A $2 billion-asset Washington State thrift dropped its plan to buy an eight-branch bank on the Olympic Peninsula, west of Seattle, after regulators said at least one branch there would have to be sold.

In September, Interwest Bancorp of Oak Harbor said it would buy Liberty Bay Financial Corp., the $179 million-asset parent of North Sound Bank in Poulsbo. The price was to have been about $49 million in stock.

Interwest already has eight branches on the peninsula. Poulsbo is across Puget Sound from Seattle; Oak Harbor is 50 miles north, on the big Whidbey Island in the sound.

Interwest expected regulators to make it divest some deposits and loans, said Steve Walden, president and chief executive officer. However, because the thrift has been changing its portfolio since 1996 to become more bank-like, regulators ordered it to divest more than if it were a straight thrift, he said. During mergers, regulators normally tabulate a thrift's regional market share at 50% of its actual total, whereas banks' deposits and assets are calculated at 100%.

"The restrictions proposed for approval of this transaction were more onerous than we originally expected and limited our ability to serve the market as we planned," Mr. Walden said.

In 1996, Interwest spent $42.1 million to buy $203.3 million-asset Central Bancorp in Wenatchee, Wash. At the time, Interwest had just begun its shift toward a commercial bank portfolio, and regulators were still weighing its assets as if it were a thrift.

- Craig Woker

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