<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549
  
                                    FORM 10-Q

                                   (Mark One)
     (X) Quarterly Report Pursuant to Section 13 or 15(d) of the 
         Securities and Exchange Act of 1934

           FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

     ( ) Transition Report Pursuant to Section 13 or 15(d) of the
         Securities Exchange Act of 1934

          For the transition period            from to 
                                    ----------         -----------
                   COMMISSION FILE NUMBER    0-26632
                                          --------------

                             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)

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


         Indicate by check mark whether the registrant (1) has filed all 
reports required to be filed by Section 13 or 15(d) of the Securities 
Exchange Act of 1934 during the preceding 12 months (or for such shorter 
period that the registrant was required to file such reports), and (2) has 
been subject to such filing requirements for the past 90 days.

                                  YES   x      NO      
                                      -----       -----

As of December 31, 1998, 15,674,457 shares of common stock were outstanding 
with no par value.

<PAGE>

                             INTERWEST BANCORP, INC

<TABLE>
<CAPTION>
INDEX                                                                     PAGE
-----                                                                     -----
<S>         <C>                                                           <C>

PART 1.     FINANCIAL INFORMATION

Item 1.     Financial Statements

            Consolidated Statements of Financial Condition
            as of December 31, 1998 and September 30, 1998                  1

            Consolidated Statements of Operations
            for the three month periods ended
            December 31, 1998 and 1997                                      2

            Consolidated Statements of Shareholders' Equity
            for the three month period ended December 31, 1998
            and the year ended September 30, 1998                           3

            Consolidated Statements of Cash Flows for
            the three month periods ended
            Decmber 31, 1998 and 1997                                      4-5

            Notes to Unaudited Consolidated Financial Statements           6-7

Item 2.     Management Discussion and Analysis of Financial
            Condition and Results of Operations                            8-21

PART II.    OTHER INFORMATION

Item 6.     Exhibits and Reports on Form 8-K                                22

SIGNATURES                                                                  23
</TABLE>


<PAGE>

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS                                               December 31, 1998    September 30, 1998
----------------------------------------------------------------------------------------------------------
                                                                     (unaudited)
<S>                                                                <C>                  <C> 
ASSETS

  Cash and cash equivalents
    Non-interest bearing                                              $   70,245            $   74,018
    Interest-bearing deposits in banks                                    16,441               107,404
  Federal funds sold                                                      14,451                19,863
  Securities available for sale, at fair value                           825,646               574,346
  Securities held to maturity                                             81,654                87,262
  Loans receivable, net                                                1,352,612             1,359,050
  Loans held for sale                                                    101,782                93,125
  Interest receivable                                                     15,796                14,991
  Real estate held for sale and for development                           11,812                11,996
  Federal Home Loan Bank (FHLB) stock, at cost                            40,232                37,496
  Premises and equipment, net                                             51,397                50,314
  Intangible assets                                                       14,088                14,026
  Other assets                                                             5,405                 3,957
                                                                   ----------------------------------------

    Total assets                                                      $2,601,561             $2,447,848
                                                                   ----------------------------------------
                                                                   ----------------------------------------

LIABILITIES

  Non-interest bearing deposits                                       $  188,631             $  178,625
  Interest-bearing deposits                                            1,351,459              1,386,200
                                                                   ----------------------------------------

  Total deposits                                                       1,540,090              1,564,825

  FHLB advances                                                          718,709                546,033
  Securities sold under agreements to repurchase                         133,992                128,613
  Other liabilities                                                       29,453                 28,981
  Other borrowings                                                         4,034                  7,744
                                                                   ----------------------------------------

  Total liabilities                                                    2,426,278              2,276,196

SHAREHOLDERS' EQUITY

  Common stock, no par value
      Authorized shares 30,000,000
      Issued and outstanding 15,674,457 and 15,651,345                      --                     --
    Paid-in-capital                                                       36,715                 36,512
    Retained earnings                                                    144,934                139,781
    Debt related to employee stock ownership plan (ESOP)                  (3,935)                (3,935)
    Net unrealized loss on
      securities available for sale, net of tax                           (2,431)                  (706)
                                                                   ----------------------------------------

    Total shareholders' equity                                           175,283                171,652
                                                                   ----------------------------------------

    Total liabilities and shareholders' equity                        $2,601,561             $2,447,848
                                                                   ----------------------------------------
                                                                   ----------------------------------------
</TABLE>

                                       1
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                            Three months ended December 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS                1998                    1997
---------------------------------------------------------------------------------------------
<S>                                                       <C>                   <C>
INTEREST INCOME
     Loans receivable and loans held for sale               $31,773                  $30,928
     Securities available for sale                           10,462                   11,415
     Securities held to maturity                              1,259                    1,850
     Other                                                    1,582                      703
                                                            --------------------------------
                                                             45,076                   44,896
INTEREST EXPENSE
     Deposits                                                14,664                   15,410
     FHLB advances and other borrowings                       7,890                    7,337
     Securities sold under agreements to repurchase           1,930                    3,193
                                                            --------------------------------
                                                             24,484                   25,940
Net interest income before provision for
  losses on loans                                            20,592                   18,956

     Provision for losses on loans                              498                      275
                                                            --------------------------------

Net interest income after provision for
  losses on loans                                            20,094                   18,681

NONINTEREST INCOME
     Gain on sale of loans                                    4,070                    2,225
     Service fees                                             2,661                    2,667
     Investment product fees and
       insurance commissions                                    590                      466
     Gain (loss) on sale of securities available for sale     (160)                      191
     Other                                                      680                      535
                                                             -------------------------------
                                                              7,841                    6,084
NONINTEREST EXPENSE
     Compensation and employee benefits                       9,131                    7,790
     General and administrative                               3,954                    3,810
     Occupancy                                                2,303                    2,137
     Data processing                                          1,084                      903
     Loss from real estate write-downs
      and operations                                            301                      318
                                                            --------------------------------
                                                             16,773                   14,958

Income before income taxes                                   11,162                    9,807

Income tax expense                                            3,794                    3,398
                                                             -------------------------------

NET INCOME                                                   $7,368                   $6,409
                                                            --------------------------------
                                                            --------------------------------

