**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WashingtonD.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**

**ý****Quarterly Report Pursuant to Section 13 or 15(d) ofthe Securities and Exchange Act of 1934**

 

**For the quarterly period ended June 30, 2003**

 

**or**

 

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

 

**For the transition periodfrom                  to                  **

 

**Commission filenumber   0-26632**

 

**PacificNorthwest Bancorp**

(Exact name of registrant as specified in its charter)

 
| **Washington**                                                                         |
|----------------------------------------------------------------------------------------|
| (State or other jurisdiction of incorporation or organization)                         |
|                                                                                   |   |   |
| **91-1691216**                                                                         |
| (I.R.S. Employer Identification No.)                                                   |
|                                                                                   |   |   |
| **1111 Third Avenue,  Suite 250  Seattle, Washington**                                 |
| (Address of principal executive offices)                                               |
|                                                                                   |   |   |
| **98101**                                                                              |
| (Zip Code)                                                                             |
|                                                                                   |   |   |
| Registrant’s telephone number including area code:  **(206)  624-0600** |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.       YES ý NO o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).       YES ý  NO o

 

As of July 30, 2003 17,115,390 shares of common stock were outstandingwith no par value.

 

 

----

 

**PACIFICNORTHWEST BANCORP**

 
| **INDEX**      |                                                                                                             |
|----------------|------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                             |
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                        |
| **Item 1.**    | **Financial Statements**                                                                                         |
|           |                                                                                                             |
|           | **Consolidated Statements of Financial  Condition as  of June 30, 2003 and December 31, 2002**                   |
|           |                                                                                                             |
|           | **Consolidated Statements of Income for  the three- and six-month periods ended June 30, 2003 and 2002**         |
|           |                                                                                                             |
|           | **Consolidated Statements of Shareholders’  Equity for the six-month periods ended June 30, 2003 and 2002** |
|           |                                                                                                             |
|           | **Consolidated  Statements of Cash Flows for the six-month periods ended June 30, 2003 and 2002**                |
|           |                                                                                                             |
|           | **Notes  to Unaudited Consolidated Financial Statements**                                                        |
|           |                                                                                                             |
| **Item 2.**    | **Management  Discussion and Analysis of Financial Condition and Results of Operations**                         |
|           |                                                                                                             |
| **Item 3.**    | **Quantitative and Qualitative Disclosures About Market Risk**                                                   |
|           |                                                                                                             |
| **Item 4.**    | **Controls and Procedures**                                                                                      |
|           |                                                                                                             |
| **PART II.**   | **OTHER INFORMATION**                                                                                            |
|           |                                                                                                             |
| **Item 1.**    | **Legal Proceedings**                                                                                            |
|           |                                                                                                             |
| **Item  4.**   | **Submission  of Matters to a Vote of Security Holders**                                                         |
|           |                                                                                                             |
| **Item 6.**    | **Exhibits and  Reports on Form 8-K**                                                                            |
|           |                                                                                                             |
| **SIGNATURES** |

 

2

----

 

### **PART I. FINANCIAL INFORMATION**

 

