INTERWEST BANCORP INC, 8-K/A, 1998-07-24

INTERWEST BANCORP INC
8-K/A, 1998-07-24
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 8-K/A

PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported) : June 15, 1998

INTERWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)

CHARTERED BY THE STATE OF WASHINGTON
------------------------------------
(State or other jurisdiction of incorporation or organization)

0-26632
-------
Commission file number

91-1691216
----------
(I.R.S. Employer Identification No.)

275 SOUTHEAST PIONEER WAY
OAK HARBOR, WASHINGTON
----------------------
(Address of principal executive offices)

98277
-----
(Zip Code)

Registrant's telephone number including area code: (360) 679-4181
--------------

<PAGE>

Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.

(a) SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS - INTERWEST BANCORP,
INC. - YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 AS RESTATED TO
REFLECT THE MERGERS WITH PACIFIC NORTHWEST BANK, PIONEER BANCORP,
INC., AND PUGET SOUND BANCORP, INC.:

Supplemental Report of Independent Auditors. . . . . . . . . . . . A-1

Supplemental Consolidated Statement of Financial Condition . . . . A-2

Supplemental Consolidated Statements of Income . . . . . . . . . . A-3

Supplemental Consolidated Statements of Stockholders' Equity . . . A-4

Supplemental Consolidated Statements of Cash Flows . . . . . . . . A-5

Notes to Supplemental Consolidated Financial Statements. . . . . . A-7

(b) SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - INTERWEST
BANCORP, INC. - SIX MONTHS ENDED MARCH 31, 1998 AND 1997 AS
RESTATED TO REFLECT THE MERGERS WITH PACIFIC NORTHWEST BANK, PIONEER
BANCORP, INC., AND PUGET SOUND BANCORP, INC.:

Supplemental Condensed Consolidated Statements of Financial
Condition as of March 31, 1998 (Unaudited) and
September 30, 1997. . . . . . . . . . . . . . . . . . . . . . B-1

Supplemental Condensed Consolidated Statements of Income
for the Six months ended March 31, 1998 and 1997
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . B-2

Supplemental Condensed Consolidated Statements of Cash Flows
for the Six months ended March 31, 1998 and 1997
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . B-3

Notes to Unaudited Supplemental Condensed Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . B-5

(c) SUPPLEMENTAL MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996
AND 1995 AS RESTATED TO REFLECT THE MERGERS WITH PACIFIC NORTHWEST
BANK, PIONEER BANCORP, INC., AND PUGET SOUND BANCORP, INC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1

(d) SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31,
1998 AND 1997 AS RESTATED TO REFLECT THE MERGERS WITH PACIFIC
NORTHWEST BANK, PIONEER BANCORP, INC., AND PUGET SOUND BANCORP, INC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1

(e) EXHIBITS.

23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
99.1 Independent Auditors' Report for Central Bancorporation

<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to the report to be signed on its
behalf by the undersigned, there unto duly authorized.

INTERWEST BANCORP,INC.

By /s/ Stephen M. Walden
----------------------
Stephen M. Walden,
President and Chief Executive Officer

Dated: July 23, 1998

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors, InterWest Bancorp, Inc.

We have audited the accompanying supplemental consolidated
statements of financial condition of InterWest Bancorp, Inc., and
subsidiaries as of September 30, 1997 and 1996, and the related supplemental
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 1997. The
supplemental consolidated financial statements give retroactive effect to the
mergers of InterWest Bancorp, Inc. and Puget Sound Bancorp, Inc. on January
15, 1998, Pacific Northwest Bank on June 15, 1998, and Pioneer Bancorp on
June 16, 1998, which have been accounted for using the pooling of interests
method as described in the notes to the supplemental consolidated financial
statements. These supplemental consolidated financial statements are the
responsibility of InterWest's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits. We did not audit the financial statements of Central Bancorporation
and subsidiaries, which statements reflect net income constituting
approximately 14.7 percent of the related 1995 consolidated financial
statement total. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Central Bancorporation and subsidiaries, is based solely on the
report of the other auditors.

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 and the
report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits, and for 1995 the report
of other auditors, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of InterWest Bancorp, Inc., and subsidiaries at September
30, 1997 and 1996, and the supplemental consolidated results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1997, after giving retroactive effect to the mergers
described in the notes to the supplemental consolidated financial statements,
in conformity with generally accepted accounting principles.

As described in Note 2 to the supplemental consolidated
financial statements, InterWest Bancorp, Inc. adopted certain new accounting
standards in fiscal year 1997 as required by the Financial Accounting
Standards Board.

Ernst & Young LLP
Seattle, Washington
October 30, 1997, except for Note 23 as to which the date is June 16, 1998

A-1
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SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

September 30,

DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

Cash and cash equivalents
Non-interest bearing $68,953 $60,078
Interest-bearing deposits in banks 166,935 18,571
Federal funds sold 12,225 1,325
Securities available for sale, at fair value 563,167 416,831
Securities held to maturity (fair value: 1997--$129,470 and 1996--$248,962) 132,295 255,507
Loans receivable, net 1,338,451 1,159,048
Loans held for sale (fair value: 1997--$10,451 and 1996--$11,396) 10,230 11,223
Accrued interest receivable 14,551 14,320
Real estate held for sale and for development 12,414 10,968
Federal Home Loan Bank (FHLB) stock, at cost 27,211 21,537
Premises and equipment, net 47,381 39,089
Intangible assets 4,291 3,992
Other assets 4,824 3,596
-------------------------
Total assets $2,402,928 $2,016,085
-------------------------

LIABILITIES

Non-interest bearing deposits $150,428 $123,018
Interest-bearing deposits 1,318,032 1,266,384
-------------------------
Total deposits 1,468,460 1,389,402

FHLB advances 494,648 343,035
Securities sold under agreements to repurchase 258,993 119,945
Accrued expenses and other liabilities 17,730 22,343
Other borrowings 2,327 3,713
-------------------------
Total liabilities 2,242,158 1,878,438

STOCKHOLDERS' EQUITY

Common stock, par value $.20 per share
Authorized shares 20,000,000
Issued and outstanding: 1997--10,443,208 shares and 1996--10,273,418 shares 2,092 2,063
Paid-in capital 34,018 32,370
Retained earnings 126,064 106,739
Treasury stock (289) (289)
Debt related to employee stock ownership plan (ESOP) -- (312)
Net unrealized loss on securities available for sale, net of tax (1,115) (2,924)
-------------------------
Total stockholders' equity 160,770 137,647
-------------------------
Total liabilities and stockholders' equity $2,402,928 $2,016,085
-------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME

Year ended September 30,

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME

Loans receivable and loans held for sale $115,053 $101,292 $86,206
Securities available for sale 35,201 23,452 7,654
Securities held to maturity 12,362 15,427 23,901
Other 2,590 3,656 1,970
---------------------------------------
165,206 143,827 119,731

INTEREST EXPENSE

Deposits 61,007 56,083 52,615
FHLB advances and other borrowings 19,708 17,851 10,932
Securities sold under agreements to repurchase 10,366 3,193 1,572
---------------------------------------
91,081 77,127 65,119

Net interest income before provision for losses on loans 74,125 66,700 54,612
Provision for losses on loans 1,508 2,452 929
---------------------------------------
Net interest income after provision for losses on loans 72,617 64,248 53,683

NONINTEREST INCOME

Gain on sale of loans 4,209 1,989 2,042
Gain on sale of loan servicing -- -- 1,831
Service fees 9,452 8,675 5,613
Investment product fees and insurance commissions 2,172 2,302 2,221
Gain on sale of securities available for sale 587 584 335
Gain on sale of real estate held for sale and for development 346 806 16
Other 1,879 1,388 972
---------------------------------------
18,645 15,744 13,030

NONINTEREST EXPENSE

Compensation and employee benefits 28,112 25,572 20,479
General and administrative 13,707 11,046 9,931
Occupancy 7,665 6,650 5,646
Data processing 3,535 2,635 2,173
FDIC premium assessment 428 1,998 2,063
Loss (credit) from real estate write-downs and operations 585 (813) 426
SAIF assessment -- 5,523 --
Special charges -- 3,105 --
---------------------------------------
54,032 55,716 40,718

Income before income taxes 37,230 24,276 25,995

Income Tax Expense 12,681 7,785 8,721
---------------------------------------
Net Income $24,549 $16,491 $17,274
---------------------------------------
---------------------------------------
Basic Net Income Per Share $ 2.37 $ 1.61 $ 1.70
---------------------------------------
---------------------------------------
Diluted Net Income Per Share $ 2.30 $ 1.57 $ 1.67
---------------------------------------
---------------------------------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A-3
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SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Securities
Debt Available
Common Stock Paid-In Retained Treasury Related for Sale,
Shares Amount Capital Earnings Stock to ESOP Net of Tax Total
- ---------------------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1994 10,185,417 $2,038 $31,372 $80,826 $ -- $ -- $ (1,026) $113,210

Net income 17,274 17,274
Dividends,
$0.29 per share (2,940) (2,940)
Proceeds from exercise
of stock options 59,647 12 359 371
Proceeds from sale of
common stock, net 5,658 1 67 68
Unrealized gain
on securities
available for sale 1,900 1,900
Purchase of
treasury stock (18,500) (289) (289)
Debt related to ESOP (55,926) (712) (712)
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 10,176,296 2,051 31,798 95,160 (289) (712) 874 128,882

Net income 16,491 16,491
Dividends,
$0.43 per share (4,439) (4,439)
Proceeds from exercise
of stock options 58,885 11 492 503
Proceeds from sale of
common stock, net 6,087 1 80 81
Unrealized loss
on securities
available for sale (3,798) (3,798)
ESOP loan repayment 32,150 400 400
Pooling accounting adjustment (473) (473)
- ---------------------------------------------------------------------------------------------------------------------------------

SEPTEMBER 30, 1996 10,273,418 2,063 32,370 106,739 (289) (312) (2,924) 137,647

Net income 24,549 24,549
Dividends,
$0.50 per share (5,224) (5,224)
Proceeds from exercise
of stock options 157,342 31 2,022 2,053
Proceeds from sale of
common stock, net 12,525 3 191 194
Unrealized gain
on securities
available for sale 1,809 1,809
Common stock repurchased
and retired (23,853) (5) (565) (570)
ESOP loan repayment 23,776 312 312
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 10,443,208 $2,092 $34,018 $126,064 $(289) $ --- $(1,115) $160,770
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A-4
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SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended September 30,

DOLLARS IN THOUSANDS 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES

Net income $24,549 $16,491 $17,274
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,781 3,007 2,517
Provision for losses on loans 1,508 2,452 929
Provision (benefit) for losses on real estate held for sale 196 (1,000) 250
Accretion of premiums and discounts, net 1,249 2,187 1,038
Gain on sale of loans and loan servicing (4,209) (1,989) (3,873)
Gain on sale of securities available for sale (587) (584) (335)
Gain on sale of real estate held for sale and
for development (346) (806) (16)
Loan fees deferred, net of amortization 1,192 1,464 1,118
FHLB stock dividends (1,551) (1,536) (1,093)
Pooling accounting adjustment -- (473) --
Cash provided (used) by changes in operating assets
and liabilities:
Accrued interest receivable (231) (3,285) (2,309)
Other assets (996) 1,679 (884)
Accrued expenses and other liabilities (6,054) 12,501 2,302
-------------------------------------
BALANCE, net cash provided by operating activities $18,501 $30,108 $16,918

INVESTING ACTIVITIES

Proceeds from sale of securities available for sale 359,641 173,847 82,930
Purchases of securities available for sale (634,115) (300,250) (197,087)
Proceeds from maturing securities available for sale 113,433 26,074 14,323
Proceeds from maturing securities held to maturity 232,471 39,016 24,707
Purchases of securities held to maturity (118,673) (173,013) (26,105)
Principal repayments on securities available for sale 61,567 64,148 3,102
Principal repayments on securities held to maturity 7,259 21,217 18,904
Proceeds from sale of loans 87,807 83,858 97,450
Net increase in loans receivable (312,024) (222,913) (238,059)
Proceeds from sale of loan servicing -- -- 1,831
Proceeds from sale of real estate
held for sale and for development 4,064 2,492 1,774
Purchases of premises and equipment (12,797) (8,662) (10,194)
Purchases of FHLB stock (9,331) (5,825) (3,764)
Redemption of FHLB stock 6,400 2,500 646
Improvements capitalized to real estate held for sale (1,894) (2,749) (1,528)
Net decrease (increase) in federal funds sold (10,425) 6,405 4,140
Intangible assets acquired through acquisitions -- (1,530) --
-------------------------------------
BALANCE, net cash used by investing activities $(226,617) $(295,385) $(226,930)
</TABLE>

CONTINUED ON FOLLOWING PAGE

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A-5
<PAGE>

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Year ended September 30,

Dollars in thousands 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

FINANCING ACTIVITIES

Net increase in deposits 47,753 51,018 7,008
Net increase in certificates of deposit 31,305 77,438 99,584
Proceeds from FHLB advances, securities sold under agreements
to repurchase, and other borrowings 1,459,216 654,071 534,459
Repayment of FHLB advances, securities sold under agreements
to repurchase, and other borrowings (1,169,629) (508,910) (422,782)
Dividends paid (4,966) (3,986) (2,874)
Issuance of common stock from exercise of stock options 2,246 584 439
Repurchase and retirement of common stock (570) --- --
Repurchase of common stock -- -- (289)
-------------------------------------
Net cash provided by financing activities 365,355 270,215 215,545

Net increase in cash and cash equivalents 157,239 4,938 5,533

CASH AND CASH EQUIVALENTS

Beginning of year 78,649 73,711 68,178
-------------------------------------
End of year $235,888 $78,649 $73,711
-------------------------------------
-------------------------------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the year for:
Interest $89,762 $76,050 $64,167
Income taxes 9,829 9,810 7,594
Noncash transactions:
Loans receivable transferred to real estate held for sale, net 2,274 1,695 317
Premises and equipment transferred to real estate
held for sale 1,179 -- --
Loans receivable securitized as securities available for sale 43,810 -- --
Transfer of securities from held to
maturity to available for sale -- 210,640 5,867
ESOP loan repayment 312 400 --
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A-6
<PAGE>

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of InterWest Bancorp, Inc., and its wholly-owned subsidiaries
(collectively, InterWest). InterWest Bancorp Inc.'s wholly-owned subsidiaries
are InterWest Bank, Pacific Northwest Bank, Pioneer National Bank and First
National Bank of Port Orchard. All material inter-company transactions and
balances have been eliminated. On July 28, 1995, InterWest Bank reorganized into
the holding company form of ownership resulting in InterWest Bancorp, Inc.
becoming the sole stockholder of InterWest Bank. In the reorganization, each
outstanding share of common stock of InterWest Bank and options to acquire
shares of common stock of InterWest Bank were converted to shares or options for
shares of InterWest Bancorp, Inc.

On August 31, 1996, InterWest Bancorp, Inc. acquired Central Bancorporation
(Central) of Wenatchee, Washington, whose principle subsidiary was Central
Washington Bank. Central Washington Bank was merged into InterWest Bank
effective October 14, 1996. On January 15, 1998, InterWest Bancorp, Inc.
acquired Puget Sound Bancorp (Puget) of Port Orchard, Washington, whose
subsidiary bank was First National Bank of Port Orchard. On June 15, 1998,
InterWest Bancorp, Inc. acquired Pacific Northwest Bank (Pacific) of Seattle,
Washington. On June 16, 1998, InterWest Bancorp, Inc. acquired Pioneer Bancorp
(Pioneer) of Yakima, Washington, whose subsidiary bank was Pioneer National
Bank. These transactions have been accounted for as pooling-of-interests.
Accordingly, InterWest's consolidated financial statements have been restated
for all periods prior to the previously discussed acquisitions to include the
accounts and operations of Central, Puget, Pacific and Pioneer as if the
companies were combined for all periods presented. These consolidated financial
statements giving retroactive effect to the mergers of Central, Puget, Pacific
and Pioneer will become the historical consolidated financial statements. In
accordance with generally accepted accounting principles, the December 31 fiscal
year end of Central, Puget, Pacific and Pioneer has been incorporated with
InterWest's September 30 fiscal year end.

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that impact amounts reported in the financial statements. Changes in
these estimates and assumptions are considered reasonably possible and may have
a material impact on the financial statements and thus actual results could
differ from the amounts reported and disclosed herein.

NATURE OF BUSINESS--InterWest Bancorp, Inc. is a multi-bank holding company
incorporated in Washington state. Through its subsidiaries, a wide range of
financial services are offered to individuals and businesses throughout western
and central Washington state. Financial services of InterWest include the
traditional banking activities of accepting deposits from the general public and
making residential loans, consumer loans and certain types of commercial real
estate loans. The mergers with Central, Puget, Pacific and Pioneer have provided
InterWest with access to the business segment of commercial banking.

Investments are available through InterWest Financial Services Inc., and
insurance products are provided by InterWest Insurance Agency Inc., subsidiaries
of InterWest Bank.

CASH AND CASH EQUIVALENTS--For purposes of the consolidated statements of cash
flows, InterWest considers all deposits and securities with an original term to
maturity of three months or less to be cash equivalents.

SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY--Those securities
that InterWest has the positive intent and ability to hold to maturity are
classified as held to maturity and are recorded at cost, net of unamortized
discounts or premiums. Discounts are accreted and premiums are amortized using
the effective yield method to maturity of the securities. Such accretion and
amortization is included as interest income on investment securities.
Securities are adjusted to the lower of cost or fair value only when an other
than temporary impairment in value occurs.

Those securities that are not classified as held to maturity are classified
as available for sale, and are carried at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity. The basis of securities subsequently sold is determined by
the specific identification method.

LOANS RECEIVABLE AND LOANS HELD FOR SALE--Loans receivable are stated at the
principal amount outstanding, net of deferred loan fees, any discounts and the
allowance for losses on loans. Loans intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to income.

LOAN FEE INCOME, INTEREST INCOME ON LOANS RECEIVABLE AND UNEARNED INTEREST--
Loan origination fees and direct costs related to loan origination activities
are deferred and amortized into interest income over contractual or actual loan
lives as an adjustment to the loan yield. Deferred fees and costs related to
loans sold

A-7
<PAGE>

are recognized into income at the time the loans are sold. Interest
is accrued on loans receivable until the loan is 90 days delinquent or
management doubts the collectibility of the loan or the unpaid interest, at
which time InterWest establishes a reserve for any accrued interest.

If management determines the ultimate collectibility of principal is in
doubt, cash receipts on nonaccrual loans are applied to reduce the principal
balance.

ALLOWANCE FOR LOSSES ON LOANS--The allowance for losses on loans is maintained
at a level sufficient to provide for estimated losses based on evaluating known
and inherent risks in the loan portfolio and upon management's continuing
analysis of the factors underlying the quality of the loan portfolio. These
factors include changes in the size and composition of the loan portfolio,
actual loan loss experience, current economic conditions, and detailed analysis
of individual loans for which full collectibility may not be assured. The
appropriate reserve level is estimated based upon factors and trends identified
by management at the time financial statements are prepared.

When available information confirms that specific loans or portions thereof
are uncollectible, these amounts are charged-off against the allowance for
losses on loans. The existence of some or all of the following criteria will
generally confirm that a loss has been incurred: the loan is significantly
delinquent and the borrower has not evidenced the ability or intent to bring the
loan current; InterWest has no recourse to the borrower, or if it does, the
borrower has insufficient assets to pay the debt; the fair value of the loan
collateral is significantly below the current loan balance, and there is little
or no near-term prospect for improvement.

On October 1, 1995, InterWest adopted Statement of Financial Accounting
Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of a Loan" as
amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures." It is applicable to all loans except large groups
of smaller-balance homogenous loans that are collectively evaluated for
impairment, and loans that are measured at fair value or at the lower of cost or
fair value. InterWest considers all single-family residential (including
construction) and consumer loans to be smaller balance homogenous loans. A loan
is impaired when it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. SFAS No.
114 requires that the valuation of impaired loans be based on the present value
of expected future cash flows discounted at the loans effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Generally,
InterWest evaluates a loan for impairment in accordance with SFAS No. 114 when
it is placed on nonaccrual status or if a loan is internally risk rated as
substandard or doubtful. The detailed analysis includes techniques to estimate
the fair value of the loan collateral and the existence of potential alternative
sources of repayment.

A provision for losses on loans, which is a charge against income, is added
to the allowance for losses on loans based on quarterly assessments of the loan
portfolio. While management has attributed the allowance for losses on loans to
various loan portfolio segments, the allowance is general in nature and is
available for the loan portfolio in its entirety.

The ultimate recovery of all loans is susceptible to future market factors
beyond InterWest's control. These factors may result in losses or recoveries
differing significantly from those provided in the financial statements.

REAL ESTATE HELD FOR SALE AND REAL ESTATE HELD FOR DEVELOPMENT--Real estate
held for sale and real estate held for development (collectively, real estate)
includes properties acquired through foreclosure, property acquired with the
intention of holding for development, and investments in real estate joint
ventures. These properties are initially recorded at the lower of cost or fair
value and are subsequently evaluated to determine that the carrying value does
not exceed the fair value of the property. Development costs including materials
and labor are capitalized on properties in development. Losses that result from
ongoing periodic valuation of these properties are charged to operations in the
period in which they are identified and are included in loss from real estate
write-downs and operations in the consolidated statements of income. The amounts
InterWest will ultimately recover from real estate held for sale and held for
development may differ substantially from the carrying value of the assets
because of future market factors beyond InterWest's control or because of
changes in InterWest's strategy for sale or development of the property.

PREMISES AND EQUIPMENT--Premises and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed on the straight-line
method over estimated useful lives of up to forty years for bank buildings and
three to twenty years for furniture and equipment.

INTANGIBLE ASSETS--Intangible assets arising from certain branch and other
acquisitions represent the excess of the purchase price over fair value of net
assets acquired. Intangible loan servicing assets are recorded when loans are
originated and subsequently sold with the servicing rights retained. Intangible
assets are amortized using the straight-line and accelerated methods over
periods not exceeding fifteen years. InterWest periodically evaluates intangible
assets for impairment. The level of intangible assets at September 30, 1997,
was supported by the value attributed to the operations acquired.

A-8
<PAGE>

INCOME TAXES--InterWest accounts for income taxes on the liability method.
Under the liability method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in InterWest's income tax
returns. The deferred tax provision for the year is equal to the net change in
the deferred tax asset and liability accounts from the beginning to the end of
the year. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.

NET INCOME PER SHARE--The diluted weighted average shares outstanding during
the years ended September 30, 1997, 1996 and 1995 includes common stock
equivalent shares outstanding using the treasury stock method. Common stock
equivalents include shares issuable upon exercise of stock options. Unallocated
shares relating to the debt leveraged money purchase employee stock ownership
plan debt obligation are deducted in the calculation of the weighted average
shares outstanding.

STOCK OPTIONS--InterWest employee stock options are accounted for under
accounting principle board opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Stock options are granted at exercise prices not less than the fair
value of common stock on the date of grant. Under APB No. 25, no compensation
expense is recognized pursuant to InterWest's stock option plans.

RECLASSIFICATIONS--Certain reclassifications have been made to the 1996 and
1995 consolidated financial statements to conform to 1997 presentation. The
effects of the reclassifications are not considered material.

NOTE 2 ACCOUNTING CHANGES

InterWest adopted the following accounting pronouncements during the year ended
September 30, 1997.

Effective October 1, 1996, InterWest adopted Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" which requires that long-lived
assets and certain identifiable intangible assets be reviewed for impairment
whenever events or changes indicate that the carrying amount of an asset is not
recoverable. Such assets are assessed quarterly for other-than-temporary
impairment. Impairment is measured based on the present value of expected cash
flows for the asset and its eventual disposition. The adoption of this statement
had no material impact on InterWest's financial condition or results of
operations.

