will be cancelled. No interest will be paid or will accrue on
any amount payable upon surrender of Old Certificates. If any New
Certificate or cash payment is to be issued or made in a name other than
that in which the Old Certificate surrendered in exchange therefor is
registered, it will be a condition of such exchange that the person
requesting such exchange will pay any transfer or other taxes required by
reason of the issuance of such New Certificate or the making of such cash
payment in a name other than that of the registered holder of the Old
Certificate surrendered, or will establish to the satisfaction of the
Combined Corporation that any such taxes have been paid or are not
applicable. An Affiliate (as defined in Section 6.15) of Harbor or Pacific
will not be entitled to receive any New Certificate or payment pursuant to
this Article IV until such Affiliate will have duly executed and delivered
an appropriate agreement described in Section 6.15.

(c) FRACTIONAL SHARES. Notwithstanding Section 4.1 or any other
provision of this Section 4.2, no fractional shares of New Common Stock
will be issued in exchange for shares of Pacific Common Stock and any
holder of Pacific Common Stock entitled to receive a fractional share of
New Common Stock but for this Section 4.2(c) will be entitled to receive
instead a cash payment in lieu thereof, without interest, in an amount
equal to the product of $130 and the fraction of a share to which such
holder would otherwise have been entitled.

(d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. Notwithstanding
any other provisions of this Agreement, no dividends or other distributions
with a record date after the Effective Time will be paid to any person
holding an Old Certificate until such Old Certificate has been surrendered
for exchange as provided in this Agreement. Subject to the effect of
applicable laws, following surrender of any such Old Certificate, there
will be paid to the holder of the New Certificate issued in exchange,
without interest, at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
payable with respect to the shares of New Common Stock represented thereby.

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<PAGE>

(e) TRANSFERS. At or after the Effective Time, there will be no
transfers on the stock transfer books of the Combined Corporation of the
Old Shares.

(f) HARBOR STOCK CERTIFICATES. All shares of Harbor Common Stock
issued and outstanding at the Effective Time will remain issued and
outstanding notwithstanding any provision of this Agreement, and the
certificates representing such shares ("Old Harbor Certificates") will
after the Effective Time, with no action on the part of any holder of such
shares, represent shares of the Combined Corporation. Old Harbor
Certificates may be surrendered to the Transfer Agent during the period
specified in Section 4.2(a) or thereafter to the Combined Corporation, in
exchange for New Certificates representing the number of shares represented
by the surrendered Old Harbor Certificates. Failure to exchange Old Harbor
Certificates for New Certificates will not affect in any way the rights of
the holder of such shares of Harbor Common Stock, including the right to
vote and to receive dividends.

(g) LOST, STOLEN, AND DESTROYED CERTIFICATES. The Exchange Agent will
be authorized to issue a certificate representing Combined Corporation in
exchange for an old Certificate that has been lost, stolen or destroyed, if
the holder provides the Exchange Agent with: (1) satisfactory evidence that
the holder owns Pacific Common Stock and that the certificate representing
this ownership is lost, stolen, or destroyed, (2) any appropriate affidavit
the Exchange Agent may require, and (3) any indemnification assurances that
the Exchange Agent may require.

4.3 PAYMENT TO DISSENTING STOCKHOLDERS. For purposes of this Agreement,
"Dissenting Shares" means those shares of Harbor and Pacific Common Stock as
to which stockholders have properly taken all steps necessary to perfect
their dissenters' rights under RCW Sections 23B.13.010 through 23B.13.310.
Each outstanding Dissenting Share of Harbor and Pacific Common Stock will be
converted at Closing into the rights provided under those sections of the RCW.

ARTICLE V
REPRESENTATIONS AND WARRANTIES

5.1 REPRESENTATIONS AND WARRANTIES OF HARBOR AND PACIFIC. Subject to
Section 5.2 and except as set forth in any Schedule to this Agreement or in a
letter heretofore delivered to the other party ("Disclosure Letter") setting
forth exceptions to certain of its representations and warranties, Harbor
hereby represents and warrants to Pacific, and Pacific hereby represents and
warrants to Harbor, that:

(a) RECITALS TRUE. The statements of fact set forth in Recital A of
this Agreement with respect to it are true.

(b) CORPORATE ORGANIZATION AND QUALIFICATION. It is a corporation duly
organized and validly existing under the laws of the State of Washington,
and its activities do not require it to be qualified in any foreign
jurisdiction. It has the requisite corporate power and authority to own or
lease its properties and assets and to carry on its

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<PAGE>

businesses as they are now being conducted. It has made available to the
other party to this Agreement a complete and correct copy of its articles
of incorporation and bylaws, each as amended to date and currently in
full force and effect.

(c) SUBSIDIARIES. SCHEDULE 1 to this Agreement lists all of its
subsidiaries as of the date of this Agreement and the percent of its
stock-ownership thereof. Each of its subsidiaries that is a depository
institution is an "insured depository institution" as defined in the
Federal Deposit Insurance Act ("FDIA"), and applicable regulations
thereunder, having its deposits insured by the Federal Deposit Insurance
Corporation (the "FDIC"), subject to applicable FDIC coverage limitations.
Each of its subsidiaries is either a commercial bank or a corporation
chartered by the State of Washington, and is duly organized, and validly
existing, under the laws of the State of Washington, and is duly qualified
to do business and in good standing in each jurisdiction where the property
owned, leased or operated, or the business conducted, by such subsidiary
requires such qualification. Each of its subsidiaries has the requisite
corporate power and authority to own or lease its properties and assets and
to carry on its business as it is now being conducted.

(d) CAPITAL STOCK.

(i) In the case of the representations and warranties made by
Harbor: The authorized capital stock of Harbor consists of one million
(1,000,000) shares common stock, par value $1.00 per share ("Harbor
Common Stock"), of which as of the date of this Agreement 258,381
shares are issued and outstanding. As of the date of this Agreement,
there were outstanding under the stock option and other plans
identified in SCHEDULE 2 to this Agreement (the "Harbor Stock Plans"),
options or rights to acquire not more than an aggregate of 14,000
shares of Harbor Common Stock (subject to adjustment on the terms set
forth in the Harbor Stock Plans). As of the date of this Agreement,
Harbor has no shares of Harbor Common Stock reserved for issuance,
other than 25,000 shares reserved for issuance under the Harbor Stock
Plans and as identified in SCHEDULE 2 to this Agreement. All the
outstanding shares of Harbor Common Stock have been duly authorized
and validly issued and are fully paid and nonassessable. All the
outstanding shares of capital stock of each of Harbor's subsidiaries
owned by Harbor or a subsidiary of Harbor have been duly authorized
and validly issued and are fully paid and are owned by Harbor or a
subsidiary of Harbor free and clear of all liens, pledges, security
interests, claims, proxies, preemptive or subscriptive rights or other
encumbrances or restrictions of any kind (collectively, "Liens").
Except as set forth in this Agreement and except for Harbor Common
Stock issued after the date hereof pursuant to the terms of the Harbor
Stock Plans, there are no shares of capital stock of Harbor
authorized, issued or outstanding and there are no preemptive rights
or any outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of Harbor or
any of its subsidiaries of any character relating to the issued or
unissued capital stock or other equity securities of Harbor or any of
its subsidiaries (including,

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<PAGE>

without limitation, those relating to the issuance, sale, purchase,
redemption, conversion, exchange, redemption, voting or transfer
thereof).

(ii) In the case of the representations and warranties made by
Pacific: The authorized capital stock of Pacific consists of three
hundred thousand (300,000) shares of common stock with $1.00 par value
(the "Pacific Common Stock"), of which as of the date of this
Agreement 293,743 shares are issued and outstanding. As of the date of
this Agreement, there were outstanding under the stock option and
other plans listed in SCHEDULE 2 to this Agreement (the "Pacific Stock
Plans"), options or rights to acquire not more than an aggregate of
6,000 shares of Pacific Common Stock (subject to adjustment on the
terms set forth in the Pacific Stock Plans). As of the date of this
Agreement, Pacific has no shares of Pacific Common Stock reserved for
issuance, other than 6,000 shares reserved for issuance under the
Pacific Stock Plans. All the outstanding shares of Pacific Common
Stock have been duly authorized and validly issued and are fully paid
and nonassessable. All the outstanding shares of capital stock of each
of Pacific's subsidiaries owned by Pacific or a subsidiary of Pacific
have been duly authorized and validly issued and are fully paid and
are owned by Pacific or a subsidiary of Pacific free and clear of all
Liens. Except as set forth in this Agreement or in the Pacific Stock
Plans, there are no shares of capital stock of Pacific authorized,
issued or outstanding, and there are no outstanding subscriptions,
options, warrants, rights, convertible securities or other agreements
or commitments of Pacific or any of its subsidiaries of any character
relating to the issued or unissued capital stock or other equity
securities of Pacific or any of its subsidiaries (including, without
limitation, those relating to the issuance, sale, purchase,
redemption, conversion, exchange, registration, voting or transfer
thereof).

(e) CORPORATE AUTHORITY. It has the requisite corporate power and
authority and has taken all corporate action necessary in order to execute
and deliver this Agreement and, subject only to the approval by its
shareholders, of the plan of merger contained in this Agreement insofar as
required by RCW Section 23B.11.030, to consummate the transactions
contemplated hereby. This Agreement is a valid and legally binding
agreement of it enforceable in accordance with its terms.

(f) GOVERNMENTAL FILINGS; NO VIOLATIONS.

(i) Other than the Regulatory Approvals, and other than as
required under the Securities Exchange Act of 1934, as amended
(including the rules and regulations thereunder, the "Exchange Act"),
the Securities Act of 1933, as amended (including the rules and
regulations thereunder, the "Securities Act"), state securities and
"Blue Sky" laws and the rules of the NASD, no notices, reports or
other filings are required to be made by it with, nor are any
consents, registrations, approvals, permits or authorizations required
to be obtained by it from, any governmental or regulatory authority,
agency, court, commission or other entity, domestic or foreign
("Governmental Entity"), in connection with the

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<PAGE>

execution, delivery or performance of this Agreement by it and the
consummation by it of the transactions contemplated hereby and
thereby.

(ii) The execution, delivery and performance of this Agreement
does not and will not, and the consummation by it of any of the
transactions contemplated hereby will not, constitute or result in (A)
a breach or violation of, or a default under, its articles of
incorporation or bylaws, or the comparable governing instruments of
any of its subsidiaries, or (B) a breach or violation of, or a default
under, or the acceleration of or the creation of a Lien (with or
without the giving of notice, the lapse of time or both) pursuant to,
any provision of any agreement, lease, contract, note, mortgage,
indenture, arrangement or other obligation ("Contracts") of it or any
of its subsidiaries or any law, rule, ordinance or regulation or
judgment, decree, order, award or governmental or non-governmental
permit or license to which it or any of its subsidiaries is subject,
or any change in the rights or obligations of any party under any of
the Contracts. SCHEDULE 3 to this Agreement contains a list of all
consents of third parties required under any Contracts to be obtained
by it or its subsidiaries prior to consummation of the Merger.

(g) REPORTS AND FINANCIAL STATEMENTS.

(i) With respect to periods since January 1, 1996, each of it and
its subsidiaries has filed all reports and statements, together with
any amendments required to be made with respect thereto, that it was
required to file with (A) the FRB, (B) the FDIC, (C) the Washington
Director, or (D) any other applicable federal or state banking,
insurance, securities, or other regulatory authorities, and, as of
their respective dates (and, in the case of reports or statements
filed prior to the date hereof, without giving effect to any
amendments or modifications filed after the date of this Agreement),
each such report or statement, including the financial statements and
exhibits thereto, complied (or will comply, in the case of reports or
statements filed after the date of this Agreement) as to form in all
respects with all applicable statutes, rules and regulations.

(ii) It has delivered to the other party, a copy of each
registration statement, offering circular, annual report, proxy
statement or information statement filed, used or circulated by it
with respect to periods since January 1, 1996 through the date of this
Agreement and will promptly deliver each such registration statement,
offering circular, report, definitive proxy statement or information
statement filed, used or circulated after the date hereof
(collectively, its "Reports"), each in the form (including exhibits
and any amendments thereto) in the form used or circulated, including
without limitation with respect to Pacific, Pacific's shareholder
offering circular for its holding company reorganization dated
February 26, 1999.

(iii) As of their respective dates (and without giving effect to
any amendments or modifications filed after the date of this
Agreement), each of the

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<PAGE>

Reports, including the financial statements, exhibits and schedules
thereto, filed, used or circulated prior to the date hereof complied
(and each of the Reports filed after the date of this Agreement,
will comply) in all respects with the applicable laws and did not
(or in the case of reports, statements, or circulars filed after the
date of this Agreement, will not) contain any untrue statement of a
fact or omit to state a fact required to be stated therein or
necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.

(iv) Each of its balance sheets included in or incorporated by
reference into its Reports, including the related notes and schedules,
fairly presents (or, in the case of Reports prepared after the date of
this Agreement, will fairly present) the consolidated financial
position of it and its subsidiaries as of the date of such balance
sheet and each of the consolidated statements of income, cash flows
and stockholders' equity included in or incorporated by reference into
its Reports, including any related notes and schedules, fairly
presents (or, in the case of Reports prepared after the date of this
Agreement, will fairly present) the consolidated results of
operations, retained earnings and cash flows, as the case may be, of
it and its subsidiaries for the periods set forth therein (subject, in
the case of unaudited statements, to normal year-end audit
adjustments), in each case in accordance with generally accepted
accounting principles consistently applied during the periods
involved, except as may be noted therein. Collectively, its foregoing
consolidated balance sheets, statements of income, cash flows and
stockholders' equity are referred to as its "Financial Statements".

(v) Its executive officers know of no reason why the allowance
for loan and lease losses shown in its balance sheet dated December
31, 1998 included in its Financial Statements was not adequate as of
such date to provide for estimable and probable losses, net of
recoveries relating to loans previously charged off, inherent in its
loan portfolio.

(h) ASSET CLASSIFICATION. SCHEDULE 4 to this Agreement sets forth a
list, accurate and complete in all material respects, of the aggregate
amounts of loans, extensions of credit and other assets of it and its
subsidiaries that have been criticized or classified as of March 31, 1999
by it, separated by category of classification or criticism (the "Asset
Classification"); and no amounts of loans, extensions of credit or other
assets that have been classified or criticized as of such date by any
representative of any Governmental Entity as "Other Loans Especially
Mentioned," "Substandard," "Doubtful," "Loss" or words of similar effect
are excluded from the amounts disclosed in the Asset Classification, other
than amounts of loans, extensions of credit or other assets that were paid
off or charged off by it or its subsidiaries prior to the date hereof.

(i) ABSENCE OF CERTAIN EVENTS AND CHANGES. Except as disclosed in its
Reports prior to the date of this Agreement, since December 31, 1998, it
and its subsidiaries have conducted their respective businesses only in the
ordinary and usual course of such businesses and, without giving effect to
the second proviso of Section

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<PAGE>

5.2(a) or to Section 5.2(b), there has not been any change or development
or combination of changes or developments which, individually or in the
aggregate, is reasonably likely to result in a Material Adverse Effect
with respect to it (as defined in Section 5.2(b)).

(j) PROPERTIES. Except as disclosed or reserved against in its Reports
or in SCHEDULE 5 to this Agreement, it and its subsidiaries have good and
marketable title, free and clear of all Liens (other than Liens for current
taxes not yet delinquent) to all of the properties and assets, tangible or
intangible, reflected in its Reports as being owned by it or its
subsidiaries as of the date thereof. To the knowledge of its executive
officers, all buildings and all fixtures, equipment and other property and
assets that are material to its business on a consolidated basis and are
held under leases or subleases by it or its subsidiaries are held under
valid leases or subleases enforceable in accordance with their respective
terms (except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors' rights
generally or by general equity principles). SCHEDULE 6 to this Agreement
lists all existing branches and offices of the bank subsidiaries of the
respective parties and all new branches or offices for which application
has been made.