CONSOLIDATED STATEMENTS OFFINANCIAL CONDITION

 
| **Dollars in thousands**                                                                                           |   | **June 30, 2003** |      | **December 31, 2002** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                                                                                                               |   | **(UNAUDITED)**   |      |                  |   |
|                                                                                                               |   |              |      |                  |   |
| *Assets*                                                                                                           |   |              |      |                  |   |
|                                                                                                               |   |              |      |                  |   |
| Cash and due from banks                                                                                            |   |              |      |                  |   |
| Non-interest bearing                                                                                               |   | $                 | 73,084    |                  | $      | 92,541 |   |
| Interest-bearing                                                                                                   |   | 8,300             |      | 7,461                 |   |
| Federal funds sold and securities purchased under  agreements to resell                                            |   | 27,975            |      | 950                   |   |
| Securities available for sale                                                                                      |   | 738,335           |      | 788,546               |   |
| Loans held for sale                                                                                                |   | 13,822            |      | 25,621                |   |
| Loans receivable                                                                                                   |   | 2,046,318         |      | 2,029,753             |   |
| Allowance for losses on loans                                                                                      |   | (27,433           | )         | (26,940               | )      |
| Net loans receivable                                                                                               |   | 2,018,885         |      | 2,002,813             |   |
|                                                                                                               |   |              |      |                  |   |
| Interest receivable                                                                                                |   | 13,523            |      | 14,306                |   |
| Other real estate                                                                                                  |   | 6,323             |      | 7,152                 |   |
| Premises and equipment                                                                                             |   | 44,449            |      | 48,082                |   |
| Goodwill                                                                                                           |   | 67,732            |      | 67,732                |   |
| Other intangible assets                                                                                            |   | 9,678             |      | 10,505                |   |
| Bank owned life insurance (BOLI)                                                                                   |   | 58,118            |      | 56,995                |   |
| Other assets                                                                                                       |   | 3,966             |      | 4,305                 |   |
|                                                                                                               |   |              |      |                  |   |
| Total assets                                                                                                       |   | $                 | 3,084,190 |                  | $      | 3,127,009 |   |
|                                                                                                               |   |              |      |                  |   |
| *Liabilities*                                                                                                      |   |              |      |                  |   |
|                                                                                                               |   |              |      |                  |   |
| Deposits:                                                                                                          |   |              |      |                  |   |
| Non-interest bearing                                                                                               |   | $                 | 395,459   |                  | $      | 345,571 |   |
| Interest-bearing                                                                                                   |   | 1,649,628         |      | 1,708,739             |   |
| Total deposits                                                                                                     |   | 2,045,087         |      | 2,054,310             |   |
|                                                                                                               |   |              |      |                  |   |
| Federal Home Loan Bank (FHLB) advances                                                                             |   | 557,171           |      | 609,581               |   |
| Federal funds purchased and securities sold under  agreements to repurchase                                        |   | 130,257           |      | 120,706               |   |
| Guaranteed preferred benefical interests in  subordinated debt                                                     |   | 52,000            |      | 48,000                |   |
| Other borrowings                                                                                                   |   | 10,063            |      | 10,072                |   |
| Other liabilities                                                                                                  |   | 15,716            |      | 22,727                |   |
|                                                                                                               |   |              |      |                  |   |
| Commitments and contingencies                                                                                      |   | —            |      | —                |   |
|                                                                                                               |   |              |      |                  |   |
| Total liabilities                                                                                                  |   | 2,810,294         |      | 2,865,396             |   |
|                                                                                                               |   |              |      |                  |   |
| *Shareholders’ Equity*                                                                                        |   |              |      |                  |   |
|                                                                                                               |   |              |      |                  |   |
| Common stock, no par value, authorized shares  30,000,000 issued and outstanding: 17,081,478 and 16,799,472 shares |   | —            |      | —                |   |
| Paid-in-capital                                                                                                    |   | 69,681            |      | 64,995                |   |
| Retained Earnings                                                                                                  |   | 204,794           |      | 192,942               |   |
| Accumulated other comprehensive income/(loss)                                                                      |   | (579              | )         | 3,676                 |   |
|                                                                                                               |   |              |      |                  |   |
| Total shareholders’ equity                                                                                    |   | 273,896           |      | 261,613               |   |
|                                                                                                               |   |              |      |                  |   |
| Total liabilities and shareholders’ equity                                                                    |   | $                 | 3,084,190 |                  | $      | 3,127,009 |   |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

 

CONSOLIDATED STATEMENTS OFINCOME (UNAUDITED)