Effective October 1, 1996 InterWest adopted SFAS No.122 "Accounting for
Mortgage Servicing Rights" which requires that mortgage servicing rights be
capitalized when acquired either through the purchase or origination of mortgage
loans that are subsequently sold or securitized with the servicing rights
retained. SFAS No. 122 also requires an enterprise, on a periodic basis, to
assess the capitalized mortgage servicing rights for impairment based on the
fair value of those rights. InterWest evaluates mortgage servicing rights for
impairment on a quarterly basis using a valuation model which incorporates
estimated future servicing income, discount rates, prepayment speeds and default
rates. Mortgage servicing rights are included in intangible assets and are
amortized as an offset to services fees in proportion to and over the period of
estimated net servicing income not to exceed 15 years. The adoption of SFAS No.
122 did not have a material impact on InterWest's financial condition or results
of operations. This statement was only effective during the period October 1,
1996 through December 31, 1996 as SFAS No. 122 was superseded effective January
1, 1997 by SFAS No. 125.

Effective January 1, 1997 InterWest adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Assets and Extinguishments of Liabilities" which
supersedes SFAS No. 122. This statement requires that accounting and reporting
standards for the transfer of and servicing of financial assets and
extinguishments of liabilities be based on consistent application of the
financial-components approach that focuses on control. Under this approach,
after a transfer of financial assets, InterWest recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. Provisions of SFAS No. 125 that deal with securities
lending, repurchase and dollar repurchase agreements and the recognition of
collateral will not be adopted until January 1, 1998. The adoption of the
delayed provisions of SFAS No. 125 is not expected to have a material impact on
InterWest's financial condition or results of operations. The adoption of SFAS
No. 125 did not have a material effect on InterWest's financial condition or
results of operations.

Effective October 1, 1996 InterWest adopted SFAS No. 123, "Accounting for
Stock-based Compensation". This statement requires expanded disclosures of
stock-based compensation arrangements with employees and encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. As permitted by this statement, InterWest
continues to follow the rules to measure compensation as outlined in APB No. 25,
but InterWest is now required to disclose pro forma amounts of net income and
earnings per share that would have been reported under the fair value
recognition provisions of SFAS No. 123. The adoption of SFAS No. 123 had no
material impact on the results of operations or financial condition of
InterWest.

A-9
<PAGE>

The Financial Accounting Standards Board (FASB) has issued statements of
financial accounting standards which will modify the current method of
accounting utilized by InterWest.

In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and disclosure of
comprehensive income and its components. Comprehensive income is defined as the
change in equity during a period. Comprehensive income includes net income and
other comprehensive income which refers to unrealized gains and losses that
under generally accepted accounting principles are excluded from net income.
Under this statement, InterWest will include a comprehensive income statement
that is presented as a financial statement. For InterWest, adoption of this
statement is required in fiscal year 1999.

In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes standards and
requirements for public enterprises regarding information about operating
segments in annual financial statements. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Operating segments are components of an enterprise that are
evaluated regularly by the chief executive officer in deciding how to allocate
resources and in assessing performance. For InterWest, adoption of this
statement is required in fiscal year 1999.

The adoption of these statements will impact the disclosures in InterWest's
financial statements, however, management does not believe that adoption of
these statements will have a material impact on InterWest's financial condition
or results of operations.

NOTE 3 SECURITIES AVAILABLE FOR SALE

Securities available for sale are recorded at estimated fair value. The
amortized cost and estimated fair values of investment securities available for
sale are summarized as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DOLLARS IN THOUSANDS COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
U.S. treasury and agency securities $306,280 $319 $308 $306,291
Obligations of states and political subdivisions 5,310 104 -- 5,414
Mortgage-backed and related securities 252,427 622 2,460 250,589
Other securities 871 3 1 873
-----------------------------------------------------
Total securities $564,888 $1,048 $2,769 $563,167
-----------------------------------------------------
-----------------------------------------------------
September 30, 1996
U.S. treasury and agency securities $52,310 $119 $114 $52,315
Obligations of states and political subdivisions 11,435 56 33 11,458
Mortgage-backed and related securities 356,368 577 5,103 351,842
Other securities 1,214 3 1 1,216
-----------------------------------------------------
Total securities $421,327 $755 $5,251 $416,831
-----------------------------------------------------
-----------------------------------------------------
</TABLE>

The amortized cost and estimated fair value of securities available for sale as
of September 30, 1997 by contractual maturity are summarized as follows:

ESTIMATED
AMORTIZED FAIR
DOLLARS IN THOUSANDS COST VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $4,014 $4,016
Due after one year but within five years 291,375 291,377
Due after five years but within ten years 14,657 14,712
Due after 10 year 2,415 2,473
-----------------------
312,461 312,578
Mortgage-backed and related securities 252,427 250,589
-----------------------
Total securities $564,888 $563,167
-----------------------
-----------------------
</TABLE>

A-10
<PAGE>

Proceeds from the sale of securities available for sale during 1997,
1996 and 1995 were $359,641,000, $173,847,000 and $83,058,000, respectively.
InterWest realized gains of $1,132,000, $1,195,000, and $473,000 and losses
of $545,000, $611,000 and $138,000 on those sales during 1997, 1996 and 1995,
respectively.

During October, 1995, FASB issued a report entitled "A GUIDE TO
IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES, QUESTIONS AND ANSWERS" that allowed companies a
one-time reassessment and related reclassification from the held to maturity
portfolio to the available for sale portfolio without adverse accounting
consequences for the remainder of the held to maturity portfolio. During
December, 1995, InterWest elected to take advantage of this opportunity and
reclassified $204,363,000 of its securities held to maturity into the
available for sale portfolio.

NOTE 4 SECURITIES HELD TO MATURITY

Securities available for sale are recorded at amortized cost. The amortized
cost and estimated fair value of investment securities held to maturity
securities are summarized as follows:

<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
DOLLARS IN THOUSANDS Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
U.S. treasury and agency securities $20,300 $19 $ - $20,319
Obligations of states and political subdivisions 10,841 154 3 10,992
Mortgage-backed and related securities 101,154 78 3,073 98,159
-----------------------------------------------------
Total securities $132,295 $251 $3,076 $129,470
-----------------------------------------------------
September 30, 1996
U.S. treasury and agency securities $133,327 $12 $32 $133,307
Obligations of states and political subdivisions 10,301 132 20 10,413
Mortgage-backed and related securities 111,879 21 6,658 105,242
-----------------------------------------------------
Total securities $255,507 $165 $6,710 $248,962
-----------------------------------------------------
-----------------------------------------------------
</TABLE>

The amortized cost and estimated fair value of securities held to maturity as of
September 30, 1997 by contractual maturity are summarized as follows:

<TABLE>
<CAPTION>
Estimated
Amortized Fair
DOLLARS IN THOUSANDS Cost Value
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $2,452 $2,443
Due after one year but within five years 26,334 26,445
Due after five years but within ten years 2,355 2,423
-----------------------
' 31,141 31,311
Mortgage-backed and related securities 101,154 98,159
-----------------------
Total securities $132,295 $129,470
-----------------------
-----------------------
</TABLE>

At September 30, 1997, InterWest had $53,609,000 of securities classified
as high-risk securities according to Federal Financial Institutions Examination
Council's supervisory guidance for analyzing and classifying mortgage derivative
products. The market value of those securities was $50,653,000 and the weighted
average yield was 6.02 percent.

A-11
<PAGE>

NOTE 5 LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE

Loans receivable, net and loans held for sale (originated principally in
Washington) consisted of the following at September 30:

DOLLARS IN THOUSANDS 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $701,840 $630,147
Multi-family residential 58,137 55,256
Commercial 214,232 191,348
Real estate construction 136,580 114,698
Consumer loans 73,876 63,240
Commercial loans 155,265 122,275
Agricultural loans 30,491 14,007
-------------------------
Total 1,370,421 1,190,971
Less:
Allowance for losses on loans 11,104 10,235
Deferred loan fees and discounts 10,636 10,465
-------------------------
$1,348,681 $1,170,271
-------------------------
-------------------------
</TABLE>

InterWest serviced loans, owned in whole or in part by others, of
$365,876,000, $311,764,000, and $305,955,000 at September 30, 1997, 1996, and
1995 respectively.

As of September 30, 1997, InterWest had $219,755,000 in real estate loan
commitments outstanding. Other loan commitments, which includes business and
consumer credit lines, totaled $111,668,000 as of September 30, 1997.
Outstanding commitments under standby letters of credit and commercial letters
of credit totaled $3,045,000 and $969,000, respectively, as of September 30,
1997.

Non-accrual loans totaled $5,144,000 and $3,839,000 at September 30, 1997
and 1996, respectively. If interest on these loans had been recognized, such
income would have been $382,000 and $240,000 for the years ended September 30,
1997 and 1996, respectively.

InterWest originates loans primarily in the state of Washington. Although
InterWest has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent the economy of Washington
state.

NOTE 6 ALLOWANCE FOR LOSSES ON LOANS

The activity in the allowance for losses on loans for the year ended September
30 is summarized as follows:

DOLLARS IN THOUSANDS 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $10,235 $7,841 $7,233
Provision for losses on loans 1,508 1,552 929
Provision pursuant to acquisition -- 900 --
Recoveries 401 425 399
Charge-offs (1,040) (483) (720)
-------------------------------------
Balance, end of year $11,104 $10,235 $7,841
-------------------------------------
-------------------------------------
</TABLE>

The following is a summary of loans considered to be impaired in accordance
with SFAS No. 114 and the related interest income as of and for the year ended
September 30:

DOLLARS IN THOUSANDS 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Recorded investment in impaired loans $3,261 $5,677
Average recorded investment in impaired loans 4,109 5,980
Interest income recognized on impaired loans 326 526
</TABLE>

All impaired loans were evaluated for impairment based on the fair value of
the collateral as all impaired loans are collateral dependent. Total allocated
reserves for impaired loans were $92,000 and $155,000 as of September 30, 1997
and

A-12
<PAGE>

1996, respectively. Interest income on impaired loans is normally recognized
on the accrual basis, unless the loan is more than 90 days past due, in which
case interest income is recorded on a cash basis.

NOTE 7 REAL ESTATE HELD FOR SALE AND FOR DEVELOPMENT

Real estate held for sale and for development at September 30 is summarized as
follows:

DOLLARS IN THOUSANDS 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned acquired through foreclosure $6,945 $6,053
Real estate held for development 5,469 4,915
----------------------
$12,414 $10,968
----------------------
----------------------
</TABLE>

NOTE 8 PREMISES AND EQUIPMENT, NET

Premises and equipment consisted of the following at September 30:

DOLLARS IN THOUSANDS 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Buildings $33,105 $28,215
Furniture and equipment 24,821 19,485
----------------------
57,926 47,700
Less accumulated depreciation (20,375) (18,007)
----------------------
37,551 29,693
Land 9,830 9,396
----------------------
$47,381 $39,089
----------------------
----------------------
</TABLE>

Depreciation expense for 1997, 1996 and 1995 was $3,379,000, $2,717,000 and
$2,306,000, respectively.

InterWest leases certain premises under operating leases. Rental expense
for leased premises was $1,417,000, $1,223,000 and $1,089,000 for 1997, 1996 and
1995, respectively. Minimum rental commitments under noncanceable operating
leases having an original or remaining term of more than one year were as
follows as of September 30, 1997:

DOLLARS IN THOUSANDS
Year Ending September 30:
----------------------------------------------
<S> <C>
1998 $1,415
1999 1,314
2000 1,320
2001 1,256
2002 765
Thereafter 1,789
------
Total minimum rental commitments $7,859
------
------
</TABLE>

NOTE 9 INTANGIBLE ASSETS

Intangible assets consisted of the following as of September 30:

DOLLARS IN THOUSANDS 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Acquisition intangibles $2,308 $2,569
Servicing intangibles 1,983 1,423
---------------------
$4,291 $3,992
---------------------
---------------------
</TABLE>

A-13
<PAGE>

The changes in the servicing intangible assets for the years ended September 30
is summarized as follows:

DOLLARS IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $1,423 $1,313
Additions 995 268
Less amortization (435) (158)
---------------------
Balance, end of year $1,983 $1,423
---------------------
---------------------
</TABLE>

The estimated fair value of servicing intangible assets approximated the book
value as of September 30, 1997 and 1996. The estimated fair value was
determined by using discounted estimated future cash flows from the servicing
assets, using discount rates that approximate current market rates and using
estimated future prepayment rates.

NOTE 10 DEPOSITS

Deposits consisted of the following at September 30:

<TABLE>
<CAPTION>
Weighted Average
Interest Rate as of
DOLLARS IN THOUSANDS September 30, 1997 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing deposits -- $150,428 $123,018
Interest-bearing checking accounts 1.39% 136,402 126,907
Money market accounts 3.73 185,029 169,757
Savings accounts 2.80 116,135 120,559
-------------------------------
2.05% 587,994 540,241
-------------------------------
Certificates:
Due within one year 633,426 642,725
After one year but within two years 113,481 139,498
After two years but within three years 117,246 44,781
After three years but within four years 7,356 12,405
After four years but within five years 7,752 7,547
After five years 1,205 2,205
-------------------
Total certificates 5.66 880,466 849,161
-------------------------------
Total deposits 4.21% $1,468,460 $1,389,402
-------------------------------
-------------------------------
</TABLE>

Deposits at September 30, 1997 and 1996, include $103,279,000 and
$92,031,000, respectively, in public fund deposits. Securities with a book
value of $12,756,000 and $11,623,000 were pledged as collateral on these
deposits at September 30, 1997 and 1996, respectively, which exceeds the minimum
collateral requirements established by the Washington Public Deposit Protection
Commission.

Certificates greater than or equal to $100,000 included in the above
amounts totaled $338,062,000 and $245,766,000 at September 30, 1997 and 1996,
respectively.

Deposit interest expense by account type for the year ended September 30
was as follows:

DOLLARS IN THOUSANDS 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Other certificates $31,678 $32,005 $29,031
Certificates greater than or equal
to $100,000 18,330 13,102 12,381
Money market accounts 6,316 5,559 4,062
Savings accounts 2,880 3,151 4,714
Checking accounts 1,803 2,266 2,427
----------------------------------
$61,007 $56,083 $52,615
----------------------------------
----------------------------------
</TABLE>

A-14
<PAGE>

NOTE 11 FEDERAL HOME LOAN BANK ADVANCES

At September 30, FHLB advances were scheduled to mature as follows:

<TABLE>
<CAPTION>
1997 1996

DOLLARS IN THOUSANDS Amount Interest Rates Amount Interest Rates
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $396,354 4.36%--6.82% $252,400 4.56%--5.95%
One to two years 75,546 5.36%--7.28% 49,802 4.36%--6.27%
Two to three years 11,548 4.68%--6.55% 24,906 5.36%--7.28%
Three to four years -- -- 15,274 4.68%--6.55%
Four to five years 11,200 5.35%--7.70% 253 5.28%
Five to six years 400 7.70%
--------------------------------------------------------------------
Total $494,648 -- $343,035 --
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>

Advances are collateralized by FHLB stock owned by InterWest, deposits with
the FHLB and certain mortgages or deeds of trust securing such properties. As
of September 30, 1997, the minimum book value of eligible collateral pledged for
these borrowings was $593,578,000.

The maximum and average outstanding and weighted average interest rates on
advances from the FHLB were as follows during the year ended September 30:

DOLLARS IN THOUSANDS 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding at any month end $494,948 $386,837
Average outstanding 347,444 317,554
Weighted average interest rates:
Annual 5.64% 5.53%
End of year 5.68% 5.51%
</TABLE>

NOTE 12 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

InterWest has sold certain securities of the U.S. Government and its agencies
and other approved investments under agreements to repurchase to a
broker/dealer. The securities underlying the agreements are delivered directly
to the broker who arranged the transaction. The dealer may loan such securities
to other parties in the normal course of operations. The carrying value of the
securities sold was $270,468,000 with a fair value of $270,400,000 at September
30, 1997.

At September 30, securities sold under agreements to repurchase were
scheduled to mature as follows:

<TABLE>
<CAPTION>
1997 1996

DOLLARS IN THOUSANDS Amount Interest Rates Amount Interest Rates
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 30 days $96,883 5.03%--5.63% $6,135 5.03%--5.40%
30 to 90 days -- -- 74,700 5.44%--5.54%
Over 90 days 162,110 5.42%--6.43% 39,110 5.42%
--------------------------------------------------------------------
Total $258,993 -- $119,945 --
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>

The maximum and average outstanding and weighted average interest rates on
securities sold under agreements to repurchase were as follows during the year
ended September 30:

DOLLARS IN THOUSANDS 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding at any month end $258,993 $119,945
Average outstanding 183,246 56,285
Weighted average interest rates
Annual 5.66% 5.67%
End of year 5.66% 5.45%
</TABLE>

A-15
<PAGE>

NOTE 13 SAIF ASSESSMENT

The deposits of InterWest Bank are insured through the Savings Association
Insurance Fund (SAIF). The deposits of Pacific Northwest Bank, Pioneer National
Bank and First National Bank of Port Orchard are insured through the Bank
Insurance Fund (BIF). Because the SAIF was undercapitalized, a one-time special
assessment of 0.657 percent of SAIF deposits was enacted into law. The special
assessment was calculated based on March 31, 1995 SAIF deposits and resulted in
a $5,523,000 expense to InterWest Bank for the year ended September 30, 1996.
Under the new law SAIF premiums have been lowered to .064 percent of deposits.

NOTE 14 SPECIAL CHARGES

Primarily in connection with the Central merger, InterWest incurred special
charges totaling $3,105,000 for the year ended September 30, 1996. These
charges primarily represented a data processing conversion, including write-off
of Central data processing equipment, deferred compensation, severance pay
agreements, and professional service fees. Branch network integration and
consolidation, including the consolidation of overlapping branches and the
consolidation of administrative services, occurred during September, 1996.

NOTE 15 INCOME TAXES

A reconciliation of the income tax expense based on the statutory corporate
tax rate on pre-tax income and the expense shown in the accompanying
consolidated statements of income for the year ended September 30 is as follows:

DOLLARS IN THOUSANDS 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rates $12,968 $8,442 $9,055
Tax effect of:
Tax exempt interest (303) (240) (189)
Other, net 16 (417) (145)
-----------------------------------------------
$12,681 $7,785 $8,721
-----------------------------------------------
-----------------------------------------------
Current tax expense 14,192 7,501 6,984
Deferred tax expense (benefit) (1,511) 284 1,737
-----------------------------------------------
$12,681 $7,785 $8,721
-----------------------------------------------
-----------------------------------------------
</TABLE>

Tax effects of temporary differences that give rise to elements of deferred
tax assets (liabilities) consisted of the following at September 30:

DOLLARS IN THOUSANDS 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Allowance for losses on loans $1,453 $1,999
Deferred compensation 572 494
Unrealized loss on securities available for sale 605 1,576
Other 641 561
---------------------------
3,271 4,630
Deferred tax liability:
Loan fees (1,863) (1,950)
FHLB stock dividends (501) (2,167)
Depreciation (1,556) (1,508)
Other (397) (695)
---------------------------
(4,317) (6,320)
---------------------------
Net deferred tax liability $(1,046) $(1,690)
---------------------------
---------------------------
</TABLE>

The tax effect of the change in the unrealized loss on securities available
for sale was a $971,000 increase and a $2,013,000 decrease in the net deferred
tax liability during the years ended September 30, 1997 and 1996, respectively.

InterWest Bank is qualified under a provision of the Internal Revenue Code
to deduct from taxable income an allowance for losses on loans based on a
percentage of taxable income before such deduction or based on the experience
method. The percentage deduction available was 8 percent for the years ended
September 1997, 1996 and 1995.

A-16
<PAGE>

InterWest Bank is required to maintain 60 percent in qualifying assets in
order to use the percentage of taxable income method, and to avoid recapture of
all or a portion of its existing tax basis allowance for losses on loans. The
cumulative amount of deductions constitutes a restriction of InterWest Bank's
retained earnings. If any portion of this loan amount is subsequently used for
purposes other than to absorb losses on loans, the amount will be subject to
federal income taxes at the then prevailing corporate tax rate. It is not
contemplated that such retained earnings will be used in any manner that would
create a federal income tax liability and, therefore, no provision has been made
for possible federal income taxes. The cumulative amount of allowance for losses
on loans deductions at September 30, 1997 and 1996, totaled $17,400,000 and
$16,170,000 respectively.

The realization of InterWest deferred tax assets is dependent upon
InterWest's ability to generate taxable income in future periods. InterWest has
evaluated available evidence supporting the realization of its deferred tax
assets and determined it is more likely than not that deferred tax assets will
be realized.

NOTE 16 EMPLOYEE BENEFITS

RETIREMENT AND SAVINGS PLANS--InterWest's subsidiary banks each have salary
deferral 401(k) plans and InterWest Bank has a debt leveraged money purchase
employee stock ownership plan (ESOP) for employees. Employees who are at least
21 years of age and have completed one year (at least 1,000 hours) of service
are eligible to participate in the plans.

The ESOP is a noncontributory stock ownership plan. InterWest Bank makes an
annual contribution to the plan of 5 percent of all the participants'
compensation. On October 31, 1994, the ESOP signed a promissory note from an
unrelated third party which provided $912,000 for the purpose of acquiring
common stock of InterWest Bancorp, Inc.

The outstanding obligation of $312,000 at September 30, 1996 is included in
other borrowings in the accompanying Consolidated Statements of Financial
Condition, with a corresponding reduction of stockholders' equity. The
obligation was paid in full during the year ended September 30, 1997. Interest
on the loan was computed at prime rate or, at the ESOP's election, at one-month
LIBOR adjusted for InterWest Bank's federal reserve percentage and taxes, plus 2
percent. At September 30, 1996, the rate applicable to this loan was 7.50
percent. Interest paid was $8,000, $30,000, and $38,000 for the years ended
September 30, 1997, 1996, and 1995, respectively. The obligation is reduced, and
stockholders' equity increased, by the amount of any principal reduction of the
debt by the ESOP. Dividends paid on unallocated shares of stock may be used to
make payments on the loan. Accordingly, $35,000, $34,000, and $6,000 of
dividends were applied toward loan payments during the years ended September 30,
1997, 1996, and 1995, respectively. The compensation of the leverage shares is
calculated by taking the difference between the average fair value of the shares
released and the cost of the shares. Shares are released as the principal of the
loan is paid down.

ESOP shares during the years ended September 30, were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Leveraged shares, beginning of year 23,776 55,926 72,000
Shares released for allocation 23,776 32,150 16,074
------------------------------
Unallocated shares, end of year -- 23,776 55,926
------------------------------
------------------------------
</TABLE>

The fair value of unallocated shares was $701,392 at September 30, 1996.

The salary deferral 401(k) plans are defined contribution plans. The
employees can contribute to their deferred contribution accounts on a pre-tax
basis the maximum limit under the law. InterWest's subsidiary banks match a
portion of the salary deferred by each participant.

Expenses of these plans were $1,042,000, $1,006,000 and $866,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.

STOCK OPTION PLANS--InterWest had a qualified stock option plan which
provided for the awarding of stock options to certain officers and employees of
InterWest at the discretion of the Board of Directors. The term of the stock
options granted ranged from four to ten years from the date of grant. This plan
expired during 1993, however, there are exercisable options outstanding under
the plan as of September 30, 1997.