(k) COMPLIANCE WITH LAWS. Except as disclosed in SCHEDULE 7 to this
Agreement, it and each of its subsidiaries:

(i) is in compliance, in the conduct of its business, with all
applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees
applicable thereto or to the employees conducting such businesses,
including, without limitation, the Truth in Lending Act, the Equal
Credit Opportunity Act, the Fair Housing Act, the Community
Reinvestment Act, the Home Mortgage Disclosure Act and all other
applicable fair lending laws or other laws relating to discrimination;

(ii) has all permits, licenses, certificates of authority,
orders, and approvals of, and has made all filings, applications, and
registrations with, federal, state, local, and foreign governmental or
regulatory bodies that are required in order to permit it or such
subsidiary to carry on its business as it is presently conducted;

(iii) has received since January 1, 1998 no notification or
communication from any Governmental Entity (including any bank,
insurance and securities regulatory authorities) or the staff thereof
(A) asserting that it or any of its subsidiaries is not in compliance
with any of the statutes, regulations or ordinances that such
Governmental Entity enforces; (B) threatening to revoke any license,
franchise, permit or governmental authorization; or (C) threatening or
contemplating revocation or limitation of, or which would have the
effect of revoking or limiting, FDIC deposit insurance (nor, to the
knowledge of its executive officers, do any grounds for any of the
foregoing exist); and

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<PAGE>

(iv) is not required to give prior notice to any federal banking
agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive.

(l) LITIGATION. Except as disclosed in its Reports or in SCHEDULE 8,
before the date of this Agreement:

(i) no criminal or administrative investigations or hearings,
before or by any Governmental Entity, or civil, criminal or
administrative actions, suits, claims or proceedings, before or by any
person (including any Governmental Entity) are pending or, to the
knowledge of its Executive Officers, threatened, against it (including
under the Truth in Lending Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Community Reinvestment Act, the Home Mortgage
Disclosure Act, or any other fair lending law or other law relating to
discrimination); and

(ii) neither it nor any officer, director, controlling person or
property of it is a party to or is subject to any order, decree,
agreement, memorandum of understanding or similar arrangement with, or
a commitment letter or similar submission to, any Governmental Entity
charged with the supervision or regulation of depository institutions
or engaged in the insurance of deposits (including the FDIC) or the
supervision or regulation of it, and it has not been advised by any
such Governmental Entity that such Governmental Entity is
contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree,
agreement, memorandum of understanding, commitment letter or similar
submission.

(m) TAXES. For purposes of this Subsection 5.1(m), "Tax" includes
any tax or similar governmental charge, impost, or levy (including income
taxes, franchise taxes, transfer taxes or fees, stamp taxes, sales taxes,
use taxes, excise taxes, ad valorem taxes, withholding taxes, worker's
compensation, payroll taxes, unemployment insurance, social security,
minimum taxes, or windfall profits taxes), together with any related
liabilities, penalties, fines, additions to tax, or interest, imposed by
the United States or any state, county, provincial, local or foreign
government or subdivision or agency of the United States.

(i) All federal, state and local Tax returns, including all
information returns, it is required to file have been timely filed or
requests for extensions have been timely filed. If any extensions were
filed, they have been or will be granted by Closing and will not have
expired. All filed returns are complete and accurate in all material
respects.

(ii) Except as disclosed in its Financial Statements:

(1) all taxes attributable to it that are or were due or
payable (without regard to whether such taxes have been
assessed)

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<PAGE>

have been paid in full or have been adequately
provided for in its Financial Statements in
accordance with GAAP;

(2) adequate provision in accordance with GAAP has been
made in its Financial Statements relating to all Taxes
for the periods covered by such Financial Statements
that were not yet due and payable as of the date of
this Agreement, regardless of whether the liability for
such Taxes is disputed;

(3) as of the date of this Agreement and except as
disclosed in its Financial Statements, there is no
outstanding audit examination, deficiency, refund
litigation or outstanding waiver or agreement extending
the applicable statute of limitations for the
assessment or collection of any Taxes for any period
with respect to any of its Taxes;

(4) all Taxes with respect to completed and settled
examinations or concluded litigation relating to it
have been paid in full or have been recorded on its
Financial Statements (in accordance with GAAP);

(5) it is not a party to a Tax sharing or similar agreement
or any agreement under which it has indemnified any
other party with respect to Taxes; and

(6) the proper and accurate amounts have been withheld from
all employees (and timely paid to the appropriate
Governmental Entity or set aside in an account for
these purposes) for all periods through the Effective
Date in compliance with all Tax withholding provisions
of applicable federal, state, local and foreign laws
(including income, social security and employment tax
withholding for all types of compensation).

(n) INSURANCE. Each of it and its subsidiaries has taken all requisite
action (including without limitation, the making of claims and the giving
of notices) pursuant to its directors' and officers' liability insurance
policy or policies in order to preserve all rights thereunder with respect
to all matters (other than matters arising in connection with this
Agreement and the transactions contemplated hereby) that are known to it.
SCHEDULE 9 to this Agreement contains a list of all directors' and
officers' liability insurance policies and other material insurance
policies maintained by it or its subsidiaries.

(o) LABOR MATTERS. Neither it nor any of its subsidiaries is a party
to, or is bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is
it or any of its subsidiaries

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the subject of any proceeding asserting that it or any such subsidiary
has committed an unfair labor practice or seeking to compel it or such
subsidiary to bargain with any labor organization as to wages or
conditions of employment, nor is there any strike involving it or any of
its subsidiaries pending or, to the knowledge of its executive officers,
threatened, nor are its executive officers aware of any activity
involving its or any of its subsidiaries' employees seeking to certify a
collective bargaining unit or engaging in any other organizational
activity.

(p) EMPLOYEE BENEFITS.

(i) For purposes of this Agreement, "Plan" or "Plans",
individually or collectively, means any "employee benefit plan," as
defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, ("ERISA"), as amended, maintained by it. If it is a
contributing employer to or sponsor of a multi-employer plan or a
single employer plan subject to Title IV of ERISA, such plan is
adequately funded and guaranteed.

(ii) SCHEDULE 10 sets forth a list, as of the date of this
Agreement, of (1) all Plans, stock purchase plans, restricted stock
and stock option plans, and other deferred compensation arrangements,
(2) all other material employee benefit plans that cover employees or
former employees of it (its "Compensation Plans"). True and complete
copies of the Compensation Plans (and, as applicable, copies of
summary plan descriptions, annual reports on Form 5500, actuarial
reports and reports under Financial Accounting Standards Board
Statement No. 106 relating to such Compensation Plans) covering
current or former employees or directors of it (its "Employees"),
including Plans and related amendments, have been made available to
the other party.

(iii) All Plans (other than "multi-employer plans" within the
meaning of ERISA Sections 3(37) or 401(a)(3)), to the extent subject
to ERISA, are in substantial compliance with ERISA. Each Plan that is
an "employee pension benefit plan" within the meaning of ERISA Section
3(2) ("Pension Plan") and that is intended to be qualified under IRC
Section 401(a), has received a favorable determination letter from the
Internal Revenue Service, and it is not aware of any circumstances
likely to result in revocation of any such favorable determination
letter. No litigation relating to Plans is pending or, to the
knowledge of its Executive Officers, threatened. It has not engaged in
a transaction with respect to any Plan that could subject it to a Tax
or penalty imposed by either IRC Section 4975 or ERISA Section 502(i).

(iv) All contributions that it is or was required to make under
the terms of any Plans have been timely made or have been reflected in
its Financial Statements. None of its Plans has an "accumulated
funding deficiency" (whether or not waived) within the meaning of IRC
Section 412 or ERISA Section 302. It has not provided, or is required
to provide, security to any Pension Plan under IRC Section 401(a)(29),
IRC Section 412(f)(3), or ERISA Sections 306 or 307.

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(v) Except as disclosed in its Financial Statements, it does not
have any obligations for retiree health and life benefits.

(vi) No restrictions exist on its rights to amend or terminate
any Plan without incurring liability under the Plan in addition to
normal liabilities for benefits.

(vii) Except as disclosed in its Financial Statements or as
provided in a Schedule to this Agreement, the transactions
contemplated by this Agreement and the Stock Plans will not result in:
(1) vesting, acceleration, or increase of any amounts payable under
any Compensation Plan, (2) any increase in benefits under any
Compensation Plan or (3) payment of any severance or similar
compensation under any Compensation Plan.

(q) ENVIRONMENTAL MATTERS.

(i) For purposes of this Section 5.1(q), the following terms
will have the indicated meaning:

(A) "Subject Property" with respect to a party means (i) all
real property at which the businesses of it has been conducted,
and any property where under any Environmental Law it is deemed
to be the owner or operator of the property; (ii) any facility in
which it participates in the management, including participating
in the management of the owner or operator of the property; and
(iii) all other real property that it, for purposes of any
Environmental Law, otherwise could be deemed to be an owner or
operator of or as otherwise having control over.

(B) "Environmental Laws" means any federal, state, local or
foreign law, regulation, agency policy, order, decree, judgment,
judicial opinion, or any agreement with any Governmental Entity,
presently in effect or subsequently adopted relating to: (i) the
manufacture, generation, transport, use, treatment, storage,
recycling, disposal, release, threatened release or presence of
Hazardous Substances, or (ii) the preservation, restoration or
protection of the environment, natural resources or human health.

(C) "Hazardous Substances" means any hazardous or toxic
substance, material or waste that is regulated by any local
governmental authority, any state government or the United States
Government, including any material or substance that is (a)
defined as a "hazardous substance" in 42 USC Section 9601(14),
(b) defined as a "pollutant or contaminant" in 42 USC Section
9604(a)(2), or (c) defined as a "hazardous waste" in 42 USC
Section 6903(5).

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(D) "Knowledge," with respect to a particular fact, means
that (i) a person is actually aware of such fact or (ii) a
prudent person could be expected to discover or otherwise become
aware of such fact or other matter in the ordinary course of
business.

(ii) Except as disclosed in SCHEDULE 11 and to the Knowledge of
its Executive Officers, it and the Subject Property are, and have
been, in compliance with all applicable Environmental Laws, and no
circumstances exist that with the passage of time or the giving of
notice would be reasonably likely to result in noncompliance with such
Environmental Laws.

(iii) Except as disclosed in SCHEDULE 11 and to the Knowledge of
its Executive Officers, none of the following, and no reasonable basis
for any of the following, exists: pending or threatened claims,
actions, investigations, notices of non-compliance, information
requests or notices of potential responsibility or proceedings
involving it or any Subject Property, relating to:

(A) an asserted liability of it or any prior owner, occupier
or user of Subject Property under any applicable Environmental
Law or the terms and conditions of any permit, license,
authority, settlement, agreement, decree or other obligation
arising under any applicable Environmental Law;

(B) the handling, storage, use, transportation, removal or
disposal of Hazardous Substances;

(C) the actual or threatened discharge, release or emission
of Hazardous Substances from, on or under or within Subject
Property into the air, water, surface water, ground water, land
surface or subsurface strata; or

(D) personal injuries or damage to property related to or
arising out of exposure to Hazardous Substances.

(iv) Except as disclosed in SCHEDULE 11 and to the Knowledge of
its Executive Officers, (i) no storage tanks underground or otherwise
are present on the Subject Property or, if present, none of such tanks
are leaking and each of them is in full compliance with all applicable
Environmental Laws; (ii) it does not own, possess or control any PCBs,
PCB-contaminated fluids, wastes or equipment, or any material amount
of asbestos or asbestos-containing material, and (iii) no Hazardous
Substances have been used, handled, stored, discharged, released or
emitted, or are threatened to be discharged, released or emitted, at
or on any Subject Property, except for those types and quantities of
Hazardous Substances typically used in an office environment and that
have not created conditions requiring remediation under any applicable
Environmental Law.

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(v) Except as disclosed on SCHEDULE 11 and except for the
investigation or monitoring by the Environmental Protection Agency or
similar state agencies in the ordinary course, no part of the Subject
Property has been or is scheduled for investigation or monitoring
under any applicable Environmental Law.

(r) AGREEMENTS.

(i) As of the date of this Agreement and except as disclosed on
Schedule 14, without giving effect to the second proviso of Section
5.2(a) and to Section 5.2(b), except for (A) the Stock Option
Agreements, and (B) arrangements made after the date and in accordance
with the terms of this Agreement, it and its subsidiaries are not
bound by any material contract that is not set forth on a Schedule to
this Agreement (for purposes of this section only, as defined in Item
601(b)(10) of Regulation S-K under the Securities Act) to be performed
after the date hereof.

(ii) Neither it nor any of its subsidiaries is in default under
any contract, agreement, commitment, arrangement, lease, insurance
policy or other instrument.

(s) KNOWLEDGE AS TO CONDITIONS. As of the date of this Agreement, it
and its executive officers and directors know of no reason why the
Regulatory Approvals and, to the extent necessary, any other approvals,
authorizations, filings, registrations, and notices should not be obtained
without the imposition of any condition or restriction described in the
proviso to Section 7.1(b) or the opinion of tax counsel referred to in
Section 7.1(h) cannot be obtained.

(t) BROKERS AND FINDERS. None of it, its subsidiaries or any of their
officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees
in connection with the transactions contemplated herein, except that Harbor
and Pacific have retained Sheshunoff as their respective financial
advisors.

(u) YEAR 2000 COMPLIANCE. It is in full compliance with all applicable
regulatory requirements, guidelines and timetables regarding systems
assessment, systems testing, third-party assessment, and other matters
related to preparation for Year 2000 Compliance. Based on its assessment
and testing conducted to date, it is not aware of anything that cause it to
believe that (1) it will fail in any material way not to timely achieve
Year 2000 Compliance, or (2) expenses related to achieving Year 2000
Compliance will have a material effect on its operations or financial
condition. For purposes of this Agreement, "Year 2000 Compliance" means
that its Information Technology will be capable of use prior to, during,
and after the calendar year 2000 A.D., and that the Information Technology
used during each such time period will accurately receive, provide and
process date/time data (including, but not limited to, calculating,
comparing and sequencing) from, into and between the twentieth and
twenty-first

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centuries, including the years 1999 and 2000 and leap year calculations,
and will not malfunction, cease to function, or provide invalid or
incorrect results as a result of date/time data. For purposes of this
Agreement, "Information Technology" includes computer software, computer
firmware, computer hardware (whether general or specific purpose) or
other similar or related automated or computerized items that are used or
relied on by it in the conduct of its business.

(v) INVESTMENTS. SCHEDULE 12 lists all investments (except investments
in securities issued by federal state or local government or any
subdivision or agency thereof) made by it in an amount greater than $25,000
or which represent an ownership interest of more than 5% in any
corporation, company, partnership, or other entity. All investments comply
with all applicable laws and regulations.

5.2 EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES.

(a) Each exception set forth in a Schedule to this Agreement or in a
Disclosure Letter will be deemed disclosed for purposes of all
representations and warranties; PROVIDED, that (i) no such exception is
required to be set forth in a Schedule if its absence would not result in
the related representation or warranty being deemed untrue or incorrect
under the standard established by Section 5.2(b) and (ii) the mere
inclusion of an exception in a Schedule will not be deemed an admission
by a party that such exception represents a material fact, event or
circumstance or would result in a Material Adverse Effect.

(b) No representation or warranty of Harbor or Pacific contained in
Section 5.1 will be deemed untrue or incorrect, and no party hereto will
be deemed to have breached a representation or warranty, as a consequence
of the existence of any fact, circumstance or event if such fact,
circumstance or event, individually or taken together with all similar
facts, circumstances or events, would not, or, in the case of Section
5.1(i), is not reasonably likely to, have a Material Adverse Effect.

As used in this Agreement, the term "Material Adverse Effect" means
an effect which (i) is materially adverse to the business, financial
condition, results of operations or prospects of Harbor or Pacific or on
the Combined Corporation, as the context may dictate, and its subsidiaries
taken as a whole, (ii) significantly and adversely affects the ability of
Harbor or Pacific, as the context may dictate, to consummate the
transactions contemplated hereby by March 31, 2000 or to perform its
material obligations hereunder or (iii) enables any person to prevent the
consummation by March 31, 2000 of the transactions contemplated hereby;
provided, however, that any effect resulting from (A) actions or
omissions of Harbor or Pacific taken with the prior consent of the other
party or in contemplation of the transactions provided for herein or (B)
circumstances affecting the banking industry in the State of Washington
generally will be deemed not to be a Material Adverse Effect.