For the three-and six-month periods ended June 30, 2003 and 2002

 
|                                                            |   | **Three-month  periods** |   | **Six-month  periods** |   |
|-----------------------------------------------------------------|--------|--------------------------|--------|------------------------|--------|
| **Dollars in thousands, except per  share amounts**             |   | **2003**                 |   | **2002**               |   | **2003** |   | **2002** |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Interest Income                                                 |   |                     |   |                   |   |   |   |   |   |
| Loans receivable and loans held for sale                        |   | $                        | 33,930 |                   | $      | 34,548 |   | $ | 68,500 |   | $ | 69,057 |   |
| Securities available for sale                                   |   | 6,708                    |   | 10,391                 |   | 15,172 |   | 20,791 |   |
| Other                                                           |   | 33                       |   | 67                     |   | 52 |   | 74 |   |
|                                                            |   | 40,671                   |   | 45,006                 |   | 83,724 |   | 89,922 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Interest Expense                                                |   |                     |   |                   |   |   |   |   |   |
| Deposits                                                        |   | 7,423                    |   | 9,744                  |   | 15,192 |   | 18,621 |   |
| FHLB advances and other borrowings                              |   | 6,190                    |   | 6,331                  |   | 12,375 |   | 12,905 |   |
| Securities sold under agreements to repurchase                  |   | 692                      |   | 996                    |   | 1,426 |   | 2,191 |   |
| Guaranteed preferred beneficial interests in  subordinated debt |   | 1,037                    |   | 901                    |   | 2,081 |   | 1,827 |   |
|                                                            |   | 15,342                   |   | 17,972                 |   | 31,074 |   | 35,544 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Net interest income                                             |   | 25,329                   |   | 27,034                 |   | 52,650 |   | 54,378 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Provision for losses on loans                                   |   | 1,250                    |   | 1,700                  |   | 2,500 |   | 3,400 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Net interest income after provision for losses on  loans        |   | 24,079                   |   | 25,334                 |   | 50,150 |   | 50,978 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Non-interest Income                                             |   |                     |   |                   |   |   |   |   |   |
| Service fees                                                    |   | 4,150                    |   | 3,281                  |   | 7,986 |   | 6,458 |   |
| Investment product fees and insurance commissions               |   | 384                      |   | 508                    |   | 811 |   | 836 |   |
| Gain on sale of loans                                           |   | 142                      |   | 707                    |   | 546 |   | 1,455 |   |
| Gain on sale of securities available for sale                   |   | 247                      |   | 40                     |   | 245 |   | 40 |   |
| Bank owned life insurance income                                |   | 538                      |   | 499                    |   | 1,122 |   | 499 |   |
| Other                                                           |   | 250                      |   | 329                    |   | 510 |   | 661 |   |
|                                                            |   | 5,711                    |   | 5,364                  |   | 11,220 |   | 9,949 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Non-interest Expense                                            |   |                     |   |                   |   |   |   |   |   |
| Compensation and employee benefits                              |   | 9,631                    |   | 9,977                  |   | 19,524 |   | 19,796 |   |
| General and administrative                                      |   | 3,892                    |   | 4,292                  |   | 7,996 |   | 8,557 |   |
| Occupancy and equipment                                         |   | 3,279                    |   | 3,042                  |   | 6,480 |   | 6,163 |   |
| Data processing                                                 |   | 1,490                    |   | 1,397                  |   | 2,944 |   | 2,782 |   |
| Severance and employment agreements                             |   | (619                     | )      | —                 |   | (407 | ) | — |   |
| Conversion and integration                                      |   | 176                      |   | —                 |   | 127 |   | — |   |
| Other real estate owned                                         |   | 194                      |   | 8                      |   | 336 |   | 10 |   |
|                                                            |   | 18,043                   |   | 18,716                 |   | 37,000 |   | 37,308 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Income before income tax expense                                |   | 11,747                   |   | 11,982                 |   | 24,370 |   | 23,619 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Income tax expense                                              |   | 3,527                    |   | 4,070                  |   | 7,768 |   | 8,143 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Net income                                                      |   | $                        | 8,220  |                   | $      | 7,912 |   | $ | 16,602 |   | $ | 15,476 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Basic net income per share                                      |   | $                        | 0.48   |                   | $      | 0.52 |   | $ | 0.98 |   | $ | 1.00 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Diluted net income per share                                    |   | $                        | 0.47   |                   | $      | 0.50 |   | $ | 0.95 |   | $ | 0.98 |   |
|                                                            |   |                     |   |                   |   |   |   |   |   |
| Dividends declared per share                                    |   | $                        | 0.14   |                   | $      | 0.14 |   | $ | 0.28 |   | $ | 0.28 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY (UNAUDITED)