During January 1993, the stockholders of InterWest approved the addition of
a qualified employee stock option plan (1993 incentive plan) and a non-qualified
director stock option plan (1993 non-incentive plan). The awarding of stock
options to certain employees at InterWest is at the discretion of the Board of
Directors. The term of the options granted is ten years. Substantially all of
the options granted under the employees' stock option plan vest over a five-year
period. Under the 1993 non-qualified director stock option plan, each director
was granted 2,875 options with a term of 10 years. These options were 100
percent vested at the date of the grant. This plan expired during 1997.

In January, 1997, stockholders of InterWest approved the non-qualified 1996
Outside Directors Stock Options-For-Fees Plan (the "1996 Director Plan"). Under
the 1996 Director Plan, nonemployee directors may elect to receive stock options
in lieu of fees otherwise due for board services and may exercise those options
after one year. Each option granted under the 1996 Director Plan has a five-year
term.

A-17
<PAGE>

Central, Puget, Pacific and Pioneer had stock option plans which have been
assumed by InterWest. The number of shares and exercise prices have been
appropriately adjusted to reflect the common stock exchange ratios for each
entity. No further awards will be granted under any of the plans. All
outstanding Central, Puget, Pacific and Pioneer stock options became 100 percent
vested and exercisable upon the consummation of the respective mergers.

In 1986, Central adopted an Incentive Stock Option Plan for officers and
key employees. In 1992, the stockholders of Central approved the 1992 Stock
Option Plan, reserving shares of common stock for the granting of options to key
employees. In 1994, the Central Director Stock Option Plan was approved, which
reserved shares of common stock for the granting of options to directors.

Puget had a nonqualified stock option plan which reserved shares for
granting to employees, officers and directors. Options granted under this plan
vest immediately and expire after ten years.

Pacific had two stock option plans in effect: the 1988 Director Stock
Option Plan and the 1988 Employee Stock Option Plan. As an alternative to
receiving cash compensation, Pacific adopted the 1988 Director Stock Option
Plan, under which each director of Pacific may elect to receive options to
purchase common stock in lieu of fees. Options granted under this plan vest
immediately and expire in fifteen years. Under provisions of the 1988 Employee
Stock Option Plan, Pacific granted options to certain key employees. Options
under this plan vest over periods of one to five years and expire after ten
years.

Pioneer had a stock option plan providing for the granting of incentive
stock options to its officers and employees. Options granted under this plan
generally vest over a three year period and expire in ten years.

The exercise price of options granted under most of these plans is equal to
the fair value of the common stock on the date of the grant. Average exercise
price per share, number of shares authorized, available for grant, granted,
exercised, outstanding and currently exercisable reflect the dilutive effect of
the stock splits.

Information with respect to options granted under all stock option plans is
as follows:

Average Options Options
Authorized Exercise Price Outstanding Exercisable
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance October 1, 1994 1,670,808 $8.55 671,968 499,310
Options granted -- 11.10 47,660 --
Options exercised -- 5.39 (59,647) (59,647)
Options rescinded/expired -- 11.96 (8,920) (8,920)
Options Vested -- -- -- 79,586
---------------------------------------------------------------------------------------------
Balance September 30, 1995 1,670,808 9.08 651,061 510,329
Options granted -- 17.02 93,483 2,125
Options exercised -- 7.10 (58,886) (58,886)
Options rescinded/expired -- 15.30 (7,880) (5,280)
Options Vested -- -- -- 79,142
---------------------------------------------------------------------------------------------
Balance September 30, 1996 1,670,808 10.27 677,778 527,430
Options authorized 25,000 -- -- --
Options granted -- 23.84 59,418 --
Options exercised -- 12.45 (171,098) (171,098)
Options rescinded/expired -- 17.45 (11,560) (11,560)
Options Vested -- -- -- 98,522
---------------------------------------------------------------------------------------------
Balance September 30, 1997 1,695,808 $10.90 554,538 443,294
---------------------------------------------------------
---------------------------------------------------------
</TABLE>

Additional financial data pertaining to outstanding stock options as of
September 30, 1997 is as follows:

Weighted Average Weighted Average
Remaining Weighted Average Number of Exercise Price
Range of Number of Contractual Life Exercise Price Exercisable of Exercisable
Exercise Prices Option Shares (In Years) of Option Shares Option Shares Option Shares
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

$ 0.25 22,910 12.00 $0.25 22,910 $0.25
$ 5.77-$10.12 249,230 1.71 6.58 248,914 6.58
$10.13-$14.93 179,491 5.96 11.30 147,138 11.26
$14.94-$22.39 73,687 8.27 19.18 21,582 18.53
$32.00-$32.75 29,220 8.70 32.68 2,750 32.00
- ------------------------------------------------------------------------------------------------------------------------
Total 554,538 4.75 $10.90 443,294 $8.55
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>

A-18
<PAGE>

SFAS No. 123 requires the disclosure of pro forma net income and earnings
per share had InterWest adopted the fair value method as of the beginning of
fiscal year 1996. Under this statement, the fair value of stock-based awards is
calculated through the use of option pricing models. These models require the
subjective assumptions, including future stock price volatility and expected
time to exercise. The fair value of options granted under stock option plans is
estimated on the date of grant using the Black-Scholes option-pricing model. The
weighted average fair value of options granted was $6.78 in 1996 and $7.81 for
options granted in 1997.

If compensation expense for InterWest's stock option plans had been
determined consistent with SFAS No. 123, InterWest's net income and net income
per share would have been the pro forma amounts indicated as follows for the
year ended September 30:

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $24,549 $16,491
Pro forma 24,377 16,364
Basic net income per share:
As reported $ 2.37 $ 1.61
Pro forma 2.35 1.60
Diluted net income per share:
As reported $ 2.30 $ 1.57
Pro forma 2.29 1.56
</TABLE>

The compensation expense included in the pro forma net income and net
income per share is not likely to be representative of the effect on reported
net income for future years because stock options vest over several years and
additional option grants generally are made each year.

The following weighted average assumptions were used in the computation of
the fair value of stock options for the year ended September 30:

<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Expected volatility 17.4% 28.4%
Expected dividend yield 1.5% 1.4%
Risk-free interest rate 6.2% 5.6%
Expected life (in years) 7.3 7.3

</TABLE>

NOTE 17 REGULATORY CAPITAL REQUIREMENTS

InterWest Bancorp, Inc., and its banking subsidiaries, are subject to
risk-based capital guidelines requiring minimum capital levels based on the
credit risk of assets. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a material effect on InterWest's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, InterWest Bancorp, Inc. and its
banking subsidiaries must meet specific capital guidelines that involve
quantitative measures of assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Capital
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.

The regulations define the relevant capital levels for the five categories.
In general terms, the capital definitions are as follows:

<TABLE>
<CAPTION>
Total Capital Tier 1 Tier 1
(to Risk (to Risk (to Average
Weighted Assets) Weighted Assets) Assets)
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized -- -- 2% or less
</TABLE>

InterWest Bancorp, Inc. is subject to risk-based capital guidelines issued
by the Federal Reserve Board (FRB) which establish a risk-adjusted ratio
relating capital to different categories of assets. InterWest's Tier I capital
is comprised of stockholders' equity less certain intangibles, and excludes the
equity impact of adjusting securities available for sale to fair value. Total
capital is Tier I capital and the allowance for losses on loans. The FRB's
risk-based capital rules have been supplemented by a leverage capital ratio,
defined as Tier I capital to adjusted quarterly average total assets. As of

A-19
<PAGE>

September 30, 1997, under the FRB's capital guidelines, InterWest's levels of
consolidated regulatory capital exceed the FRB's minimum requirements.

The capital amounts and ratios as of September 30, 1997 for InterWest
Bancorp, Inc. and each subsidiary bank are presented in the following table:

<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Amount Adequacy Purposes Action Provisions
DOLLARS IN THOUSANDS Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANCORP, INC.:
Total Capital
(to Risk Weighted Assets) $170,652 13.64% $100,122 8.0% $125,153 10.0%
Tier I Capital
(to Risk Weighted Assets) 159,548 12.75% 50,061 4.0% 75,092 6.0%
Tier I Capital
(to Average Assets) 159,548 6.97% 68,657 3.0% 114,429 5.0%

INTERWEST BANK:
Total Capital
(to Risk Weighted Assets) $136,681 13.75% $79,499 8.0% $99,373 10.0%
Tier I Capital
(to Risk Weighted Assets) 128,014 12.88% 39,749 4.0% 59,624 6.0%
Tier I Capital
(to Average Assets) 128,014 6.58% 77,815 4.0% 97,269 5.0%

PACIFIC NORTHWEST BANK:
Total Capital
(to Risk Weighted Assets) $17,319 11.16% $12,419 8.0% $15,523 10.0%
Tier I Capital
(to Risk Weighted Assets) 15,944 10.27% 6,209 4.0% 9,314 6.0%
Tier I Capital
(to Average Assets) 15,944 8.50% 7,507 4.0% 9,383 5.0%

PIONEER NATIONAL BANK:
Total Capital
(to Risk Weighted Assets) $9,697 15.95% $4,865 8.0% $6,081 10.0%
Tier I Capital
(to Risk Weighted Assets) 9,001 14.80% 2,432 4.0% 3,649 6.0%
Tier I Capital
(to Average Assets) 9,001 8.71% 4,133 4.0% 5,166 5.0%

FIRST NATIONAL BANK OF PORT ORCHARD:
Total Capital
(to Risk Weighted Assets) $5,625 14.38% $3,130 8.0% $3,912 10.0%
Tier I Capital
(to Risk Weighted Assets) 5,259 13.44% 1,565 4.0% 2,347 6.0%
Tier I Capital
(to Average Assets) 5,259 10.08% 2,088 4.0% 2,610 5.0%
</TABLE>

At September 30, 1997, all subsidiary banks were in compliance with the
well-capitalized capital requirements. Management believes that under the
current regulations the subsidiary banks will continue to meet minimum capital
requirements in the foreseeable future. However, events beyond the control of
the subsidiary banks, such as a downturn in the economy in areas where the
subsidiary banks have most of their loans, could adversely affect future
earnings and, consequently, the ability of the subsidiary banks to meet future
minimum capital requirements.

Currently, InterWest pays quarterly dividends which it intends to continue
to do. The amount of future dividends will be based on InterWest's earnings and
financial condition and is restricted by federal and state tax laws and by tax
considerations related to financial institutions. Generally, InterWest is
precluded from paying dividends on its common stock if capital would be reduced
to below regulatory capital requirements at either the holding company or
subsidiary bank level. InterWest is also restricted by income appropriated to
allowance for losses on loans and deducted for federal income

A-20
<PAGE>

taxes. As of September 30, 1997, $59.7 million of retained earnings were
available for dividend distribution based on the capital levels and
restrictions of the InterWest Bancorp, Inc. and the banking subsidiaries.

NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by InterWest using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data in the development of the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts InterWest could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
impact on the estimated fair value amounts. The following methods and
assumptions were used to estimate the fair value of each class of InterWest's
financial instruments as of September 30, 1997 and 1996:

CASH AND CASH EQUIVALENTS--The carrying value is a reasonable estimate of the
fair value.

SECURITIES AVAILABLE FOR SALE, SECURITIES HELD TO MATURITY AND LOANS HELD FOR
SALE--The fair value of securities available for sale, securities held to
maturity and loans held for sale are based on quoted market rates and dealer
quotes.

LOANS RECEIVABLE--The fair value of fixed rate loans is based upon quoted
market prices for similar loans. The fair value for adjustable-rate loans is
based on discounted cash flows, using estimated interest rates currently offered
for loans of similar characteristics adjusted for pre-payment estimates.

No adjustment was made to the estimated interest rates for changes in credit
of performing loans for which there are no known credit concerns. Management
believes that the risk factor embedded in the estimated interest rates, along
with the allowance for losses on loans applicable to the loan portfolio, results
in a fair valuation of such loans.

FHLB STOCK--FHLB stock does not have a market and the fair value is unknown. as
such, the carrying value is a reasonable estimate of the fair value.

DEPOSIT LIABILITIES--Under SFAS No. 107, the fair value of deposits with no
stated maturity, such as checking accounts, money market and savings accounts,
is equal to the amount payable on demand as of September 30, 1997 and September
30, 1996, respectively. the fair value of certificates of deposit is based on
the discounted value of contractual cash flows. the discount rate is estimated
using the current average rate for deposits of like maturities of other local
thrift institutions.

FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE--The fair value
of FHLB advances and securities sold under agreements to repurchase are
estimated based on the present values using a discount rate equal to the rate
currently offered on similar borrowings with similar maturities.

OTHER--The carrying value of other financial instruments has been determined to
be a reasonable estimate of their fair value.

A-21
<PAGE>

<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
Carrying Estimated Carrying Estimated
DOLLARS IN THOUSANDS Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS

Cash and cash equivalents $ 235,888 $ 235,888 $ 78,649 $ 78,649
Securities available for sale 563,167 563,167 416,831 416,831
Securities held to maturity 132,295 129,470 255,507 248,962
Loans receivable, net 1,338,451 1,353,277 1,159,048 1,160,486
Loans held for sale 10,230 10,451 11,223 11,396
Federal funds sold 12,225 12,225 1,325 1,325
FHLB stock 27,211 27,211 21,537 21,537

LIABILITIES

Non-interest bearing deposits $ 150,428 $ 150,428 $ 123,018 $ 123,018
Interest-bearing checking accounts 136,402 136,402 126,907 126,907
Money market accounts 185,029 185,029 169,757 169,757
Savings accounts 116,135 116,135 120,559 120,559
Certificates of deposit 880,466 883,580 849,161 853,554
------------------------------------------------------
Total deposits 1,468,460 1,471,574 1,389,402 1,393,795

FHLB advances and other borrowings 496,975 496,431 346,748 345,155
Securities sold under agreements to repurchase 258,993 256,486 119,945 119,590

Off balance sheet loan commitments:
Real estate 219,755 219,755 124,861 124,861
Other 111,668 111,668 79,593 79,593
Standby letters of credit 3,045 3,045 1,271 1,271
Commercial letters of credit 969 969 417 417
</TABLE>

LIMITATIONS--The fair value estimates presented herein are based on information
available to management as of September 30, 1997 and 1996. since September 30,
1997 and 1996, amounts have not been comprehensively revalued for purposes of
these financial statements and, therefore, current estimates of fair value may
differ from the amounts presented herein.

NOTE 19 CONTINGENCIES

At periodic intervals, the FDIC, the Washington Department of Financial
Institutions, Division of Banks, the Office of the Comptroller of Currency, the
FRB and other regulatory agencies (collectively the regulators), examine
InterWest Bancorp, Inc. and its banking subsidiaries' as part of the regulatory
oversight of the thrift and bank industries. Based on their examinations, the
regulators may direct InterWest Bancorp, Inc. or a bank subsidiary to adjust
financial statements in accordance with their findings. A future examination by
the regulators could include a review of certain transactions or other amounts
reported in InterWest's 1997 financial statements. The regulators have not
proposed significant adjustments to InterWest's financial statements in prior
years and management is not aware of any basis for any such adjustments for
1997. In view of the uncertain regulatory environment in which InterWest
operates, the extent, if any, to which a forthcoming examination may ultimately
result in regulatory adjustments to the 1997 financial statements cannot
presently be determined.

In the normal course of business, InterWest has various legal claims and
other contingent matters outstanding. Management believes that any ultimate
liability arising from these actions will not have a material adverse impact on
InterWest's financial condition or results of operations.

The subsidiary banks are required to maintain balances with the Federal
Reserve Bank based on a percentage of deposit liabilities. The average required
reserve at September 30, 1997 and 1996, was $13,259,000 and $8,411,000,
respectively.

A-22
<PAGE>

NOTE 20 CONDENSED PARENT COMPANY FINANCIAL INFORMATION INTERWEST BANCORP, INC.

Condensed financial information for InterWest Bancorp, Inc., (parent company
only) as of and for the years ended September 30, is as follows:

CONDENSED STATEMENTS OF FINANCIAL CONDITION

DOLLARS IN THOUSANDS 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

Cash and cash equivalents $1,958 $417
Other assets 2,198 1,471
Investment in subsidiaries 159,441 137,199
-----------------------
Total $163,597 $139,087
-----------------------
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Other liabilities $2,427 $1,440
Other borrowings 400 -
Stockholders' equity 160,770 137,647
-----------------------
Total $163,597 $139,087
-----------------------
-----------------------
</TABLE>

CONDENSED STATEMENTS OF INCOME

DOLLARS IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends received from subsidiaries $5,865 $7,562 $2,187
-------------------------------------
Interest expense -- 140 219
Operating expenses 709 1,417 775
-------------------------------------
Total expenses 709 1,557 994
-------------------------------------
Net income before federal income taxes and equity in
undistributed net income from subsidiaries 5,156 6,005 1,193
Federal income tax benefit (227) (414) (400)
-------------------------------------
Net income before equity in undistributed net income from subsidiaries 5,383 6,419 1,593
-------------------------------------
Equity in undistributed net income from subsidiaries 19,166 10,072 15,681
-------------------------------------
Net income $24,549 $16,491 $17,274
-------------------------------------
-------------------------------------
</TABLE>

A-23
<PAGE>

CONDENSED STATEMENTS OF CASH FLOWS

DOLLARS IN THOUSANDS 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $24,549 $16,491 $17,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income from subsidiaries (25,031) (17,634) (17,868)
Dividends received from subsidiaries 5,865 7,562 2,187
Change in other assets and liabilities, net (650) (565) 495
Pooling accounting adjustment -- (361) --
--------------------------------------
Net cash provided by operating activities 4,733 5,493 2,088

Cash flows from financing activities:
Payment of dividends (4,967) (3,987) (869)
Purchase and retirement of treasury stock (570) -- --
Purchase of treasury stock -- -- (289)
Net increase (decrease) in borrowings 400 (2,200) (663)
Proceeds from stock option plans 1,945 418 127
--------------------------------------
Net cash used by financing activities (3,192) (5,769) (1,694)
--------------------------------------
Net increase (decrease) in cash and cash equivalents 1,541 (276) 394
--------------------------------------
Cash and cash equivalents at beginning of year 417 693 299
--------------------------------------
Cash and cash equivalents at end of year $1,958 $417 $693
--------------------------------------
--------------------------------------
</TABLE>

NOTE 21 BUSINESS COMBINATIONS

On August 31, 1996, InterWest Bancorp, Inc. merged with Central
Bancorporation, of Wenatchee, Washington ("Central"), the holding company of
Central Washington Bank. Under the terms of this transaction, Central merged
into InterWest Bancorp, Inc. Central Washington Bank operated ten offices in
central Washington. Effective October 14, 1996, Central Washington Bank was
merged into InterWest Bank. At the merger date, Central had total consolidated
assets of $206,093,000, including total loans of $132,157,000, total customer
deposits of $181,952,000, and stockholders' equity of $17,109,000. Each share of
Central common stock was exchanged for 1.41 shares of InterWest Bancorp, Inc.
common stock. The total number of shares issued was 1,431,594. The merger was
accounted for using the pooling-of-interests method. In accordance with
generally accepted accounting principles, prior period financial statements have
been restated as if the companies had been combined.

The consolidated financial statements have been adjusted to conform
Central's December 31 fiscal year end with InterWest's September 30 fiscal year
end. In accordance with generally accepted accounting principles, Central's
interest income of $4,033,000, net interest income of $2,413,000 and net income
of $473,000 for the period from October 1, 1995 to December 31, 1995 has been
included in the consolidated statements of income for both of the years ended
September 30, 1996 and 1995. Accordingly, $473,000 has been deducted from
retained earnings in the statement of stockholders' equity for the year ended
September 30, 1996.

A-24
<PAGE>

NOTE 22 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Fourth Third Second First
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended September 30, 1997
Interest income $44,263 $41,778 $39,901 $39,264
Interest expense 25,069 23,175 21,545 21,292
Net interest income before
provision for losses on loans 19,194 18,603 18,356 17,972
Provision for losses on loans 275 303 512 418
Net interest income after
provision for losses on loans 18,919 18,300 17,844 17,554
Noninterest income 6,142 4,438 4,114 3,951
Noninterest expense 15,139 13,222 12,868 12,803
Income before federal income taxes 9,922 9,516 9,090 8,702
Federal income tax expense 3,446 3,171 3,144 2,920
----------------------------------------------------
Net income $6,476 $6,345 $5,946 $5,782
----------------------------------------------------
----------------------------------------------------

Basic net income per share $ 0.62 $ 0.61 $ 0.57 $ 0.56
----------------------------------------------------
----------------------------------------------------
Diluted net income per share $ 0.60 $ 0.59 $ 0.56 $ 0.55
----------------------------------------------------
----------------------------------------------------
Year ended September 30, 1996
Interest income $38,163 $36,258 $35,204 $34,202
Interest expense 20,440 18,986 18,762 18,939
Net interest income before
provision for losses on loans 17,723 17,272 16,442 15,263
Provision for losses on loans 1,301 356 411 384
Net interest income after
provision for losses on loans 16,422 16,916 16,031 14,879
Noninterest income 4,237 3,929 4,540 3,038
Noninterest expense 20,454 12,188 12,389 10,685
Income before federal income taxes 205 8,657 8,182 7,232
Federal income tax expense (benefit) (344) 2,900 2,736 2,493
----------------------------------------------------
Net income $ 549 $5,757 $5,446 $4,739
----------------------------------------------------
----------------------------------------------------
Basic net income per share $ 0.05 $ 0.56 $ 0.53 $ 0.47
----------------------------------------------------
----------------------------------------------------
Diluted net income per share $ 0.05 $ 0.55 $ 0.52 $ 0.46
----------------------------------------------------
----------------------------------------------------
</TABLE>

Other operating expenses for the fourth quarter of 1996 include $5,523,000
related to the recapitalization of the SAIF and special charges of $2,849,000
primarily associated with the Central merger. See Notes 13 and 14 for further
details. The provision for losses on loans for the fourth quarter of 1996
includes $900,000 to bring into conformity the allowance for losses on loan
practices of Central and InterWest.

NOTE 23 SUBSEQUENT EVENTS

BUSINESS COMBINATIONS--On January 15, 1998, InterWest Bancorp, Inc. merged with
Puget Sound Bancorp, Inc. (Puget), of Port Orchard, Washington, the holding
company of First National Bank of Port Orchard. Under the terms of this
transaction, Puget merged into InterWest Bancorp, Inc., with First National Bank
of Port Orchard becoming a subsidiary of InterWest Bancorp, Inc. First National
Bank of Port Orchard operates three branch offices in western Washington. At
the merger date, Puget had total consolidated assets of $53,109,000, including
total loans receivable of $38,731,000, total deposits of $45,602,000, and
stockholders' equity of $5,928,000. Each share of Puget common stock has been
exchanged for 1.67 shares of InterWest Bancorp, Inc. common stock. The total
number of shares issued was 390,947.

On June 15,1998, InterWest Bancorp, Inc. merged with Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of this transaction, Pacific
has become a wholly-owned subsidiary of InterWest Bancorp, Inc. At the merger
date, Pacific had four offices in the metropolitan Seattle area of western
Washington with total assets of $200,219,000, including total loans receivable
of $150,125,000, total deposits of $170,210,000, and stockholders' equity of

A-25
<PAGE>

$16,787,000. Each share of Pacific common stock has been exchanged for 3.95
shares of InterWest Bancorp, Inc. common stock. The total number of shares
issued was 1,564,054.