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ARTICLE VI
COVENANTS

6.1 CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME. Each of Harbor and
Pacific agrees as to itself and its subsidiaries that, from and after the
date hereof until the Effective Time, except insofar as the other party will
otherwise consent in writing (such consent not to be unreasonably withheld)
or except as otherwise expressly contemplated (i) by this Agreement, (ii) the
Stock Option Agreements, (iii) its Schedules attached to this Agreement, (iv)
its Disclosure Letter or (v) in any other agreements or documents referred in
to or delivered pursuant to this Agreement.

(a) The business of it and its subsidiaries will be conducted only in
the ordinary and usual course and, to the extent consistent therewith, it
and its subsidiaries will use all reasonable efforts to preserve intact
their business organizations and assets and maintain their rights,
franchises and existing relations with customers, suppliers, employees and
business associates and to take no action that would (i) materially
adversely affect the ability of any of them to obtain any necessary
approvals of Governmental Entities required for the transactions
contemplated hereby without imposition of a condition or restriction of the
type referred to in the proviso to Section 7.1(b) or (ii) materially
adversely affect its ability to perform its obligations under this
Agreement.

(b) It will not (i) sell or pledge or agree to sell or pledge or
permit any Lien to exist on any stock owned by it or any of its material
subsidiaries; (ii) amend its articles of incorporation or bylaws; (iii)
split, combine or reclassify any outstanding capital stock; (iv) other than
as permitted by Section 6.2, declare, set aside or pay any dividend payable
in cash, stock or other property with respect to any of its capital stock;
or (v) repurchase, redeem or otherwise acquire, or permit any subsidiary to
purchase or otherwise acquire, directly or indirectly, any shares of its
capital stock or any securities convertible into or exercisable for any
shares of its capital stock (other than such capital stock repurchased
pursuant to any existing plans, disclosed in SCHEDULE 2 to this Agreement).

(c) Notwithstanding anything to the contrary contained in Section 6.3,
neither it nor any of its subsidiaries will (i) issue, sell, pledge,
dispose of or encumber, or authorize or propose the issuance, sale, pledge,
disposition or encumbrance of, any shares of, or securities convertible or
exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of its capital stock of any class, other than
pursuant to the Harbor and Pacific Stock Plans; (ii) transfer, lease,
license, guarantee, sell, mortgage, pledge or dispose of any other material
property or assets or encumber any property or assets other than to a
direct or indirect wholly owned subsidiary of it other than in the ordinary
and usual course of business; (iii) cancel, release, assign or modify any
material amount of indebtedness of any other individual, corporation or
other entity (collectively, a "Person") other than in the ordinary and
usual course of business; or (iv) authorize capital expenditures other than
in the ordinary and usual course of business.

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<PAGE>

(d) Except for internal reorganizations involving existing
subsidiaries, neither it nor any of its subsidiaries will make any material
acquisition of, or investment in, assets or stock of any other Person not
in the ordinary and usual course of business, and will not make application
for permission or take any other material steps to opening any new branch
or office, except as listed on SCHEDULE 6.

(e) Other than in the ordinary course of business consistent with past
practice, it will not incur or permit any of its subsidiaries to incur any
indebtedness for borrowed money or assume, guarantee, endorse or otherwise
as an accommodation become responsible for the obligations of any other
Person or make any loan or advance.

(f) Except as required by agreements or arrangements disclosed in
SCHEDULE 10 to this Agreement, neither it nor any of its subsidiaries will,
without the consent of the other party, (i) grant any increase in
compensation or benefits to its Employees or to its officers, except for
normal increases consistent with past practice or as required by law; (ii)
pay any bonus except as consistent with past practice; (iii) grant any
severance or termination pay to any director, officer or other of its
Employees except as consistent with past practice; (iv) enter into or amend
any employment or severance agreement with any director, officer or other
of its Employees (PROVIDED, that this clause (iv) will not prohibit either
party from approving a renewal or other extension of an existing employment
or severance agreement in accordance with its terms and in the ordinary
course of business); (v) grant any increase in fees or other increases in
compensation or other benefits to any of its present or former directors;
or (vi) effect any change in retirement benefits for any class of its
Employees or officers (unless such change is required by applicable law or,
in the written opinion of counsel, is necessary or advisable to maintain
the tax qualification of any plan under which the retirement benefits are
provided).

(g) Except as may be required to satisfy contractual obligations
existing as of the date hereof and the requirements of applicable law,
neither it nor any of its subsidiaries will establish, adopt, enter into or
make any new, or amend any existing, collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, employee stock ownership, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any directors, officers or employees.

(h) Neither it nor any of its subsidiaries will implement or adopt any
change in its accounting principles, practices or methods, other than as
may be required by generally accepted accounting principles ("GAAP")
consistently applied or other than may be required for tax purposes or to
take advantage of any beneficial tax or accounting methods.

(i) Neither it nor any of its subsidiaries will authorize or enter
into an agreement to take any of the actions referred to in paragraphs (a)
through (h) above.

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6.2 DIVIDENDS. Each of Harbor and Pacific agrees that, from and after
the date hereof until the Effective Time, direct and indirect wholly owned
subsidiaries of each of Harbor and Pacific may (to the extent legally and
contractually permitted to do so), but will not be obligated to, declare and
pay dividends in cash, stock or other property. Unless Harbor and Pacific
otherwise agree in writing, neither Harbor nor Pacific will declare or pay
any dividend or distribution on shares of their capital stock, whether
payable in cash, stock or other property, other than regular annual cash
dividends to shareholders of Harbor and Pacific. With respect to Pacific
only, such dividends will not exceed by more than three percent (3%) the cash
dividend per share paid to shareholders of Pacific in the most recent year
immediately preceding execution of this Agreement. Any dividends paid by
Pacific consistent with the foregoing sentence will be paid as of record and
payment dates that do not result in Pacific shareholders receiving a dividend
from both Pacific and the Combined Corporation in the same calendar year.

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6.3 Acquisition Proposals.

(a) Each of Harbor and Pacific agrees that neither it nor any of its
subsidiaries nor any of its respective officers and directors or the
officers and directors of its subsidiaries will, and it will direct and use
all reasonable efforts to cause its employees, agents and representatives
(including, without limitation, any investment banker, attorney or
accountant retained by it or any of its subsidiaries) not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making
or implementation of any proposal or offer with respect to a merger,
acquisition, consolidation or similar transaction involving, or any
purchase of all or any substantial part of the assets or any equity
securities of, it or any of its subsidiaries, other than (but without in
any manner limiting the covenants contained in Sections 6.1(c)(i) and
(ii)), (i) non-performing assets, (ii) securities of a subsidiary formed
for the sole purpose of holding for sale such assets, in either case which
are otherwise permitted to be sold hereunder, (iii) securities to be issued
in connection with the Harbor and Pacific Stock Plans, or (iv) as disclosed
in any Disclosure Letter (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person (hereinafter referred to as a "Third Party")
relating to an Acquisition Proposal; PROVIDED, HOWEVER, that the Board of
Directors of Harbor or Pacific, on behalf of Harbor or Pacific,
respectively, may furnish or cause to be furnished information and may
participate in such discussions and negotiations directly or through its
representatives if such Board of Directors, after having consulted with and
considered the written advice of outside counsel, has determined that the
failure to provide such information or participate in such negotiations and
discussions would cause the members of such Board of Directors to breach
their fiduciary duties established under Washington law. Pacific will
notify Harbor, and Harbor will notify Pacific, immediately if any such
inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with, it.

(b) With respect to Harbor, if (1) an Acquisition Proposal occurs
prior to the Harbor Meeting, (2) the approval of the Harbor stockholders
contemplated by Section 6.4 is not obtained at the Harbor Meeting, and (3)
prior to June 30, 2000 a Third Party acquires control of Harbor or The Bank
of Grays Harbor by merger, purchase of assets, acquisition of stock or
otherwise, then unless the representations and warranties of Pacific in
this Agreement were false in any material respect on the date of the Harbor
Meeting or Pacific was in material default of its covenants in this
Agreement as of such date, Harbor will promptly pay to Pacific the amount
of $1 million.

(c) With respect to Pacific, if (1) an Acquisition Proposal occurs
prior to the Pacific Meeting, (2) the approval of the Pacific stockholders
contemplated by Section 6.4 is not obtained at the Pacific Meeting, and (3)
prior to June 30, 2000 a Third Party acquires control of Pacific or Bank of
the Pacific by merger, purchase of assets, acquisition of stock or
otherwise, then unless the representations and warranties of Harbor in this
Agreement were false in any material respect on the date of the Pacific

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Meeting or Harbor was in material default of its covenants in this
Agreement as of such date, Pacific will promptly pay to Harbor the amount
of $1 million.

For purposes of Subsections 6.3(b) and (c) of this Agreement, a Third
Party will be deemed to have acquired control of Harbor or Pacific, as the
case may be, when the Third Party possesses, directly or indirectly, the
power to direct or cause the direction of the management and the policies of
Harbor or Pacific, as the case may be, whether through ownership of voting
interests, by contract, or otherwise.

6.4 STOCKHOLDER APPROVALS; ELECTION OF DIRECTORS. Each of Harbor and
Pacific agrees to take, in accordance with applicable law and its respective
articles of incorporation and bylaws, all action necessary to convene a
meeting of holders of Harbor Common Stock (the "Harbor Meeting") and Pacific
Common Stock (the "Pacific Meeting"), respectively, as promptly as
practicable after the Registration Statement (as defined in Section 6.5) is
declared effective to consider and vote upon the approval of the plan of
merger (within the meaning of RCW Section 23B.11.030) contained in this
Agreement. Subject to the next succeeding sentence, the Board of Directors of
each of Harbor and Pacific will recommend such approval to their respective
stockholders, and each of Harbor and Pacific will take all reasonable lawful
action to solicit such approval by its respective stockholders and to obtain
written resignations conditioned upon the occurrence of the Merger from each
director of Harbor and Pacific who will not serve as a director of the
Combined Corporation. The Board of Directors of Harbor or Pacific, acting on
behalf of Harbor or Pacific, respectively, may fail to make such a
recommendation, or withdraw, modify or change any such recommendation if (i)
the affected party fails to receive such "fairness opinion" contemplated by
Section 6.7 of this Agreement or the fairness opinion is withdrawn prior to
the date of the Harbor Meeting or Pacific Meeting, as applicable, or (ii) if
such Board of Directors, after having consulted with and considered the
written advice of outside counsel, has determined that the making of such
recommendation, or the failure so to withdraw, modify or change its
recommendation, would constitute a breach of the fiduciary duties of such
directors established under Washington Law.

6.5 FILINGS; OTHER ACTIONS.

(a) Each of Harbor and Pacific agrees to cooperate in the preparation
of a registration statement on Form S-4 to be filed by Pacific with the SEC
in connection with the issuance of New Common Stock in the Merger
(including the joint proxy statement and prospectus and other proxy
solicitation materials of Harbor and Pacific constituting a part thereof
(the "Joint Proxy Statement"), the "Registration Statement"). Pacific
agrees to use all reasonable efforts to obtain all necessary state
securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement, and Harbor agrees to
furnish all information concerning Harbor and the holders of Harbor capital
stock as may be reasonably requested in connection with any such action.
Harbor and Pacific will also cooperate in the preparation of any 1934 Act
Registration Statement on Form 8-A for the Combined Corporation that may be
prepared in connection with the transactions contemplated by this
Agreement.

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<PAGE>

(b) Each of Harbor and Pacific agrees to cooperate with the other and,
subject to the terms set forth in this Agreement, use reasonable efforts to
prepare and file all necessary documentation, to effect all necessary
applications, notices, petitions, filings and other documents, and to
obtain all necessary permits, consents, orders, approvals and
authorizations of, or any exemption by, all third parties and Governmental
Entities necessary or advisable to consummate the transactions contemplated
by this Agreement, including without limitation the Regulatory Approvals.
Each of Harbor and Pacific will have the right to review in advance, and to
the extent practicable each will consult with the other, in each case
subject to applicable laws relating to the exchange of information, with
respect to all the information relating to the other party, and any of
their respective subsidiaries, which appear in any filing made with, or
written materials submitted to, any third party or any Governmental Entity
in connection with the transactions contemplated by this Agreement. In
exercising the foregoing right, each of the parties hereto agrees to act
reasonably and as promptly as practicable. Each party hereto agrees that it
will consult with the other party hereto with respect to the obtaining of
all permits, consents, approvals and authorizations of all third parties
and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the
other party apprised of the status of matters relating to completion of the
transactions contemplated hereby.

(c) Each party agrees, upon request, to furnish the other party with
all information concerning itself, its subsidiaries, directors, officers
and stockholders and such other matters as may be reasonably necessary or
advisable in connection with the Registration Statement or Joint Proxy
Statement or any other statement, filing, notice or application made by or
on behalf of such other party or any of its subsidiaries to any
Governmental Entity in connection with the Merger, and the other
transactions contemplated by this Agreement.

(d) Each of Harbor and Pacific agrees to consult and cooperate with
the other in effecting actions and measures for the purpose of ensuring the
orderly consummation of the transactions contemplated hereby and the
efficient conduct of the combined businesses of Harbor and Pacific
following the Merger. Without limiting the foregoing, each of Harbor and
Pacific agrees, to the extent consistent with applicable law, to consult
and cooperate with the other in (i) developing a joint business plan for
periods beginning at the Effective Time and (ii) taking reasonable steps in
an effort to enable the Combined Corporation to achieve the objectives
stated in such joint business plan.

6.6 INFORMATION SUPPLIED. Each of Harbor and Pacific agrees, as to
itself and its subsidiaries, that none of the information supplied or to be
supplied by it for inclusion or incorporation by reference in (i) the
Registration Statement will, at the time the Registration Statement and each
amendment and supplement thereto, if any, become effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and (ii) the Joint Proxy Statement and
any amendment or supplement and at the times of the meetings of stockholders
of Harbor and Pacific to be held in connection with this Agreement, contain
any statement which, in the light of the circumstances under which such
statement is made, will be

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<PAGE>

false or misleading with respect to any material fact, or which will omit to
state any material fact necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any earlier
statement in the Joint Proxy Statement or any amendment or supplement
thereto. Neither the Joint Proxy Statement nor the Registration Statement
will be filed, and, prior to the termination of this Agreement, no amendment
or supplement to the Joint Proxy Statement or the Registration Statement will
be filed, by Harbor and Pacific without consultation with the other party and
its counsel.

6.7 ACCOUNTANTS' LETTERS, TAX AND FAIRNESS OPINIONS. Each of Harbor and
Pacific agrees to use all reasonable efforts to cause to be delivered to the
other party, the Pooling Letter required by Section 7.1(g) from Knight Vale
& Gregory, Inc., P.S. ("KVG"), independent auditors, dated as of the
Effective Time. In addition, each party agrees to use all reasonable efforts
to cause to be delivered at or prior to the filing of the Registration
Statement the tax opinion described in Sections 7.2(c) and 7.3(d).
Further, each party agrees to use all reasonable efforts to secure opinions
from their investment banker to the effect that the financial terms of the
Merger are fair from a financial point of view to its stockholders.

6.8 ACCESS. Upon reasonable notice, each party agrees to (and will cause
each of its subsidiaries to) afford the other party's officers, employees,
counsel, accountants and other authorized representatives ("Representatives")
access, during normal business hours throughout the period until the Closing
Date, to its properties, books, contracts and records and, during such
period, such party will (and will cause each of its subsidiaries to) furnish
promptly to the other party all information concerning its business,
properties and personnel as may reasonably be requested; PROVIDED, that no
investigation pursuant to this Section 6.8 will affect or be deemed to modify
any representation or warranty made by the party furnishing such information.
Each party will not, and will cause its respective Representatives not to,
use any information obtained pursuant to this Section 6.8 for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. Subject to the requirements of applicable law, pending
consummation of the transactions herein contemplated, each party conducting
an investigation hereunder will keep confidential, and will cause its
Representatives to keep confidential, all information and documents obtained
from the other party pursuant to this Section 6.8 or during the investigation
leading up to the execution of this Agreement. The agreements between Harbor
and Pacific regarding the confidentiality of such information in effect at
the date hereof (the "Confidentiality Agreements") will continue and survive
in full force and effect until the Effective Time or, in the event this
Agreement is terminated, will continue in accordance with the terms hereof.
Upon any termination of this Agreement, each party will collect and deliver
to the other party all nonpublic documents received by it or any of its
Representatives from the other party and then in their possession and any
copies thereof and destroy or cause to be destroyed all notes, memoranda or
other documents in the possession of it or of its Representatives containing
or reflecting any nonpublic information obtained from the other party, except
to the extent that any such information may be embodied in minutes of the
meetings of such party's Board of Directors or in filings, reports or
submissions to or with any Governmental Entity.