Basic net income per share                                    $0.47                    $0.41
                                                            --------------------------------
                                                            --------------------------------

Diluted net income per share                                  $0.46                    $0.40
                                                            --------------------------------
                                                            --------------------------------
</TABLE>

                                       2
<PAGE>

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

<TABLE>
<CAPTION>
                                                                             Unrealized loss     Debt
                                                                             on securities     Related
DOLLARS IN THOUSANDS,             Common Stock      Paid-in     Retained     available for        To       Treasury
EXCEPT SHARE DATA                # of Shares        Capital     Earnings    sale, net of tax     ESOP        Stock       Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                <C>         <C>         <C>                <C>        <C>           <C>
Balance, October 1, 1997            15,664,812        $36,110    $126,064       $(1,115)           $ --      $(289)       $160,770

Net income                                                         22,642                                                   22,642

Dividends, $0.50 per share                                         (7,676)                                                  (7,676)

Issuance of common stock:                                                                              
  Stock option plans                   132,993            706                                                                  706

  Stock purchase plans                   1,404             19                                                                   19

Purchase and retirement of
  treasury stock                          (809)          (323)                                                 289             (34)

Debt related to ESOP                  (147,055)                                                   (3,935)                   (3,935)

Unrealized gain on securities   
  available for sale, net of tax                                                    409                                        409

Pooling accounting adjustment                                      (1,249)                                                  (1,249)
----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998         15,651,345        $36,512    $139,781         $(706)         $(3,935)    $ --         $171,652

Net income                                                          7,368                                                    7,368

Dividends, $0.14 per share                                         (2,215)                                                  (2,215)

Issuance of common stock:                                                                              
  Stock option plans                    23,112            203                                                                  203

Unrealized loss on securities 
  available for sale, net of tax                                                 (1,725)                                    (1,725)
----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998           15,674,457        $36,715    $144,934       $(2,431)         $(3,935)    $ --         $175,283
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       3
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

Net Income                                                              $7,368               $6,409
Adjustments to reconcile net income to net
    cash provided by operating activities:
  Depreciation and amortization                                          1,585                  939
  Provision for losses on loans                                            498                  275
  Loss on real estate held for sale                                        232                  201
  Accretion of premiums and discounts, net                                 353                  248
  Gain on sale of loans                                                 (4,070)              (2,225)
  Loss (gain) on sale of securities available for sale                     160                 (191)
  Gain on sale of real estate held for sale and
    for development                                                        (85)                (102)
  Loan fees deferred, net of amortization                                  674                  217
  FHLB stock dividends                                                    (734)                (528)
  Pooling accounting adjustment                                                              (1,114)
  Cash provided (used) by changes in 
    operating assets and liabilities:
    Interest receivable                                                   (805)              (3,206)
    Other assets                                                        (1,448)                (887)
    Other liabilities                                                    1,407               (2,782)
                                                                -------------------------------------

Net cash provided (used) by operating activities,                       $5,135              $(2,746)

INVESTING ACTIVITIES

  Purchase of securities available for sale                           (624,823)            (199,921)
  Proceeds from matured securities available for sale                  162,969               52,675
  Proceeds from sale of securities available for sale                  159,073               60,146
  Proceeds from matured securities held to maturity                        370               21,235
  Principal repayments securities available for sale                    48,481               16,640
  Principal repayments from securities held to maturity                  5,166                2,194
  Proceeds from sale of loans                                          140,904               57,993
  Net increase in loans receivable                                    (142,138)             (94,133)
  Proceeds from sale of real estate held for sale
    and for development                                                  1,762                  632
  Purchases of premises and equipment                                   (2,255)              (1,979)
  Purchase of FHLB stock                                                (1,863)              (4,754)
  Net decrease in federal funds sold                                     5,412                   --
  Improvements capitalized to real estate held for sale                   (531)                (190)
                                                                -------------------------------------

Net cash used by investing activities                                $(247,473)            $(89,462)
</TABLE>

                                       4
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued)

<TABLE>
<CAPTION>
                                                                    Three months ended December 31,
DOLLARS IN THOUSANDS                                                 1998                     1997
----------------------------------------------------------------------------------------------------
<S>                                                              <C>                    <C>
FINANCING ACTIVITIES

  Net increase in deposits                                              25,267                9,255
  Net decrease in certificates of deposit                              (50,002)             (25,782)
  Proceeds from FHLB advances, securities sold under
    agreements to repurchase, and other borrowings                     200,822              519,503
  Repayment of FHLB advances, securities sold under
    agreements to repurchase and other borrowings                      (26,477)            (568,735)
  Dividends paid                                                        (2,211)              (1,291)
  Issuance of common stock from exercise of stock options                  203                   51
                                                                  ----------------------------------

Net cash provided (used) by financing activities                       147,602              (66,999)
                                                                  ----------------------------------

Net change in cash and cash equivalents                                (94,736)            (159,207)

CASH AND CASH EQUIVALENTS
  Beginning of period                                                  181,422              235,888
                                                                  ----------------------------------

  End of period                                                        $86,686              $76,681
                                                                  ----------------------------------
                                                                  ----------------------------------

  SUPPLEMENTAL DISCLOSURE OF
    CASH FLOW INFORMATION

  Cash paid during the quarter for:
    Interest                                                           $25,446              $27,023
    Income taxes                                                             7                2,250
  Noncash transaction
    Loans receivable transferred to real estate held for sale            1,194                  957
</TABLE>

                                       5
<PAGE>

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED DECEMBER 31, 1998

NOTE A BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of 
InterWest Bancorp, Inc. (InterWest Bancorp) and its wholly owned 
subsidiaries, (collectively InterWest). As of December 31, 1998, InterWest 
Bancorp's wholly owned subsidiaries were InterWest Bank, Pacific Northwest 
Bank, Pioneer National Bank and Kittitas Valley Bank, N.A. All material 
intercompany transactions and balances have been eliminated.