On June 16, 1998, InterWest Bancorp, Inc. merged with Pioneer Bancorp,
Inc. (Pioneer), of Yakima, Washington, the holding company of Pioneer
National Bank. Under the terms of this transaction, Pioneer merged into
InterWest Bancorp, Inc., with Pioneer National Bank becoming a wholly-owned
subsidiary of InterWest Bancorp, Inc. Pioneer National Bank operates five
offices in central Washington. At the merger date, Pioneer had total
consolidated assets of $108,399,000, including total loans receivable of
$63,377,000, total deposits of $87,213,000, and stockholders' equity of
$9,337,000. Each share of Pioneer common stock has been exchanged for 1.34
shares of InterWest Bancorp, Inc. common stock. The total number of shares
issued was 461,897.

The mergers have been accounted for using the pooling-of-interests
method. In accordance with generally accepted accounting principles, prior
period financial statements have been restated as if the companies had been
combined for all periods presented. The following unaudited pro forma
information represents the results of operations of InterWest, Pacific,
Pioneer and Puget for the years ending September 30, 1997, 1996 and 1995, on
an individual as well as a combined basis. In accordance with generally
accepted accounting principles, the December 31 fiscal year end of Pacific,
Pioneer and Puget has been incorporated with InterWest's September 30 fiscal
year end. The unaudited pro forma results do not necessarily indicate the
actual results that would have been obtained, nor are they necessarily
indicative of the future operations of the combined companies. The unaudited
pro forma statements of income were as follows:

DOLLARS IN THOUSANDS INTERWEST PACIFIC PIONEER PUGET COMBINED
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997
Interest Income $138,011 $14,113 $8,636 $4,446 $165,206
Interest Expense 80,903 4,629 3,877 1,672 91,081
Net Interest Income 57,108 9,484 4,759 2,774 74,125
Net Income 20,299 2,254 1,081 915 24,549

Year ended September 30, 1996
Interest Income $120,913 $11,548 $7,658 $3,708 $143,827
Interest Expense 68,808 3,745 3,129 1,445 77,127
Net Interest Income 52,105 7,803 4,529 2,263 66,700
Net Income 12,771 1,846 1,163 711 16,491

Year ended September 30, 1995
Interest Income $100,264 $10,082 $6,161 $3,224 $119,731
Interest Expense 57,926 3,366 2,490 1,337 65,119
Net Interest Income 42,338 6,716 3,671 1,887 54,612
Net Income 14,362 1,539 845 528 17,274

</TABLE>

On April 20, 1998 InterWest Bancorp, Inc. signed a definitive agreement to
acquire Kittitas Valley Bancorp, Inc. (Kittitas) and its banking subsidiary,
Kittitas Valley Bank, of Ellensburg, Washington. The transaction is structured
such that, within certain limitations, stockholders of Kittitas can elect to
receive either cash, or a fixed number of shares of InterWest Bancorp, Inc.
common stock for each share of Kittitas common stock. The transaction provides
that, in the aggregate, fifty percent of the shares of Kittitas common stock
will be exchanged for cash and fifty percent of the shares of Kittitas common
stock will be exchanged for InterWest Bancorp, Inc. common stock. The
transaction is valued at approximately $13.0 million and will result in the
issuance of approximately 150,000 shares of InterWest Bancorp, Inc. common
stock. As of March 31, 1998, Kittitas had total consolidated assets of $45.9
million and stockholders' equity of $4.0 million. Kittitas Valley Bank operates
three branch offices in Kittitas County. The acquisition of Kittitas is
expected to be completed during the quarter ending September 30, 1998 following
approval of regulatory authorities and the shareholders of Kittitas.

ACCOUNTING CHANGES--Effective December 15, 1997 InterWest adopted SFAS No. 128,
"Earnings per Share". This statement simplifies the standards for computing
earnings per share and makes them comparable to international earnings per share
standards. It requires dual presentation of basic and diluted earnings per share
on the face of the income statement. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.

A-26
<PAGE>

The following table sets forth the computation of basic and diluted net income
per share for the years ended September 30:

DOLLARS IN THOUSANDS, EXCEPT SHARE DATA 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Net income $24,549 $16,491 $17,274
----------------------------------------
----------------------------------------
Denominator
Denominator for basic net income per share-
Weighted average shares 10,378,701 10,217,883 10,186,991

Effect of dilutive securities:
Stock options 273,996 268,813 185,611
----------------------------------------
Denominator for diluted net income per share-
Weighted average shares and assumed
conversion of stock options 10,652,697 10,486,696 10,372,602
----------------------------------------
----------------------------------------
Basic net income per share $2.37 $1.61 $1.70
----------------------------------------
----------------------------------------
Diluted net income per share $2.30 $1.57 $1.67
----------------------------------------
----------------------------------------
</TABLE>

A-27

<PAGE>

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

DOLLARS IN THOUSANDS March 31, 1998 September 30, 1997
- ------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS

Cash and cash equivalents
Non-interest bearing $62,322 $68,953
Interest-bearing deposits in banks 43,197 166,935
Federal funds sold 11,682 12,225
Securities available for sale, at fair value 647,138 563,167
Securities held to maturity
(fair value: $97,922 and $129,470) 99,647 132,295
Loans receivable, net 1,309,765 1,338,451
Loans held for sale (fair value: $101,062 and $10,451) 100,563 10,230
Accrued interest receivable 14,975 14,551
Real estate held for sale and for development 12,194 12,414
Federal Home Loan Bank (FHLB) stock, at cost 35,237 27,211
Premises and equipment, net 48,052 47,381
Intangible assets 4,899 4,291
Other assets 3,891 4,824
-------------------------
Total assets $2,393,562 $2,402,928
-------------------------
-------------------------
LIABILITIES

Non-interest bearing deposits $146,823 $150,428
Interest-bearing deposits 1,345,344 1,318,032
-------------------------
Total deposits 1,492,167 1,468,460

FHLB advances 586,879 494,648
Securities sold under agreements to repurchase 128,360 258,993
Accrued expenses and other liabilities 17,333 17,730
Other borrowings 1,753 2,327
-------------------------
Total liabilities 2,226,492 2,242,158

STOCKHOLDERS' EQUITY

Common stock, par value $.20 per share
Authorized 20,000,000 shares
Issued and outstanding 10,443,744 and 10,443,208 2,101 2,092
Paid-in-capital 34,343 34,018
Treasury stock (289) (289)
Retained earnings 133,397 126,064
Debt related to ESOP (1,652) --
Net unrealized loss on
securities available for sale, net of tax (830) (1,115)
-------------------------
Total stockholders' equity 167,070 160,770
-------------------------
Total $2,393,562 $2,402,928
-------------------------
-------------------------
</TABLE>

B-1
<PAGE>

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
Quarter ended March 31, Six months ended March 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $31,685 $27,741 $62,613 $54,948
Securities available for sale 10,904 8,305 22,319 15,329
Securities held to maturity 1,156 3,001 3,006 7,483
Other 455 854 1,159 1,403
----------------------------------------------------
44,200 39,901 89,097 79,163
INTEREST EXPENSE
Deposits 14,956 15,152 30,367 29,769
FHLB advances and other borrowings 7,462 3,645 14,799 8,370
Securities sold under agreements to repurchase 2,244 2,747 5,437 4,699
----------------------------------------------------
24,662 21,544 50,603 42,838
Net interest income before provision for
losses on loans 19,538 18,357 38,494 36,325

Provision for losses on loans 571 512 846 930
----------------------------------------------------
Net interest income after provision for
losses on loans 18,967 17,845 37,648 35,395

NONINTEREST INCOME
Gain on sale of loans 2,486 921 4,711 1,500
Service fees 2,674 2,244 5,341 4,428
Investment product fees and
insurance commissions 519 483 985 1,036
Gain (loss) on sale of securities available for sale 240 (25) 431 296
Gain on real estate held for sale
and for development 145 152 247 185
Other 504 338 936 623
----------------------------------------------------
6,568 4,113 12,651 8,068
NONINTEREST EXPENSE
Compensation and employee benefits 7,867 6,553 15,657 13,417
General and administrative 3,660 3,484 7,298 6,624
Occupancy 2,207 1,791 4,344 3,633
Data processing 989 829 1,892 1,716
FDIC premium assessment 160 150 331 87
Merger Related Charges 1,300 -- 1,300 --
Loss from real estate write-downs
and operations 718 61 1,036 192
----------------------------------------------------
16,901 12,868 31,858 25,669

Income before income taxes 8,634 9,090 18,441 17,794

Income tax expense 3,081 3,144 6,479 6,067
----------------------------------------------------
NET INCOME $5,553 $5,946 $11,962 $11,727
----------------------------------------------------
----------------------------------------------------

Basic net income per share $0.53 $0.57 $1.15 $1.13
----------------------------------------------------
----------------------------------------------------
Diluted net income per share $0.52 $0.56 $1.12 $1.10
----------------------------------------------------
----------------------------------------------------
</TABLE>

B-2
<PAGE>

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
Six months ended March 31,
DOLLARS IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES

Net Income $11,962 $11,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,127 1,408
Provision for losses on loans 846 930
Loss on real estate held for sale 753 --
Accretion of premiums and discounts, net 735 672
Gain on sale of loans (4,711) (1,500)
Gain on sale of securities available for sale (431) (296)
Gain on sale of real estate held for sale and
for development (247) (185)
Amortization of deferred loan fees, net 568 (8)
FHLB stock dividends (1,124) (701)
Pooling accounting adjustment (1,146) --
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable (424) (484)
Other assets 813 1,320
Accrued expenses and other liabilities (1,034) (5,265)
-------------------------

BALANCE, net cash provided by operating activities $8,687 $7,618

INVESTING ACTIVITIES

Purchase of securities available for sale (567,477) (304,874)
Proceeds from matured securities available for sale 224,174 14,816
Proceeds from sale of securities available for sale 229,828 194,136
Proceeds from matured securities held to maturity 22,348 176,571
Purchase of securities held to maturity -- (85,794)
Principal repayments securities available for sale 35,184 36,464
Principal repayments from securities held to maturity 4,893 3,242
Proceeds from sale of loans 126,612 26,083
Net increase in loans receivable (187,872) (155,314)
Proceeds from sale of real estate held for sale
and for development 2,298 1,407
Purchases of premises and equipment (2,733) (6,287)
Purchase of FHLB stock (7,102) 6,000
Net decrease (increase) in federal funds sold 543 (12,480)
Improvements capitalized to real estate held for sale (506) (1,292)
-------------------------
BALANCE, Net cash used by investing activities $(119,810) $(107,322)
</TABLE>

B-3
<PAGE>

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)

Net increase in transaction account deposits 9,217 21,586
Net increase in certificates of deposit 14,490 58,486
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 1,203,560 481,432
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (1,243,786) (467,268)
Dividends paid (3,061) (2,633)
Issuance of common stock from exercise of stock options 334 1,292
---------------------------
Net cash provided (used) by financing activities (19,246) 92,895

Net change in cash and cash equivalents (130,369) (6,809)

CASH AND CASH EQUIVALENTS
Beginning of period 235,888 78,649
---------------------------
End of period $105,519 $71,840
---------------------------
---------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest $50,932 $40,251
Income taxes 7,760 5,520
Noncash transaction
Loans transferred to real estate held for sale, net 2,079 796
Transfer of premises to real estate held for sale -- 1,179
Loans securitizied as mortgage-backed and related
securities -- 43,810
Securities held to maturity transferred to available
for sale 4,709 --
</TABLE>

B-4
<PAGE>

NOTES TO UNAUDITED SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 1998

NOTE A BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the
accounts of InterWest Bancorp, Inc. and its wholly owned banking
subsidiaries, which is collectively defined as InterWest. All material
intercompany transactions and balances have been eliminated.

The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim consolidated financial statements.
The consolidated statements of operations for the quarter and six months
ended March 31, 1998 and 1997 are not necessarily indicative of the operating
results for the full year. For further information, refer to the consolidated
financial statements and footnotes for the year ended September 30, 1997.

NOTE B NET INCOME PER SHARE

The diluted weighted average shares outstanding during the quarters and six
months ended March 31, 1998 and 1997 includes common equivalent shares
outstanding using the treasury stock method. Common stock equivalents
include shares issuable upon exercise of stock options. Unallocated shares
relating to the Employee Stock Ownership Plan (ESOP) debt obligation are
deducted in the calculation of weighted average shares outstanding.

NOTE C BUSINESS COMBINATIONS

On January 15, 1998, InterWest Bancorp, Inc. merged with Puget Sound Bancorp,
Inc. (Puget), of Port Orchard, Washington, the holding company of First
National Bank of Port Orchard. Under the terms of this transaction, Puget
merged into InterWest Bancorp, Inc., with First National Bank of Port Orchard
becoming a subsidiary of InterWest Bancorp, Inc. First National Bank of Port
Orchard operates three branch offices in western Washington. At the merger
date, Puget had total consolidated assets of $53.1 million, including total
loans receivable of $38.7 million, total deposits of $45.6 million, and
stockholders' equity of $5.9 million. Each share of Puget common stock has
been exchanged for 1.67 shares of InterWest common stock. The total number of
shares issued was 390,947.

On June 15,1998, InterWest Bancorp, Inc. merged with Pacific Northwest
Bank (Pacific), of Seattle, Washington. Under the terms of this transaction,
Pacific has become a subsidiary of InterWest Bancorp, Inc. At the merger
date, Pacific had four offices in the metropolitan Seattle area of western
Washington and total assets of $200.2 million, including total loans
receivable of $150.1 million, total deposits of $170.2 million, and
stockholders' equity of $16.8 million. Each share of Pacific common stock
has been exchanged for 3.95 shares of InterWest Bancorp, Inc. common stock.
The total number of shares issued was 1,564,054. The merger has been
accounted for using the pooling-of-interests method. In accordance with
generally accepted accounting principles, prior period financial statements
have been restated as if the companies had been combined.

On June 16, 1998, InterWest Bancorp, Inc. merged with Pioneer Bancorp,
Inc. (Pioneer), of Yakima, Washington, the holding company of Pioneer
National Bank. Under the terms of this transaction, Pioneer merged into
InterWest Bancorp, Inc., with Pioneer National Bank becoming a subsidiary of
InterWest Bancorp, Inc. Pioneer National Bank operates five offices in
central Washington. At the merger date, Pioneer had total consolidated
assets of $108.4 million, including total loans receivable of $63.4 million,
total deposits of $87.2 million, and stockholders' equity of $9.3 million.
Each share of Pioneer common stock has been exchanged for 1.34 shares of
InterWest Bancorp, Inc. common stock. The total number of shares issued was
461,897.

B-5
<PAGE>

September 30 fiscal year end. The unaudited pro forma results do not
necessarily indicate the actual results that would have been obtained, nor
are they necessarily indicative of the future operations of the combined
companies. The unaudited pro forma statements of income were as follows:

Dollars in thousands InterWest Pacific Pioneer Puget Combined
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Quarter ended March 31, 1998
Interest Income $37,175 $3,692 $2,116 $1,217 $44,200
Interest Expense 22,091 1,156 966 449 24,662
Net Interest Income 15,084 2,536 1,150 768 19,538
Net Income 4,415 606 317 215 5,553

Quarter ended March 31, 1997
Interest Income $33,182 $3,442 $2,169 $1,108 $39,901
Interest Expense 19,008 1,140 983 413 21,544
Net Interest Income 14,174 2,302 1,186 695 18,357
Net Income 4,964 507 233 242 5,946

Six months ended March 31, 1998
Interest Income $75,043 $7,489 $4,169 $2,396 $89,097
Interest Expense 45,381 2,381 1,951 890 50,603
Net Interest Income 29,662 5,108 2,218 1,506 38,494
Net Income 9,576 1,275 636 475 11,962

Six months ended March 31, 1997
Interest Income $66,295 $6,519 $4,252 $2,097 $79,163
Interest Expense 38,077 2,079 1,897 785 42,838
Net Interest Income 28,218 4,440 2,355 1,312 36,325
Net Income 9,916 958 421 432 11,727
</TABLE>

On April 20, 1998 InterWest Bancorp, Inc. signed a definitive agreement to
acquire Kittitas Valley Bancorp, Inc. (Kittitas) and its banking subsidiary,
Kittitas Valley Bank, of Ellensburg, Washington. The transaction is
structured such that, within certain limitations, stockholders of Kittitas
can elect to receive either cash, or a fixed number of shares of InterWest
Bancorp, Inc. common stock for each share of Kittitas common stock. The
transaction provides that, in the aggregate, fifty percent of the shares of
Kittitas common stock will be exchanged for cash and fifty percent of the
shares of Kittitas common stock will be exchanged for InterWest Bancorp, Inc.
common stock. The transaction is valued at approximately $13.0 million and
will result in the issuance of approximately 150,000 shares of InterWest
Bancorp, Inc. common stock. As of March 31, 1998, Kittitas had total
consolidated assets of $45.9 million and stockholders' equity of $4.0
million. Kittitas Valley Bank operates three branch offices in Kittitas
County. The acquisition of Kittitas is expected to be completed during the
quarter ending September 30, 1998 following approval of regulatory
authorities and the shareholders of Kittitas.

NOTE D RECLASSIFICATION

Certain reclassifications have been made to prior financial statements to
conform with current presentation. The effects of the reclassifications are
not considered material.

NOTE E ACCOUNTING CHANGES

On December 31, 1997, InterWest adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "EARNINGS PER SHARE" which provides standards for
computing net income per share. It requires dual presentation of basic and
diluted net income per share on the face of the income statement. Basic net
income per share excludes dilution and is computed by dividing net income
available to common stockholders 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 securities or other contracts to issue
common stock were exercised or converted into common stock.

B-6

<PAGE>

SUPPLEMENTAL MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

BASIS OF PRESENTATION

The following discussion is provided for the consolidated operations of
InterWest Bancorp, Inc., which includes its wholly owned subsidiaries
(collectively InterWest). InterWest Bancorp, Inc.'s wholly owned
subsidiaries are InterWest Bank, Pacific Northwest Bank, Pioneer National
Bank and First National Bank of Port Orchard. The purpose of this discussion
is to focus on significant factors concerning InterWest's financial condition
and results of operations. This discussion should be read along with the
consolidated financial statements (including notes thereto) for an
understanding of the following discussion and analysis.

OVERVIEW

InterWest is implementing its plan to become a financial services
company that provides a variety of products and services for both individual
and business customers. InterWest's sales efforts in consumer and business
lending will continue to change the composition of the loan portfolio.
InterWest intends to change the funding sources for asset growth. InterWest
is emphasizing higher growth in transaction accounts relative to certificates
of deposit and borrowings. This is designed to have a positive impact on net
interest income, service fee revenue and market penetration while meeting the
needs of InterWest's customers.

The merger with Central Bancorporation on August 31, 1996 began this
process. Central's subsidiary bank, Central Washington Bank, operated ten
offices in central Washington. At the merger date, Central had total
consolidated assets of $206.1 million, including total loans receivable of
$132.2 million, total deposits of $181.9 million and stockholders' equity of
$17.1 million. Each share of Central Bancorporation common stock has been
exchanged for 1.41 shares of InterWest Bancorp, Inc. common stock.

Continuing its commitment to commercial banking, InterWest has acquired
three financial institutions subsequent to September 30, 1997 and signed a
definitive agreement to acquire a fourth prior to the end of fiscal year
1998.

On January 15, 1998, InterWest Bancorp, Inc. acquired Puget Sound
Bancorp, Inc. (Puget), of Port Orchard, Washington, the holding company of
First National Bank of Port Orchard. Under the terms of this transaction,
Puget merged into InterWest Bancorp, Inc., with First National Bank of Port
Orchard becoming a subsidiary of InterWest Bancorp, Inc. First National Bank
of Port Orchard operates three branch offices in western Washington. At the
acquisition date, Puget had total consolidated assets of $53.1 million,
including total loans receivable of $38.7 million, total deposits of $45.6
million, and stockholders' equity of $5.9 million. Each share of Puget common
stock has been exchanged for 1.67 shares of InterWest common stock.

On June 15, 1998, InterWest Bancorp, Inc. acquired Pacific Northwest
Bank (Pacific), of Seattle, Washington. Under the terms of this transaction,
Pacific has become a subsidiary of InterWest Bancorp, Inc. At the acquisition
date, Pacific had four offices in the metropolitan Seattle area of western
Washington and total assets of $200.2 million, including total loans
receivable of $150.1 million, total deposits of $170.2 million, and
stockholders' equity of $16.8 million. Each share of Pacific common stock
has been exchanged for 3.95 shares of InterWest Bancorp, Inc. common stock.

On June 16, 1998, InterWest Bancorp, Inc. acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National
Bank. Under the terms of this transaction, Pioneer merged into InterWest
Bancorp, Inc., with Pioneer National Bank becoming a subsidiary of InterWest
Bancorp, Inc. Pioneer National Bank operates five branch offices in central
Washington. At the acquisition date, Pioneer had total consolidated assets of
$108.4 million, including total loans receivable of $63.4 million, total
deposits of $87.2 million, and stockholders' equity of $9.3 million. Each
share of Pioneer common stock has been exchanged for 1.34 shares of InterWest
Bancorp, Inc. common stock.

These mergers have been accounted for using the pooling-of-interests
method of accounting. In accordance with generally accepted accounting
principles, prior period financial statements, as well as management
discussion and analysis have been restated as if the companies were combined
for all periods presented.
C-1
<PAGE>

The following table summarizes pertinent information related to the completed
mergers:

Merger Total Assets At Merger Date Common Shares
Date Institution (dollars in thousands) Issued
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 31, 1996 Central Bancorporation $ 206,093 1,431,594
January 15, 1998 Puget Sound Bancorp, Inc. 53,109 390,947
June 15, 1998 Pacific Northwest Bank 200,219 1,564,054
June 16, 1998 Pioneer Bancorp, Inc. 108,399 461,897

</TABLE>

On April 20, 1998 InterWest Bancorp, Inc. signed a definitive agreement
to acquire Kittitas Valley Bancorp, Inc. (Kittitas) and its banking
subsidiary, Kittitas Valley Bank, of Ellensburg, Washington. Stockholders of
Kittitas can elect to receive either cash, or a fixed number of shares of
InterWest Bancorp, Inc. common stock for each share of Kittitas common stock
such that, in aggregate, fifty percent of the shares of Kittitas common stock
will be exchanged for cash and fifty percent of the shares of Kittitas common
stock will be exchanged for InterWest Bancorp, Inc. common stock. The
transaction will result in the issuance of approximately 150,000 shares of
InterWest Bancorp, Inc. common stock and the cash payment of approximately
$6.5 million. As of March 31, 1998, Kittitas had total consolidated assets of
$45.9 million and stockholders' equity of $4.0 million. Kittitas Valley Bank
operates three branch offices in Kittitas County. This transaction will be
accounted for using the purchase method under generally accepted accounting
principles.

A source of future growth may be through acquisitions. InterWest
believes that many other financial institutions are considering selling their
institutions for a variety of reasons, including lack of stockholder
liquidity, management succession issues, technology challenges and increasing
competition. InterWest actively reviews proposals for various acquisition
opportunities. InterWest has established a due diligence review process to
evaluate potential acquisitions and has established parameters for potential
acquisitions relating to market factors, financial performance and certain
nonfinancial factors. Successful completion of acquisitions by InterWest
depends on several factors such as the availability of suitable acquisition
candidates, necessary regulatory and stockholder approval and compliance with
applicable capital requirements.

Today InterWest conducts its business through 51 full-service branch
offices in 15 counties in western and central Washington State. These
offices are located in towns, small cities, suburbs and metropolitan markets.
Investments are available through InterWest Financial Services, Inc., a
wholly-owned subsidiary of InterWest Bank and insurance is available through
InterWest Insurance Agency, Inc., a majority-owned subsidiary of InterWest
Bank.

The table below sets forth summary financial information and certain
performance ratios for the previous five fiscal years.