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6.9 NOTIFICATION OF CERTAIN MATTERS. Each of Harbor and Pacific will
give prompt notice to the other of any fact, event or circumstance known to
its executive officers that (i) is reasonably likely to result in any
Material Adverse Effect, (ii) would cause or constitute a material breach of
any of the representations, warranties, covenants or agreements of such party
contained herein or (iii) is reasonably likely to result in the failure of a
condition to consummation set forth in Article VII to be satisfied on or
prior to March 31, 2000.

6.10 PUBLICITY. The initial press release announcing the execution of
this Agreement will be a joint press release and thereafter Harbor and
Pacific will consult with each other prior to issuing any press releases or
otherwise making public statements with respect to the transactions
contemplated hereby and prior to making any filings with any Governmental
Entity.

6.11 OPTIONS, WARRANTS AND BENEFIT PLANS.

(a) OPTIONS. At the Effective Time, by virtue of the Merger, and
without any action on the part of any holder of an option or warrant, each
option or warrant granted by Pacific to purchase shares of Pacific Common
Stock (any such option or warrant to purchase shares of Pacific Common
Stock being referred to as a "Pacific Option") that is outstanding and
unexercised immediately prior thereto (excluding any such option or warrant
the holder of which is then entitled to receive cash in satisfaction
thereof under the terms of such option or warrant) will be converted into
an option or warrant, as the case may be, to purchase shares of New Common
Stock on the same terms and conditions as are in effect immediately prior
to the Effective Time, adjusted as set forth below. Each such Pacific
Option that is converted will be converted into an option or warrant, as
the case may be, to purchase such number of shares of New Common Stock at
an exercise price determined as provided below (and otherwise having the
same duration and other terms as the original Pacific Option):

(i) the number of shares of New Common Stock to be subject to the
new option or warrant will be equal to the product of (A) the number
of shares of Pacific Common Stock purchasable upon exercise of the
original Pacific Option and (B) the Exchange Ratio (rounded to the
nearest whole share, rounding down if the first decimal is four or
less and rounding up if the first decimal is five or more); and

(ii) the exercise price per share of New Common Stock under the
new option or warrant will be equal to (A) the exercise price per
share of Pacific Common Stock under the original Pacific Option
divided by (B) the Exchange Ratio (rounded to two decimals, rounding
down if the third decimal is four or less and rounding up if the third
decimal is five or more).

With respect to any Pacific Options that are "incentive stock options" (as
defined in Section 422 of the Internal Revenue Code), the foregoing
adjustments will be effected in a manner consistent with Section 424(a) of
the Internal Revenue Code. Nothing in this Agreement will affect options or
warrants to purchase shares of Harbor Common Stock outstanding immediately
prior to the Effective Time.

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(b) EXECUTIVE COMMITTEE. The Executive Committee will review the
existing plans, arrangements and agreements of Harbor and Pacific relating
to director compensation and employee compensation and benefits and will
recommend for adoption by the Board of Directors of the Combined
Corporation as soon as practicable after the Effective Time (subject to
shareholder approval if applicable) forms of officer and director
compensation and benefit plans, consistent with paragraph (c) of this
Section 6.11.

(c) BENEFIT PLANS. It is the intent of the parties that the Banks will
continue to maintain separate employee benefit plans for their employees.
With regard to any employees of the Combined Corporation who may not be
covered by either Bank's existing employee benefit plan, the Continuing
Corporation will adopt employee benefit plans substantially commensurate
with the Banks' employee benefit plans.

6.12 EXPENSES. Each of the parties will bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including fees and expenses of its own financial or
other consultants, investment advisors, accountants and counsel, except that
Harbor and Pacific each will bear and pay one-half of (i) all fees and
disbursements incurred in connection with the preparation (including copying
and printing) of the Registration Statement and applications to Governmental
Entities for the approval of the Merger; (ii) all listing, filing or
registration fees, including, without limitation, fees paid for filing the
Registration Statement with the SEC and fees paid for filings with
Governmental Entities; and (iii) all fees paid to Sheshunoff.

6.13 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE.

(a) Each of Harbor and Pacific agrees that from and after the
Effective Time, the Combined Corporation will indemnify and hold harmless
each present and former director and officer of Harbor, Pacific and their
respective subsidiaries, determined as of the Effective Time (the
"Indemnified Parties"), against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative
or investigative, arising out of or pertaining to matters existing or
occurring at or prior to the Effective Time, whether asserted or claimed
prior to, at or after the Effective Time, to the fullest extent that
Harbor, Pacific or such subsidiary would have been permitted under
Washington law and the articles of incorporation or bylaws of Harbor,
Pacific or such subsidiary in effect on the date hereof to indemnify such
person (and the Combined Corporation will also advance expenses as incurred
to the fullest extent permitted under applicable law; PROVIDED, that the
person to whom expenses are advanced provides an undertaking to repay such
advances if it is ultimately determined that such person is not entitled to
indemnification).

(b) To the extent that paragraph (a) will not serve to indemnify and
hold harmless an Indemnified Party, for a period of six years after the
Effective Time, each of Harbor and Pacific agrees that the Combined
Corporation will, subject to the terms set

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<PAGE>

forth herein, indemnify and hold harmless, to the fullest extent
permitted under applicable law (and the Combined Corporation will also
advance expenses as incurred to the fullest extent permitted under
applicable law, PROVIDED, that the person to whom expenses are advanced
provides an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to indemnification), each
Indemnified Party against any Costs incurred in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to the
transactions contemplated by this Agreement. In the event any claim or
claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims will continue until
final disposition of any and all such claims.

(c) Any Indemnified Party wishing to claim indemnification under
Section 6.13(a) or (b), upon learning of any such claim, action, suit,
proceeding or investigation, will promptly notify the Combined Corporation
thereof, but the failure to so notify will not relieve the Combined
Corporation of any liability it may have to such Indemnified Party if such
failure does not materially prejudice the Combined Corporation. In the
event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time), the Combined Corporation will
have the right to assume the defense thereof and the Combined Corporation
will not be liable to such Indemnified Parties for any legal expenses of
other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that, if
the Combined Corporation elects not to assume such defense or counsel for
the Indemnified Parties advises that there are issues which raise conflicts
of interest between the Combined Corporation and the Indemnified Parties,
the Indemnified Parties may retain counsel satisfactory to them, and the
Combined Corporation will pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received. If such indemnity is not available with respect to any
Indemnified Party, then the Combined Corporation and the Indemnified Party
will contribute to the amount payable in such proportion as is appropriate
to reflect relative faults and benefits.

6.14 ANTI-TAKEOVER PROVISIONS. If any "business combination", "control
share" or other state anti-takeover statute or regulation (collectively,
"Anti-takeover Provisions") may become applicable to the transactions
contemplated hereby, each of Harbor and Pacific and the members of their
respective Boards of Directors will grant such approvals and take such
actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and thereby and otherwise act to eliminate or minimize
the effects of any Anti-takeover Provision on any of the transactions
contemplated by this Agreement.

6.15 AFFILIATE AGREEMENTS.

(a) As soon as practicable after the date hereof, Harbor will identify
to Pacific and Pacific will identify to Harbor all persons who are at the
date hereof (or at another reasonably proximate date) possible "affiliates"
of Harbor or Pacific, respectively, as that term is used in paragraphs (c)
and (d) of Rule 145 under the Securities Act and/or

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Accounting Series Releases 130 and 135, as amended, of the SEC
("Affiliates"). Each of Harbor and Pacific will use all reasonable efforts
to obtain a written agreement in the form of EXHIBIT 3 from each person
who is so identified as a possible Affiliate and will deliver copies of
such written agreements to the other party as soon as practicable.

(b) As soon as practicable after the date of the Harbor Meeting or
Pacific Meeting, as applicable, Harbor will identify to Pacific and Pacific
will identify to Harbor all persons who were, at the time of the Harbor
Meeting or the Pacific Meeting, possible Affiliates of Harbor and Pacific,
respectively, and who were not previously identified in accordance with
Section 6.15(a). Each of Harbor and Pacific will use all reasonable
efforts to obtain a written agreement in the form of EXHIBIT 3 from each
person who is so identified and will deliver copies of such written
agreements to the other party as soon as practicable.

6.16 EFFORTS TO CONSUMMATE. Subject to the terms and conditions of this
Agreement, each of Harbor and Pacific agrees to use reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective, as
soon as practicable after the date of this Agreement, the transactions
contemplated hereby, including, without limitation, using reasonable efforts
to lift or rescind any injunctive or restraining order or other order
adversely affecting the ability of the parties to consummate the transactions
contemplated hereby.

6.17 REPORTS. Each of Harbor and Pacific agrees to file, and to cause
its respective subsidiaries to file, all reports required to be filed with
all Governmental Entities pursuant to the Securities Laws or Federal or state
banking laws between the date of this Agreement and the Effective Time, and
to deliver to the other party copies of all such reports promptly after the
same are filed.

6.18 ACCOUNTING AND TAX TREATMENT. Neither Harbor nor Pacific will take,
cause or to the best of its ability permit to be taken any action that would
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment or the qualification of the Merger as a "reorganization"
within the meaning of Section 368 of the Internal Revenue Code.

ARTICLE VII
CONDITIONS

7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each of Harbor and Pacific to consummate the Merger
is subject to the fulfillment or written waiver by Harbor and Pacific prior
to the Effective Time of each of the following conditions:

(a) STOCKHOLDER APPROVAL. The Plan of Merger contained in this
Agreement will have been duly approved by the affirmative vote of the
holders of at least a majority of the outstanding shares of Harbor Common
Stock and of the holders of at least two-

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<PAGE>

thirds of the outstanding shares of Pacific Common Stock, in each case in
accordance with RCW Section 23B.11.030, other applicable law and the
articles of incorporation and bylaws of Harbor and Pacific, respectively.

(b) GOVERNMENTAL AND REGULATORY CONSENTS. The Regulatory Approvals
will have been obtained and will be in full force and effect and all
related waiting periods will have expired; and all other material approvals
and authorizations of, filings and registrations with, and notifications
to, all Governmental Entities required for the consummation of the Merger
and for the prevention of any termination of any material right, privilege,
license or agreement of either Harbor or Pacific or their respective
subsidiaries will have been obtained or made and will be in full force and
effect and all waiting periods required by law will have expired);
PROVIDED, HOWEVER, that none of the preceding will be deemed obtained or
made if it will be conditioned or restricted in a manner that would result
in a Material Adverse Effect on the Combined Corporation.

(c) THIRD PARTY CONSENTS. All consents or approvals of all persons
(other than Governmental Entities) required for or in connection with the
execution, delivery and performance of this Agreement and the consummation
of the Merger will have been obtained and will be in full force and effect,
unless the failure to obtain any such consent or approval is not reasonably
likely to have, individually or in the aggregate, a Material Adverse Effect
on the Combined Corporation.

(d) LITIGATION. No United States or state court or other Governmental
Entity of competent jurisdiction will have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is in effect and prohibits consummation of the transactions
contemplated by this Agreement.

(e) REGISTRATION STATEMENT. The Registration Statement will have
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement will have been issued and no
proceedings for that purpose will have been initiated or threatened by the
SEC.

(f) BLUE SKY APPROVALS. All permits and other authorizations under the
Securities Laws and other authorizations necessary to consummate the
transactions contemplated hereby and to issue the shares of New Common
Stock to be issued in the Merger will have been received and be in full
force and effect.

(g) ACCOUNTANTS' POOLING LETTER. Each of Harbor and Pacific will have
received a letter, dated as of the Effective Time, from KVG to the effect
that the Merger will qualify for pooling-of-interests accounting treatment
under Accounting Principles Board Opinion No. 16, if consummated in
accordance with this Agreement.

(h) TAX OPINION. Pacific and Harbor will have received an opinion of
Graham & Dunn, dated the Closing Date, for the benefit of Pacific and
Harbor and their shareholders, in form and substance reasonably
satisfactory to counsel for Pacific, to the

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<PAGE>

effect that (i) the Merger is a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code, (ii) the Merger will not
result in the recognition of gain or loss to Harbor or Pacific, (iii) no
gain or loss will be recognized by the stockholders of Pacific who
exchange their Old Shares solely for shares of New Common Stock (except
to the extent of any cash paid in lieu of fractional shares, any cash
paid to dissenting shareholders or any state and local transfer taxes
paid on behalf of a stockholder), (iii) the adjusted tax basis of shares
of New Common Stock received by holders of Old Shares who exchange such
Old Shares in the Merger will be the same as the adjusted tax basis of
the Old Shares surrendered therefore (reduced by any amount allocable to
a fractional share interest for which cash is received), and (iv) the
holding period of the shares of New Common Stock received in the Merger
will include the period during which the Old Shares exchanged therefor
were held, provided such Old Shares were held as capital assets at the
Effective Time.

(i) EXECUTION OF EMPLOYMENT AND DIRECTORS AGREEMENTS. The
Shareholder and Directors Agreements in the forms attached to this Agreement
as Exhibits 4 and 5 will have been executed by all directors of Harbor and
Pacific. All of the Employees listed on SCHEDULE 13 will have executed
employment agreements with Harbor, Pacific, The Bank of Grays Harbor or the
Bank of the Pacific, as set forth on SCHEDULE 13.

7.2 CONDITIONS TO OBLIGATION OF PACIFIC. The obligation of Pacific to
consummate the Merger is also subject to the fulfillment or written waiver by
Pacific prior to the Effective Time of each of the following conditions:

(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Harbor set forth in this Agreement will be true and correct (subject to
Section 5.2) as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except that representations and
warranties that by their terms speak as of the date of this Agreement or
some other date will be true and correct as of such date), and Pacific will
have received a certificate, dated the Closing Date, signed on behalf of
Harbor by the Chief Executive Officer of Harbor to such effect.

(b) PERFORMANCE OF OBLIGATIONS OF HARBOR. Harbor will have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and Pacific will have
received a certificate, dated the Closing Date, signed on behalf of Harbor
by the Chief Executive Officer of Harbor to such effect.

(c) ACCOUNTANTS' LETTER. Pacific and its directors and officers who
sign the Registration Statement will have received the letter referred to
in Section 6.7 from KVG, as Harbor's independent auditors.

(d) FAIRNESS OPINION. Pacific will have received immediately prior to
the mailing of the Joint Proxy Statement contained in the Registration
Statement from Sheshunoff the fairness opinion referred to in Section 6.7
of this Agreement.

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<PAGE>

7.3 CONDITIONS TO OBLIGATION OF HARBOR. The obligation of Harbor to
consummate the Merger is also subject to the fulfillment or written waiver by
Harbor prior to the Effective Time of each of the following conditions:

(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Pacific set forth in this Agreement will be true and correct (subject to
Section 5.2) as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except that representations and
warranties that by their terms speak as of the date of this Agreement or
some other date will be true and correct as of such date), and Harbor will
have received a certificate, dated the Closing Date, signed on behalf of
Pacific by the Chief Executive Officer of Pacific to such effect.

(b) PERFORMANCE OF OBLIGATION OF PACIFIC. Pacific will have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date, and Pacific will have
received a certificate, dated the Closing Date, signed on behalf of Pacific
by the Chief Executive Officer of Pacific to such effect.

(c) ACCOUNTANTS' LETTER. Harbor and its directors and officers who
sign the Registration Statement will have received the letter referred to
in Section 6.7 from KVG, as Pacific's independent auditors.