On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp, Inc. 
(Puget) of Port Orchard, whose subsidiary bank was First National Bank of 
Port Orchard. On June 15, 1998, InterWest Bancorp acquired Pacific Northwest 
Bank (Pacific) of Seattle, Washington. On June 16, 1998, InterWest Bancorp 
acquired Pioneer Bancorp, Inc. (Pioneer) of Yakima, Washington, whose 
subsidiary bank was Pioneer National Bank. These acquisitions have been 
accounted for using the pooling-of-interests method. Accordingly, InterWest's 
consolidated financial statements have been restated to include the accounts 
and operations of Puget, Pacific and Pioneer as if the companies were 
combined for all periods presented.

On August 31, 1998, InterWest Bancorp completed the acquisition of Kittitas 
Valley Bancorp, Inc. and its banking subsidiary, Kittitas Valley Bank, N.A. 
of Ellensburg, Washington. This acquisition has been accounted for using the 
purchase method.

On October 15, 1998, First National Bank of Port Orchard was merged into 
Pacific Northwest Bank. Pioneer National Bank was merged into Pacific 
Northwest Bank on January 22, 1999. Pioneer National Bank will continue to 
operate under the Pioneer Bank name.

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.

The unaudited consolidated financial statements have been prepared in 
accordance with generally 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 three month 
periods ended December 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, 1998.

NOTE B NET INCOME PER SHARE

The diluted weighted average shares outstanding during the three month 
periods ended December 31, 1998 and 1997 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 
(ESOP) debt obligation are deducted in the calculation of weighted average 
shares outstanding.

                                       6
<PAGE>

NOTE C  RECLASSIFICATIONS

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

NOTE D  ACCOUNTING CHANGES

On October 1, 1998, InterWest adopted Statement of Financial Accounting 
Standards (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 the 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. The 
adoption of this statement does not have any impact on InterWest's financial 
condition or results of operations. However, this statement does affect the 
disclosures in InterWest's consolidated financial statements.

The following table summarizes comprehensive income for the periods indicated:

<TABLE>
<CAPTION>
                                                              Three months ended December 31,
DOLLARS IN THOUSANDS                                          1998                      1997
------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>
Net income                                                           $7,368          $6,409
                                                              ----------------------------------
Other comprehensive income:
     Unrealized gain (loss) on securities available for sale         (2,654)            718
                                                              ----------------------------------
Other comprehensive income before income taxes                       (2,654)            718
Income tax benefit (expense) on comprehensive income                    929            (243)
                                                              ----------------------------------
Other comprehensive income after income taxes                        (1,725)            475
                                                              ----------------------------------
Total comprehensive income                                           $5,643          $6,884
                                                              ----------------------------------
                                                              ----------------------------------
</TABLE>

Effective October 1, 1998, InterWest adopted SFAS No. 134 "ACCOUNTING FOR 
MORTGAGE-BACKED SECURITIES RETAINED AFTER SECURITIZATION OF MORTGAGE LOANS 
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE," which amends SFAS No. 65 
"ACCOUNTING FOR CERTAIN MORTGAGE BANKING ACTIVITIES." SFAS No. 65 required 
that after the securitization of a mortgage loan held for sale, InterWest 
classify the resulting mortgage-backed security as a trading security. SFAS 
No. 134 amends SFAS No. 65 to require that after securitization of mortgage 
loans held for sale, InterWest classify the resulting mortgage-backed 
securities or other retained interests based on its ability and intent to 
sell or hold those securities. The adoption of this statement did not 
materially impact InterWest's financial condition or results of operations.

NOTE E SUBSEQUENT EVENTS

On January 20, 1999, the Board of Directors authorized the purchase of up to 
5 percent of InterWest Bancorp's outstanding shares of common stock in the 
open market over the next twelve months. The planned purchases of common 
stock will be limited by the anticipated timing of stock option exercises as 
well as other considerations.

                                       7
<PAGE>

ITEM 2.   MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS

BASIS OF PRESENTATION

The following discussion is provided for the consolidated financial condition 
and results of operations of InterWest Bancorp, Inc. (InterWest Bancorp), 
which includes its wholly owned subsidiaries (collectively InterWest). As of 
December 31, 1998, InterWest Bancorp's wholly owned subsidiaries were 
InterWest Bank, Pacific Northwest Bank, Pioneer National Bank and Kittitas 
Valley Bank, N.A. The purpose of this discussion is to focus on significant 
factors concerning InterWest's financial condition and results of operations.

ACQUISITIONS

The acquisitions of Pacific Northwest Bank, Pioneer National Bank, First 
National Bank of Port Orchard and Kittitas Valley Bank N.A. reflect a 
continuing commitment to commercial banking and the goal of becoming a 
statewide institution. InterWest has implemented a 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 will continue to 
change the composition of the loan portfolio and the funding sources for 
asset growth. InterWest has experienced growth in transaction accounts while 
reducing reliance on certificates of deposit. These changes are 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 (Central) on August 31, 1996 began 
this process. Central's commercial banking subsidiary, 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 
shareholders' equity of $17.1 million.

On January 15, 1998, InterWest Bancorp 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, with First National Bank of Port Orchard becoming a 
subsidiary of InterWest Bancorp. First National Bank of Port Orchard operated 
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 
shareholders' equity of $5.9 million. Each share of Puget common stock was 
exchanged for 2.50 shares of InterWest Bancorp common stock.

On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank 
(Pacific), of Seattle, Washington. Under the terms of this transaction, 
Pacific became a subsidiary of InterWest Bancorp. 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 
shareholders' equity of $16.8 million. Each share of Pacific common stock was 
exchanged for 5.93 shares of InterWest Bancorp common stock.

On June 16, 1998, InterWest Bancorp 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, and 
Pioneer National Bank became a subsidiary of InterWest Bancorp. 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 shareholders' equity of $9.3 million. Each share of Pioneer 
common stock was exchanged for 2.01 shares of InterWest Bancorp common stock.

                                       8
<PAGE>

These mergers were accounted for using the pooling-of-interests method. 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.