As of and for the year ended September 30, 1997 1996(1) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C>
Summary of Operations

Interest Income $ 165,206 $ 143,827 $ 119,731 $ 97,850 $ 85,736
Interest Expense 91,081 77,127 65,119 45,251 39,150
Net Interest Income Before
Provision for Losses on Loans 74,125 66,700 54,612 52,599 46,586
Provision for Losses on Loans 1,508 2,452 929 1,053 1,898
Net Interest Income After
Provision for Losses on Loans 72,617 64,248 53,683 51,546 44,688
Other Operating Income 18,645 15,744 13,030 10,428 12,434
Other Operating Expense 54,032 55,716 40,718 36,924 34,627
Federal Income Tax Expense 12,681 7,785 8,721 8,568 6,763
Net Income $ 24,549 $ 16,491 $ 17,274 $ 16,482 $ 15,732
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic Net Income Per Share $ 2.37 $ 1.61 $ 1.70 $ 1.63 $ 1.59
Diluted Net Income Per Share 2.30 1.57 1.67 1.60 1.56
Cash Dividends Declared Per Share 0.50 0.43 0.29 0.29 0.23
Weighted Average Basic
Shares Outstanding 10,378,701 10,217,883 10,186,991 10,131,999 9,920,128
Weighted Average Diluted

Shares Outstanding 10,652,697 10,486,696 10,372,602 10,322,231 10,113,175
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

C-2
<PAGE>

As of and for the year ended September 30,
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA 1997 1996(1) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Financial Condition
Total Assets $2,402,928 $2,016,085 $1,723,780 $1,485,978 $1,172,017
Loans Receivable and
Loans Held for Sale 1,348,681 1,170,271 1,035,099 895,564 784,790
Deposits 1,468,460 1,389,402 1,260,946 1,154,331 949,655
Borrowings 755,968 466,693 321,932 209,468 116,282
Stockholders' Equity 160,770 137,647 128,882 113,210 97,982
Book Value Per Share $ 15.39 $ 13.40 $ 12.67 $ 11.12 $ 9.84

KEY OPERATING RATIOS:

Return on average assets.................................. 1.15% 0.90% 1.10% 1.23% 1.40%
Return on average stockholders' equity.................... 16.64% 12.13% 14.25% 15.49% 17.43%
Average stockholders' equity to
average assets........................................... 6.89% 7.38% 7.73% 7.96% 8.01%
Net interest margin....................................... 3.70% 3.85% 3.70% 4.16% 4.45%
Ratio of non-performing assets
to total assets(2)...................................... 0.52% 0.49% 0.41% 0.53% 0.69%
Dividend payout ratio..................................... 21.35% 26.97% 17.04% 16.31% 12.90%

</TABLE>

(1) 1996 results include nonrecurring SAIF assessment of $3.6 million (net of
tax) and special charges of $2.0 million (net of tax).

(2) Non-performing assets consist of non-performing loans (including nonaccrual
loans certain other delinquent loans at the discretion of management) and
real estate held for sale.

RESULTS OF OPERATIONS

InterWest's net income of $24.5 million in 1997 increased from $16.5
million in 1996 and $17.3 million in 1995. Diluted net income per share was
$2.30 in 1997 compared to $1.57 in 1996 and $1.67 in 1995. InterWest's return
on average assets was 1.15 percent in 1997, an increase from 0.90 percent in
1996 and 1.10 percent in 1995. Return on average stockholders' equity of 16.64
percent in 1997 also increased from 12.13 percent in 1996 and 14.25 percent in
1995. The results of operations for 1996 included significant nonrecurring
expenses of $5.5 million related to the recapitalization of the Savings
Association Insurance Fund (SAIF) and special charges primarily associated with
the Central merger of $3.1 million. Excluding these nonrecurring expenses, net
income for 1996 was $22.1 million, diluted net income per share was $2.11,
return on average assets was 1.20 percent and return on average stockholders'
equity was 16.25 percent.

NET INTEREST INCOME--Net interest margin was 3.70 percent in 1997, a decrease
from 3.85 percent in 1996 and consistent with 3.70 percent in 1995. The decrease
in net interest margin was primarily due to a flat yield curve. In such an
interest rate environment, the margin earned on mortgage lending has decreased
due to the compression of the spread between short-term deposit and borrowing
rates and lending rates. InterWest has taken steps to insulate itself from the
impact of a flat yield curve by focusing on adjustable-rate lending, increasing
short-term business and consumer loan originations and selling fixed-rate
mortgage loans. During 1997, the securities portfolio increased and InterWest
used borrowings from the Federal Home Loan Bank (FHLB) and securities sold under
agreements to repurchase to fund this growth. Leveraging capital offsets higher
operating costs associated with the development of the infra-structure for
growth in consumer and commercial banking by increasing net interest income.
This activity decreases net interest margin as the spread earned on securities
funded by borrowings is lower compared to the spread earned on loans funded by
customer deposits. In spite of the decrease in net interest margin, net interest
income increased to $74.1 million in 1997 from $66.7 million in 1996 and $54.6
million in 1995. The increase in net interest income is due to growth in
interest-earning assets which is partially offset by a decrease in the margin
earned on these assets.

C-3
<PAGE>

The following table presents for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resulting yield and
cost ratios, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin for InterWest.

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1997 1996
-----------------------------------------------------------------------
Average Average Average Average
DOLLARS IN THOUSANDS Balance Interest Yield/Cost Balance Interest Yield/Cost
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) . . . . . . . . . . . . . $1,258,351 $115,053 9.14% $1,086,149 $101,292 9.33%
Securities available for sale and
securities held to maturity . . . . . . . . 709,235 47,563 6.71 594,208 38,879 6.54
Other interest-earning assets . . . . . . . . 38,486 2,590 6.73 54,349 3,656 6.73
-------------------------------------------------------------------
Total interest-earning
assets . . . . . . . . . . . . . . . . . . 2,006,072 165,206 8.24 1,734,706 143,827 8.29

Non-interest earning assets. . . . . . . . . . 134,860 107,331
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . $2,140,932 $1,842,037
---------- ----------
---------- ----------
Interest-bearing liabilities:
Savings accounts and Money market accounts. . 294,112 9,196 3.13 272,427 8,720 3.20
Checking accounts(2). . . . . . . . . . . . . 256,829 1,803 0.70 238,318 2,266 0.95
Certificates of deposit . . . . . . . . . . . 893,244 50,008 5.60 800,306 45,097 5.63
-------------------------------------------------------------------
Total Deposits. . . . . . . . . . . . . . . 1,444,185 61,007 4.22 1,311,051 56,083 4.28

FHLB advances, securities sold
under agreements to repurchase
and other borrowings . . . . . . . . . . . . 530,356 30,074 5.67 379,319 21,044 5.55
-------------------------------------------------------------------
Total interest-bearing
liabilities. . . . . . . . . . . . . . . . . 1,974,541 91,081 4.61 1,690,370 77,127 4.56

Non-interest bearing
liabilities. . . . . . . . . . . . . . . . . 18,837 15,741
---------- ----------
Total liabilities. . . . . . . . . . . . . 1,993,378 1,706,111

Stockholders' equity . . . . . . . . . . . . . 147,554 135,926
---------- ----------
Total liabilities and
stockholders' equity . . . . . . . . . . . . $2,140,932 $1,842,037
---------- ----------
---------- ----------
Net interest income. . . . . . . . . . . . . . $74,125 $66,700
------- -------
------- -------
Interest rate spread . . . . . . . . . . . . . 3.63 3.73

Net interest margin . . . . . . . . . . . . . 3.70 3.85

Ratio of average interest-earning
assets to average interest-
bearing liabilities . . . . . . . . . . . . . 101.60% 102.62%

1995
--------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Interest Yield/Cost
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) . . . . . . . . . . . . . $ 962,594 $ 86,206 8.96%
Securities available for sale and
securities held to maturity . . . . . . . . 479,567 31,555 6.58
Other interest-earning assets . . . . . . . . 32,722 1,970 6.02
---------------------------------
Total interest-earning
assets . . . . . . . . . . . . . . . . . . 1,474,883 119,731 8.12

Non-interest earning assets. . . . . . . . . . 92,371
----------
Total Assets . . . . . . . . . . . . . . . . . $1,567,254
----------
----------
Interest-bearing liabilities:
Savings accounts and Money market accounts. . $ 265,712 8,775 3.30
Checking accounts(2). . . . . . . . . . . . . 209,894 2,427 1.16
Certificates of deposit . . . . . . . . . . . 728,656 41,413 5.68
---------------------------------
Total Deposits. . . . . . . . . . . . . . . 1,204,262 52,615 4.37

FHLB advances, securities sold
under agreements to repurchase
and other borrowings . . . . . . . . . . . . 230,999 12,504 5.41
---------------------------------
Total interest-bearing
liabilities. . . . . . . . . . . . . . . . . 1,435,261 65,119 4.54

Non-interest bearing
liabilities. . . . . . . . . . . . . . . . . 10,783
----------
Total liabilities. . . . . . . . . . . . . 1,446,044

Stockholders' equity . . . . . . . . . . . . . 121,210
----------
Total liabilities and
stockholders' equity . . . . . . . . . . . . $1,567,254
----------
----------
Net interest income. . . . . . . . . . . . . . $54,612
-------
-------
Interest rate spread . . . . . . . . . . . . . 3.58

Net interest margin . . . . . . . . . . . . . 3.70

Ratio of average interest-earning
assets to average interest-
bearing liabilities . . . . . . . . . . . . . 102.76%

</TABLE>

_______________
(1) Does not include interest on loans 90 days or more past due.
(2) Includes average non-interest bearing deposits of $125.6 million, $105.0
and $91.3 million for the years ended September 30, 1997, 1996 and 1995,
respectively.

C-4
<PAGE>

The effect on net interest income due to changes in interest rates and
the amounts of interest-earning assets and interest-bearing liabilities are
depicted in the following table. The table below provides information on
changes for the periods which are attributable to changes in interest rates
and changes in volume.

<TABLE>
<CAPTION>
1997 vs 1996 1996 vs 1995
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
DOLLARS IN THOUSANDS Rate Volume Total Rate Volume Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans receivable and loans
held for sale $(1,939) $15,700 $13,761 $3,675 $11,411 $15,086
Securities available for sale,
securities held to maturity and
other interest-earning assets 986 6,632 7,618 73 8,937 9,010
----------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (953) 22,332 21,379 3,748 20,348 24,096
----------------------------------------------------------------------------------
Interest-Bearing Liabilities
Deposits (690) 5,614 4,924 (1,070) 4,538 3,468
FHLB advances, securities sold
under agreements to repurchase
and other borrowings 475 8,555 9,030 319 8,221 8,540
----------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (215) 14,169 13,954 (751) 12,759 12,008
----------------------------------------------------------------------------------
Net change in net
interest income $ (738) $ 8,163 $7,425 $4,499 $7,589 $12,088
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>

PROVISION FOR LOSSES ON LOANS--The provision for losses on loans in 1997 was
$1,508,000 compared to $2,452,000 in 1996 and $929,000 in 1995. The 1996
provision included $900,000 to conform the allowance for losses on loan
methodology of Central and InterWest.

NONINTEREST INCOME--Noninterest income was $18.6 million in 1997, an
increase from $15.7 million in 1996 and $13.0 million in 1995. This increase
in 1997 is primarily due to the securitization and sale of $86.9 million in
fixed-rate mortgage loans. Of these loan securitizations, $43.1 million were
sold immediately and $43.8 million were held for a period of time as
securities available for sale. Additionally during fiscal year 1997,
$4.9 million of sub-prime and $17.4 million of other mortgage loans originated
by InterWest Bank were sold. These transactions resulted in gains on sale of
loans that were $2.2 million higher as compared to fiscal year 1996. For the
year ended September 30, 1997 gains on sale of loans totaled $4.2 million,
representing 22.6 percent of noninterest income compared to an average of
14.0 percent for fiscal years 1996 and 1995. Another contributing factor to
the overall increase in noninterest income was an increase in service fee
revenues of $777,000 from 1996 and $3.1 million from 1995. This increase in
service fees is primarily due to a $325,000 increase in loan fees earned by
mortgage brokerage activities and an increase of $433,000 in service charges
on deposits.

Revenue from the sale of non-traditional financial and insurance
products through InterWest Bank's subsidiaries, InterWest Financial Services
and InterWest Insurance Agency were $2.2 million for 1997, compared to
$2.3 million in 1996 and $2.2 million in 1995.

Gains on the sale of real estate held for sale and for development were
$346,000 in 1997 compared to $806,000 in 1996 and $16,000 in 1995. Gains
recorded for 1997 are lower compared to 1996 primarily as a result of a gain
of $500,000 recorded on the sale of one significant real estate property
during 1996. InterWest is currently attempting to sell two land development
projects in Mount Vernon, Washington, and Fountain, Colorado. Both
properties will take several years to sell out.

NONINTEREST EXPENSE--Noninterest expenses totaled $54.0 million in 1997
compared to $55.7 million in 1996 and $40.7 million in 1995. During 1996,
noninterest expenses were adversely impacted by the SAIF recapitalization
charge of $5.5 million and the special charges primarily associated with the
Central merger of $3.1 million. Excluding these nonrecurring expenses in
1996, other operating expenses increased $6.9 million or 14.7 percent in 1997
compared to $6.4 million or 15.6 percent expense growth in 1996.

C-5
<PAGE>

Excluding the nonrecurring SAIF assessment and special charges from the
Central merger incurred in 1996, InterWest's efficiency ratio was 58.24
percent in 1997, 57.12 percent in 1996 and 60.20 percent in 1995.

The increase in noninterest expenses and the efficiency ratio is
consistent with strategies for planned future balance sheet growth and
diversification of product lines. Increases in compensation and employee
benefits, general and administrative, data processing and occupancy expenses
are due to expansion and diversification, enhanced focus on consumer and
commercial banking products and services, and the opening of new branch
offices during 1997. Key elements of the consumer and commercial banking
focus were the development of credit administration, consumer and business
lending support, business relationship officers and the addition of several
experienced commercial banking management personnel at InterWest Bank.

InterWest recorded a charge of $200,000 for fair value adjustments on
certain properties in the real estate held for sale portfolio during 1997.
During 1996, InterWest reduced the allowance for losses on the real estate
held for sale by $1.0 million which reduced other operating expenses. These
charges and credits are based on the periodic evaluation of the real estate
held for sale and for development portfolios and risks associated with
respective properties.

On September 30, 1996, a law was enacted to recapitalize the SAIF
through a one-time assessment of 0.657 percent of SAIF insured deposits,
resulting in a $5.5 million expense to InterWest. This legislation was
intended to recapitalize the SAIF to a level equivalent to the Bank Insurance
Fund (BIF). Prior to this legislation, most savings institutions were paying
0.23 percent of insured deposits. Beginning January 1, 1997, savings
institutions began paying 0.064 percent of insured deposits which, in
InterWest's case, produced an annual costs savings of approximately $1.5
million in FDIC premium assessments. This should allow InterWest to recover
this one time assessment in less than four years. FDIC premium assessments
decreased to $428,000 in 1997, compared to $2.0 million in 1996 and $2.1
million in 1995.

The century date change for the Year 2000 is a serious issue that may
impact virtually every organization, including InterWest. The challenge is
especially important to financial institutions since many processes, such as
interest accruals and payments, are date sensitive and InterWest has
interaction with numerous customers, vendors and third party service
providers whom must also address the century date change issue.

InterWest has developed a plan, is developing contingency plans and has
performed assessments on its systems. As part of InterWest's process to
address the Year 2000 issue, InterWest has implemented a program to monitor
Year 2000 efforts of its suppliers, service providers and large customers.
Testing on systems identified as critical to validate upgrades, vendor
certification and other changes necessary is expected to begin in 1998.
Current estimates indicate renovation costs will not be material to
InterWest's results of operations. Costs incurred related to renovating and
testing will be expensed in the period incurred. InterWest could possibly be
impacted by the century change to the extent other entities not affiliated
with InterWest are unsuccessful in addressing this issue.

INCOME TAX EXPENSE--Consistent with increased net income, income tax expense
for 1997 was $12.7 million, an increase from $7.8 million in 1996 and $8.7
million in 1995. The effective tax rates were 34.1 percent in 1997, 32.1
percent in 1996 and 33.5 percent in 1995. The lower effective tax rate in
1996 is primarily due to certain tax benefits resulting from the merger with
Central.

REVIEW OF FINANCIAL CONDITION

InterWest's total assets were $2.403 billion as of September 30, 1997,
compared to $2.016 billion as of September 30, 1996. This is an increase of
$387.0 million, or 19.2 percent. This growth is primarily due to an
increase in the balance of loans receivable oustanding of $179.4 million as
well as an increase in securities and other interest-earning assets of $188.0
million. The growth in assets has been primarily funded through an increases
in borrowings of $289.3 million and deposits of $79.1 million.

SECURITIES AND OTHER INTEREST-EARNING ASSETS--Securities and other
interest-earning assets, including securities available for sale, securities
held to maturity, FHLB stock interest-bearing deposits in banks and federal
funds sold increased to $901.8 million as of September 30, 1997, compared to
$713.8 million as of September 30, 1996. It is InterWest's intent to
increase the loan portfolio relative to other interest-earning assets. During
fiscal year 1997, management has leveraged capital with securities growth in
an attempt to offset increased operational costs associated with the
implementation of the plan for consumer and business banking growth. This has
increased net interest income but decreased net interest margin as the margin
earned on securities is less than loans. As of September 30, 1997, the
securities portfolio consists of $351.7 million or 51 percent, of
mortgage-backed and related securities and $343.8 million or 49 percent, of
investment securities. This is a change from September 30, 1996 when 68
percent of all securities were mortgage-backed and related securities and 32
percent were investment securities. As of September 30, 1997, 81 percent of
InterWest's securities were classified as available for sale an increase from
62 percent as of September 30, 1996. Management believes that a higher
percentage of securities classified as available for sale provides greater
flexibility to respond to interest rate changes and liquidity needs to fund
loan growth.

C-6
<PAGE>

InterWest has generally maintained liquidity in excess of regulatory
guidelines. Liquidity levels may be increased or decreased depending upon
the yields on investment alternatives, management's judgment as to the
attractiveness of the yields then available in relation to other
opportunities, management's expectation of the level of yield that will be
available in the future as well as management's projections as to the short
term demand for funds to be used in the InterWest's loan origination and
other activities.

Securities are categorized as held to maturity or available for sale,
based upon management's intent as to the ultimate disposition of each
security acquired. InterWest does not actively trade securities. Securities
classified as held to maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts over the terms of the securities,
while securities classified as available for sale are reported at fair value,
with unrealized gains and losses (net of deferred income taxes) reported as a
net amount in a separate component of stockholders' equity. See Notes 3 and
4 to Consolidated Financial Statements regarding the InterWest's securities
available for sale and securities held to maturity.

The following table sets forth carrying values and estimated fair values
for InterWest's securities held to maturity as of the dates indicated.

<TABLE>
<CAPTION>
September 30,
1997 1996 1995
--------------------------------------------------------------------------------------------------
Estimated Percent Estimated Percent Estimated Percent
Amortz Fair of Amortz Fair of Amortz Fair of
DOLLARS IN THOUSANDS Cost Value Portfolio Cost Value Portfolio Cost Value Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and Agency securities . . . . $54,905 $54,622 41.5% $158,389 $157,505 62.0% $ 66,079 $65,467 18.9%
Obligations of states
and political subdivisions. . 10,841 10,992 8.2 10,301 10,413 4.0 11,009 11,169 3.1
Other securities . . . . . . . 66,549 63,856 50.3 86,817 81,044 34.0 272,684 266,947 77.0
--------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . $132,295 $129,470 $255,507 $248,962 $349,772 $343,583
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>

The following table sets forth the maturities and weighted average yields of
the securities held to maturity at September 30, 1997.

<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------------ ------------------ ------------------ --------------------
Amortized Amortized Amortized Amortized
DOLLARS IN THOUSANDS Cost Yield Cost Yield Cost Yield Cost Yield
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and Agency securities . . . . $300 5.19% $20,093 6.59% $ -- --% $34,512 6.29%
Obligations of states
and political subdivisions. . 2,152 4.21 5,448 4.77 3,241 5.65 -- --
Other securities . . . . . . . -- -- -- -- -- -- 66,549 6.51
-----------------------------------------------------------------------------------------
Total. . . . . . . . . . . $2,452 4.32 $25,541 6.19 $3,241 5.65 $101,061 6.42
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>

The following table sets forth InterWest's securities available for sale
portfolio at the dates indicated.

<TABLE>
<CAPTION>
September 30,
-------------
1997 1996 1995
-----------------------------------------------------------------------------
Estimated Estimated Estimated
Fair Percent of Fair Percent of Fair Percent of
DOLLARS IN THOUSANDS Value Portfolio Value Portfolio Value Portfolio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Securities . . . . . . $421,856 74.9% $134,969 32.4% $61,787 34.0%
SBA Certificates . . . . . . . 61,160 10.8 71,037 17.0 71,286 39.4
Obligations of states and
political subdivisions. . . . 5,414 1.0 11,458 2.8 1,883 1.0
Other securities . . . . . . . 74,737 13.3 199,367 47.8 46,516 25.6
-------------------------------------------------------------------------
Total . . . . . . . . . . . $563,167 $416,831 $181,472
-------- -------- --------
-------- -------- --------
</TABLE>

C-7
<PAGE>

The following table sets forth the maturities and weighted average yields
of InterWest's securities available for sale portfolio at September 30, 1997.

<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------------------------------------------------------------------------------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
DOLLARS IN THOUSANDS Value Yield Value Yield Value Yield Value Yield
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Securities . . . . . . $ 537 5.57% $291,302 6.51% $12,911 6.39% $117,029 6.66%
SBA Certificates . . . . . . . -- -- -- -- 11,683 8.33 49,477 7.89
Obligations of states and
political subdivisions. . . . 1,135 4.71 2,193 4.28 1,982 4.75 104 5.37
Other securities . . . . . . . 427 7.07 345 5.90 3,346 7.39 70,619 6.58
----------------------------------------------------------------------------------------------
Total . . . . . . . . . . . $2,099 5.41 $293,840 6.49 $29,922 7.11 $237,229 6.81
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>

The following table presents the name of the issuer and the aggregate
amortized cost and aggregate estimated fair value of the securities of each
issuer for those securities in InterWest's portfolio whereby the aggregate
amortized cost exceeds 10 percent of InterWest's stockholders' equity as of
September 30, 1997.

<TABLE>
<CAPTION>
Estimated
DOLLARS IN THOUSANDS Amortized Cost Fair Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Chase Mortgage Finance Corporation . . . . . . $21,631 $20,896

DLJ Mortgage Acceptance Corporation. . . . . . 18,208 18,153

GE Capital Mortgage Services, Inc. . . . . . . 56,827 53,899

</TABLE>

LOANS RECEIVABLE AND LOANS HELD FOR SALE--The loan portfolio, which includes
loans receivable and loans held for sale has increased by $179.0 million or
15.2 percent from $1.170 billion as of September 30, 1996 to $1.349 billion
as of September 30, 1997. The business loan portfolio, which includes
commercial and agricultural loans, and the consumer loan portfolio increased
to $185.8 million and $73.9 million, representing growth rates of 36.3
percent and 16.8 percent, respectively, during 1997. Business loans
represented 13.6 percent and consumer loans 5.4 percent of the total loan
portfolio as of September 30, 1997. Mortgage loans increased by 11.0 percent
during fiscal year 1997. The increase in mortgage loans and the overall loan
growth would have been more significant, however InterWest securitized and
sold $86.9 million of fixed-rate mortgage loans during 1997. Real estate
construction loans outstanding increased by 19.1 percent from September 30,
1996 to September 30, 1997.