(d) FAIRNESS OPINION. Harbor will have received immediately prior to
the mailing of the Joint Proxy Statement contained in the Registration
Statement from Sheshunoff the fairness opinion referred to in Section 6.7
of this Agreement.

ARTICLE VIII
TERMINATION

8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before
or after the approval by the stockholders of Harbor and Pacific,
respectively, by the mutual consent of Harbor and Pacific, by action of their
respective Boards of Directors.

8.2 TERMINATION BY EITHER HARBOR OR PACIFIC. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of
Directors of either Harbor or Pacific if (i) the Merger will not have been
consummated by March 31, 2000, (ii) any approval or authorization of any
Government Entity, the lack of which would result in the failure to satisfy
the closing condition set forth in Section 7.1(b), will have been denied by
such Governmental Entity or such Governmental Entity will have requested the
withdrawal of any application therefor or indicated an intention to deny, or
imposed a condition of a type referred to in the proviso to Section 7.1(b)
with respect to, such approval or authorization, or (iii) the approval of the
stockholders of Harbor or Pacific referred to in Section 7.1(a) will not
have been obtained at the Harbor Meeting or the Pacific Meeting or at any
adjournment thereof (PROVIDED, that the terminating party is not then in
material breach of its obligations under Section 6.4).

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<PAGE>

8.3 TERMINATION BY PACIFIC. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time by action of the Board
of Directors of Pacific:

(a) before or after the approval by stockholders of Pacific to in
Section 7.1(a), if (i) Harbor will have breached any representation,
warranty, covenant or agreement contained herein that would result in the
failure to satisfy a closing condition set forth in Section 7.2(a) or
7.2(b) and such breach cannot be or has not been cured within 30 days
after the giving of a written notice to Harbor of such breach, (ii) the
Board of Directors of Harbor will have withdrawn, modified or changed in a
manner adverse to Pacific its approval or recommendation of this Agreement,
or (iii) the Board of Directors of Harbor will have authorized or engaged
in any negotiations as permitted by the proviso to the first sentence of
Section 6.3; or

(b) before the adoption and approval by stockholders of Harbor
referred to in Section 7.1(a), if the Board of Directors of Harbor will
have failed to recommend to its stockholders the approval of the agreement
of merger contained in this Agreement, or will have withdrawn, modified or
changed such recommendation, in a manner permitted by the last sentence of
Section 6.4.

8.4 TERMINATION BY HARBOR. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of Harbor:

(a) before or after the approval by the stockholders of Harbor
referred to in Section 7.1(a), if (i) Pacific will have breached any
representation, warranty, covenant or agreement contained herein that would
result in the failure to satisfy the closing condition set forth in Section
7.3(a) or 7.3(b) and such breach cannot be or has not been cured within
30 days after the giving of a written notice to Pacific of such breach,
(ii) the Board of Directors of Pacific will have withdrawn, modified or
changed in a manner adverse to Harbor its approval or recommendation of
this Agreement, or (iii) the Board of Directors of Pacific will have
authorized or engaged in any negotiations as permitted by the proviso to
the first sentence of Section 6.3; or

(b) before the approval by stockholders of Pacific referred to in
Section 7.1(a), if the Board of Directors of Pacific will have failed to
recommend to its stockholders the approval of the agreement of merger
contained in this Agreement, or will have withdrawn, modified or changed
such recommendation, in a manner permitted by the last sentence of Section
6.4.

8.5 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article
VIII, no party to this Agreement will have any liability or further
obligation to any other party hereunder except as set forth in Sections 6.3,
8.6 and 9.1.

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8.6 TERMINATION FEE. Harbor and Pacific acknowledge that each party to this
Agreement has incurred expenses, direct and indirect, in negotiating and
executing this Agreement and in taking steps to effect the Merger. Accordingly,
subject to 6.3:

(a) Harbor will pay to Pacific $250,000 if (1) Harbor did not use all
reasonable efforts to consummate the Merger in accordance with the terms of
this Agreement; (2) Harbor terminates this Agreement for any reason other
than the grounds for termination set forth in Subsection 8.3; or (3)
Pacific terminates this Agreement under Subsection 8.3. If this termination
fee becomes payable, it will be payable on Pacific's demand and must be
paid within 3 business days of the date Pacific makes the demand.

(b) Pacific will pay to Harbor $250,000 if (1) Pacific did not use all
reasonable efforts to consummate the Merger in accordance with the terms of
this Agreement; (2) Pacific terminates this Agreement for any reason other
than the grounds for termination set forth in Subsection 8.3; or (3) Harbor
terminates this Agreement under Subsection 8.4. If this termination fee
becomes payable, it will be payable on Harbor's demand and must be paid
within 3 business days of the date Harbor makes the demand.

ARTICLE IX
MISCELLANEOUS

9.1 SURVIVAL. Only those agreements and covenants of the parties that by
their express terms apply in whole or in part after the Effective Time will
survive the Effective Time. All other representations, warranties, agreements
and covenants will be deemed only to be conditions of the Merger and will not
survive the Effective Time. If the Merger will be abandoned and this
Agreement terminated, the provisions of Section 8.5 will apply and the
agreements of the parties in Sections 6.8 (excluding the first sentence
thereof), 6.10 and 6.12 will survive such abandonment.

9.2 MODIFICATION OR AMENDMENT.

(a) Subject to the applicable provisions of Washington law, at any
time prior to the Closing Date, the parties hereto may modify or amend this
Agreement, by written agreement executed and delivered by duly authorized
officers of the respective parties.

(b) At any time prior to the Effective Time, Harbor and Pacific may
enter into an amendment to this Agreement in accordance with Section
9.2(a) in order to modify the structure of the Merger, or the other
transactions contemplated hereby, or the manner of effecting such
transactions; PROVIDED, that after the approval of the agreement of merger
contained in this Agreement by the stockholders of Harbor and Pacific
referred to in Section 7.1(a), no such amendment will adversely affect
the consideration to be received by the stockholders of Harbor and Pacific,
respectively, unless such amendment is approved by such stockholders of
Harbor or Pacific, respectively, prior to the Effective Time.

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<PAGE>

9.3 WAIVER OF CONDITIONS. The conditions to each party's obligation to
consummate the Merger are for the sole benefit of such party and may be
waived by such party in whole or in part to the extent permitted by
applicable law. No waiver will be effective unless it is in a writing signed
by a duly authorized officer of the waiving party that makes express
reference to the provision or provisions subject to such waiver.

9.4 COUNTERPARTS. For the convenience of each of the parties hereto,
this Agreement may be executed in any number of separate counterparts, each
such counterpart being deemed to be an original instrument, and all such
counterparts will together constitute the same agreement.

9.5 GOVERNINg LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Washington applicable to contract
made and to be performed within such State.

9.6 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the other will be in writing and will be
deemed to have been duly given (i) on the date of delivery if delivered
personally, or by facsimile, upon confirmation of receipt, (ii) on the first
business day following the date of dispatch if delivered by a recognized
next-day courier service, or (iii) on the third business day following the
date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder will be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice.

(a) If to Pacific:

Pacific Financial Corporation
1007 South Pacific
P.O. Box 738
Long Beach, WA 98631
Attention: Dennis A. Long

with a copy to:

Sandra L. Gallagher-Alford, Esq.
Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim
1201 Pacific Avenue, Suite 2200
P.O. Box 1157
Tacoma, WA 98401

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<PAGE>

(b) If to Harbor:

Harbor Bancorp, Inc.
300 East Market
P.O. Box 1826
Aberdeen, WA 98520
Attention: Robert J. Worrell

with a copy to:

Mark C. Lewington, Esq.
Graham & Dunn, P.C.
1420 Fifth Avenue, 33rd Floor
Seattle, WA 98101-2390

9.7 ENTIRE AGREEMENT AND NON-ASSIGNABILITYhh (a) This Agreement
(including its Exhibits and Schedules and any Disclosure Letters), the Stock
Option Agreements and the Confidentiality Agreements constitute the entire
agreement, and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, between the parties,
with respect to the subject matter hereof, and (b) this Agreement will not be
assignable by operation of law or otherwise.

9.8 CAPTIONS. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
will not be deemed to limit or otherwise affect any of the provisions hereof.

9.9 SEVERABILITY. If any provision of this Agreement or the application
thereof to any person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or circumstances
other than those as to which it has been held invalid or unenforceable, will
remain in full force and effect and will in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination, the parties will negotiate in
good faith in an effort to agree upon a suitable and equitable substitute
provision to effect the original intent of the parties. Prior to the
termination of this Agreement in accordance with its terms, the absence of
approval by the stockholders of a party hereto will not render invalid or
inoperative any provision hereof not required to be contained in the plan of
merger to be approved by such stockholders pursuant to RCW Section.23B.11.030
and the articles of incorporation and bylaws of such party.

9.10 NO THIRD PARTY BENEFICIARIES. Nothing contained in this Agreement,
expressed or implied, is intended to confer upon any person or entity other
than the parties hereto, any benefit right or remedies except that the
provisions of Section 6.11(a) will inure to the benefit of the holders of
stock options and Section 3.2 (subject to the limitations set forth in
Section 3.6) and Section 6.13 will inure to the benefit of the persons
referred to therein.

1-40
<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first above
written.

PACIFIC FINANCIAL CORPORATION HARBOR BANCORP, INC.

By:/s/ Dennis Long By:/s/ Robert Worrell
---------------------------------- -------------------------------------
Dennis Long Robert Worrell
President and Chief Executive Officer President and Chief Executive Officer

1-41

<PAGE>

EXHIBIT 1

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

PACIFIC FINANCIAL CORPORATION

* * * * * * * * * * *

ARTICLE I
NAME

The name of the corporation is PACIFIC FINANCIAL CORPORATION.

ARTICLE II

MAIN OFFICE LOCATION

The head office and principal place of business of this corporation is
located in the City of Aberdeen, County of Grays Harbor, State of Washington.

ARTICLE III

CAPITALIZATION

3.1 The total number of shares of stock which the corporation is
authorized to issue is One Million (1,000,000), of which all shares will be
Common Stock with One Dollar ($1.00) par value per share.

3.2 The Board of Directors of the corporation will determine the
preferences, limitations and relative rights of any class of shares before
issuance of any shares of that class and may designate one or more series within
a class as well as the number of shares within that series, before the issuance
of any shares within that series.

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<PAGE>

ARTICLE IV
BOARD OF DIRECTORS

4.1 The Board of Directors will consist of not fewer than five (5) or more
than twenty (20) persons. The exact number within such minimum and maximum
limits will be fixed and determined by resolution of the Board of Directors.

4.2 The Board of Directors will be divided into three classes: Class 1,
Class 2, and Class 3. Each such Class will consist, as nearly as possible, of
one-third of the total number of directors constituting the entire Board of
Directors. Each director will serve for a term ending on the date of the third
annual meeting of shareholders following the annual meeting at which such
director was elected; PROVIDED, HOWEVER, that each initial director in Class 1
will hold office until the annual meeting of shareholders in 2000; each initial
director in Class 2 will hold office until the annual meeting of shareholders in
2001; and each initial director in Class 3 will hold office until the annual
meeting of shareholders in the year 2002.

4.3 If the number of directors is increased or decreased, (i) each
director then serving as such will nevertheless continue as a director of the
Class in which he or she is a member until the expiration of his or her current
term, or his or her earlier resignation, removal from office or death, and (ii)
the newly created or eliminated directorships resulting from such increase or
decrease will be apportioned by the Board of Directors among the three Classes
of directors so as to maintain such Classes as nearly equal as possible.

4.4 Nominations for election to the Board of Directors may be made by the
Board of Directors or by any stockholder of any outstanding class of stock of
the corporation entitled to vote for the election of directors. Nominations,
other than those made by the Board of Directors must be made in writing and
delivered or mailed to the Chairman of the corporation not less than fourteen
(14) days nor more than sixty (60) days prior to any meeting of shareholders
called for the election of directors; provided, however, if less than twenty-one
(21) days' notice of the meeting is given to shareholders, such nominations will
be mailed or delivered not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed. Such notification
will contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the total number of shares of
stock of the corporation that will be voted for each proposed nominee; (d) the
name and address of the notifying shareholder; and (e) the number of shares of
common stock of the corporation owned by the notifying shareholder. Any
nomination not made in accordance with these provisions may, at the discretion
of the Chairperson of the meeting, be disregarded.

ARTICLE V
SHAREHOLDER RIGHTS

2
<PAGE>

5.1 Shareholders will not have a preemptive right to acquire unissued
shares of capital stock of the corporation, whether now or hereafter authorized,
or to acquire any obligations issued or sold which are convertible into stock of
the corporation, other than such rights, if any, as the Board of Directors, in
its discretion, may from time to time determine, and at such price as the Board
of Directors may from time to time fix.

5.2 Each share of the capital stock of this corporation will be entitled
to one vote at all meetings of shareholders. Each shareholder entitled to vote
at any election for directors will have the right to vote, in person or by
proxy, the number of shares owned by him for as many persons as there are
directors to be elected and for whose election he has a right to vote, and no
shareholder will be entitled to cumulate his votes.

5.3 At any time, upon the request of any shareholder or shareholders
holding in the aggregate more than 25 percent of the voting power of all
shareholders, it will be the duty of the Secretary to call a special meeting of
the shareholders.

ARTICLE VI
FAIR PRICE PROVISION

6.1 For purposes of this Article:

(a) An interested shareholder transaction means any transaction
between a corporation, or any subsidiary thereof, and an interested shareholder
of such corporation or an affiliated person to an interested shareholder, that
must be authorized pursuant to applicable law by a vote of the shareholders.

(b) An interested shareholder:

(1) Includes any person or group of affiliated persons who
beneficially own twenty percent or more of the outstanding voting shares of a
corporation. An affiliated person is any person who either acts jointly or in
concert with, or directly or indirectly controls, is controlled by, or is under
common control with another person; and

(2) Excludes any person who, in good faith and not for the
purpose of circumventing this Article, is an agent, custodial bank, broker,
nominee, or trustee for another person, if such other person is not an
interested shareholder under Section 6.1(b)(1) of this Article.

6.2 Except as provided in Section 6.1 of this Article, an interested
shareholder transaction must be approved by the affirmative vote of the holders
of two-thirds of the shares entitled to be counted under this Section 6.2, or if
any class of shares is entitled to vote thereon as a class, then by the
affirmative vote of two-thirds of the shares of each class entitled to be
counted under this Section 6.2 and of the total shares entitled to be counted
under this Section 6.2. All outstanding shares entitled to vote under
applicable law or the Articles of Incorporation will be

3
<PAGE>

entitled to be counted under this Section 6.2, except shares owned by or voted
under the control of an interested shareholder may not be counted to determine
whether shareholders have approved a transaction for purposes of this Section
6.2. The vote of the shares owned by or voted under the control of an
interested shareholder, however, will be counted in determining whether a
transaction is approved under other provisions of applicable law and for
purposes of determining a quorum.

6.3 This Article will not apply to a transaction:

(a) Approved by a majority [60%] vote of the board of directors. For
such purpose, the vote of directors whose votes are otherwise entitled to be
counted under the Articles of Incorporation and applicable law who are directors
or officers of, or have a material financial interest in, an interested
shareholder, or who were nominated for election as a director as a result of an
arrangement with an interested shareholder and first elected as a director
within twenty-four months of the proposed transaction, will not be counted in
determining whether the transaction is approved by such directors; or

(b) In which a majority of directors whose votes are entitled to be
counted under Section 6.3(a) determines that the fair market value of the
consideration to be received by noninterested shareholders for shares of any
class of which shares are owned by any interested shareholder is not less than
the highest fair market value of the consideration paid by any interested
shareholder in acquiring shares of the same class within twenty-four months of
the proposed transaction.

6.4 This Article may be amended or repealed only by the affirmative vote
of the holders of two-thirds of the shares entitled to be counted under this
Section 6.4. All outstanding shares entitled to vote under applicable law or
the Articles of Incorporation will be entitled to be counted under this Section
6.4, except shares owned by or voted under the control of an interested
shareholder may not be counted to determine whether shareholders have voted to
approve the amendment or repeal. The vote of the shares owned by or voted under
the control of an interested shareholder, however, will be counted in
determining whether the amendment or repeal is approved under other provisions
of applicable law and for purposes of determining a quorum.