On August 31, 1998, InterWest Bancorp completed the acquisition of Kittitas 
Valley Bancorp, Inc. (Kittitas), of Ellensburg, Washington, the holding 
company of Kittitas Valley Bank N.A. Under the terms of this transaction, 
Kittitas merged into InterWest Bancorp, and Kittitas Valley Bank N.A. became 
a subsidiary of InterWest Bancorp. The acquisition was completed through the 
payment of $6.4 million in cash and the issuance of 229,831 shares of 
InterWest Bancorp common stock to Kittitas shareholders. The shares issued to 
Kittitas shareholders were purchased by InterWest Bancorp in the open market. 
At the merger date, Kittitas had total consolidated assets of $47.4 million 
and shareholders' equity of $4.3 million. This acquisition has been accounted 
for using the purchase method.

On October 15, 1998, First National Bank of Port Orchard was merged into 
Pacific Northwest Bank. Pioneer National Bank was merged into Pacific 
Northwest Bank on January 22, 1999. Pioneer National Bank will continue to 
operate under the Pioneer Bank name. The primary purpose of these internal 
mergers is to create cost savings and operating efficiencies.

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

<TABLE>
<CAPTION>
Acquisition                                                  Total Assets At Merger Date        Common Shares
Date                       Institution                         (dollars in thousands)               Issued
---------------------------------------------------------------------------------------------------------------
<S>                        <C>                               <C>                              <C>
August 31, 1996            Central Bancorporation                $    206,093                     2,147,391
January 15, 1998           Puget Sound Bancorp, Inc.                   53,109                       586,420
June 15, 1998              Pacific Northwest Bank                     200,219                     2,346,081
June 16, 1998              Pioneer Bancorp, Inc.                      108,399                       692,846
August 31, 1998            Kittitas Valley Bancorp, Inc.               49,065                       229,831
</TABLE>

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 shareholder 
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 shareholder approval and compliance with 
applicable capital requirements. No assurance can be made that acquisition 
activity will continue in the future.

Today InterWest conducts its business through 55 full-service branch offices 
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 products are available through InterWest 
Insurance Agency, Inc., a majority-owned subsidiary of InterWest Bank.

RESULTS OF OPERATIONS

Net income was $7.4 million for the three months ended December 31, 1998, 
compared to $6.4 million for the three months ended December 31, 1997. Basic 
and diluted net income per share were $0.47 and $0.46, respectively for the 
three months ended December 31, 1998 compared to $0.41 and $0.40, 
respectively for the three months ended December 31, 1997. The increase from 
the three month period one year ago was due to an increase in mortgage 
banking and the resulting increase in the gain on sale of loans of $1.8 million 

                                       9
<PAGE>

and an increase in net interest income before the provision for losses on 
loans of $1.6 million. These increases were partially offset by an increase 
in noninterest expense of $1.8 million

InterWest's return on average shareholders' equity was 16.89 percent for the 
three months ended December 31, 1998 compared to 15.92 percent for the three 
months ended December 31, 1997. InterWest's return on average assets was 1.20 
percent for the three months ended December 31, 1998 compared to 1.09 percent 
for the three months ended December 31, 1997.

The following table summarizes net income, net income per share and key 
financial ratios:

<TABLE>
<CAPTION>
                                                             Three months ended December 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS                1998                      1997
----------------------------------------------------------------------------------------------
<S>                                                         <C>                      <C>
     Net income                                              $7,368                    $6,409
                                                            ----------------------------------
                                                            ----------------------------------

     Basic net income per share                               $0.47                     $0.41
                                                            ----------------------------------
                                                            ----------------------------------

     Diluted net income per share                             $0.46                     $0.40
                                                            ----------------------------------
                                                            ----------------------------------

     Efficiency ratio                                        58.99%                    59.74%

     Return on average shareholders' equity                  16.89%                    15.92%

     Return on average assets                                 1.20%                     1.09%

     Net interest margin                                      3.58%                     3.42%
</TABLE>

NET INTEREST INCOME | InterWest's net income is significantly affected by 
changes in net interest income, which is the difference between interest 
income received on loans receivable and other interest-earning assets and 
interest paid on deposits and borrowings. InterWest's operations are 
sensitive to changes in interest rates and the resulting impact on net 
interest income.

Net interest income before provision for losses on loans increased to $20.6 
million for the three months ended December 31, 1998, compared to $19.0 
million for the three months ended December 31, 1997. The increase in net 
interest income is due to an increase in interest-earning assets and an 
increase in the margin earned on these assets.

InterWest's net interest margin was 3.58 percent for the three months ended 
December 31, 1998, an increase from 3.42 percent for the three months ended 
December 31, 1997. Several factors have influenced the increase in net 
interest margin.

During the quarter ended December 31, 1998, management has increased net 
interest income by leveraging the balance sheet with securities growth funded 
by borrowings from the Federal Home Loan Bank. However, leveraging the 
balance sheet decreases net interest margin as the spread earned on 
securities funded by borrowings is lower compared to the spread earned on 
loans funded by deposits.

The negative impact on net interest margin from leveraging the balance sheet 
has been more than offset by changes in the loan portfolio and deposit 
composition as well as the positive impact from the acquisition of Kittitas 
Valley Bank, N.A. InterWest will continue to focus on changing the 
composition of the loan portfolio by increasing commercial lending and 
reducing the dependence on single-family lending. In addition to the changes 
in the loan portfolio, the deposit base has changed with increases in 
non-interest bearing and interest-bearing transaction deposits and a decrease 
in certificates of deposit.

                                       10
<PAGE>

Interest income for the three months ended December 31, 1998 was $45.1 
million compared to $44.9 million for the three months ended December 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 7.83 percent three months ended 
December 31, 1998, compared to 8.10 percent for the three months ended 
December 31, 1997.

Interest expense decreased to $24.5 million for the three months ended 
December 31, 1998 compared to $25.9 million for the three months ended 
December 31, 1997. This is due to a decrease in the cost of funds from the 
prior year, which is partially offset by an increase in interest-bearing 
liabilities. The cost of funds for the three months ended December 31, 1998 
was 4.33 percent, a decrease from 4.76 percent for the three months ended 
December 31, 1997.