The principal lending activity of InterWest Bank is the origination of
single-family residential mortgage loans and, to a lesser extent, loans
secured by income property, consumer loans, commercial loans and agricultural
loans. Pacific Northwest Bank, Pioneer National Bank and First National Bank
of Port Orchard, have loan portfolios which have a greater percentage of
commercial loans than InterWest Bank.

As of September 30, 1997, $701.8 million, or 51.2 percent of the
InterWest's loan portfolio consisted of loans secured by one-to-four family
residential properties and $272.4 million, or 19.9 percent of total loans,
consisted of income property loans (multi-family residential and commercial
real estate loans). Real estate construction loans, which are primarily
secured by one-to-four family residential properties, were $136.6 million or
10.0 percent of total loans as of September 30, 1997. InterWest typically
requires that mortgage loans be secured by first liens on single-family,
residential dwellings (one- to-four family units), land, developed lots and
income property. The purpose of the majority of real estate mortgage loans
has been for the purchase or construction of single-family residential
dwellings or refinancing of these properties, but some loans have been for
acquisition or development of residential lots or permanent loans secured by
income properties.

The mergers with Central, Pacific, Pioneer and Puget has increased
InterWest's access to commercial lending. This initiated the process of
changing the composition of the InterWest loan portfolio to that of a
financial institution with less reliance on single-family lending as the
primary loan product. InterWest will continue to focus loan growth efforts in
commercial, agricultural and consumer lending. Growth in commercial,
agricultural and consumer loans should shorten duration risk, produce higher
net interest margin, create better protection from interest rate volatility
and ultimately meet the needs of InterWest's individual and business
customers.

C-8
<PAGE>

The following table sets forth the composition of InterWest's loan
portfolio by type of loan as of the dates indicated.

<TABLE>
<CAPTION>
As of September 30,
--------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:

Real estate mortgage loans:
Single-family residential(1) $701,840 51.2% $630,147 52.9% $570,377 54.2% $509,842 55.9% $458,071 57.4%
Multi-family residential 58,137 4.2 55,256 4.6 53,608 5.1 39,741 4.4 33,233 4.2
Commercial 214,232 15.6 191,348 16.1 165,547 15.7 138,727 15.2 118,920 14.9
Real estate construction 136,580 10.0 114,698 9.6 105,212 10.0 89,759 9.9 74,552 9.3
Consumer loans 73,876 5.4 63,240 5.3 55,299 5.3 43,889 4.8 41,027 5.1
Commercial loans 155,265 11.4 122,275 10.3 87,788 8.3 76,346 8.4 65,717 8.2
Agricultural loans 30,491 2.2 14,007 1.2 14,878 1.4 13,169 1.4 6,856 0.9
-------------------------------------------------------------------------------------------------
Total gross loans 1,370,421 1,190,971 1,052,709 911,473 798,376

Less:
Allowance for losses
on loans (11,104) (10,235) (7,841) (7,233) (5,958)
Deferred loan fees
and discounts (10,636) (10,465) (9,769) (8,676) (7,628)
-------------------------------------------------------------------------------------------------
Total loans receivable, net $1,348,681 $1,170,271 $1,035,099 $895,564 $784,790
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>

_____________
(1) Includes construction loans converted to permanent loans.

The following table shows the contractual maturity of InterWest's gross
loans at September 30, 1997. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Loan balances do not include deferred loan fees and discounts and
allowance for losses on loans. The table does not reflect any estimate of
prepayments, which significantly shorten the average life of all loans and will
cause InterWest's actual repayment experience to differ significantly from that
shown below.

<TABLE>
<CAPTION>
After
Within One Year
One Through After
Dollars in thousands Year 5 Years 5 Years Total
- -----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential. . . $ 13,205 $ 44,925 $643,710 $ 701,840
Multi-family residential . . . 3,556 2,605 51,976 58,137
Commercial . . . . . . . . . . 28,596 68,790 116,846 214,232
Real estate construction . . . . 40,220 25,760 70,600 136,580
Consumer loans . . . . . . . . . 37,594 20,093 16,189 73,876
Commercial loans . . . . . . . . 84,219 35,836 35,210 155,265
Agricultural loans . . . . . . . 25,295 3,395 1,801 30,491
-----------------------------------------
Total loans. . . . . . . . . . $232,685 $201,404 $936,332 $1,370,421
-----------------------------------------
-----------------------------------------
</TABLE>

The following table sets forth the dollar amount of all loans due one year
or more after September 30, 1997 which have fixed interest rates and have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
Fixed Floating or
Dollars in thousands Rates Adjustable Rates
- ----------------------------------------------------------------------------
<S> <C> <C>
Loans maturing in more than one year $528,783 $608,953

</TABLE>

SINGLE-FAMILY RESIDENTIAL MORTGAGE LOANS--The primary lending activity of
InterWest has historically been the granting of mortgage loans to enable
borrowers to refinance and purchase existing dwellings or to construct new
single-family dwellings on properties located within its primary market area.
Management believes that focusing on single-family residential mortgage loans
has been successful in contributing to interest income while keeping
delinquencies

C-9
<PAGE>

and losses to a minimum. InterWest's single-family residential loan
portfolio also includes loans on two- to four-family dwellings and
manufactured homes.

InterWest presently originates both fixed-rate loans and adjustable-rate
mortgage loans ("ARMs") secured by one- to four-family properties with loan
terms of up to 30 years. ARMs have interest rates that adjust based upon
changes in the pre-determined index for a period matching the repricing
period of the loan. The majority of these loans provide that the amount of
any increase or decrease in the interest rate is limited to one percentage
point (upward or downward) per adjustment period which is typically six
months and generally limited to four and one-half percentage points over the
life of the loan. Borrower demand for ARMs versus fixed-rate mortgage loans
is a function of the level of interest rates, the expectations of changes in
the level of interest rates and the difference between the interest rates and
loan fees offered for fixed-rate mortgage loans and the rates and loan fees
for ARMs.

MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE MORTGAGE LOANS--
InterWest originates permanent loans on commercial real estate and
multi-family residences with terms of up to 30 years. Currently, InterWest
originates income property loans in its primary market area. InterWest's
permanent income property loans are secured by improved property such as
multi-family properties, office buildings and small commercial business
properties, condominiums, churches, subdivision developments and strip
shopping centers.

Income property loans in the portfolio are generally made in amounts
between $250,000 and $2.5 million. Loans that are not secured by single
family residences are integral to the InterWest's asset and liability
management program and reduce exposure to interest rate changes, such loans
may entail additional risks compared to residential mortgage lending.
Commercial real estate and multi-family residential mortgage loans secured by
income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are dependent on the successful operation or management of the
properties. As a result, repayment of such loans may be subject to
conditions in the real estate market or the economy to a greater extent than
single-family residential real estate loans. Commercial real estate mortgage
loans may involve large loan balances to single borrowers or groups of
related borrowers.

REAL ESTATE CONSTRUCTION--InterWest originates residential construction
mortgage loans to residential owner-occupants (custom construction loans) and
to contractors building residential properties for resale, as well as
construction loans for condominiums, multi-family residential properties and
land development on properties located within its primary market area.
Construction loans to owner-occupants generally have a term of six months and
then are converted to single-family residential mortgage loans. Construction
loans to builders generally are in amounts below $250,000 and are made with a
terms of twelve to eighteen months. InterWest's construction loans to
builders bear variable interest rates.

Real estate construction loans may involve additional risks because loan
funds are advanced upon the security of the project under construction which
is of uncertain value prior to the completion, delays may arise from labor
problems, material shortages may be experienced and other unpredictable
contingencies may occur. It is extremely important to evaluate accurately
the total loan funds required to complete a project and related loan-to-value
ratios. Because of these factors, the analysis of prospective construction
loan projects requires an expertise that is different in significant respects
from the expertise required for residential real estate mortgage lending.
Construction lending is generally considered to involve a higher degree of
collateral risk than long-term financing of residential properties.
InterWest's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value and marketability at
completion of construction or development and the estimated cost (including
interest) of construction. If the estimate of construction costs and the
marketability of the property upon completion of the project prove to be
inaccurate, InterWest may be required to advance additional funds to complete
the development.

InterWest's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, InterWest considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the
project, the independent appraisal and review of cost estimates, the
pre-construction sale and leasing information, and the cash flow projections
of the borrower. In addition, most of the construction loans granted by
InterWest are secured by property in the InterWest's local market areas.

COMMERCIAL--Commercial loans include a wide range of loan types to
small and medium sized businesses. A significant portion of these loans are
commercial lines of credit with adjustable rates and maturities of less than
one year. The remaining commercial loans include equipment and operational
loans with terms generally not exceeding five years. These loans are
primarily secured by capital assets and inventory, although certain loans are
unsecured. Commercial and agricultural lending have increased risks as a
result of dependence on income production for future repayment, and in
certain circumstances, the lack of tangible collateral. Commercial loans
are underwritten based on the financial strength and repayment ability of the
borrower, as well as the value of any collateral securing the loans.
Commercial lending operations rely on a strong credit culture that combines
prudent credit policies and individual lender accountability.

C-10
<PAGE>

AGRICULTURAL--Agricultural loans include seasonal production loans
secured by crops and equipment. These loans generally have adjustable rates
and maturities of less than one year. Agricultural loans also include loans
secured by farmland. The majority of these loans have terms of less than
five years and have adjustable rates.

CONSUMER--Consumer loans consist of savings account loans, automobile
loans, home equity loans and loans for other consumer purposes. Consumer
lending may involve special risks, including decreases in the value of
collateral and transaction costs associated with foreclosure and repossession.

LOANS HELD FOR SALE--Loans intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income. Loans that are held for sale are generally fixed-rate mortgage loans
and loans originated under a small business administration program. The
loans are sold to FHLMC and other financial institutions. In connection with
loan sales, InterWest generally retains the right to service the loans (i.e.,
collection of principal and interest payments), for which it generally
receives a fee based on the difference between the rate paid to the investor
and that collected from the borrower, which generally ranges from 1/4 percent
to 1/2 percent of the unpaid balance of each loan. In accordance with SFAS
No. 125 "Accounting for Transfers and Servicing of Assets and Extinguishments
of Liabilities", InterWest capitalizes mortgage servicing rights when
acquired either through the purchase or origination of mortgage loans that
are subsequently sold or securitized with the servicing rights retained.
Mortgage servicing rights are included in intangible assets and are amortized
as an offset to services fees in proportion to and over the period of
estimated net servicing income not to exceed 15 years. As of September 30,
1997, InterWest was servicing $365.9 million of loans for others.

NONACCRUAL AND PROBLEM LOANS--InterWest follows regulatory guidelines
with respect to classifying loans on a nonaccrual basis. Loans are placed on
nonaccrual when they become past due over 90 days or when the collection of
interest or principal is considered unlikely. InterWest does not return a
loan to accrual status until it is brought current with respect to both
principal and interest and future principal payments are no longer in doubt.
When a loan is placed on nonaccrual status, any previously accrued and
uncollected interest is reversed. As of September 30, 1997 and 1996,
InterWest had $5.1 million and $3.8 million, respectively, of loans on
nonaccrual status.

Each of the subsidiary banks performs a review of its loan portfolio for
weaknesses in credit quality on an ongoing basis to identify problem loans.
This review results in internal loan classifications based on risk
characteristics and loan performance. Any portion of a loan that is
classified as loss is charged-off against the allowance for losses on loans.
The overall objective of this review process is to identify any trends and
determine the level of loss exposure to evaluate the need for an adjustment
to the allowance for losses on loans.

ALLOWANCE FOR LOSSES ON LOANS--InterWest's allowance for losses on loans is
$11.1 million or 0.82 percent of loans as of September 30, 1997, compared to
$10.2 million, or 0.87 percent of loans as of September 30, 1996. Net loan
charge-offs for the year ended September 30, 1997 were $640,000 or 0.05
percent of the average balance of loans outstanding, compared to an average
of $327,000 or 0.04 percent of average loans for fiscal years 1993 through
1996.

When loans are originated, InterWest recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term
of the loan, general economic conditions and, in the case of a secured loan,
the quality of the collateral securing the loan.

The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes
in the size and composition of the loan portfolio, delinquency levels, actual
loan loss experience, current economic conditions, and detailed analysis of
individual loans for which full collectibility may not be assured. The
appropriate level of the allowance for losses on loans is estimated based
upon factors and trends identified by management.

When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged-off against the
allowance for losses on loans. The existence of some or all of the following
criteria will generally confirm that a loss has been incurred: the loan is
significantly delinquent and the borrower has not evidenced the ability or
intent to bring the loan current; the subsidiary bank has no recourse to the
borrower, or if it does, the borrower has insufficient assets to pay the
debt; the fair value of the loan collateral is significantly below the
current loan balance, and there is little or no near-term prospect for
improvement. A provision for losses on loans, which is a charge against
operations, is added to the allowance for losses on loans based on ongoing
assessments of credit risk in the loan portfolio.

While InterWest believes it has established its allowance for losses on
loans in accordance with generally accepted accounting principles, there can
be no assurance that in the future, regulators, when reviewing InterWest's
loan portfolio, will not request InterWest to increase its allowance for
losses on loans thereby impacting InterWest's financial condition and results
of operations. In addition, because future events impacting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for losses on loans is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate
as a result of the factors discussed above.

C-11
<PAGE>

The following table sets forth an analysis of the InterWest's allowance
for losses on loans for the periods indicated.

<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period . . $10,235 $7,841 $7,233 $5,958 $4,816
Provision for losses on loans. . . . 1,508 1,552 929 1,053 1,898
Provision pursuant to acquisition. . -- 900 -- -- --
Provision acquired . . . . . . . . . -- -- -- 393 --

Charge-offs:
Real estate mortgage loans:
Single-family residential. . . . . 109 99 126 164 428
Multi-family residential . . . . . -- -- 142 -- --
Commercial . . . . . . . . . . . . 234 20 -- -- 124
Real estate construction. . . . . . -- -- -- -- --
Consumer loans. . . . . . . . . . . 449 304 314 247 499
Commercial loans. . . . . . . . . . 246 60 138 54 147
Agricultural loans. . . . . . . . . 2 -- -- 5 13
------------------------------------------------
Total charge-offs . . . . . . . . 1,040 483 720 470 1,211
Recoveries:
Real estate mortgage loans:
Single-family residential. . . . . 39 6 20 84 15
Commercial . . . . . . . . . . . . 67 13 22 -- --
Consumer loans. . . . . . . . . . . 162 118 152 77 87
Commercial loans. . . . . . . . . . 133 288 201 133 179
Agricultural loans. . . . . . . . . -- -- 4 5 174
------------------------------------------------
Total recoveries. . . . . . . . . 401 425 399 299 455
------------------------------------------------
Net recoveries (charge-offs). . . (639) (58) (321) (171) (756)
------------------------------------------------
Balance at end of period. . . . . $11,104 $10,235 $7,841 $7,233 $5,958
------------------------------------------------
------------------------------------------------
Ratio of allowance to total
loans outstanding at the
end of the period . . . . . . . . . 0.82% 0.87% 0.76% 0.81% 0.76%
Ratio of net charge-offs
to average loans outstanding
during the period . . . . . . . . . 0.05% 0.01% 0.03% 0.02% 0.10%

</TABLE>

InterWest has historically maintained a positive variance from the
minimum estimated allowance for losses on loans based on the analyses
conducted by management and credit personnel. Management allocates part of
the allowance for losses on loans to certain loan categories based on the
relative risk characteristics and charge-off histories of the loan portfolio.
Management has reviewed the allocations in the various loan categories and
believes the allowance for losses on loans was adequate at all times during
the five year period ended September 30, 1997. Although the allocation of
the allowance for losses on loans is an important credit management tool, the
entire allowance for losses on loans is available for the entire loan
portfolio. The following table sets forth the allocation of the allowance
for losses on loans by loan category for the periods indicated.

<TABLE>
<CAPTION>
September 30,
-------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
DOLLARS IN THOUSANDS Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential. . $2,092 51.2% $1,611 52.9% $1,455 54.2% $1,292 55.9% $1,153 57.4%
Multi-family residential . . 256 4.2 445 4.6 424 5.1 314 4.4 263 4.2
Commercial . . . . . . . . . 742 15.6 1,685 16.1 1,365 15.7 1,157 15.2 1,015 14.9
Real estate construction . . . 494 10.0 459 9.6 388 10.0 368 9.9 326 9.3
Consumer loans . . . . . . . . 1,012 5.4 1,047 5.3 904 5.3 703 4.8 630 5.1
Commercial loans . . . . . . . 1,592 11.4 1,064 10.3 843 8.3 720 8.4 937 8.2
Agricultural loans . . . . . . 59 2.2 214 1.2 217 1.4 162 1.4 113 0.9
Unallocated. . . . . . . . . . 4,857 N/A 3,710 N/A 2,245 N/A 2,517 N/A 1,521 N/A
-------------------------------------------------------------------------------------------
Total allowance
for losses on loans . . . . $11,104 $10,235 $7,841 $7,233 $5,958
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>

C-12
<PAGE>

REAL ESTATE HELD FOR SALE AND FOR DEVELOPMENT--Real estate held for sale
includes property acquired by InterWest through foreclosure. The property is
carried at the lower of its fair market value or the principal balance of the
foreclosed loan. At September 30, 1997, InterWest had 27 foreclosed
properties totaling $6.9 million.

The real estate held for development portfolio of $5.5 million as of
September 30, 1997 primarily consists of one land development. As of
September 30, 1997, the property was estimated to have a fair value of $5.3
million using a discounted cash flow projection based on expected lot sales
and future development costs. As of September 30, 1997, the book value of
the property was $5.1 million.

NONPERFORMING ASSETS--InterWest's non-performing assets as of September 30,
1997, which consist of non-performing loans and real estate held for sale
totaled $12.4 million or 0.52 percent of total assets. This is an increase
from $9.9 million or 0.49 percent of total assets at September 30, 1996.
InterWest's non-performing assets at September 30, 1995, totaled $7.0 million
or 0.41 percent of assets. The increase in real estate held for sale from
$6.1 million at year end 1996 to $6.9 million in 1997 was due to foreclosures
of $2.1 million, expenditures capitalized to improve real estate of $900,000
and write-downs of real estate properties of $200,000. Total sales of real
estate during 1997 totaled $2.0 million, an increase from $1.6 million in
1996. Non-performing loans increased to $5.5 million as of September 30, 1997
compared to $3.8 million as of September 30, 1996 and $2.8 million as of
September 30, 1995. During 1997 the asset quality of InterWest continued to
be strong. This is attributable to the strong local economy, stringent
underwriting guidelines and internal review processes customized to identify
problem loans.

The following table sets forth information with respect to InterWest's
non-performing assets and restructured loans at the dates indicated.

<TABLE>
<CAPTION>
At September 30,
----------------
DOLLARS IN THOUSANDS 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>

Loans accounted for on
a nonaccrual basis:
Real estate mortgage loans:
Single-family residential. . . . . $3,181 $2,008 $ 985 $ 708 $1,024
Multi-family residential . . . . . 407 -- 900 -- --
Commercial . . . . . . . . . . . . 484 1,323 308 624 315
Real estate construction . . . . . . 234 -- -- 3 --
Consumer loans . . . . . . . . . . . 417 208 132 144 144
Commercial loans . . . . . . . . . . 343 300 507 138 143
Agricultural loans . . . . . . . . . 78 -- -- 123 146
-------------------------------------------------
Total. . . . . . . . . . . . . . 5,144 3,839 2,832 1,740 1,772

Accruing loans which
are contractually past
due 90 days or more:
Real estate mortgage
Commercial. . . . . . . . . . . 321 -- -- -- --
Agricultural . . . . . . . . . . . -- -- -- 129 --
Consumer . . . . . . . . . . . . . -- -- -- 16 26
-------------------------------------------------
Total. . . . . . . . . . . . . . 321 -- -- 145 26

Real estate owned. . . . . . . . . . 6,945 6,053 4,178 5,930 6,342
-------------------------------------------------
Total nonperforming assets . . . . . $12,410 $9,892 $7,010 $7,815 $8,140
-------------------------------------------------
-------------------------------------------------

Restructured loans . . . . . . . . . $1,403 $1,715 $1,958 $ -- $ --

Total loans delinquent
90 days or more to
net loans . . . . . . . . . . . . . 0.38% 0.33% 0.27% 0.19% 0.23%

Total loans delinquent
90 days or more to
total assets. . . . . . . . . . . . 0.21% 0.19% 0.16% 0.12% 0.15%

Total nonperforming assets
to total assets . . . . . . . . . . 0.52% 0.49% 0.41% 0.53% 0.69%

</TABLE>

Interest income that would have been recorded for the year ended
September 30, 1997 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $382,000.

C-13
<PAGE>

DEPOSITS--InterWest offers various types of deposit accounts, including
savings, checking accounts, money market type accounts and a variety of
certificate accounts. Deposit accounts vary as to terms, with the principal
differences being the minimum balance required, the time period the funds
must remain on deposit, the interest rate and the deposit or withdrawal
option. InterWest has rarely relied on brokered deposits, but has relied on
generating deposits through a marketing strategy that employs a sales staff
responsible for generating deposits as well as fee products. Transaction
deposit accounts offer InterWest an opportunity to market other products to
these customers.

Certificates of deposit increased $31.3 million or 3.7 percent in 1997,
and totaled $880.5 million or 60 percent of total deposits as of year end
1997. Transaction account balances have increased $47.8 million or 8.8
percent from 1996 and totaled $588.0 million or 40 percent of total deposits
as of September 30, 1997. Non-interest bearing deposits, money market and
interest-bearing checking account balances have increased by $27.4 million,
$15.3 million and $9.5 million, respectively. This represents annualized
growth rates of 22.3 percent, 9.0 percent and 7.5 percent, respectively. It
is management's strategy to increase the percentage of transaction deposits,
which should have a positive impact on net interest income, service fee
revenue and market penetration. This should be accomplished through internal
growth and future acquisitions.

The following table indicates the amount of the InterWest's certificates
of deposit with balances equal to or greater than $100,000 classified by time
remaining until maturity as of September 30, 1997.

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS Certificates
Maturity Period of Deposit
-------------------------------------------------
<S> <C>
Three months or less. . . . . . . $150,520
Three through six months. . . . . 51,244
Six through twelve months . . . . 73,325
Over twelve months. . . . . . . . 62,973
--------
Total . . . . . . . . . . . . $338,062
--------
--------
</TABLE>

The following table sets forth the balances and changes in dollar amount
of deposits in the various types of accounts offered by InterWest at the dates
indicated.

<TABLE>
<CAPTION>
At September 30,
----------------
1997 1996 1995
Percent Percent Percent
of Increase of Increase of
DOLLARS IN THOUSANDS Amount Total (Decrease) Amount Total (Decrease) Amount Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits. . . . $150,428 10.24% $27,410 $123,018 8.85% $20,861 $102,157 8.10%
Interest bearing checking accounts . 136,402 9.29 9,495 126,907 9.13 3,416 123,491 9.79
Money market accounts. . . . . . . . 185,029 12.60 15,272 169,757 12.22 27,065 142,692 11.32
Savings accounts . . . . . . . . . . 116,135 7.91 (4,424) 120,559 8.68 (323) 120,882 9.59
Certificates . . . . . . . . . . . . 880,466 59.96 31,305 849,161 61.12 77,437 771,724 61.20
---------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . $1,468,460 $79,058 $1,389,402 $128,456 $1,260,946
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>

FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER
BORROWINGS--Over the last two fiscal years, InterWest has increased its
borrowings from the Federal Home Loan Bank (FHLB) and securities sold under
agreements to repurchase. These two borrowing sources increased to $753.6
million as of the end of 1997 from $463.0 million as of September 30, 1996
and $316.6 million as of September 30, 1995. The proceeds from these
borrowings were used to fund growth in loans and securities. It is
management's intention to decrease the percentage of liabilities represented
by borrowings and increase deposits. This should increase net interest
income.