 
| **Dollars in thousands, except per  share data**                            |   | **Common Stock,  no par value  Shares** |   | **Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Debt  Related to  ESOP** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|----------------------|--------|------------------------|--------|------------------------------------------------------|--------|----------------------------|--------|-----------|--------|
| January 1, 2002                                                             |   | 15,595,204                              |   | $                    | 26,757 |                   | $      | 172,967                                              |   | $                          | 1,305  |      | $      | (543 | ) | $ | 200,486 |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Dividends declared, $0.28 per share                                         |   |                                    |   |                 |   | (4,335                 | )      |                                                 |   |                       |   | (4,335    | )      |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Issuance of common stock:                                                   |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Stock option plans                                                          |   | 113,926                                 |   | 1,497                |   |                   |   |                                                 |   |                       |   | 1,497     |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Purchase and retirement of common stock                                     |   | (532,621                                | )      | (14,435              | )      |                   |   |                                                 |   |                       |   | (14,435   | )      |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| ESOP debt repayment                                                         |   | 17,664                                  |   |                 |   |                   |   |                                                 |   | 543                        |   | 543       |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Comprehensive income:                                                       |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Net income                                                                  |   |                                    |   |                 |   | 15,476                 |   |                                                 |   |                       |   | 15,476    |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Unrealized gain on securities available for sale,  net of taxes of $1,540   |   |                                    |   |                 |   |                   |   | 2,859                                                |   |                       |   | 2,859     |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Reclassification adjustment for gains included in  net income, net of taxes |   |                                    |   |                 |   |                   |   | (40                                                  | )      |                       |   | (40       | )      |
| Total comprehensive income*********                                         |   |                                    |   |                 |   | 15,476                 |   | 2,819                                                |   | —                     |   | 18,295    |   |
| June 30, 2002                                                               |   | 15,194,173                              |   | $                    | 13,819 |                   | $      | 184,108                                              |   | $                          | 4,124  |      | $      | — |   | $ | 202,051 |   |

 

 
| **Dollars in thousands, except per  share data**                            |   | **Common Stock,  no par value  Shares** |   | **Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Debt  Related to  ESOP** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|----------------------|--------|------------------------|--------|------------------------------------------------------|--------|----------------------------|--------|-----------|--------|
| January 1, 2003                                                             |   | 16,799,472                              |   | $                    | 64,995 |                   | $      | 192,942                                              |   | $                          | 3,676  |      | $      | — |   | $ | 261,613 |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Dividends declared, $0.28 per share                                         |   |                                    |   |                 |   | (4,750                 | )      |                                                 |   |                       |   | (4,750    | )      |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Issuance of common stock:                                                   |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Stock option plans                                                          |   | 386,297                                 |   | 5,876                |   |                   |   |                                                 |   |                       |   | 5,876     |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Tax deduction on stock option exercises                                     |   |                                    |   | 1,580                |   |                   |   |                                                 |   |                       |   | 1,580     |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Purchase and retirement of common stock                                     |   | (104,291                                | )      | (2,770               | )      |                   |   |                                                 |   |                       |   | (2,770    | )      |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Comprehensive income:                                                       |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Net income                                                                  |   |                                    |   |                 |   | 16,602                 |   |                                                 |   |                       |   | 16,602    |   |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Unrealized loss on securities available for sale,  net of taxes of $1,080   |   |                                    |   |                 |   |                   |   | (4,256                                               | )      |                       |   | (4,256    | )      |
|                                                                        |   |                                    |   |                 |   |                   |   |                                                 |   |                       |   |      |   |
| Reclassification adjustment for gains included in  net income, net of taxes |   |                                    |   |                 |   |                   |   | 1                                                    |   |                       |   | 1         |   |
| Total comprehensive income*********                                         |   |                                    |   |                 |   | 16,602                 |   | (4,255                                               | )      | —                     |   | 12,348    |   |
| June 30, 2003                                                               |   | 17,081,478                              |   | $                    | 69,681 |                   | $      | 204,794                                              |   | $                          | (579   | )         | $      | — |   | $ | 273,896 |   |

 

----

***** Total comprehensive income for the threemonths ended June 30, 2003 and 2002 was $5,967 and $13,414, respectively.

 

 

Seeaccompanying notes to consolidated financial statements.