6.5 The requirements imposed by this Article are to be in addition to, and
not in lieu of, requirements imposed on any transaction by any provision of
applicable law, or any other provision of the Articles of Incorporation, or the
Bylaws or otherwise.

ARTICLE VII
CONSIDERATION OF NON-MONETARY FACTORS

The Board of Directors of the corporation, when evaluating any offer of
another party to (a) make a tender or exchange offer for any equity security of
the corporation, (b) merge or consolidate the corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the corporation, will, in connection with the
exercise of its judgment in determining what is in the best interests of the
corporation and its stockholders, give due consideration to all relevant
factors, including without limitation the

4
<PAGE>

social and economic effects on the employees, customers, suppliers, and other
constituents of the corporation and its subsidiaries and on the communities in
which the corporation and its subsidiaries operate or are located.

ARTICLE VIII
DIRECTOR LIABILITY AND INDEMNIFICATION

8.1 DEFINITIONS. As used in this Article:

(a) The term "Egregious Conduct" by a person will mean acts or
omissions that involve intentional misconduct or a knowing violation of law,
conduct violating Section 23B.08.310 of the Revised Code of Washington, as
amended, or participation in any transaction from which the person will
personally receive a benefit in money, property, or services to which the person
is not legally entitled.

(b) The term "Finally Adjudged" will mean stated in a judgment based
upon clear and convincing evidence by a court having jurisdiction, from which
there is no further right to appeal.

(c) The term "Director" will mean any person who is a director of the
corporation and any person who, while a director of the corporation, is serving
at the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, limited liability
company, partnership, joint venture, trust, or other enterprise, or is a
fiduciary or party in interest in relation to any employee benefit plan covering
any employee of the corporation or of any employer in which it has an ownership
interest; and "conduct as a Director" will include conduct while a Director is
acting in any of such capacities.

(d) The term "Officer-Director" will mean any person who is
simultaneously both an officer and director of the corporation and any person
who, while simultaneously both an officer and director of the corporation, is
serving at the request of the corporation as a director, officer, manager,
partner, trustee, employee, or agent of another foreign or domestic corporation,
limited liability company, partnership, joint venture, trust, or other
enterprise, or is a fiduciary or party in interest in relation to any employee
benefit plan covering any employee of the corporation or of any employer in
which it has an ownership interest; and "conduct as an Officer-Director" will
include conduct while such a person is acting as an officer of the corporation
or in any of such other capacities.

(e) The term "Subsidiary Corporation" will mean any corporation or
limited liability company at least eighty percent of the voting interests of
which is held beneficially by this corporation.

(f) The term "Subsidiary Outside Director" will mean any person who,
while not principally employed by this corporation or any Subsidiary
Corporation, is a director or manager of a Subsidiary Corporation and any such
person who, while a director or manager of a Subsidiary Corporation, is serving
at the request of such corporation as a director, officer, manager,

5
<PAGE>

partner, trustee, employee, or agent of another foreign or domestic
corporation, limited liability company, partnership, joint venture, trust, or
other enterprise, or is a fiduciary or party in interest in relation to any
employee benefit plan covering any employee of such corporation or of any
employer in which it has an ownership interest; and "conduct as a Subsidiary
Outside Director" will include conduct while such a person is acting in any of
such capacities.

8.2 LIABILITY OF DIRECTORS. No Director, Officer-Director, former
Director or former Officer-Director will be personally liable to the corporation
or its shareholders for monetary damages for conduct as a Director or
Officer-Director occurring after the effective date of this Article unless the
conduct is Finally Adjudged to have been Egregious Conduct.

8.3 LIABILITY OF SUBSIDIARY OUTSIDE DIRECTORS. No Subsidiary Outside
Director or former Subsidiary Outside Director will be personally liable in any
action brought directly by this corporation as a shareholder of the Subsidiary
Corporation or derivatively on behalf of the Subsidiary Corporation (or by any
shareholder of this corporation double-derivatively on behalf of this
corporation and the Subsidiary Corporation) for monetary damages for conduct as
a Subsidiary Outside Director occurring after the effective date of this Article
unless the conduct is Finally Adjudged to have been Egregious Conduct.

8.4 MANDATORY INDEMNIFICATION OF DIRECTORS. Subject to Sections 8.7 and
8.8 of this Article, the corporation will indemnify any person who is, or is
threatened to be made, a party to any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, and whether formal or
informal, and whether by or in the right of the corporation or its shareholders
or by any other party, by reason of the fact that the person is or was a
Director, Officer-Director, or Subsidiary Outside Director against judgments,
penalties or penalty taxes, fines, settlements (even if paid or payable to the
corporation or its shareholders or to a Subsidiary Corporation) and reasonable
expenses, including attorneys' fees, actually incurred in connection with such
action, suit or proceeding unless the liability and expenses were on account of
conduct Finally Adjudged to be Egregious Conduct.

8.5 ADVANCING EXPENSES. Except as prohibited by Sections 8.7 and 8.8 of
this Article, the reasonable expenses, including attorneys' fees, of a Director,
Officer-Director, Subsidiary Outside Director, or person formerly serving in any
such capacities, incurred in connection with an action, suit or proceeding in
which the individual is entitled to indemnification under Section 8.4 will be
paid or reimbursed by the corporation, upon request of such person, in advance
of the final disposition of such action, suit or proceeding upon receipt by the
corporation of a written, unsecured promise by the person to repay such amount
if it will be Finally Adjudged that the person is not eligible for
indemnification. All expenses incurred by such person in connection with such
action, suit or proceeding will be considered reasonable unless Finally Adjudged
to be unreasonable.

8.6 PROCEDURE. Except as required by Sections 8.7 and 8.8 of this
Article, no action by the Board of Directors, the shareholders, independent
counsel, or any other person or persons will be necessary or appropriate to the
determination of the corporation's indemnification obligation under this Article
in any specific case, to the determination of the reasonableness of any expenses

6
<PAGE>

incurred by a person entitled to indemnification under this Article, nor to the
authorization of indemnification in any specific case.

8.7 EXCEPTION FOR INTERNAL CLAIMS. Notwithstanding anything else in these
Articles, the corporation will not be obligated to indemnify any person for any
expenses, including attorneys' fees, incurred to assert any claim against the
corporation (except a claim to enforce rights to indemnification) or any person
related to or associated with it, including any person who would be entitled
hereby to indemnification in connection with the claim.

8.8 EXCEPTION FOR REGULATORY CLAIMS.

(a) REGULATORY PROCEEDINGS GENERALLY. Notwithstanding anything else
in these Articles, indemnification of any Director, Officer-Director or
Subsidiary Outside Director, or any person formerly serving in any such
capacities, and advancement of expenses in connection with either an
administrative proceeding or a civil action instituted by a federal banking
agency ("Regulatory Proceedings") will be governed by this Section.

(b) BANKING REGULATIONS DEFINED. The term "Banking Regulations" will
mean any state or federal laws or regulations applicable to the corporation, or
any formal policies adopted by a regulatory agency having jurisdiction over the
corporation.

(c) INDEMNIFICATION IN REGULATORY PROCEEDINGS. The corporation will
provide indemnification and advancement of expenses in connection with
Regulatory Proceedings to the extent permitted, and in the manner prescribed by
Banking Regulations. Insurance and other means to ensure payment of costs and
expenses in Regulatory Proceedings may be obtained or provided to the extent
permitted and in the manner prescribed by Banking Regulations.

(d) FEDERAL DEPOSIT INSURANCE CORPORATION. Notwithstanding anything
else in these Articles, the Articles are subject to the requirements and
limitations set forth in state and federal laws, rules, regulations, and orders
regarding indemnification and prepayment of legal expenses and liabilities,
including Section 18(k) of the Federal Deposit Insurance Act, as amended, and
Part 359 of the Federal Deposit Insurance Corporation's Rules and Regulations or
any successor regulations. To the extent of any conflict between state and
federal law regarding the interpretation and scope of the Articles, federal law
will supercede and control.

8.9 ENFORCEMENT OF RIGHTS. The corporation will indemnify any person
granted indemnification rights under this Article against any reasonable
expenses incurred by the person to enforce such rights.

8.10 SET-OFF OF CLAIMS. Any person granted indemnification rights herein
may directly assert such rights in set-off of any claim raised against the
person by or in the right of the corporation and will be entitled to have the
same tribunal which adjudicates the corporation's claim adjudicate the person's
entitlement to indemnification by the corporation.

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<PAGE>

8.11 CONTINUATION OF RIGHTS. The indemnification rights provided in this
Article will continue as to a person who has ceased to be a Director,
Officer-Director, or Subsidiary Outside Director and will inure to the benefit
of the heirs, executors, and administrators of such person.

8.12 EFFECT OF AMENDMENT OR REPEAL. Any amendment or repeal of this
Article will not adversely affect any right or protection of a Director,
Officer-Director, or Subsidiary Outside Director or person formerly serving in
any of such capacities existing at the time of such amendment or repeal with
respect to acts or omissions occurring prior to such amendment or repeal.

8.13 SEVERABILITY OF PROVISIONS. Each of the substantive provisions of
this Article is separate and independent of the others, so that if any provision
hereof will be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability will not affect the validity or enforceability of
the other provisions.

ARTICLE IX
REPURCHASE OF SHARES

To the extent authorized by the Washington Director of Financial
Institutions and the Federal Deposit Insurance Corporation, as applicable, the
corporation may use its unreserved and unrestricted surplus to purchase its own
shares which will be held as authorized but unissued shares.

ARTICLE X
AMENDMENT TO BYLAWS

The Board of Directors will have full power to adopt, alter, amend, or
repeal the Bylaws or adopt new Bylaws; provided nothing herein will deny the
concurrent power of the shareholders to adopt, alter, amend, or repeal the
Bylaws so long as any Bylaw is not inconsistent with law or these Articles.

ARTICLE XI
AMENDMENT TO ARTICLES

This corporation reserves the right to amend all or change or repeal any
provision contained in its Articles of Incorporation in any manner now or
hereafter prescribed or permitted by law. All rights of shareholders of this
corporation are granted subject to this reservation.

Dated: ______________, 1999.
By:
-------------------------------
Its:
-------------------------------

<PAGE>

EXHIBIT 2

BYLAWS

PACIFIC FINANCIAL CORPORATION

DATED ____________________, 1999

<PAGE>

TABLE OF CONTENTS

PAGE NO.
--------

<S> <C>
Section 1 SHAREHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . .1

1.1 Place. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.3 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.4 Notices of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.5 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.6 Adjourned Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.7 Quorum of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.8 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.9 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . .2

Section 2 BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . .3

2.1 Number and Qualifications. . . . . . . . . . . . . . . . . . . . . . . . .3
2.2 Election - Term of Office. . . . . . . . . . . . . . . . . . . . . . . . .3
2.3 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.5 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.6 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.7 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.8 Notice of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.9 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.10 Quorum of Directors; Attendance. . . . . . . . . . . . . . . . . . . . . .4
2.11 Dissent by Directors . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.12 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.13 Removal of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.14 Executive Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.15 Audit Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.16 Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.17 Rules of Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Section 3 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

3.1 Officers Enumerated - Election . . . . . . . . . . . . . . . . . . . . . .6
3.2 Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.3 Chairperson of the Board . . . . . . . . . . . . . . . . . . . . . . . . .6
3.4 Vice Chairperson of the Board. . . . . . . . . . . . . . . . . . . . . . .6
3.5 Chief Executive Officer. . . . . . . . . . . . . . . . . . . . . . . . . .6
3.6 President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.7 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.8 Secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.9 Treasurer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.10 Other Officers and Agents. . . . . . . . . . . . . . . . . . . . . . . . .7

<PAGE>

3.11 Removal of Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.12 Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
3.13 Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Section 4 BUSINESS OF THE CORPORATION . . . . . . . . . . . . . . . . . . . . . . .8

4.1 Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.2 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.3 Loans to Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . .8
4.4 Checks and Drafts. . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Section 5 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Section 6 STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

6.1 Certificate of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .8
6.2 Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
6.3 Shareholders of Record . . . . . . . . . . . . . . . . . . . . . . . . . .9
6.4 Loss or Destruction of Certificates. . . . . . . . . . . . . . . . . . . .9
6.5 Record Date and Transfer Books . . . . . . . . . . . . . . . . . . . . . .9
6.6 Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
6.7 Preemptive Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Section 7 BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

7.1 Records of Corporate Meetings and Share Register . . . . . . . . . . . . 10
7.2 Reliance on Records. . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 8 CORPORATE SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 9 AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

8.1 By the Shareholders. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.2 By the Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . 10

Section 10 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Section 11 CERTIFICATE OF ADOPTION. . . . . . . . . . . . . . . . . . . . . . . . 11

</TABLE>

<PAGE>

BYLAWS

PACIFIC FINANCIAL CORPORATION

(Incorporated Under the Laws of Washington)

____________________________________________________

SECTION 1

SHAREHOLDERS' MEETINGS

1.1 PLACE. Shareholders' meetings will be held at the principal office of
the corporation, or at any other location within any county in which the
corporation has a branch or office, as will be determined by the Board of
Directors and stated in the notice of meeting.

1.2 ANNUAL MEETING. The annual meeting of the shareholders of the
corporation for the election of directors to succeed those whose terms then
expire and for the transaction of any other business as may properly come before
the meeting will be held each year on the date determined by the Board of
Directors. Failure to hold an election of directors at the annual meeting of
the shareholders, through oversight or otherwise, does not affect the validity
of any corporate action, and a meeting of the shareholders may be held at a
later date for the election of directors and for the transaction of any other
business that may properly come before the meeting. Any election held or other
business transacted at a later meeting will be as valid as if done or transacted
at the annual meeting of the shareholders. Any later meeting will be called in
the same manner as a special meeting of the shareholders, and notice of the
time, place, and purpose of the meeting will be given in the same manner as
notice of a special meeting of the shareholders.

1.3 SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the President, any member of
the Board of Directors, or by the shareholders as set forth in the Articles of
Incorporation.

1.4 NOTICES OF MEETINGS. Written notice stating the date, time, and place
of the meeting and, in the case of a special meeting, the purpose or purposes
for which the meeting is called, will be delivered not less than ten (10) nor
more than sixty (60) days before the date of the meeting, unless a purpose of
the meeting is to act on an amendment to the Articles of Incorporation, a plan
of merger or share exchange, a proposed sale of all or substantially all of the
assets of the corporation, or the dissolution of the corporation, in which case
notice will be delivered not less than twenty (20) nor more than sixty (60) days
before the date of the meeting. Notice of any shareholders' meeting will be
delivered either personally or by mail, by or at the direction of the President,
the Secretary, or the person or persons calling the meeting, to each shareholder
of record entitled to vote at the meeting and to others as required by law. If
mailed, the notice will be deemed to be delivered when deposited in the United
States mail with postage prepaid,

<PAGE>

addressed to the shareholder at his or her address as it appears in the
current records of the corporation.

1.5 WAIVER OF NOTICE. Notice of any shareholders' meeting may be
waived at any time, either before or after the meeting, if the waiver is in
writing, signed by the shareholders entitled to notice, and delivered to the
corporation. A shareholder's attendance at a meeting waives objection to lack
of notice or defective notice of the meeting unless the shareholder objects
at the beginning of the meeting to holding the meeting or transacting
business at the meeting. A shareholder waives objection to consideration of
a particular matter at a meeting that is not within the purpose or purposes
described in the meeting notice unless the shareholder objects to considering
the matter when it is presented.

1.6 ADJOURNED MEETINGS. An adjournment or adjournments of any
shareholders' meeting may be taken until the time and place determined by
those present, without new notice being given, whether by reason of the
failure of a quorum to attend or otherwise. However, any meeting at which
directors are to be elected will be adjourned only from day to day until the
directors are elected.

1.7 QUORUM OF SHAREHOLDERS. A majority of the votes in a voting group
entitled to vote on a matter represented at a shareholders' meeting in person
or by proxy other than solely to object to the meeting or the business to be
transacted, having once been in attendance at the meeting, will constitute a
quorum for that voting group for action taken during the meeting on that
matter. If a quorum is present, action is approved if the votes cast within
the voting group favoring the action exceed the votes cast within the voting
group opposing the action, unless the vote of a greater number is required by
law, the Articles of Incorporation, or these Bylaws. Shareholders may
participate in a meeting of the shareholders by means of a conference
telephone or similar communications equipment by which all persons
participating in the meeting can hear each other during the meeting.
Participation by such means will constitute presence in person at a meeting.