The Federal Home Loan Bank ("FHLB") functions as a central reserve bank
providing credit for member financial institutions. As members, InterWests'
subsidiary banks are required to own capital stock in the FHLB, and are
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally securities that are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made to
members pursuant to several different programs. These programs are generally
tailored to the institution's need while still reflecting market terms and
conditions. InterWest relies upon advances from the FHLB to supplement its
supply of lendable funds and to meet liquidity guidelines. The rates on these
advances vary from time to time in response to general economic conditions.

C-14
<PAGE>

InterWest uses the securities market as a vehicle for borrowing by
utilizing its securities available for sale and securities held to maturity
as collateral. As of September 30, 1997, InterWest has $259.0 million
outstanding in securities sold under agreement to repurchase. These
borrowings are collateralized by securities with a fair value exceeding the
face value of the borrowings. The following table sets forth certain
information regarding borrowings by InterWest during the periods indicated:

<TABLE>
<CAPTION>
At or For the
Year Ended
September 30,
--------------
DOLLARS IN THOUSANDS 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding at any
month end during the period:
FHLB advances . . . . . . . . . . . . . . $494,948 $386,637 $277,465
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . 258,993 119,945 41,090

Approximate average amount outstanding
during the period:
FHLB advances . . . . . . . . . . . . . . 347,444 317,554 199,200
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . 183,246 56,285 26,434

Balance outstanding at end of period:
FHLB advances . . . . . . . . . . . . . . 494,648 343,035 275,912
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . 258,993 119,945 40,734

Approximate weighted average rate paid
during the period:
FHLB advances . . . . . . . . . . . . . . 5.64% 5.53% 5.27%
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . 5.66 5.67 5.94

Weighted average rate paid at end
of period:
FHLB advances . . . . . . . . . . . . . . 5.68 5.51 5.62
Securities sold under agreements
to repurchase. . . . . . . . . . . . . . 5.66 5.45 5.84

</TABLE>

C-15
<PAGE>

CAPITAL REQUIREMENTS

InterWest Bancorp, Inc. is committed to managing capital for maximum
stockholder benefit and maintaining strong protection for depositors and
creditors at both the holding company and subsidiary bank level. InterWest
manages various capital levels at both the holding company and subsidiary
bank level to maintain appropriate capital ratios and levels in accordance
with external regulations and capital guidelines established by the Board of
Directors of each institution. See Note 17 of the Consolidated Financial
Statements for detail of regulatory capital ratios for InterWest Bancorp,
Inc. and each of the subsidiary banks.

InterWest's total stockholders equity was $160.8 million as of September
30, 1997, an increase of $23.1 million or 16.8 percent from $137.7 million as
of September 30, 1996. This increase is due to net income of $24.5 million
for fiscal year 1997, a $1.8 million decrease in the net unrealized loss on
securities available for sale, the scheduled $312,000 repayment of the
Employee Stock Ownership Plan (ESOP) loan and $2.2 million from the exercise
of common stock options. These increases are offset by $5.2 million in cash
dividends declared during fiscal year 1997 and the repurchase and retirement
of common stock of $500,000.

Book value per share increased to $15.39 as of September 30, 1997, from
$13.40 as of September 30, 1996. Stockholders' equity as a percentage of
total assets decreased from 6.83 percent as of September 30, 1996, to 6.69
percent as of September 30, 1997. This reduction in the capital ratio
reflects management's leveraging of the balance sheet to increase net income,
net income per share and return on stockholders' equity.

During fiscal year 1997, InterWest Bancorp, Inc. declared cash dividends
totaling $0.59 per share, an increase from $0.48 per share for fiscal year
1996. The amount of dividends reported in the consolidated statement of
stockholders' equity varies from these amounts due to the application of the
pooling-of-interests method of accounting to the financial statements for the
mergers with Central, Pacific, Pioneer and Puget.

LIQUIDITY RESOURCES

Liquidity management focuses on the need to meet both short-term funding
requirements and InterWest's long-term strategies and goals. Specifically,
the objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, creditors and
borrowers. Management is structuring the balance sheet to meet these needs.
InterWest desires to attract and retain consumer and business customer
relationships with a focus on transaction accounts and short-term business
and consumer lending. InterWest also uses wholesale funds through advances
from the Federal Home Loan Bank of Seattle (FHLB) and the sale of securities
under agreements to repurchase to fund asset growth. Other sources of funds
for liquidity include loan repayments, loan sales, securities sales and
mortgage-backed and related security repayments. Repayments on loans and
mortgage-backed and related securities and deposit inflows and outflows are
impacted by changes in interest rates.

InterWest has additional capacity to borrow funds from the FHLB through
a pre-approved credit line. This credit line has a pledge requirement
whereby InterWest must maintain unencumbered collateral with a par value at
least equal to the outstanding balance. InterWest uses the securities market
as a vehicle for borrowing by utilizing its securities available for sale and
securities held to maturity as collateral. These borrowings are
collateralized by securities with a market value exceeding the face value of
the borrowings. If the market value of the securities were to decline as a
result of an increase in interest rates or other factors, InterWest would be
required to pledge additional securities or cash as collateral.

The analysis of liquidity also includes a review of InterWest's
consolidated statement of cash flows for fiscal year 1997. The consolidated
statement of cash flows details InterWest's operating, investing and
financing activities during the fiscal year. The most significant item under
operating activities was 1997 net income of $24.5 million. Investing
activities included proceeds from the sale of securities available for sale
of $359.6 million, security maturities totaling $345.9 million and purchases
of securities available for sale and securities held to maturity of $634.1
million and $118.7 million, respectively. Investing activities also included
$312.0 million in loan originations, net of principal repayments and $87.8
million of proceeds from the sale of loans. Additionally, $43.8 million of
mortgage loans were securitized, held for a period of time as securities
available for sale and sold during 1997. As such, total proceeds from the
sale of loans originated by InterWest were $131.6 million in 1997. During
1997, financing activities included $289.6 million in borrowing proceeds, net
of borrowing repayments, a $79.1 million increase in deposits and a total of
$5.0 million paid in cash dividends to stockholders.

C-16
<PAGE>

MARKET RISK

InterWest's results of operations are largely dependent upon its ability
to manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on InterWest's
financial condition and results of operations. InterWest does not currently
use derivatives to manage market and interest rate risks.

Historically, InterWest has had a mismatch between the maturities of its
assets and liabilities because its customers have traditionally preferred
short-term deposits and long-term loans. InterWest is sensitive to the
potential change in interest rates and the resulting impact on net interest
income. It has been an objective of management to reduce this sensitivity
through the use of adjustable rate loans which enables InterWest to better
match the duration of its deposit base with these types of assets.

In addition to adjustable rate loans, InterWest uses a number of
additional strategies to minimize the impact on net income during significant
changes in interest rates. The strategies utilized by InterWest to achieve
this goal include: origination of short-term consumer loans; emphasis on
intermediate to long-term fixed-rate certificates of deposit; sales of
fixed-rate mortgage loans; growth in non-interest bearing checking accounts;
purchases of adjustable rate and callable agency securities; and short-term
business lending.

The table on the following page sets forth the balances of the
InterWest's financial instruments at the expected maturity dates as well as
the fair value of those financial instruments as of September 30, 1997. The
expected maturities take into consideration historical and estimated
principal prepayments for loans and securities. Principal prepayments are the
amounts of principal reduction, over and above normal amortization.
Fixed-rate loans and mortgage backed securities are expected to have annual
prepayment rates between 10 percent and 20 percent. Adjustable rate loans and
mortgage backed securities are assumed to have prepayment rates between 20
percent and 35 percent. Expected maturities are also adjusted from
contractual maturities with respect to callable securities which are expected
to mature at the respective call dates.

The expected maturities for financial liabilities with no stated
maturity reflect assumptions based on historical and estimated future
roll-off rates. The roll-off rates for non-interest bearing deposits,
interest-bearing checking accounts, money market accounts and savings
accounts are 14 percent, 20 percent, 33 percent and 20 percent, respectively.
The weighted average interest rates for financial instruments presented are
actual as of September 30, 1997.

The estimated fair value amounts have been determined by InterWest using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data in the
development of the estimates of fair value amounts. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
InterWest could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The carrying value of cash and cash
equivalents and accrued interest receivable is a reasonable estimate of the
fair value for such financial assets. The fair values of securities available
for sale, securities held to maturity and loans held for sale are based on
quoted market rates and dealer quotes. The fair value of fixed-rate loans is
based on quoted market rates for similar loans. The fair value for
adjustable rate loans is based on discounted cash flows, using estimated
interest rates currently offered for loans of similar characteristics
adjusted for prepayment estimates. FHLB stock does not have a market and the
fair value is unknown. As such, the carrying value is a reasonable estimate
of the fair value. The fair value of deposits with no stated maturity, such
as checking accounts, money market accounts and savings accounts, is equal to
the amount payable on demand as of September 30, 1997. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows using a discount rate based on the current average rate for deposits of
like maturities of other local institutions. The fair value of FHLB advances
and securities sold under agreements to repurchase are estimated based on the
present value of future cash flows using a discount rate equal to the rate
offered on similar borrowings with similar maturities as of September 30,
1997. The fair value estimates presented are based on information available
as of September 30, 1997.

C-17
<PAGE>

MARKET RISK

Year ended September 30, Expected maturity date

DOLLARS IN THOUSANDS 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS

Cash and cash equivalents
Non-interest bearing 68,953 68,953 68,953
Weighted average interest rate -- -- --
Interest-bearing deposits in banks 166,935 166,935 166,935
Weighted average interest rate 6.27% 6.27% --
Federal Funds Sold 12,225 12,225 12,225
Weighted average interest rate 6.66 6.66 --
Securities available for sale
Fixed rate 293,456 19,038 13,423 15,689 13,123 31,977 386,706 386,706
Weighted average interest rate 6.54 6.18 6.26 6.33 6.38 6.53 6.51 --
Adjustable rate 57,317 39,352 26,333 17,718 11,800 23,941 176,461 176,461
Weighted average interest rate 7.00 7.00 7.02 7.02 7.03 6.82 6.98 --

Securities held to maturity
Fixed rate 28,842 4,120 4,194 3,979 7,475 50,867 99,477 97,453
Weighted average interest rate 6.25 5.95 5.72 5.91 5.88 6.16 6.12 --
Adjustable rate 5,775 3,912 2,638 1,771 1,183 17,539 32,818 32,017
Weighted average interest rate 7.71 7.78 7.77 7.76 7.74 5.89 6.76 --
Loans receivable, net
Fixed rate 98,606 76,719 70,769 55,526 48,944 200,935 551,499 561,624
Weighted average interest rate 8.41 8.17 8.18 7.91 8.05 7.85 8.25 --
Adjustable rate 311,261 134,249 104,008 64,901 48,303 124,230 786,952 791,653
Weighted average interest rate 9.41 9.15 9.28 9.10 9.14 9.29 9.29 --
Loans held for sale 10,230 -- -- -- -- -- 10,230 10,451
Weighted average interest rate 7.98 -- -- -- -- -- 7.98 --
Accrued interest receivable 14,551 -- -- -- -- -- 14,551 14,551
Weighted average interest rate -- -- -- -- -- -- -- --
Federal Home Loan Bank (FHLB) stock -- -- -- -- -- 27,211 27,211 27,211
Weighted average interest rate -- -- -- -- -- 8.00 8.00

FINANCIAL LIABILITIES

Non-interest bearing deposits 21,060 18,112 15,576 13,395 11,520 70,765 150,428 150,428
Weighted average interest rate -- -- -- -- -- -- -- --
Interest-bearing checking accounts 27,280 21,824 17,459 13,968 11,174 44,697 136,402 136,402
Weighted average interest rate 1.39 1.39 1.39 1.39 1.39 1.39 1.39 --
Money market accounts 61,060 40,910 27,410 18,364 12,304 24,981 185,029 185,029
Weighted average interest rate 3.73 3.73 3.73 3.73 3.73 3.73 3.73 --
Savings accounts 23,227 18,582 14,865 11,892 9,514 38,055 116,135 116,135
Weighted average interest rate 2.80 2.80 2.80 2.80 2.80 2.80 2.80 --
Certificates of deposit
Fixed rate 596,052 103,270 117,246 7,356 7,752 1,205 832,881 835,498
Weighted average interest rate 5.56 5.79 6.11 6.00 6.07 6.29 5.68 --
Adjustable rate 37,373 10,212 -- -- -- -- 47,585 48,082
Weighted average interest rate 5.22 5.30 -- -- -- -- 5.24 --
FHLB advances and other borrowings
Fixed rate 372,769 73,651 11,553 5 10,405 74 468,457 467,851
Weighted average interest rate 5.69 5.62 4.92 7.00 5.48 7.00 5.66 --
Adjustable rate 28,518 -- -- -- -- -- 28,518 28,580
Weighted average interest rate 6.24 -- -- -- -- -- 6.24 --
Securities sold under agreements
to repurchase 135,993 -- -- -- 123,000 -- 258,993 256,486
Weighted average interest rate 5.56 -- -- -- 5.78 -- 5.66 --

</TABLE>

While the table presented above helps provide some information about
InterWest's interest sensitivity, it does not predict the trends of future
earnings. For this reason, InterWest uses financial modeling to forecast
earnings under different interest rate projections. While this modeling is
helpful in managing interest rate risk, it does require significant assumptions
for the projection of loan prepayment rates, loan origination volumes and
liability funding sources that may prove to be inaccurate.

C-18
<PAGE>

FORWARD LOOKING STATEMENTS--In this registration statement, we have included
certain "forward looking statements" concerning the future operations of
InterWest. It is management's desire to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. This
statement is for the express purpose of availing InterWest of the protections of
such safe harbor with respect to all "forward looking statements" contained in
this registration statement. We have used "forward looking statements" to
describe the future plans and strategies including our expectations of
InterWest's future financial results. Management's ability to predict results or
the effect of future plans and strategy is inherently uncertain. Factors that
could effect results include interest rate trends, the general economic climate
in Washington State and the country as a whole, loan delinquency rates, and
changes in federal and state regulation. These factors should be considered in
evaluating the "forward looking statements" and undue reliance should not be
placed on such statements.

C-19

<PAGE>

SUPPLEMENTAL MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 1998

BASIS OF PRESENTATION

The following discussion is provided for the consolidated operations of
InterWest Bancorp, Inc., which includes its wholly owned subsidiaries
(collectively InterWest). InterWest Bancorp, Inc.'s wholly owned
subsidiaries are InterWest Bank, Pacific Northwest Bank, Pioneer National
Bank and First National Bank of Port Orchard. The purpose of this discussion
is to focus on significant factors concerning InterWest's financial condition
and results of operations. This discussion should be read along with the
unaudited supplemental condensed consolidated financial statements (including
notes thereto) for an understanding of the following discussion and analysis.

OVERVIEW

InterWest is implementing its plan to become a financial services company
that provides a variety of products and services for both individual and
business customers. InterWest's sales efforts in consumer and business
lending will continue to change the composition of the loan portfolio.
InterWest intends to change the funding sources for asset growth. InterWest
is emphasizing higher growth in transaction accounts relative to certificates
of deposit and borrowings. This is designed to have a positive impact on net
interest income, service fee revenue and market penetration while meeting the
needs of InterWest's customers.

The merger with Central Bancorporation on August 31, 1996 began this process.
Central's subsidiary bank, Central Washington Bank, operated ten offices in
central Washington. At the merger date, Central had total consolidated
assets of $206.1 million, including total loans receivable of $132.2 million,
total deposits of $181.9 million and stockholders' equity of $17.1 million.
Each share of Central Bancorporation common stock has been exchanged for 1.41
shares of InterWest Bancorp, Inc. common stock.

Continuing its commitment to commercial banking, InterWest has acquired three
financial institutions subsequent to September 30, 1997 and signed a
definitive agreement to acquire a fourth prior to the end of fiscal year
1998.

On January 15, 1998, InterWest Bancorp, Inc. acquired Puget Sound Bancorp,
Inc. (Puget), of Port Orchard, Washington, the holding company of First
National Bank of Port Orchard. Under the terms of this transaction, Puget
merged into InterWest Bancorp, Inc., with First National Bank of Port Orchard
becoming a subsidiary of InterWest Bancorp, Inc. First National Bank of Port
Orchard operates three branch offices in western Washington. At the
acquisition date, Puget had total consolidated assets of $53.1 million,
including total loans receivable of $38.7 million, total deposits of $45.6
million, and stockholders' equity of $5.9 million. Each share of Puget common
stock has been exchanged for 1.67 shares of InterWest common stock.

On June 15, 1998, InterWest Bancorp, Inc. acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of this transaction,
Pacific has become a subsidiary of InterWest Bancorp, Inc. At the acquisition
date, Pacific had four offices in the metropolitan Seattle area of western
Washington and total assets of $200.2 million, including total loans
receivable of $150.1 million, total deposits of $170.2 million, and
stockholders' equity of $16.8 million. Each share of Pacific common stock has
been exchanged for 3.95 shares of InterWest Bancorp, Inc. common stock.

These mergers have been accounted for using the pooling-of-interests method
of accounting. In accordance with generally accepted accounting principles,
prior period financial statements, as well as management discussion and
analysis have been restated as if the companies were combined for all periods
presented.

D-1

<PAGE>

RESULTS OF OPERATIONS

Net income was $5.6 million for the quarter ended March 31, 1998, compared to
$5.9 million for the quarter ended March 31, 1997. Basic and diluted net
income per share was $0.53 and $0.52 for the quarter ended March 31, 1998
compared to $0.57 and $0.56, respectively for the quarter ended March 31,
1997. For the six months ended March 31, 1998 net income was $12.0 million
compared to $11.7 million for the six months ended March 31, 1997. Basic and
diluted net income per share was $1.15 and $1.12 for the six months ended
March 31, 1998 compared to $1.13 and $1.10, respectively for the six months
ended March 31, 1997.

The results of operations for the quarter and six months ended March 31, 1998
have been impacted by nonrecurring merger related charges associated with the
merger with Puget Sound Bancorp on January 15, 1998. Net income before
nonrecurring merger related charges was $6.6 million and $13.0 for the
quarter and six months ended March 31, 1998, respectively. Basic and diluted
net income per share before merger related charges was $0.63 and $0.62 for
the quarter and $1.25 and $1.21 for the six months ended March 31, 1998.

Merger related charges incurred during the quarter and six months ended March
31, 1998 are summarized as follows:

DOLLARS IN THOUSANDS
- -----------------------------------------------------------------
<S> <C>
Severance and other personnel expenses $462
Professional fees 397
Data and facilities conversion 269
Other 172
------
1,300
Merger related provision for losses on loans 100
------
Total merger related expenses 1,400
Income tax benefit (355)
------
Merger related expenses, net of tax $1,045
------
------
</TABLE>

The following table summarizes net income, net income per share and key
financial ratios before and after nonrecurring merger related expenses:

<TABLE>
<CAPTION>
Quarter ended March 31, Six months ended March 31,
Dollars in thousands, except per share amounts 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEFORE MERGER RELATED EXPENSES

Net income $6,598 $5,946 $13,007 $11,727
---------------------------------------------------
---------------------------------------------------
Basic net income per share $0.63 $0.57 $1.25 $1.13
---------------------------------------------------
---------------------------------------------------
Diluted net income per share $0.62 $0.56 $1.21 $1.10
---------------------------------------------------
---------------------------------------------------
Efficiency ratio 59.76% 57.27% 59.75% 57.82%

Return on average stockholders' equity 15.85% 16.46% 15.86% 16.45%

Return on average assets 1.14% 1.14% 1.11% 1.14%
</TABLE>

D-2

<PAGE>

Net income $5,553 $5,946 $11,962 $11,727
---------------------------------------------------
---------------------------------------------------
Basic net income per share $0.53 $0.57 $1.15 $1.13
---------------------------------------------------
---------------------------------------------------
Diluted net income per share $0.52 $0.56 $1.12 $1.10
---------------------------------------------------
---------------------------------------------------
Efficiency ratio 64.74% 57.27% 62.29% 57.82%

Return on average stockholders' equity 13.34% 16.46% 14.59% 16.45%

Return on average assets 0.96% 1.14% 1.02% 1.14%

</TABLE>

NET INTEREST INCOME--Net interest income before provision for losses on
loans increased to $19.5 million for the quarter ended March 31, 1998,
compared to $18.4 million for the quarter ended March 31, 1997. For the six
months ended March 31, 1998 net interest income before provision for losses
on loans was $38.5 million, an increase from $36.3 million for the six months
ended March 31, 1997. The increase in net interest income is due to growth
in interest-earning assets which is partially offset by a decrease in the
margin earned on these assets.

InterWest's net interest margin was 3.59 percent for the quarter ended March
31, 1998, a decrease from 3.74 percent for the quarter ended March 31, 1997.
For the six months ended March 31, 1998 net interest margin was 3.50 percent,
a decrease from 3.78 percent for the six months ended March 31, 1997.

Net interest margin has decreased from the corresponding periods of fiscal
year 1997 primarily due to an increase in the cost of funds. The cost of
funds has increased due to an increase in the relative percentage of funding
from borrowed funds compared with deposits and an increase in the interest
rate paid on borrowings.

Net interest margin has also been impacted by the continued flattening of the
yield curve. In an interest rate environment with a flat yield curve, the
margin earned on mortgage lending has decreased due to the compression of the
interest rate spread between short-term deposit and borrowing rates and
lending rates. InterWest focused on originating adjustable-rate loans,
increasing short-term business and consumer loans and selling fixed-rate
mortgage loans in the secondary market to offset the impact of a flat yield
curve.

Interest income for the quarter ended March 31, 1998 was $44.2 million
compared to $39.9 million for the quarter ended March 31, 1997. For the six
months ended March 31, 1998, interest income was $89.1 million compared to
$79.2 million for the six months ended March 31, 1997. The increase is due
to growth in interest-earning assets, which is partially offset by a decrease
in the yield earned on those assets. The yield on interest-earning assets
decreased to 8.12 percent and 8.11 percent for the quarter and six months
ended March 31, 1998, compared to 8.16 percent and 8.23 percent for the
quarter and six months ended March 31, 1997.

Interest expense increased to $24.7 million for the quarter ended March 31,
1998 compared to $21.5 million for the quarter ended March 31, 1997. For the
six months ended March 31, 1998 interest expense was $50.6 million compared
to $42.8 million for the six months ended March 31, 1997. This is due to an
increase in the balance of interest-bearing liabilities and an increase in
the cost of funds from the prior year. Interest-bearing liabilities
increased to fund the growth in interest-earning assets. The increase in the
cost of funds is due to the fact that the growth in interest-bearing
liabilities has been borrowings which bears a higher cost than deposits.
Borrowings represented 32 percent and 33 percent of interest-bearing
liabilities during the quarter and six months ended March 31, 1998 compared
to 24 percent and 25 percent for the respective periods of 1997. The cost of
borrowings has also increased to 5.66 percent and 5.73 percent for the
quarter and six months ended March 31, 1998 as compared to 5.46 percent and
5.58 percent for the quarter and six months ended March 31, 1997.