AVERAGE RATES AND BALANCES | The following table indicates the average 
balance and average interest rates earned or paid, interest rate spread and 
net interest margin for the three months ended December 31:

<TABLE>
<CAPTION>
                                                   1998                          1997
                                         -------------------------    -----------------------
                                            Average                     Average
DOLLARS IN THOUSANDS                        Balance        Rate          Balance       Rate
---------------------------------------------------------------------------------------------
<S>                                      <C>             <C>          <C>            <C>

Loans receivable and loans
   held for sale                          $ 1,421,388      8.94%       $1,364,876      9.06%
Securities available for sale,
   securities held to maturity and
   other interest-earning assets              879,975      6.05%          852,132      6.56%
                                          ---------------------------------------------------
Total interest-earnings assets              2,301,363      7.83%        2,217,008      8.10%
                                          ---------------------------------------------------

Deposits                                    1,552,374      3.78%        1,453,548      4.24%
FHLB advances, securities
   sold under agreements
   to repurchase and                          710,286      5.53%          724,398      5.81%
   other borrowings
                                          ---------------------------------------------------
Total interest-bearing liabilities          2,262,660      4.33%        2,177,946      4.76%
                                          ---------------------------------------------------

Net interest spread                       $    38,703      3.50%       $   39,062      3.34%
                                          ---------------------------------------------------
                                          ---------------------------------------------------

Net interest margin                                        3.58%                       3.42%
                                                          -------                     -------
                                                          -------                     -------
</TABLE>

                                       11
<PAGE>

The following table provides information on changes in net interest income 
for the periods which are attributable to changes in interest rates and 
changes in volume:

<TABLE>
<CAPTION>
                                              Three months December 31, 1998 vs 1997
                                                       Increase (Decrease)
                                                         Due to changes in

DOLLARS IN THOUSANDS                        Rate              Volume            Total
-----------------------------------------------------------------------------------------
<S>                                    <C>                <C>               <C>
INTEREST-EARNING ASSETS

Loans receivable and
   loans held for sale                      $(410)            $1,255             $845

Securities available for
   sale, securities held
   to maturity and other
   interest-earning assets                 (1,147)               482             (665)
                                        --------------------------------------------------

Total net change in income
   on interest-earning assets              (1,557)             1,737              180
                                        --------------------------------------------------

INTEREST-BEARING LIABILITIES

Deposits                                   (1,983)             1,237             (746)

FHLB advances, securities
   sold under agreement to
   repurchase and other
   borrowings                                (508)              (202)            (710)
                                        --------------------------------------------------

Total net change in expense
   on interest-bearing liabilities         (2,491)             1,035           (1,456)
                                        --------------------------------------------------

Net change in net
   interest income                           $934               $702           $1,636
                                        --------------------------------------------------
                                        --------------------------------------------------
</TABLE>

PROVISION FOR LOSSES ON LOANS | The provision for losses on loans was 
$498,000 for the three months ended December 31, 1998, an increase from 
$275,000 for the three months ended December 31, 1997.

NONINTEREST INCOME | Noninterest income was $7.8 million for the three months 
ended December 31, 1998, compared to $6.1 million for the three months ended 
December 31, 1997. The increase in noninterest income from the three months 
ended December 31, 1997 was due to increases in mortgage banking and the 
resulting gains on the sale of loans. The increase in mortgage banking 
activities is due to the current interest rate environment as well as the 
overall strategy of changing the composition of the loan portfolio with less 
reliance on single-family residential mortgages with a greater emphasis on 
commercial lending. During calendar year 1998, the low interest rate 
environment resulted in increased fixed-rate single-family residential 
mortgage loan originations. It is currently InterWest's strategy to 
securitize and sell fixed-rate single-family mortgage loans on the secondary 
market while retaining the right to service the loans. Changes in interest 
rates can significantly affect the volume of single family loan originations 
and refinances which could impact InterWest's mortgage banking revenue. 
InterWest will continue to focus on commercial 

                                       12
<PAGE>

banking to increase net interest income and service fee revenue while 
reducing the impact of potential volatility in mortgage banking revenue.

Service fees were $2.7 million for the three months ended December 31, 1998 
compared to $2.7 million for the three months ended December 31, 1997. 
Service fees decreased as a result of the closing of the Cornerstone Home 
Loan Center Division of InterWest Bank during the quarter ended December 31, 
1998. The decrease in service fees from the Cornerstone Home Loan Center was 
offset by an increase in service fees resulting from the growth in 
transaction deposit accounts and commercial banking services.

NONINTEREST EXPENSE | Noninterest expense was $16.8 million for the three 
months ended December 31, 1998, compared to $15.0 million for the three 
months ended December 31, 1997. The operating efficiency ratio was 58.99 
percent for the three months ended December 31, 1998, compared to 59.74 
percent for the three months ended December 31, 1997. The increase in 
noninterest expense from the three months ended December 31, 1997 was due to 
activities to develop the resources and infrastructure for commercial banking 
growth.

Compensation and employee benefits were $9.1 million for the three months 
ended December 31, 1998, an increase from $7.8 million for the three months 
ended December 31, 1997. This increase was primarily due to the focus on 
commercial banking growth and the acquisition of Kittitas Valley Bank, N.A.

FEDERAL INCOME TAX | Income tax expense was $3.8 million for the three months 
ended December 31, 1998, compared to $3.4 million for the three months ended 
December 31, 1997. The effective tax rates were 34.0 percent for the three 
months ended December 31, 1998, compared to 34.6 percent for the three months 
ended December 31, 1997.

REVIEW OF FINANCIAL CONDITION

InterWest's total consolidated assets were $2.602 billion as of December 31, 
1998, compared to $2.448 billion as of September 30, 1998. This was an 
increase of $154 million or 6.3 percent.

SECURITIES | As of December 31, 1998, InterWest had $825.6 million of 
securities available for sale, compared to $574.3 million as of September 30, 
1998. Securities held to maturity have decreased to $81.7 million as of 
December 31, 1998, compared to $87.3 million as of September 30, 1998. The 
overall increase in securities reflects management's leveraging of the 
balance sheet to increase net interest income. As of December 31, 1998, 91 
percent of InterWest securities were classified as available for sale, an 
increase from 87 percent as of September 30, 1998. 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.

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 and management's expectation of the level of yield that will be 
available in the future. Management's projections as to the short term demand 
for funds to be used for loan originations and other activities can also 
impact liquidity levels.