1.8 VOTING OF SHARES. All voting at shareholders' meetings will be by
voice vote unless any qualified voter demands a vote by ballot. A
shareholder may vote either in person or by proxy executed in writing by the
shareholder or his or her duly authorized attorney-in-fact. No proxy will be
valid after eleven (11) months from the date of its execution, unless
otherwise provided in the proxy. Each outstanding share is entitled to one
vote on each matter submitted, and shareholders do not have the right to
cumulate their votes with respect to the election of directors.

1.9 ACTION WITHOUT MEETING. Any action required or permitted to be taken
at a meeting of the shareholders of the corporation may be taken without a
meeting if a written consent resolution, setting forth the action taken, is
signed by all shareholders entitled to vote on the action and is delivered to
the corporation. Once delivered, the

<PAGE>

consent resolution will have the same force and effect as a unanimous vote of
the shareholders.

SECTION 2
BOARD OF DIRECTORS

2.1 NUMBER AND QUALIFICATIONS. All corporate powers will be exercised
by, or under the authority of, and the business and affairs of the
corporation will be managed by a board of directors, the members of which
need not be shareholders of the corporation or residents of the State of
Washington. The range in the number of directors will be as set by the
Articles of Incorporation with the exact number of directors to be determined
by resolution of the Board of Directors from time to time.

2.2 ELECTION - TERM OF OFFICE. The directors will be elected by the
shareholders as set forth in the Articles of Incorporation.

2.3 VACANCIES.

(a) Except as otherwise provided by law and in Section 2.3(b) of
these Bylaws, vacancies in the Board of Directors, whether caused by
resignation, death, or otherwise, may be filled by the remaining directors,
whether constituting a quorum or not, or by the shareholders entitled to
vote for the positions vacated. Directors elected to fill vacancies will
hold office during the unexpired term of their predecessors and until their
successors are elected and qualified.

(b) Pursuant to the Agreement and Plan of Merger dated June 9, 1999
(the "Agreement") for any annual or special meeting held prior to the first
annual meeting of the Effective Time of the Merger, vacancies on the Board
will be filled as set forth in the Agreement.

2.4 COMPENSATION. The directors will receive such reasonable
compensation for their attendance at meetings of the Board and for their
services as members of any committee appointed by the Board as may be
prescribed by the Board of Directors, and may be reimbursed by the
corporation for ordinary and reasonable expenses incurred in the performance
of their duties.

2.5 ANNUAL MEETING. The first meeting of each newly elected Board of
Directors will be the annual meeting of the Board of Directors and will be
held immediately after and at the same place as the annual shareholders'
meeting or any later shareholders' meeting at which a Board of Directors is
elected.

2.6 REGULAR MEETINGS. Regular meetings of the Board of Directors will
be held on the dates and at the times and places decided by resolution of the
Board of Directors.

<PAGE>

2.7 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be held at any time and at any place whenever called by the Chairperson, the
Chief Executive Officer, the President or any two (2) directors of the
corporation.

2.8 NOTICE OF MEETINGS. Notice of the annual or regular meetings of the
Board of Directors is not required. Notice of the date, time, and place of
special meetings of the Board of Directors must be given, by or at the direction
of the Chairperson of the Board, the Chief Executive Officer, the President, the
Secretary, or any person or persons calling the meeting, by mail, facsimile,
radio, telegram, or personal communication over the telephone or otherwise, at
least three (3) days prior to the day on which the meeting is to be held. No
notice need be given if the time and place of the meeting has been fixed by
resolution of the Board of Directors and a copy of the resolution has been
mailed to every director at least three (3) days before the meeting.

2.9 WAIVER OF NOTICE. Notice of any meeting of the Board of Directors
may be waived at any time, either before or after a meeting, if the waiver is
in writing, signed by the director entitled to notice, and delivered to the
corporation. Notice is waived by any director attending or participating in
a meeting unless the director, at the beginning of the meeting or promptly on
the director's arrival, objects to holding the meeting or transacting
business at the meeting and does not vote for or assent to any action taken
at the meeting.

2.10 QUORUM OF DIRECTORS; ATTENDANCE. A majority of the number of
directors fixed in accordance with the Articles of Incorporation or Bylaws
from time to time will constitute a quorum for the transaction of business.
Except as provided in Section 3.2 of the Agreement, the act of a majority of
the directors present at a meeting at which a quorum is present will be the
act of the Board of Directors. Members of the Board of Directors or any
committee designated by the Board of Directors may participate in a meeting
of the Board or committee by means of a conference telephone or similar
communication equipment by which all persons participating in the meeting can
hear each other at the meeting. Participation by such means will constitute
presence in person at a meeting.

2.11 DISSENT BY DIRECTORS. A director of the corporation who is present
at a meeting of its Board of Directors at which action on any corporate
matter is taken will be presumed to have assented to the action unless (a)
the director objects at the beginning of the meeting, or promptly on his or
her arrival, to holding the meeting or transacting business at the meeting;
(b) the director's dissent or abstention from the action taken is entered in
the minutes of the meeting, or (c) the director delivers written notice of
his or her dissent or abstention to the presiding officer of the meeting
before its adjournment or to the corporation within a reasonable time after
adjournment. The right of dissent or abstention is not available to a
director who votes in favor of the action taken.

2.12 ACTION WITHOUT MEETING. Any action which may be or is required to
be taken at a meeting of the Board of Directors, or any action which may be
taken at a meeting of a committee designated by the Board of Directors, may
be taken without a

<PAGE>

meeting if a written consent resolution, setting forth the action taken, is
signed by all of the directors or all of the members of the committee, as the
case may be, and is delivered to the corporation. The fully signed consent
resolution will have the same force and effect as a unanimous vote.

2.13 REMOVAL OF DIRECTORS. One or more directors may be removed, with or
without cause, at a special meeting of shareholders called expressly for that
purpose by a vote of the holders of a majority of the shares then entitled to
vote at an election of directors. Subject to Section 2.3(b) of these Bylaws, any
vacancy caused by such removal may be filled by the shareholders at such
meeting, and any director elected to fill such vacancy will serve only for the
unexpired term of his predecessor in office.

2.14 EXECUTIVE COMMITTEE. By resolution adopted by a majority of the
full Board of Directors, the Board may designate from among its members an
Executive Committee of not less than two (2) members, and may designate one
of such members as chairperson. Any member of the Board may serve as an
alternate member of the Executive Committee in the absence of a regular
member or members. The Executive Committee will have and exercise all of the
authority of the Board of Directors during intervals between meetings of the
Board except that the Executive Committee will not have the authority to: (1)
authorize or approve a distribution except according to a general formula or
method prescribed by the Board of Directors; (2) approve or propose to
shareholders action required to be approved by shareholders; (3) fill
vacancies on the Board of Directors or on any of its committees; (4) amend
the Articles of Incorporation of the corporation; (5) adopt, amend, or repeal
the Bylaws of the corporation; (6) approve a plan of merger not requiring
shareholder approval, or (7) authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and relative
rights, preferences, and limitations of a class or series of shares, except
as authorized by the Board of Directors within limits specifically prescribed
by the board.

2.15 AUDIT COMMITTEE. By resolution adopted by a majority of the full
Board of Directors, the Board may appoint from among its members an Audit
Committee of two (2) or more directors, none of whom will be active officers of
the corporation, and may designate one or more of such members as chairperson of
the Committee. The Board may also designate one or more directors as alternates
to serve as a member of members of the Committee in the absence of a regular
member or members. The Committee will establish and maintain continuing
communications between the Board and the corporation's independent auditors,
internal auditors, and members of financial management with respect to the audit
of the corporation's accounts and financial affairs and the audit of the
corporation's controlled subsidiaries. The Committee will have such other
powers and perform such other duties as may from time to time be prescribed by
the Board of Directors.

2.16 OTHER COMMITTEES. By resolution adopted by a majority of the full
Board of Directors, the board may designate from among its members such other
committees as it may deem necessary, each of which will consist of not less than
two (2) directors and have such powers and duties as may from time to time be
prescribed by the Board.

<PAGE>

2.17 RULES OF PROCEDURE. The majority of the members of any committee
may fix its rules of procedure. All actions by any committee will be
reported in written minutes available at any reasonable time to any Board
member. Such actions will be subject to revision, alteration and approval by
the Board of Directors; provided, that no rights or acts of third parties who
have relied in good faith on the authority granted herein will be affected by
such revision or alteration.

SECTION 3
OFFICERS

3.1 OFFICERS ENUMERATED - ELECTION. The officers of the corporation
may include a Chief Executive Officer, President, Secretary, and Cashier and
one or more Vice Presidents, as well as any assistants to the officers as the
Board of Directors may determine. The Board of Directors, in its discretion,
may also elect a Chairperson of the Board from among the members of the
Board. All officers will be elected by the Board of Directors at its annual
meeting to hold office until their successors are elected and qualified.

3.2 QUALIFICATIONS. None of the officers of the corporation need be a
director, except the Chairperson of the Board who will serve as a presiding
officer. Any two or more offices may be held by the same person.

3.3 CHAIRPERSON OF THE BOARD. The Chairperson of the Board, if any,
will preside over all shareholder and director meetings at which he or she is
present and will perform such other duties as may from time to time be
assigned by the Board of Directors; PROVIDED, however, that the Chairperson
of the Board will not, by reason of his or her office, be considered an
executive officer of the corporation or be assigned executive
responsibilities or participate in the operational management of the
corporation.

3.4 VICE CHAIRPERSON OF THE BOARD. The Vice Chairperson of the Board,
if any, will perform the duties of the Chairman if the Chairman is unable to
perform such duties.

3.5 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer will oversee
the management of the corporation, subject to the authority of the Board of
Directors. The Chief Executive Officer will submit a report of the
operations of the corporation for the preceding year to the shareholders at
their annual meeting. If no Chairperson of the Board is elected by the Board
of Directors or in the absence of the Chairperson or Vice Chairperson, if
any, of the Board, the Chief Executive Officer will preside at all meetings
of the shareholders, and of the Board of Directors if he or she is a member
of the Board. Any shares of stock of another corporation held by the
corporation will be voted by the Chief Executive Officer, subject to
direction from the Board of Directors.

3.6 PRESIDENT. The President will have general day-to-day management
of the business of the corporation. Subject to the authority of the Board of
Directors and the Chief Executive Officer, the President will have general
charge, supervision, and control

<PAGE>

over the business and affairs of the corporation and will be responsible for
its management. The President will perform any other duties assigned to
that office from time to time by the Board of Directors and the Chief
Executive Officer.

3.7 VICE PRESIDENT. If the President is absent or disabled, the Vice
President will have and may exercise and perform the authority and duties of
the President. In addition, the Vice President will perform any other duties
assigned to that office by the Board of Directors or President from time to
time. If more than one Vice President is elected, the Vice Presidents will
have the titles, seniority, and duties established for them by the Board of
Directors.

3.8 SECRETARY. The Secretary will prepare and keep minutes of meetings
of shareholders and directors, will be responsible for authenticating records
of the corporation, and will exercise the usual authority pertaining to the
office of secretary. The Secretary will keep the stock book of the
corporation, a record of certificates representing shares of stock issued by
the corporation, and a record of transfers of certificates. The Secretary
will keep and, when proper, affix the seal of the corporation, if any, and
will perform any other duties assigned to that office by the Board of
Directors or President from time to time.

3.9 TREASURER. The Treasurer will, subject to the direction of the
President, have general custody of all the property, funds and securities of
the corporation and have general supervision of the collection and
disbursement of funds of the corporation. The Treasurer will provide for the
keeping of proper records of all transactions of the corporation and will
perform any other duties assigned to that office by the Board of Directors or
President from time to time.

3.10 OTHER OFFICERS AND AGENTS. The Board of Directors may appoint
other officers and agents as it deems necessary or expedient. Such other
officers will hold their offices for terms as provided in Subsection 3.1
above, and such other agents will hold their positions for the periods
determined from time to time by the Board of Directors. These other officers
and agents will exercise the authority and perform the duties prescribed for
them by the Board of Directors, which authority and duties may include, in
the case of the other officers, one or more of the duties of the named
officers of the corporation.

3.11 REMOVAL OF OFFICERS. Any officer or agent may be removed by the
Board of Directors whenever in its judgment the best interests of the
corporation will be served by doing so. Removal will be without prejudice to
the contract rights, if any, of the person removed. Election or appointment
of an officer or agent will not of itself create contract rights.

3.12 VACANCIES. Vacancies in any office arising from any cause may be
filled by the Board of Directors at any regular or special meeting.

<PAGE>

3.13 SALARIES. Salaries of all officers and agents of the corporation
appointed by the Board of Directors will be fixed by the Board of Directors.

SECTION 4
BUSINESS OF THE CORPORATION

4.1 OBLIGATIONS. The President, CEO and Chairperson of the Board, if
any (or the Vice President in their absence or disability), will have
responsibility for and authority to carry out the normal and regular business
affairs of the corporation. Any agreements or other documents requiring
Board approval will be valid if approved by the Board and signed by the
Chairperson of the Board, the President, or Vice President and attested by
the Secretary or an Assistant Secretary.

4.2 CONTRACTS. The Board of Directors may authorize any officer or
agent to enter into any contract or execute and deliver any instrument in the
name of and on behalf of the corporation. This authority may be general or
confined to specific instances.

4.3 LOANS TO CORPORATION. No loans will be contracted on behalf of the
corporation, and no evidence of indebtedness will be issued in its name,
unless authorized by the Board of Directors. This authority may be general
or confined to specific instances.

4.4 CHECKS AND DRAFTS. All checks, drafts, or other orders for the
payment of money, notes, or other evidence of indebtedness issued in the name
of the corporation will be signed by the officer(s) or agent(s) of the
corporation and in the manner prescribed from time to time by the Board of
Directors.

SECTION 5
INDEMNIFICATION

The corporation may provide indemnification consistent with its Articles of
Incorporation and applicable state and federal laws.

SECTION 6
STOCK

6.1 CERTIFICATE OF STOCK. Certificates of stock will be issued in
numerical order. Each shareholder will be entitled to a certificate signed,
either manually or in facsimile, by the President or Vice President and the
Secretary, or by the Board of Directors. The certificate may be sealed with the
corporate seal. Every certificate of stock will state:

(a) The name of the corporation and the fact that the corporation is
incorporated under the laws of the State of Washington;

<PAGE>

(b) The name of the registered holder of the shares represented by
the certificate; and

6.2 TRANSFER. Shares of stock may be transferred by delivery of the
certificate, accompanied by either an assignment in writing on the back of
the certificate or a separate written assignment and power of attorney to
transfer the same, which in either event is signed by the record holder of
the certificate. No transfer will be valid, except as between the parties to
the transfer, until the transfer is made on the books of the corporation.
Except as otherwise specifically provided in these Bylaws, no shares of stock
will be transferred on the books of the corporation until the outstanding
certificate or certificates representing the transferred stock have been
surrendered to the corporation.

6.3 SHAREHOLDERS OF RECORD. The corporation will be entitled to treat
the holder of record on the books of the corporation of any share or shares
of stock as the holder in fact of those shares for all purposes, including
the payment of dividends on and the right to vote the stock, unless provided
otherwise by the Board of Directors.

6.4 LOSS OR DESTRUCTION OF CERTIFICATES. If any certificate of stock
is lost or destroyed, another may be issued in its place on proof of loss or
destruction and on the giving of a satisfactory bond of indemnity to the
corporation. A new certificate may be issued without requiring any bond
when, in the judgment of any two officers of the corporation, it is proper to
do so.