D-3
<PAGE>

AVERAGE RATES AND BALANCES

The following tables indicate the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the quarter
ended March 31:

<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable, net and loans
held for sale $ 1,393,536 9.09% $1,218,343 9.11%
Securities available for sale,
securities held to maturity and
other interest-earning assets 784,672 6.38% 737,848 6.59%
-------------------------------------------------
Total interest-earnings assets 2,178,208 8.12% 1,956,191 8.16%
-------------------------------------------------
Deposits 1,446,768 4.14% 1,458,317 4.16%
FHLB advances, securities
sold under agreements
to repurchase and 685,552 5.66% 468,235 5.46%
other borrowings
-------------------------------------------------
Total interest-bearing liabilities 2,132,320 4.63% 1,926,552 4.47%
-------------------------------------------------
Net interest spread $ 45,888 3.49% $29,639 3.69%
-------------------------------------------------
-------------------------------------------------
Net interest margin 3.59% 3.75%
----- -----
----- -----
</TABLE>

The following tables indicate the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the six months
ended March 31:

-------------------------------------------------
Total interest-earnings assets 2,197,413 8.11% 1,923,816 8.23%
-------------------------------------------------
Deposits 1,448,058 4.19% 1,426,543 4.17%
FHLB advances, securities
sold under agreements
to repurchase and 706,826 5.73% 468,804 5.58%
other borrowings
-------------------------------------------------
Total interest-bearing liabilities 2,154,884 4.70% 1,895,347 4.52%
-------------------------------------------------
Net interest spread $ 42,529 3.41% $28,469 3.71%
-------------------------------------------------
-------------------------------------------------
Net interest margin 3.50% 3.78%
----- -----
----- -----
</TABLE>

D-4
<PAGE>

Net interest income is impacted by changes in both interest rates and changes
in interest-earning assets and interest-bearing liabilities. The tables
presented below are an analysis of these changes for the quarter and six
months ended March 31, 1998 as compared to the quarter and six months ended
March 31, 1997 (in thousands):

Quarter 1998 vs 1997 Six months 1998 vs 1997
Increase (Decrease) Increase (Decrease)
Due to changes in Due to changes in

DOLLARS IN THOUSANDS Rate Volume Total Rate Volume Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net
and loans held for sale $(39) $3,983 $3,944 $(355) $8,020 $7,665

Securities available for
sale, securities held
to maturity and other
interest-earning assets (366) 721 355 (824) 3,093 2,269
--------------------------------------------------------------
Total net change in income
on interest-earning assets (405) 4,704 4,299 (1,179) 11,113 9,934
--------------------------------------------------------------
INTEREST-BEARING LIABILITIES

Deposits (76) (120) (196) 147 451 598

FHLB advances, securities
sold under agreement to
repurchase and other
borrowings 245 3,069 3,314 362 6,805 7,167
--------------------------------------------------------------
Total net change in expense
on interest-bearing liabilities 169 2,949 3,118 509 7,256 7,765
--------------------------------------------------------------
Net change in net
interest income $(574) $1,755 $1,181 $(1,688) $3,857 $2,169
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>

NONINTERST INCOME--Noninterest income for the quarter ended March 31, 1998
was $6.6 million, an increase from $4.1 million for the quarter ended March
31, 1997. This is primarily due to increased gains on the sale of loans of
$1.6 million, an increase of $450,000 in service fee revenue and a $250,000
increase in the gain on sale of securities available for sale. The increase
in service fee revenue is primarily due to growth in transaction deposit
accounts and the development of new business and consumer banking products.
Noninterest income was $12.7 million for the six months ended March 31, 1998,
an increase from $8.1 million for the six months ended March 31, 1997.
Consistent with the quarterly increase, this is primarily due to an increase
in the gain on sale of mortgage loans of $3.2 million and increased service
fee revenue of $950,000.

NONINTERST EXPENSE--Excluding nonrecurring merger related charges associated
with the Puget Sound Bancorp merger, noninterest expenses were $15.6 million
for the quarter ended March 31, 1998, compared to $12.9 million for the
quarter ended March 31, 1997. Excluding merger related charges, the
operating efficiency ratio was 59.76 percent for the quarter ended March 31,
1998 as compared to 57.27 percent for the quarter ended March 31, 1997. For
the six months ended March 31, 1998 noninterest expenses were $30.6 million
and the efficiency ratio was 59.75 percent before merger related charges,
compared to noninterest expenses of $25.7 million and an efficiency ratio of
57.82 percent for the six months ended March 31, 1997.

The increase in noninterest expenses and the efficiency ratio from the
respective periods one year ago is consistent with planned consumer and
business loan portfolio growth and diversification of deposit product lines.
Increases in compensation and benefits, general and administrative, occupancy
and data processing expenses are due to bank

D-5
<PAGE>

expansion and diversification, enhanced focus on consumer and business
banking products and services, and the opening of new branches. Key elements
of the consumer and business banking focus were the development of credit
administration, business and consumer lending support, business relationship
officers and the addition of several experienced commercial banking
management personnel. During the quarter ended March 31, 1998, InterWest
recorded an expense of $550,000 associated with fair value adjustments on
certain properties in the real estate held for development portfolio. This
expense resulted from the periodic assessment of the value of the real estate
held for sale and for development portfolios and the risks associated with
respective properties.

INCOME TAX EXPENSE--Income tax expense was $3.1 million and $6.5 million for
the quarter and six months ended March 31, 1998, compared to $3.1 million and
$6.1 million for the quarter and six months ended March 31, 1997,
respectively. The effective tax rates were 35.7 percent and 35.1 percent for
the quarter and six months ended March 31, 1998, compared to 34.6 percent and
34.1 percent for the quarter and six months ended March 31, 1997. The higher
effective tax rate in 1998 is due to certain merger expenses that are not
deductible for federal income tax purposes.

REVIEW OF FINANCIAL CONDITION

Total assets were $2.394 billion as of March 31, 1998, compared to $2.403
billion as of September 30, 1997. The loan portfolio, including loans held
for sale, has increased 4.5 percent from $1.349 billion at September 30,
1997, to $1.410 billion as of March 31, 1998. Other interest-earning assets,
which includes securities available for sale, securities held to maturity,
FHLB stock, federal funds sold and interest-bearing deposits in banks,
decreased 7.2 percent from $901.8 million at September 30, 1997 to $836.9
million as of March 31, 1998.

Total liabilities were $2.226 billion as of March 31, 1998, compared to
$2.242 billion as of September 30, 1997. This change resulted from a decrease
in borrowings of $39.0 million, which is partially offset by an increase in
deposits of $23.7 million.

SECURITIES AND OTHER INTEREST-EARNING ASSETS--As of March 31, 1998,
InterWest had $647.1 million or 87 percent of its securities classified as
available for sale. The available for sale portfolio is required to be
carried at fair value, thus its carrying value fluctuates with changes in
market conditions. As of March 31, 1998, InterWest has an unrealized loss on
securities available for sale of $1.3 million as compared to an unrealized
loss of $1.7 million as of September 30, 1997. The remaining $99.6 million
or 13 percent of securities are classified as held to maturity. As permitted
by SFAS No. 115 "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES", upon the merger with Puget Sound Bancorp and subsequent
restructuring of First National Bank of Port Orchard's investment portfolio,
$4.7 million of securities classified as held to maturity have been
transferred to the available for sale portfolio.

LOANS RECEIVABLE AND LOANS HELD FOR SALE--The loan portfolio, including
loans held for sale, increased $61.0 million from September 30, 1997. The
business (which includes commercial and agricultural loans) and consumer loan
principal balances outstanding has increased to $203.9 and $76.7 million as
of March 31, 1998, representing annual growth rates of 19.5 percent and 7.7
percent, respectively. As of March 31, 1998, outstanding business loans
represent 14.2 percent and consumer loans 5.4 percent of the total loan
portfolio compared to 13.6 percent and 5.4 percent, respectively, as of
September 30, 1997. InterWest will continue activities to implement a
strategy of changing the composition of the loan portfolio. Real estate
mortgage loans have experienced an annualized growth rate of 4.6 percent
during the first six months of fiscal year 1998 and real estate construction
loans outstanding have increased by $17.7 million for the same period.
During the quarter ended March 31, 1998, InterWest experienced record real
estate mortgage loan originations. However, there is not a corresponding
growth in real estate mortgage loan balances due to mortgage banking
activities to sell fixed rate mortgage loans and high prepayment rates on
real estate mortgage loans compared to recent periods.

D-6
<PAGE>

The following table indicates the loan portfolio mix as of March 31, 1998,
and September 30, 1997:

DOLLARS IN THOUSANDS March 31, 1998 September 30, 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $724,972 $701,840
Multi-family residential 57,986 58,137
Commercial 213,562 214,232
Real estate construction 154,266 136,580
Consumer loans 76,707 73,876
Commercial loans 168,671 155,265
Agricultural loans 35,229 30,491
-------------------------------
1,431,393 1,370,421
Less:
Allowance for losses on loans 11,447 11,104
Deferred loan fees and discounts 9,618 10,636
-------------------------------
$1,410,328 $1,348,681
-------------------------------
-------------------------------
</TABLE>

Interest is accrued on loans receivable until the loan is 90 days delinquent
or management doubts the collectibility of the loan or the unpaid interest,
at which time InterWest establishes a reserve for any accrued interest. All
loans on which interest is not being accrued are referred to as non-accrual
loans. As of March 31, 1998, non-accrual loans totaled $6.9 million, an
increase from $5.5 million as of September 30, 1997. Total non-performing
assets, including non-accrual loans and real estate owned through
foreclosure, increased to $14.0 million or 0.59 percent of total assets as of
March 31, 1998, compared to $12.4 million or 0.52 percent of total assets as
of September 30, 1997.

The following table summarizes non-performing assets as of March 31, 1998 and
September 30, 1997:

DOLLARS IN THOUSANDS March 31, 1998 September 30, 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS

Real estate mortgage loans
Single-family residential $3,807 $3,181
Multi-family residential 229 407
Commercial 834 805
Real estate construction 626 234
Consumer loans 238 417
Commercial loans 1,139 343
Agricultural loans 16 78
----------------------------
Total nonaccrual loans 6,889 5,465

REAL ESTATE OWNED THROUGH FORECLOSURE

Single-family residential 2,255 2,100
Multi-family residential 414 --
Commercial 4,482 4,845
----------------------------
Total real estate owned through
foreclosure 7,151 6,945
----------------------------
Total non performing assets $14,040 $12,410
----------------------------
----------------------------
</TABLE>

D-7
<PAGE>

The allowance for losses on loans totaled $11.4 million (0.81 percent of
loans) as of March 31, 1998 compared to $11.1 million (0.82 percent of loans)
as of September 30, 1997. Net loan charge-offs were $428,000 or 0.03 percent
of the average balance of loans outstanding for the six months ended March
31, 1998. InterWest assesses the risk level inherent in the loan portfolio to
provide adequate reserves to meet these risks as a part of the ongoing review
of the loan portfolio. Non-performing assets and delinquency trends are key
elements in determining the allowance for losses on loans. The allowance for
losses on loans is also determined by taking into consideration general
economic conditions in the market InterWest serves, historical loss
experience, individual loan review findings, loan mix and the level of loans
relative to the allowance for losses on loans.

The following tables summarize the activity in allowance for losses on loans
during the quarter and six months ended March 31:

<TABLE>
<CAPTION>
Quarter Six months
DOLLARS IN THOUSANDS 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Balance at beginning of period $11,009 $10,709 $11,104 $10,235

Provisions 571 512 846 930

Pooling adjustment (75)

Recoveries 79 34 195 178

Charge-offs (212) (268) (623) (356)
----------------------------------------------------
Balance at end of period $11,447 $10,987 $11,447 $10,987
----------------------------------------------------
----------------------------------------------------
</TABLE>

DEPOSITS--Certificates of deposit increased $14.5 million or 1.6 percent
from September 30, 1997 and currently represent 60.0 percent of total
deposits. Transaction account balances increased $9.2 million or 1.6 percent
from September 30, 1997 and currently represent 40.0 percent of total
deposits.

The following table indicates the deposit mix as of March 31, 1998 and
September 30, 1997:

DOLLARS IN THOUSANDS March 31, 1998 September 30, 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing deposits $146,823 $150,428
Interest-bearing checking accounts 142,706 136,402
Money market accounts 197,064 185,029
Savings accounts 110,618 116,135
Certificates 894,956 880,466
---------------------------
Total $1,492,167 $1,468,460
---------------------------
---------------------------
</TABLE>

STOCKHOLDERS' EQUITY--InterWest's total stockholders' equity was $167.1
million as of March 31, 1998, an increase of $6.3 million from $160.8 million
as of September 30, 1997. This increase is due to net income of $12.0
million for the six months ended March 31, 1998, $300,000 in proceeds from
the exercise of common stock options and a $300,000 decrease in the net
unrealized loss on securities available for sale. These changes are offset
by $3.4 million in common stock dividends declared during the six months
ended March 31, 1998, the borrowing of $1.6 million to purchase common stock
for the ESOP and a $1.3 million pooling of interests accounting adjustment to
December 31 fiscal year end of Pacific, Pioneer and Puget with InterWest's
September 30 fiscal year end in accordance with generally accepted accounting
principles. For the quarter ended March 31, 1998 InterWest Bancorp, Inc.
declared dividends totaling $0.19 per share, which was an increase from $0.18
per share for the quarter ended December 31, 1997. Book value per share was
$16.00 as of March 31, 1998, which was an increase from $15.39 as of
September 30, 1997. Stockholders' equity as a percentage of total assets
increased from 6.69 percent as of September 30, 1997, to 6.98 percent as of
March 31, 1998.

D-8
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Management of liquidity focuses on the need to meet both short-term funding
requirements and InterWest's long-term strategies and goals. Specifically,
the objective of liquidity management is to ensure the continuous
availability of funds to meet the demands of depositors, creditors and
borrowers. Management has structured the balance sheet to meet these needs.
InterWest desires to attract and retain consumer and business customer
relationships with a focus on transaction accounts and short-term business
and consumer lending. InterWest also uses wholesale funds through advances
from the Federal Home Loan Bank of Seattle (FHLB) and the sale of securities
under agreements to repurchase them to fund asset growth. Other sources of
funds for liquidity include loan repayments, loan sales, securities sales and
mortgage-backed and related security repayments. Repayments on loans and
mortgage-backed and related securities and deposit inflows and outflows can
be significantly impacted by interest rates.

InterWest has additional capacity to borrow funds from the FHLB through a
preapproved credit line. This credit line has a pledge requirement whereby
InterWest must maintain unencumbered collateral with a par value at least
equal to the outstanding balance. As of March 31, 1998, InterWest has $586.9
million outstanding in advances from the FHLB. InterWest uses the securities
market as a vehicle for borrowing by utilizing its securities available for
sale and securities held to maturity as collateral. As of March 31, 1998,
InterWest has $128.4 million outstanding in securities sold under agreement
to repurchase. These borrowings are collateralized by securities with a
market value exceeding the face value of the borrowings. If the market value
of the securities were to decline as a result of an increase in interest
rates or other factors, InterWest would be required to pledge additional
securities or cash as collateral.

InterWest is committed to managing capital for maximum stockholder benefit
and maintaining strong protection for depositors and creditors. InterWest
manages various capital levels at both the holding company and subsidiary
bank level to maintain appropriate capital ratios and levels in accordance
with external regulations and capital guidelines established by the Board of
Directors. InterWest Bancorp, Inc. and it's subsidiaries, InterWest Bank,
Pacific Northwest Bank, Pioneer National Bank and First National Bank of Port
Orchard, are subject to risk-based capital guidelines requiring minimum
capital levels based on the perceived credit risk of assets.

FDIC regulations establish the amount of capital for each of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) established
categories of institutions. The regulations define the relevant capital
levels for the five categories In general terms, the capital definitions are
as follows:

<TABLE>
<CAPTION>
Total Capital Tier 1 Tier 1
(to Risk (to Risk (to Average
Weighted Assets) Weighted Assets) Assets)
---------------- ---------------- -----------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized - - 2% or less

</TABLE>

InterWest Bancorp, Inc. is subject to risk-based capital guidelines issued by
the Federal Reserve Board (FRB) which establish a risk-adjusted ratio
relating capital to different categories of assets. InterWest Bancorp Inc.'s
Tier I capital is comprised of stockholders' equity less certain intangibles,
and excludes the equity impact of adjusting securities available for sale to
fair value. Total capital is Tier I capital and the allowance for losses on
loans. The FRB's risk-based capital rules have been supplemented by a
leverage capital ratio, defined as Tier I capital to adjusted quarterly
average total assets. As of March 31, 1998, under the FRB's capital
guidelines, InterWest Bancorp Inc.'s levels of consolidated regulatory
capital exceed the FRB's minimum requirements.

As of March 31, 1998, InterWest Bancorp, Inc., InterWest Bank, Pacific
Northwest Bank, Pioneer National Bank and First National Bank of Port Orchard
were in compliance with the well-capitalized capital requirements. Management
believes that under the current regulations InterWest Bancorp, Inc. and
subsidiaries will continue to

D-9
<PAGE>

meet minimum capital requirements in the foreseeable future. However, events
beyond the control of InterWest, such as a downturn in the economy in areas
where InterWest has most of their loans, could adversely affect future
earnings and, consequently, the ability of InterWest to meet future minimum
capital requirements.

The capital amounts and ratios as of March 31, 1998 for each entity are
presented in the following table:

<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Amount Adequacy Purposes Action Provisions
DOLLARS IN THOUSANDS Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANCORP, INC.
Total Capital
(to Risk Weighted Assets) $177,045 13.80% $102,664 8.0% $128,330 10.0%
Tier I Capital
(to Risk Weighted Assets) 165,598 12.90% 51,332 4.0% 76,998 6.0%
Tier I Capital
(to Average Assets) 165,598 7.15% 69,451 3.0% 115,752 5.0%

INTERWEST BANK:
Total Capital
(to Risk Weighted Assets) $142,837 14.01% $81,594 8.0% $101,993 10.0%
Tier I Capital
(to Risk Weighted Assets) 134,055 13.14% 40,797 4.0% 61,196 6.0%
Tier I Capital
(to Average Assets) 134,055 6.78% 79,075 4.0% 98,844 5.0%

PACIFIC NORTHWEST BANK
Total Capital
(to Risk Weighted Assets) $17,738 11.36% $12,497 8.0% $15,621 10.0%
Tier I Capital
(to Risk Weighted Assets) 16,338 10.46% 6,248 4.0% 9,373 6.0%
Tier I Capital
(to Average Assets) 16,338 8.81% 7,419 4.0% 9,273 5.0%

PIONEER NATIONAL BANK
Total Capital
(to Risk Weighted Assets) $10,006 14.54% $5,315 8.0% $6,644 10.0%
Tier I Capital
(to Risk Weighted Assets) 9,227 13.35% 2,658 4.0% 3,986 6.0%
Tier I Capital
(to Average Assets) 9,227 6.91% 4,199 4.0% 5,249 5.0%

FIRST NATIONAL BANK OF PORT ORCHARD:
Total Capital
(to Risk Weighted Assets) $5,960 14.54% $3,279 8.0% $4,099 10.0%
Tier I Capital
(to Risk Weighted Assets) 5,474 13.35% 1,640 4.0% 2,459 6.0%
Tier I Capital
(to Average Assets) 5,474 10.19% 2,148 4.0% 2,686 5.0%

</TABLE>

InterWest had paid annual cash dividends for 13 years. Currently, InterWest
pays quarterly dividends which it intends to continue to do. The amount of
future dividends will be based on InterWest's earnings and financial
condition and is restricted by federal and state tax laws and by tax
considerations related to financial institutions. Generally, InterWest is
precluded from paying dividends on its common stock if its regulatory capital
would be

D-10
<PAGE>

reduced to a level below regulatory capital requirements. InterWest is also
restricted by income appropriated to allowance for losses on loans and
deducted for federal income taxes.

YEAR 2000 ISSUES--The century date change for the Year 2000 is a serious
issue that may impact virtually every organization, including InterWest. The
challenge is especially important to financial institutions since many
processes, such as interest accruals and payments, are date sensitive and
InterWest has interaction with numerous customers, vendors and third party
service providers whom must also address the century date change issue.

FORWARD LOOKING STATEMENTS--In this document, InterWest has included certain
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing InterWest of the protections of such safe harbor with respect to all
"forward looking statements". InterWest has used "forward looking
statements" to describe future plans and strategies including expectations of
InterWest's future financial results. Management's ability to predict
results or the effect of future plans and strategy is inherently uncertain.
Factors that could effect results include interest trends, the general
economic climate in Washington state and the country as a whole, loan
delinquency rates, and changes in federal and state regulation. These
factors should be considered in evaluating the "forward looking statements"
and undue reliance should not be placed on such statements.

D-11

<PAGE>

EXHIBIT 23.1: CONSENT OF ERNST & YOUNG LLP

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement
(Form S-4 No. 333-57861) and related Prospectus of InterWest Bancorp, Inc.
for the registration of its shares of common stock related to the planned
merger with Kittitas Valley Bancorp, Inc. of our report dated October 30,
1997, except for Note 23 as to which the date is June 16, 1998, with respect
to the supplemental consolidated financial statements of InterWest Bancorp,
Inc. included in its Current Report on Form 8-K, dated on or about July 22,
1998, filed with the Securities and Exchange Commission.

Ernst & Young LLP
Seattle, Washington
July 22, 1998

<PAGE>

EXHIBIT 23.2: CONSENT OF DELOITTE & TOUCHE LLP

Independent Auditors' Consent

We consent to the incorporation by reference in Registration Statement No.
333-57861 of InterWest Bancorp, Inc. on Form S-4 of our report dated
January 19, 1996 (relating to the consolidated statements of operations,
stockholders' equity and cash flows of Central Bancorporation and
subsidiaries for the year ended December 31, 1995, not presented separately
herein), appearing in this Current Report on Form 8-K of InterWest Bancorp,
Inc.

DELOITTE & TOUCHE LLP

Seattle, Washington
July 22, 1998

<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF INTERWEST BANCORP,
INC. AS OF AND FOR PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 62,322
<INT-BEARING-DEPOSITS> 43,197
<FED-FUNDS-SOLD> 11,682
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 647,138
<INVESTMENTS-CARRYING> 99,647
<INVESTMENTS-MARKET> 97,922
<LOANS> 1,410,328
<ALLOWANCE> 11,447
<TOTAL-ASSETS> 2,393,562
<DEPOSITS> 1,492,167
<SHORT-TERM> 500,564
<LIABILITIES-OTHER> 17,333
<LONG-TERM> 216,428
0
0
<COMMON> 2,101
<OTHER-SE> 164,969
<TOTAL-LIABILITIES-AND-EQUITY> 2,393,562
<INTEREST-LOAN> 62,613
<INTEREST-INVEST> 25,325
<INTEREST-OTHER> 1,159
<INTEREST-TOTAL> 89,097
<INTEREST-DEPOSIT> 30,367
<INTEREST-EXPENSE> 50,603
<INTEREST-INCOME-NET> 38,494
<LOAN-LOSSES> 846
<SECURITIES-GAINS> 431
<EXPENSE-OTHER> 31,858
<INCOME-PRETAX> 18,441
<INCOME-PRE-EXTRAORDINARY> 11,962
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,962
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.12
<YIELD-ACTUAL> 3.59
<LOANS-NON> 6,889
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,104
<CHARGE-OFFS> 623
<RECOVERIES> 195
<ALLOWANCE-CLOSE> 11,447
<ALLOWANCE-DOMESTIC> 6,573
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,874

</TABLE>

<PAGE>

EXHIBIT 99.1: INDEPENDENT AUDITORS' REPORT FOR CENTRAL BANCORPORATION

Independent Auditors' Report

Board of Directors
Central Bancorporation
Wenatchee, Washington

We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Central Bancorporation (Bancorp) and subsidiaries
for the year ended December 31, 1995 (not presented separately herein).
These consolidated financial statements are the responsibility of Bancorp's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Central
Bancorporation and subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Seattle, Washington

January 19, 1996