 

5

----

 

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 
|                                                                                             |   | **Six-month  periods ended June 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
| **Dollars in thousands**                                                                         |   | **2003**                              |   | **2002** |   |
|                                                                                             |   |                                  |   |   |   |
| *Operating Activities*                                                                           |   |                                  |   |   |   |
|                                                                                             |   |                                  |   |   |   |
| Net income                                                                                       |   | $                                     | 16,602 |   | $ | 15,476 |   |
| Adjustments to reconcile net income to net cash  provided cash provided by operating activities: |   |                                  |   |   |   |
| Depreciation                                                                                     |   | 2,601                                 |   | 2,638 |   |
| Amortization of intangible assets                                                                |   | 827                                   |   | 458 |   |
| Provision for losses on loans                                                                    |   | 2,500                                 |   | 3,400 |   |
| Amortization of premiums and discounts, net                                                      |   | 3,213                                 |   | 946 |   |
| Gain on sale of mortgage banking assets                                                          |   | (546                                  | )      | (1,455 | ) |
| (Gain)/Loss on sale of securities available for  sale                                            |   | 106                                   |   | (40 | ) |
| (Gain)/Loss on sale of other real estate                                                         |   | (44                                   | )      | 35 |   |
| Write-downs on other real estate                                                                 |   | 205                                   |   | 32 |   |
| (Gain)/Loss on disposal of premises and equipment                                                |   | (221                                  | )      | 82 |   |
| Income from bank owned life insurance                                                            |   | (1,122                                | )      | (499 | ) |
| Loan fees deferred, net of amortization                                                          |   | (364                                  | )      | 602 |   |
| FHLB stock dividends                                                                             |   | (1,563                                | )      | (1,381 | ) |
| Changes in operating assets and liabilities:                                                     |   |                                  |   |   |   |
| Decrease in interest receivable                                                                  |   | 1,926                                 |   | 1,067 |   |
| Increase in other assets                                                                         |   | (1,239                                | )      | (4,015 | ) |
| Decrease in other liabilities                                                                    |   | (2,945                                | )      | (433 | ) |
|                                                                                             |   |                                  |   |   |   |
| Net cash provided by operating activities                                                        |   | $                                     | 19,936 |   | $ | 16,913 |   |
|                                                                                             |   |                                  |   |   |   |
| *Investing Activities*                                                                           |   |                                  |   |   |   |
|                                                                                             |   |                                  |   |   |   |
| Purchases of securities available for sale                                                       |   | (305,083                              | )      | (200,796 | ) |
| Proceeds from maturing and principal repayments on  securities available for sale                |   | 242,485                               |   | 188,751 |   |
| Proceeds from sale of securities available for  sale                                             |   | 104,332                               |   | 2,040 |   |
| Proceeds from sale of loans                                                                      |   | 12,016                                |   | 104,324 |   |
| Net increase in loans receivable                                                                 |   | (20,734                               | )      | (116,796 | ) |
| Proceeds from sale of other real estate                                                          |   | 4,029                                 |   | 3,881 |   |
| Improvements capitalized to other real estate                                                    |   | (506                                  | )      | (263 | ) |
| Purchases of premises and equipment                                                              |   | (1,983                                | )      | (1,394 | ) |
| Proceeds from sales of premises and equipment                                                    |   | 3,237                                 |   | 62 |   |
| Purchase of bank owned life insurance                                                            |   | —                                |   | (50,000 | ) |
| Net increase in federal funds sold and securities  purchased under agreements to resell          |   | (27,025                               | )      | (31,900 | ) |
|                                                                                             |   |                                  |   |   |   |
| Net cash provided by (used in) investing  activities                                             |   | $                                     | 10,768 |   | $ | (102,091 | ) |

 

See accompanying notes to consolidated financial statements.