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 currently 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. 
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 shareholders' equity.

                                       13
<PAGE>

LOANS RECEIVABLE AND LOANS HELD FOR SALE | Loans receivable were $1.35 
billion as of December 31, 1998, compared to $1.36 billion as of September 
30, 1998. During the three months ended December 31, 1998 the principal 
balances outstanding of commercial real estate, real estate construction, 
commercial and agricultural loans increased. These increases were offset by a 
decrease in single-family residential mortgage loans outstanding.

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 Kittitas Valley 
Bank, N.A. have loan portfolios which have a greater percentage of commercial 
loans than InterWest Bank.

The acquisitions of Central, Pacific, Pioneer and Puget increased InterWest's 
access to commercial lending. These acquisitions, as well as the development 
of commercial banking at InterWest Bank, are changing the composition of the 
InterWest loan portfolio to that of a financial institution that emphasizes 
both real estate and commercial lending. Growth in commercial lending should 
shorten duration risk, produce higher net interest margin, create better 
protection from interest rate volatility and ultimately meet the needs of 
InterWest's customers.

The commercial loan portfolio increased $11.8 million from September 30, 
1998, representing an annualized growth rate of 22 percent. As of December 
31, 1998, outstanding commercial loans represent 15.5 percent of the total 
gross loans compared to 14.8 percent as of September 30, 1998. Commercial 
real estate mortgage loans increased $21.1 million from September 30, 1998, 
representing an annualized growth rate of 33 percent. Real estate 
construction loans outstanding increased by $13.8 million from September 30, 
1998, representing an annualized growth rate of 30 percent. Single-family 
residential mortgage loans decreased $46.8 million from September 30, 1998. 
This decrease is due to mortgage banking activities and the increased 
emphasis on commercial lending. During the quarter ended December 31, 1998, 
InterWest securitized and sold $113.8 million of single-family residential 
mortgage loans on the secondary market.

Loans held for sale were $101.8 million as of December 31, 1998 compared to 
$93.1 million as of September 30, 1998. Loans held for sale are generally 
fixed-rate mortgage loans and loans originated under a Small Business 
Administration program. The loans are typically sold to FHLMC and other 
financial institutions.

The following table sets forth the composition of InterWest's loan portfolio 
by type as of December 31, 1998, and September 30, 1998:

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS                              December 31, 1998        September 30, 1998
-----------------------------------------------------------------------------------------------
<S>                                               <C>                      <C>
Real estate mortgage loans
   Single-family residential                            $580,418                  $627,191
   Multi-family residential                               61,190                    62,948
   Commercial                                            278,991                   257,906
Real estate construction                                 195,810                   182,020
Consumer loans                                            80,832                    81,386
Commercial loans                                         229,350                   217,546
Agricultural loans                                        50,023                    45,637
                                                  ---------------------------------------------
                                                       1,476,614                 1,474,634
Less:
   Loans held for sale                                   101,782                    93,125
   Allowance for losses on loans                          13,527                    13,224
   Deferred loan fees and discounts                        8,693                     9,235
                                                  -----------------        --------------------
                                                      $1,352,612                $1,359,050
                                                  -----------------        --------------------
                                                  -----------------        --------------------
</TABLE>

                                       14
<PAGE>

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 nonaccrual 
loans. As of December 31, 1998, non-accrual loans totaled $12.4 million, an 
increase from $8.2 million as of September 30, 1998. The majority of the 
increase resulted from one land development loan being placed on nonaccrual 
status during the period. Total non-performing assets, including non-accrual 
loans and real estate owned through foreclosure, increased to $19.8 million 
or 0.76 percent of total assets as of December 31, 1998, compared to $15.8 
million or 0.64 percent of total assets as of September 30, 1998.

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

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS                                   December 31, 1998         September 30, 1998
---------------------------------------------------------------------------------------------------
<S>                                                  <C>                       <C>
NONACCRUAL LOANS

Real estate mortgage loans
    Single-family residential                                $5,565                     $5,036
    Multi-family residential                                     --                         --
    Commercial                                                1,226                        557
Real estate construction                                      3,265                        634
Consumer loans                                                  385                        174
Commercial loans                                              1,751                      1,682
Agricultural loans                                              200                        127
                                                     ---------------------------------------------

    Total nonaccrual loans                                   12,392                      8,210

REAL ESTATE OWNED THROUGH FORECLOSURE

Total real estate owned through foreclosure                   7,421                      7,553
                                                     ---------------------------------------------

Total non-performing assets                                 $19,813                    $15,763
                                                     ---------------------------------------------
                                                     ---------------------------------------------
</TABLE>

ALLOWANCE FOR LOSSES ON LOANS | The allowance for losses on loans was $13.5 
million or 0.99 percent of total loans receivable as of December 31, 1998 
compared to $13.2 million or 0.96 percent of total loans receivable as of 
September 30, 1998. Net loan charge-offs were $195,000 or 0.05 percent of the 
average balance of loans outstanding for the three months ended December 31, 
1998.

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; there is no recourse to the borrower, or if there is 
recourse, 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 

                                       15
<PAGE>

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.

The following tables summarize the activity in allowance for losses on loans 
during the three months ended December 31:

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS                                            1998                  1997
--------------------------------------------------------------------------------------------------
<S>                                                  <C>                        <C>
Balance at beginning of period                                 $13,224                $11,104

Provision for losses on loans                                      498                    275

Pooling accounting adjustment                                                             (76)

Recoveries                                                         123                    117

Charge-offs                                                       (318)                  (411)
                                                     ---------------------------------------------

Balance at end of period                                       $13,527                $11,009
                                                     ---------------------------------------------
                                                     ---------------------------------------------
</TABLE>

DEPOSITS | Noninterest bearing deposits increased to $188.6 million as of 
December 31, 1998 from $178.6 million as of September 30, 1998. Noninterest 
bearing deposits represented 12.3 percent of total deposits as of December 
31, 1998, an increase from 11.4 percent as of September 30, 1998. Interest 
bearing transaction accounts (which includes interest-bearing checking, money 
market and savings accounts) increased to $554.4 million as of December 31, 
1998 compared to $539.2 million as of September 30, 1998. Interest bearing 
transaction accounts represented 35.9 percent of total deposits as of 
December 31, 1998, an increase from 34.5 percent as of September 30, 1998. 
Money market and interest bearing checking account balances increased by $2.3 
million and $15.4 million, respectively, from September 30, 1998.