6.5 RECORD DATE AND TRANSFER BOOKS. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders
or any adjournment thereof, or entitled to receive payment of any dividend,
or in order to make a determination of shareholders for any other proper
purpose, the Board of Directors will make in advance a record date for any
such determination of shareholders. The record date in any case will not be
more than seventy (70) days and, in the case of a meeting of shareholders,
not less than ten (10) days prior to the date on which the particular action
requiring the determination of shareholders is to be taken. If no record
date is fixed for these purposes, the date on which notice of the meeting is
mailed or the date on which the resolution of the Board of Directors
declaring the dividend is adopted, as the case may be, will be the record
date for the determination of shareholders.

6.6 REGULATIONS. The Board of Directors will have the power and
authority to make all rules and regulations it deems expedient concerning the
issue, transfer, conversion, and registration of certificates for shares of
stock of the corporation not inconsistent with these Bylaws, the Articles of
Incorporation, or the laws of the United States or the State of Washington.

6.7 PREEMPTIVE RIGHTS. Shareholders do not have a preemptive right to
acquire unissued shares of stock of the corporation.

<PAGE>

SECTION 7
BOOKS AND RECORDS

7.1 RECORDS OF CORPORATE MEETINGS AND SHARE REGISTER. The corporation
will keep at either its principal place of business, its registered office,
or another place permitted by law, as the Board of Directors may designate,
(a) complete books and records of account and complete minutes or records of
all of the proceedings of the Board of Directors, director committees, and
shareholders, and (b) a record of shareholders, giving the names of the
shareholders in alphabetical order by class of shares and showing their
respective addresses and the number and class of shares held by each.

7.2 RELIANCE ON RECORDS. Any person dealing with the corporation may
rely on a copy of any of the records of the proceedings, resolutions, or
votes of the Board of Directors, director committees, or shareholders when
certified by the President, Vice President, or Secretary.

SECTION 8
CORPORATE SEAL

The corporation may adopt, but will not be required to adopt, a
corporate seal. If a seal is adopted, it will state the name of the
corporation, the year of its incorporation, and the words "corporate seal."

SECTION 9
AMENDMENTS

8.1 BY THE SHAREHOLDERS. These Bylaws may be amended, altered, or
repealed at any regular or special meeting of the shareholders if notice of
the proposed alteration or amendment is contained in the notice of the
meeting.

8.2 BY THE BOARD OF DIRECTORS. Except as provided in Article II of the
Agreement, the Bylaws may be amended, altered, or repealed by the affirmative
vote of a majority of the whole Board of Directors at any regular or special
meeting of the Board, if notice of the proposed alteration or amendment is
contained in the notice of the meeting; provided, however, the Board of
Directors will not amend, alter, or repeal any Bylaw in such manner as to
affect the qualifications, classifications, term of office or compensation of
the directors in any way. Any action of the Board of Directors with respect
to the amendment, alteration or repeal of these Bylaws is hereby made
expressly subject to change or repeal by the shareholders.

SECTION 10
FISCAL YEAR

The fiscal year of the corporation will be the calendar year.

<PAGE>

CERTIFICATE OF ADOPTION

The undersigned, being the Chief Executive Officer of Pacific Financial
Corporation, certifies that these are the Bylaws of the corporation, duly
adopted by the Board of Directors.

DATED this _____ day of _________, 1999.

______________________________
Robert J. Worrell,
Chief Executive Officer

<PAGE>

APPENDIX 2

FAIRNESS OPINION OF HARBOR FINANCIAL ADVISOR

<PAGE>

ALEX SHESHUNOFF & CO.
INVESTMENT BANKING

98 SAN JACINTO BOULEVARD SUITE 1925 AUSTIN, TEXAS 78701
PHONE 512-479-8200 FAX 512-472-8953

August 26, 1999

Board of Directors
Harbor Bancorp, Inc.
300 Market Street
Aberdeen, Washington 98520-5244

Board Members:

You have requested an update of our written opinion dated June 9, 1999, as to
the fairness, from a financial point of view, to the holders of the outstanding
shares of common stock of Harbor Bancorp, Inc. ("Harbor"), Aberdeen, Washington
of the exchange ratio in the proposed merger between Harbor and Pacific
Financial Corporation ("Pacific"), Long Beach, Washington. Pursuant to the
Agreement and Plan of Merger dated June 9, 1999 ("Agreement"), Pacific will be
merged with and into Harbor so that Harbor will be the surviving corporation
operating under the name Pacific Financial Corporation (the "Combined
Corporation"). The outstanding shares of Harbor will remain outstanding as
shares of the Combined Corporation. The outstanding shares of Pacific will be
exchanged pursuant to the exchange ratio set forth in the Agreement.

Alex Sheshunoff & Co. Investment Banking ("Sheshunoff") is regularly engaged in
the valuation of securities in connection with mergers and acquisitions, private
placements, and valuations for estate, corporate, and other purposes.

In connection with our opinion, we have, among other things:

1. Evaluated Call Report information of Harbor and Pacific for the
five-year period ending December 31, 1998 and the consolidated
unaudited financial information for the period ending June 30,
1999 of each;
2. Conducted conversations with executive management regarding recent
and projected financial performance of Harbor and Pacific;
3. Compared recent operating results of Harbor and Pacific with those
of certain other banks in the United States which have recently
engaged in a merger-of-equals transaction;

<PAGE>

Board of Directors
Harbor Bancorp, Inc.
August 26, 1999
Page 2

4. Compared the relative contributions of assets, liabilities,
income, and expenses to the Combined Corporation by Harbor and
Pacific in the merger to those of certain other banks in the
United States which have recently been engaged in a
merger-of-equals transaction;

5. Analyzed the pro-forma results the Combined Corporation could
produce through the year 2003 based on assumptions provided by
management; and

6. Performed such other analyses as we deemed appropriate.

We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information provided to us by Harbor and
Pacific for the purposes of this opinion. In addition, where appropriate, we
have relied upon publicly available information that we believe to be
reliable, accurate and complete; however, we cannot guarantee the
reliability, accuracy or completeness of any such publicly available
information.

We have not made an independent evaluation of the assets or liabilities of
Harbor or Pacific, nor have we been furnished with any such appraisals. We
are not experts in the evaluation of loan portfolios for the purposes of
assessing the adequacy of the allowance for loan and lease losses and have
assumed that such allowances for each of the companies are, in the aggregate,
adequate to cover such losses.

Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date
hereof. Events occurring after the date hereof could materially affect the
assumptions used in preparing this opinion.

The preparation of an opinion involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
those methods to the particular circumstances. Consequently, this opinion is
not readily susceptible to partial analysis of summary description. Moreover,
the evaluation of fairness, from a financial point of view, of the exchange
ratio is to some extent subjective, based on our experience and judgment, and
not merely the result of mathematical analysis of financial data.
Accordingly, notwithstanding the separate factors summarized above, we
believe that our analyses must be considered as a whole and that selecting
portions of our analyses and of the factors considered by us, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying our opinion.

<PAGE>

Board of Directors
Harbor Bancorp, Inc.
August 26, 1999
Page 3

Our opinion is limited to the fairness of the exchange ratio, from a
financial point of view, to the holders of Harbor and of Pacific common
stock, respectively. Moreover, this letter and the opinion expressed herein
do not constitute a recommendation to any stockholder as to any approval of
the merger or the Agreement. It is understood that this letter is for the
information of the Boards of Directors of Harbor and Pacific and may not be
used for any other purpose without our prior written consent.

Based on the foregoing and such other matters we have deemed relevant, it is
our opinion, as of the date hereof, that the exchange ratio of .785 pursuant
to the merger is fair, from a financial point of view, to the stockholders of
Harbor and of Pacific, respectively.

Very truly yours,

/s/

ALEX SHESHUNOFF & CO.
INVESTMENT BANKING

<PAGE>

APPENDIX 3

FAIRNESS OPINION OF PACIFIC FINANCIAL ADVISOR

98 SAN JACINTO BOULEVARD SUITE 1925 AUSTIN, TEXAS 78701
PHONE 512-479-8200 FAX 512-472-8953

<PAGE>

ALEX SHESHUNOFF & CO.
INVESTMENT BANKING

August 26, 1999

Board of Directors
Pacific Financial Corporation
1007 South Pacific
Long Beach, Washington 98631-0738

Board Members:

You have requested an update of our written opinion dated June 9, 1999, as to
the fairness, from a financial point of view, to the holders of the outstanding
shares of common stock of Pacific Financial Corporation. ("Pacific"), Long
Beach, Washington of the exchange ratio in the proposed merger between Pacific
and Harbor Bancorp, Inc. ("Harbor"), Aberdeen, Washington. Pursuant to the
Agreement and Plan of Merger dated June 9, 1999 ("Agreement"), Pacific will be
merged with and into Harbor so that Harbor will be the surviving corporation
operating under the name Pacific Financial Corporation (the "Combined
Corporation"). The outstanding shares of Harbor will remain outstanding as
shares of the Combined Corporation. The outstanding shares of Pacific will be
exchanged pursuant to the exchange ratio set forth in the Agreement.

In connection with our opinion, we have, among other things:

1. Evaluated Call Report information of Harbor and Pacific for the
five-year period ending December 31, 1998 and the consolidated
unaudited financial statements of each for the period ending June
30, 1999;

2. Conducted conversations with executive management regarding recent
and projected financial performance of Harbor and Pacific;

3. Compared recent operating results of Harbor and Pacific with those
of certain other banks in the United States which have recently
engaged in a merger-of-equals transaction;

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Board of Directors
Pacific Financial Corporation
August 26, 1999
Page 2

5. Analyzed the pro-forma results the Combined Corporation could
produce through the year 2003 based on assumptions provided by
management; and

6. Performed such other analyses as we deemed appropriate.

<PAGE>

Board of Directors
Pacific Financial Corporation
August 26, 1999
Page 3

Very truly yours,

/s/

ALEX SHESHUNOFF & CO.
INVESTMENT BANKING

<PAGE>

APPENDIX 4

DISSENTERS' RIGHTS OF APPRAISAL

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TITLE 23B. WASHINGTON BUSINESS CORPORATION ACT
CHAPTER 23B.13. DISSENTERS' RIGHTS

SECTION 23B.13.010 DEFINITIONS. As used in this chapter:

(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.

(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.

(3) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.

(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.

(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.

(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.

(7) "Shareholder" means the record shareholder or the beneficial
shareholder.

SECTION 23B.13.020 RIGHT TO DISSENT.

(1) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:

(a) Consummation of a plan of merger to which the corporation
is a party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the shareholder is
entitled to vote on the merger, or (ii) if the corporation is a subsidiary that
is merged with its parent under RCW 23B.11.040;

(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;

(c) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;

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(d) An amendment of the articles of incorporation that
materially reduces the number of shares owned by the shareholder to a fraction
of a share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or

(e) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are entitled
to dissent and obtain payment for their shares.

(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.

(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:

(a) The proposed corporate action is abandoned or rescinded;

(b) A court having jurisdiction permanently enjoins or sets
aside the corporate action; or

(c) The shareholder's demand for payment is withdrawn with
the written consent of the corporation. 1991 c 269 Section. 37; 1989 c 165
Section. 141.

SECTION 23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.

(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which the
dissenter dissents and the dissenter's other shares were registered in the names
of different shareholders.

(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:

(a) The beneficial shareholder submits to the corporation the
record shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and

(b) The beneficial shareholder does so with respect to all
shares of which such shareholder is the beneficial shareholder or over which
such shareholder has power to direct the vote.
1989 c 165 Section. 142.

SECTION 23B.13.200 NOTICE OF DISSENTERS' RIGHTS.

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.

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(2) If corporate action creating dissenters' rights under RCW
23B.13.020 it taken without a vote of shareholders, the corporation, within ten
days after [the] effective date of such corporate action, shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in RCW 23B.13.220. 1989
c 165 Section. 143.

SECTION 23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT.

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must (a) deliver to the corporation before
the vote is taken written notice of the shareholder's intent to demand payment
for the shareholder's shares if the proposed action is effected, and (b) not
vote such shares in favor of the proposed action.

(2) A shareholder who does not satisfy the requirements of subsection
(1) of this section is not entitled to payment for the shareholder's shares
under this chapter. 1989 c 165 Section. 144.

SECTION 23B.13.220 DISSENTERS' NOTICE.

(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.

(2) The dissenters' notice must be sent within ten days after the
effective date of the corporate action, and must:

(a) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;

(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;

(c) Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of the
shares before that date;

(d) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty nor more than sixty days
after the date the notice in subsection (1) of this section is delivered; and

(e) Be accompanied by a copy of this chapter.

SECTION 23B.13.230 DUTY TO DEMAND PAYMENT.

(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.

(2) The shareholder who demands payment and deposits the shareholder's
share certificates

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under subsection (1) of this section retains all other rights of a shareholder
until the proposed corporate action is effected.

(3) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.

SECTION 23B.13.240 SHARE RESTRICTIONS.

(1) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is effected or the restriction is released under RCW
23B.13.260.

(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.

SECTION 23B.13.250 PAYMENT.

(1) Except as provided in RCW 23B.13.270, within thirty days of the
later of the effective date of the proposed corporate action, or the date the
payment demand is received, the corporation shall pay each dissenter who
complied with RCW 23B.13.230 the amount the corporation estimates to be the fair
value of the shareholders' shares, plus accrued interest.

(2) The payment must be accompanied by:

(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;

(b) An explanation of how the corporation estimated the
fair value of the shares;

(d) A statement of the dissenter's right to demand payment
under RCW 23B.13.280; and

(e) A copy of this chapter.

SECTION 23B.13.260 FAILURE TO TAKE ACTION.

(1) If the corporation does not effect the proposed action within
sixty days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release any transfer restrictions imposed on uncertificated shares.

(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it
must send a new dissenters' notice under RCW 23B.13.220 and repeat the
payment demand procedure.

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SECTION 23B.13.270 AFTER-ACQUIRED SHARES.

(1) A corporation may elect to withhold payment required by RCW
23B.13.250 from a dissenter unless the dissenter was the beneficial owner of
the shares before the date set forth in the dissenters' notice as the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action.

(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action,
it shall estimate the fair value of the shares, plus accrued interest, and
shall pay this amount to each dissenter who agrees to accept it in full
satisfaction of the dissenter's demand. The corporation shall send with its
offer an explanation of how it estimated the fair value of the shares, an
explanation of how the interest was calculated, and a statement of the
dissenter's right to demand payment under RCW 23B.13.280.

SECTION 23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.

(1) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and
amount of interest due, and demand payment of the dissenter's estimate, less
any payment under RCW 23B.13.250, or reject the corporation's offer under RCW
23B.13.270 and demand payment of the dissenter's estimate of the fair value
of the dissenter's shares and interest due, if:

(a) The dissenter believes that the amount paid under RCW
23B.13.250 or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;

(b) The corporation fails to make payment under RCW 23B.13.250
within sixty days after the date set for demanding payment; or

(c) The corporation does not effect the proposed action and
does not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.

(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.

SECTION 23B.13.300 COURT ACTION.

(1) If a demand for payment under RCW 23B.13.280 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.

(2) The corporation shall commence the proceeding in the superior
court of the county where a corporation's principal office, or, if none in
this state, its registered office, is located. If the corporation is a
foreign corporation without a registered office in this state, it shall
commence the proceeding in the county in this state where the registered
office of the domestic corporation merged with or whose shares were acquired
by the foreign corporation was located.

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(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled, parties to the
proceeding as in an action against their shares and all parties must be
served with a copy of the petition. Nonresidents may be served by registered
or certified mail or by publication as provided by law.

(4) The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of
the corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.

(5) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other
civil proceedings.

(6) Each dissenter made a party to the proceeding is entitled to
judgment (a) for the amount, if any, by which the court finds the fair value
of the dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to
withhold payment under RCW 23B.13.270.

SECTION 23B.13.310 COURT COSTS AND COUNSEL FEES.

(1) The court in a proceeding commenced under RCW 23B.13.300 shall
determine all costs of the proceeding, including the reasonable compensation
and expenses of appraisers appointed by the court. The court shall assess the
costs against the corporation, except that the court may assess the costs
against all or some of the dissenters, in amounts the court finds equitable,
to the extent the court finds the dissenters acted arbitrarily, vexatiously,
or not in good faith in demanding payment under RCW 23B.13.280.

(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:

(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially comply with
the requirements of RCW 23B.13.200 through 23B.13.280; or

(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by chapter 23B.13 RCW.

(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.

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