 

6

----

 

 
|                                                                                              |   | **Six-month  periods ended June 30,** |    |
|---------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
| **Dollars in thousands**                                                                          |   | **2003**                              |    | **2002** |   |
|                                                                                              |   |                                  |    |   |   |
| *Financing Activities*                                                                            |   |                                  |    |   |   |
|                                                                                              |   |                                  |    |   |   |
| Net increase in deposits                                                                          |   | $                                     | 5,312   |   | $ | 115,727 |   |
| Net increase (decrease) in certificates of  deposits                                              |   | (14,535                               | )       | 122,221 |   |
| Proceeds from FHLB advances, securties sold under  agreements to repurchase, and other borrowings |   | 469,551                               |    | 2,543,963 |   |
| Repayment of FHLB advances, securities sold under  agreements to repurchase, and other borrowings |   | (512,419                              | )       | (2,666,931 | ) |
| Proceeds from re-issuance of guaranteed subordinated  debt                                        |   | 4,373                                 |    | — |   |
| Purchase of InterWest Capital Trust I - capital  securities                                       |   | —                                |    | (1,500 | ) |
| Dividends paid to shareholders                                                                    |   | (4,710                                | )       | (4,363 | ) |
| Issuance of common stock from exercise of stock  options                                          |   | 5,876                                 |    | 1,497 |   |
| Purchase and retirement of common stock                                                           |   | (2,770                                | )       | (14,435 | ) |
|                                                                                              |   |                                  |    |   |   |
| Net cash provided by (used in) financing  activities                                              |   | $                                     | (49,322 | ) | $ | 96,179 |   |
|                                                                                              |   |                                  |    |   |   |
| Net increase (decrease) in cash and cash  equivalents                                             |   | (18,618                               | )       | 11,001 |   |
|                                                                                              |   |                                  |    |   |   |
| *Cash and due from banks:*                                                                        |   |                                  |    |   |   |
| Beginning of year                                                                                 |   | 100,002                               |    | 58,625 |   |
| End of year                                                                                       |   | $                                     | 81,384  |   | $ | 69,626 |   |
|                                                                                              |   |                                  |    |   |   |
| *Supplemental Disclosures of Cash  Flow Information*                                              |   |                                  |    |   |   |
|                                                                                              |   |                                  |    |   |   |
| Cash paid during the year for:                                                                    |   |                                  |    |   |   |
| Interest                                                                                          |   | $                                     | 28,950  |   | $ | 33,257 |   |
| Income taxes                                                                                      |   | 165                                   |    | 11,500 |   |
|                                                                                              |   |                                  |    |   |   |
| Non-cash investing and financing activities:                                                      |   |                                  |    |   |   |
| Loans receivable transferred to other real estate                                                 |   | $                                     | 2,856   |   | $ | 3,796 |   |
| ESOP debt repayment                                                                               |   | —                                |    | 543 |   |

 

See accompanying notes to consolidated financial statements.

 

7

----

 

 

NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS

 

**NOTEA** BASIS OFPRESENTATION

 

Pacific Northwest Bancorp is a bank holding company incorporated in thestate of Washington.  Through itscommercial banking subsidiary, Pacific Northwest Bank, a wide range offinancial services is offered to businesses and individuals in its market areaincluding investment products available through its subsidiary, PacificNorthwest Financial Services, Inc. and insurance products available through itssubsidiary, Pacific Northwest Insurance Agency, Inc.  Pacific Northwest Bank operates 58 Financial Centers in thePacific Northwest, including the metropolitan areas of Seattle and Bellevue,Washington, and Portland, Oregon, and other areas of western and centralWashington.

 

The unaudited consolidated financial statements includethe accounts of Pacific Northwest Bancorp and its wholly owned subsidiaries(collectively PNWB).  As of June 30,2003, Pacific Northwest Bancorp’s wholly owned subsidiaries were PacificNorthwest Bank, InterWest Capital Trust I and Pacific Northwest Statutory TrustI.  All material inter-companytransactions and balances have been eliminated in consolidation.

 

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

 

The unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments necessary for a fair presentation are reflected in the unauditedinterim consolidated financial statements. The consolidated statements of income for the three and six-monthperiods ended June 30, 2003 and 2002 are not necessarily indicative of theoperating results for the full year. For further information, refer to the consolidated financial statementsand footnotes filed on the Form 10-K for the most recent annual period endedDecember 31, 2002.