Certificates of deposit decreased to $797.0 million as of December 31, 1998 
compared to $847.0 million as of September 30, 1998. Certificates of deposit 
currently represent 51.8 percent of total deposits which is a decrease from 
54.1 percent as of September 30, 1998.

Management is continuing to pursue initiatives to increase the percentage of 
noninterest bearing deposits and interest bearing transaction deposits 
relative to certificates of deposit. This activity should increase net 
interest income, service fee revenue and customer growth and retention. As of 
December 31, 1998, 48.2 percent of InterWest's deposits were transaction 
accounts, which is an increase from 45.9 percent as of September 30, 1998.

The  following  table sets forth the balances of deposits in the various  
types of accounts as of December 31, 1998 and September 30, 1998:

<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS                    December 31, 1998         September 30, 1998
------------------------------------------------------------------------------------
<S>                                     <C>                       <C>
Non-interest bearing deposits               $188,631                     $178,625
Interest-bearing checking accounts           177,442                      162,051
Money market accounts                        270,221                      267,953
Savings accounts                             106,750                      109,148
Certificates                                 797,046                      847,048
                                         --------------               ------------

Total                                     $1,540,090                   $1,564,825
                                         --------------               ------------
                                         --------------               ------------
</TABLE>

                                       16
<PAGE>

FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER 
BORROWINGS | InterWest borrows through advances from the Federal Home Loan 
Bank (FHLB) and securities sold under agreements to repurchase. InterWest had 
$718.7 million outstanding in FHLB advances as of December 31, 1998, an 
increase from $546.0 million as of September 30, 1998. The increase in FHLB 
advances was used to fund the growth in securities.

The FHLB provides credit for member financial institutions. As members, 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 designed to meet 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.

InterWest uses the securities market as a vehicle for borrowing by utilizing 
its securities as collateral. As of December 31, 1998, InterWest had $134.0 
million outstanding in securities sold under agreements to repurchase, an 
increase from $128.6 million as of September 30, 1998.

SHAREHOLDERS' EQUITY | InterWest Bancorp is committed to managing capital for 
maximum shareholder 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

InterWest's total shareholders equity was $175.3 million as of December 31, 
1998, an increase of $3.6 million from $171.7 million as of September 30, 
1998. Book value per share increased to $11.18 as of December 31, 1998, from 
$10.97 as of September 30, 1998. During three months ended December 31, 1998, 
InterWest Bancorp declared cash dividends totaling $0.14 per share, an 
increase from $0.12 per share for the three months ended December 31, 1997.

InterWest Bancorp 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 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>

                                       17
<PAGE>

InterWest Bancorp 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's Tier I capital 
is composed of shareholders' 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 December 31, 1998, under the FRB's capital guidelines, InterWest 
Bancorp's levels of consolidated regulatory capital exceed the FRB's minimum 
requirements.

The capital amounts and ratios for InterWest Bancorp, InterWest Bank and 
Pacific Northwest Bank as of December 31, 1998 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:
Total Capital
      (to Risk Weighted Assets)        $180,729      10.77%     $134,298      8.0%      $167,873       10.0%
Tier I Capital
      (to Risk Weighted Assets)         167,202       9.96%       67,149      4.0%       100,724        6.0%
Tier I Capital
      (to Average Assets)               167,202       6.79%       73,900      3.0%       123,166        5.0%

INTERWEST BANK:
Total Capital
      (to Risk Weighted Assets)        $145,615      10.91%     $106,774      8.0%      $133,467       10.0%
Tier I Capital
      (to Risk Weighted Assets)         136,453      10.22%       53,387      4.0%        80,080        6.0%
Tier I Capital
      (to Average Assets)               136,453       6.70%       81,496      4.0%       101,870        5.0%

PACIFIC NORTHWEST BANK:
Total Capital
      (to Risk Weighted Assets)         $25,942      11.12%      $18,663      8.0%       $23,329       10.0%
Tier I Capital
      (to Risk Weighted Assets)          23,702      10.16%        9,332      4.0%        13,997        6.0%
Tier I Capital
      (to Average Assets)                23,702       8.85%       10,716      4.0%        13,395        5.0%
</TABLE>

As of December 31, 1998, 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.

On January 20, 1999, the Board of Directors of InterWest Bancorp authorized 
the purchase of up to 5 percent of InterWest Bancorp's outstanding shares of 
common stock in the open market over the next twelve months. The planned 
purchases of common stock will be limited by the anticipated timing of stock 
option exercises as well as other considerations. 

                                       18
<PAGE>

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 commercial 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 the three months ended December 31, 1998. The 
consolidated statement of cash flows details InterWest's operating, investing 
and financing activities during the period. The most significant item under 
operating activities was net income of $7.4 million for the three months 
ended December 31, 1998. Investing activities included proceeds from the sale 
of securities available for sale of $159.1 million, security maturities 
totaling $163.0 million and purchases of securities available for sale of 
$624.8 million. Investing activities also included $142.1 million in loan 
originations, net of principal repayments and $140.9 million of proceeds from 
the sale of loans. During the period, financing activities included $174.3 
million in borrowing repayments, net of borrowing proceeds, a $25.3 million 
increase in deposits, a $50.0 million decrease in certificates of deposit and 
a total of $2.2 million paid in cash dividends to shareholders.

YEAR 2000

The century date change for the year 2000 is a serious issue that may impact 
virtually every organization, including InterWest. Many software programs are 
not able to recognize the year 2000, since most programs and systems were 
designed to store calendar years in the 1900s by assume the "19" and storing 
only the last two digits of the year. The problem is especially important to 
financial institutions since many transactions, such as interest accruals and 
payments, are date sensitive, and because InterWest interacts with numerous 
customers, vendors and third party service providers who must also address 
the year 2000 issue. The problem is not limited to computer systems. Year 
2000 issues will potentially affect every system that has an embedded 
microchip, such as automated teller machines, elevators and vaults.