 

**NOTEB**RECLASSIFICATIONS

 

Certain reclassifications have been made toprior financial statements to conform to current presentation. The effects ofthe reclassifications are not considered material.

 

**NOTE C** BUSINESSCOMBINATION

 

OnMay 20, 2003, PNWB announced that it had signed an Agreement and Plan ofReorganization with Wells Fargo & Company, a Delaware corporation (“WellsFargo”). Under the terms of the agreement, a wholly-owned subsidiary of WellsFargo will be merged with and into PNWB. PNWB will survive the merger andbecome a wholly owned subsidiary of Wells Fargo. Each share of PNWB commonstock outstanding immediately prior to the closing of the merger will be convertedand exchanged into Wells Fargo common stock with a value of $35.00, based onthe average of the closing prices of Wells Fargo common stock on the New YorkStock Exchange as reported by Bloomberg, L.P. for each of the 20 consecutivetrading days prior to the special meeting of PNWB’s shareholders to vote on themerger. The agreementwith Wells Fargo limits certain lending and investing activities of PNWBwithout the prior approval of Wells Fargo and requires PNWB to pay Wells 

 

8

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Fargoa $30 million termination fee if the merger is not completed by reason ofPNWB having received a superior competing acquisition proposal, and the failureof PNWB’s board of directors torecommend approval or call a special meeting of PNWB shareholders to vote on the merger prior to December 15,2003, as required by the agreement.

 

The merger is subject to several conditions, including receipt ofapplicable regulatory approvals and approval by shareholders of PNWB.Management expects the merger to close by the end of the third quarter 2003.

 

 

**NOTED****STOCKBASED COMPENSATION

 

PNWB accounts for stock-based employee compensation plan using theintrinsic value method prescribed in Accounting Principle Board Opinion (APB)No. 25, “Accounting for Stock Issued to Employees.”   No stock-based employee compensation cost is reflected in netincome, as all stock options are granted at exercise prices not less than thefair value of common stock on the date of grant.  PNWB has elected to apply the disclosure only provisions ofStatement of Financial Accounting Standards (SFAS) No. 148, “Accounting forStock-Based Compensation.”  Thefollowing table illustrates the effect on net income and earnings per share ifPNWB had applied the fair value recognition provisions of FASB Statement No.148 to stock-based employee compensation.

 
|                                                |                                                                                                                                  | **Three-months  ended  June 30,** |   | **Six-months  ended  June 30,** |   |
|-----------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|--------|---------------------------------|--------|
| **Dollars in thousands, except per  share amounts** |                                                                                                                                  | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                |                                                                                                                                  |                              |   |                            |   |   |   |   |   |
| Net income, as reported                             |                                                                                                                                  | $                                 | 8,220  |                            | $      | 7,912 |   | $ | 16,602 |   | $ | 15,476 |   |
| Less:                                               | Total stock-based employee compensation expense  determined under fair value based method for all awards, net of tax related  effects |                              | 250    |                            | 359    |   | 513 |   | 753 |   |
| Pro forma net income                                |                                                                                                                                  | $                                 | 7,970  |                            | $      | 7,553 |   | $ | 16,089 |   | $ | 14,723 |   |
|                                                |                                                                                                                                  |                              |   |                            |   |   |   |   |   |
| Earnings per share:                                 |                                                                                                                                  |                              |   |                            |   |   |   |   |   |
| Basic - as reported                                 |                                                                                                                                  | $                                 | 0.48   |                            | $      | 0.52 |   | $ | 0.98 |   | $ | 1.00 |   |
| Basic - pro forma                                   |                                                                                                                                  | $                                 | 0.47   |                            | $      | 0.50 |   | $ | 0.95 |   | $ | 0.95 |   |
|                                                |                                                                                                                                  |                              |   |                            |   |   |   |   |   |
| Diluted - as reported                               |                                                                                                                                  | $                                 | 0.47   |                            | $      | 0.50 |   | $ | 0.95 |   | $ | 0.98 |   |
| Diluted - pro forma                                 |                                                                                                                                  | $                                 | 0.45   |                            | $      | 0.48 |   | $ | 0.92 |   | $ | 0.93 |   |
|                                                     |                                                                                                                                       |                                   |        |                                 |        |  |  |  |  |  |  |  |  |  |