INTERWEST'S STATE OF READINESS/ InterWest is committed to addressing these 
Year 2000 issues in a prompt and responsible manner, and has dedicated the 
resources to do so. Management has completed an assessment of its automated 
systems and has implemented a program consistent with applicable regulatory 
guidelines, to complete all steps necessary to resolve identified issues. 
InterWest's compliance program has several phases, including project 
management, assessment, testing, remediation and implementation.

PROJECT MANAGEMENT. Each subsidiary bank has developed a process to address Year
2000 compliance matters. This process includes a project manager, senior
management and departmental representatives. There are periodic meetings with
senior management of each subsidiary bank to discuss the process, assign tasks,
determine priorities and monitor progress. Periodic reports are provided to each
subsidiary banks' 

                                       19
<PAGE>

Board of Directors on the status of the Year 2000 project. Additionally, the 
subsidiary banks regularly report to InterWest Bancorp management and to the 
InterWest Bancorp Board of Directors.

ASSESSMENT. InterWest's computer equipment and mission-critical software 
programs have been identified. InterWests' primary software vendors were also 
assessed during this phase, and vendors who provide mission-critical software 
have been contacted. InterWest will continue to monitor and work with these 
vendors. Additionally, InterWest has identified, and began working with, 
significant borrowers to assess the extent to which they may be affected by 
Year 2000 issues.

TESTING. Updating and initial testing of InterWest's automated systems has 
been completed. Based on the results of initial testing, InterWest has been 
able to identify internal computer systems that are non-compliant and further 
remediation and testing will continue during 1999.

REMEDIATION AND IMPLEMENTATION. This phase involves obtaining and 
implementing renovated software applications provided by InterWest's vendors. 
As renovated applications or new applications are received and implemented, 
InterWest tests them for Year 2000 compliance. This phase also involves 
upgrading and replacing systems where appropriate, and will continue 
throughout 1999.

ESTIMATED COSTS TO ADDRESS INTERWEST'S YEAR 2000 ISSUES/ The total financial 
effect that year 2000 issues will have on InterWest cannot be predicted with 
any certainty at this time. In fact, in spite of all efforts being made to 
rectify these problems, the success of InterWest's efforts will not be known 
until the year 2000 actually arrives. However, based on its assessment to 
date, InterWest does not believe that expenses or required capital 
expenditures related to meeting Year 2000 challenges will have a material 
effect on the operations or financial condition of InterWest. Year 2000 
challenges facing vendors of mission-critical software and systems, 
third-party service providers, and customers, could have a material effect on 
the operations or financial condition of InterWest, to the extent such 
parties are materially affected by such challenges.

RISKS RELATED TO YEAR 2000 ISSUES/ The Year 2000 poses certain risks to 
InterWest and its operations. Some of these risks are present because 
InterWest purchases technology and information systems applications from 
other parties who face Year 2000 challenges and relies on third party service 
providers for processing data. In addition, other risks are inherent in the 
business of banking or are risks faced by many companies. Although it is 
impossible to identify all possible risks that InterWest may face moving into 
the millennium, management has identified the following significant potential 
risks:

Commercial banks may experience a contraction in their deposit base, if a 
significant amount of deposited funds are withdrawn by customers prior to the 
Year 2000, and interest rates may increase as the millennium approaches. This 
potential deposit contraction could make it necessary for InterWest to change 
its sources of funding and could affect future earnings. InterWest has 
established a contingency plan for addressing this situation, should it 
arise, in its asset and liability management policies. The plan includes 
maintaining the ability to borrow funds from correspondent banks and the 
Federal Home Loan Bank of Seattle. Significant demand for funds from other 
banks could reduce the amount of funds available for InterWest to borrow. If 
insufficient funds are available from these sources, InterWest may also sell 
investment securities or other liquid assets to meet liquidity needs.

InterWest originates loans to businesses in its marketing area. If these 
businesses are adversely affected by Year 2000 problems, their ability to 
repay loans could be impaired. This increased credit risk could adversely 
affect InterWest's financial performance. During the assessment phase of 
InterWest's Year 2000 program, InterWest identified substantial borrowers, 
and is working with such borrowers to ascertain their levels of exposure to 
Year 2000 problems. To the extent that InterWest is unable to assure itself 
of the Year 2000 readiness of such borrowers, it intends to apply additional 
risk assessment criteria to the indebtedness of such borrowers and make any 
necessary related adjustments to InterWest's provision for losses on loans.

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<PAGE>

InterWest's operations, like those of many other companies, can be adversely 
affected by the Year 2000-triggered failures of other companies upon whom 
InterWest depends for the functioning of its automated systems. Accordingly, 
InterWest's operations could be materially affected if the operations of 
mission-critical third party service providers are adversely affected. As 
described previously, InterWest has identified its mission-critical vendors 
and is monitoring their Year 2000 compliance programs.

INTERWEST'S CONTINGENCY PLANS/ InterWest has initially developed contingency 
plans related to Year 2000 issues. As InterWest continues the testing phase, 
and based on future ongoing assessment of the readiness of vendors, service 
providers and substantial borrowers, InterWest will modify contingency plans 
as necessary or develop additional contingency plans. The review of 
contingency plans is an ongoing process subject to internal assessments, 
third party and regulatory review. Additionally, specific timeframes have 
been established for the monitoring and assessment of contingency planning as 
well as "trigger" dates for implementing contingency plans. Certain 
circumstances, as described above in "Risks" may occur for which there are no 
completely satisfactory contingency plans.

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.

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 sales of fixed-rate mortgage loans; growth in non-interest bearing 
deposits, purchases of adjustable rate and callable agency securities and 
short-term commercial lending.

FORWARD LOOKING STATEMENTS | In this document, InterWest has 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.



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<PAGE>

PART II. OTHER INFORMATION

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            (a) REPORTS ON FORM 8-K

            None

            EXHIBITS

            (27) Financial Data Schedule







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<PAGE>

                                   SIGNATURES

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


                                   INTERWEST BANCORP, INC.




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



Dated:            February 11                   , 1999
        ----------------------------------------





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