 

 

**NOTE****E** NET INCOME PER SHARE

 

Basicnet income per share is calculated by dividing net income by the weightedaverage number of common shares outstanding during the period.  Diluted net income per share is calculatedby dividing net income by diluted weighted average shares outstanding, whichincludes common stock equivalent shares outstanding using the treasury stockmethod, unless such shares are anti-dilutive. Common stock equivalents includeshares issuable upon exercise of stock options.  Unallocated shares relating to the employee stock ownership plandebt obligation are deducted in the calculation of weighted average sharesoutstanding.

 

Thefollowing table presents the computation of basic and diluted net income pershare for the three- and six-month periods ended June 30:

 

9

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|                                                                                                                     |   | **Three months** |   | **Six months** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|----------------|--------|
| **Dollars in thousands, except per  share amounts**                                                                      |   | **2003**         |   | **2002**       |   | **2003** |   | **2002** |   |
|                                                                                                                     |   |             |   |           |   |   |   |   |   |
| **Numerator:**                                                                                                           |   |             |   |           |   |   |   |   |   |
|                                                                                                                     |   |             |   |           |   |   |   |   |   |
| Net income                                                                                                               |   | $                | 8,220  |           | $      | 7,912 |   | $ | 16,602 |   | $ | 15,476 |   |
|                                                                                                                     |   |             |   |           |   |   |   |   |   |
| **Denominator:**                                                                                                         |   |             |   |           |   |   |   |   |   |
|                                                                                                                     |   |             |   |           |   |   |   |   |   |
| Denominator for basic net income per share -  Weighted average shares                                                    |   | 16,967,621       |   | 15,353,873     |   | 16,910,123 |   | 15,443,721 |   |
| Effect of dilutive securities:                                                                                           |   |             |   |           |   |   |   |   |   |
| Stock options                                                                                                            |   | 665,275          |   | 456,355        |   | 647,438 |   | 395,898 |   |
| Denominator for diluted net income per share -  Weighted average shares and assumed conversion of dilutive stock options |   | 17,632,896       |   | 15,810,228     |   | 17,557,561 |   | 15,839,619 |   |
|                                                                                                                     |   |             |   |           |   |   |   |   |   |
| Basic net income per share                                                                                               |   | $                | 0.48   |           | $      | 0.52 |   | $ | 0.98 |   | $ | 1.00 |   |
|                                                                                                                     |   |             |   |           |   |   |   |   |   |
| Diluted net income per share                                                                                             |   | $                | 0.47   |           | $      | 0.50 |   | $ | 0.95 |   | $ | 0.98 |   |

 

**NOTE F**BUSINESS SEGMENT INFORMATION

 

Between the period August 31, 1996 and October 1999, PNWB acquired sixcommercial banking institutions. Subsequent to the acquisitions of PacificNorthwest Bank, First National Bank of Port Orchard, Pioneer Bank and KittitasValley Bank in 1998, PNWB was managed at the individual subsidiary banklevel.  Each subsidiary bank had a Boardof Directors and an executive management team that was responsible for theoperation and performance of the respective subsidiary bank. During the year ended December 31, 2000, PNWBmerged the subsidiary banks into one commercial bank.  In addition, PNWB consolidated its executive management functionsand implemented a new organizational structure, while converting separatebanking systems into a single operating system.

 

On November 13, 2002, PNWB completed theacquisition of Bank of the Northwest (BKNW) and merged BKNW into its commercialbank subsidiary, Pacific Northwest Bank. BKNW operated five branch offices in the metropolitan Portland marketarea. On December 9, 2002, PNWB successfully completed the information systemsand data conversion of BKNW and all of the five BKNW branches were renamedPacific Northwest Bank.

 

As a result of these organizational andsystem changes, the financial information that is used by the chief operatingdecision maker in allocating resources and assessing performance is onlyprovided for one reportable segment for the three and six-month periods endedJune 30, 2003 and 2002.

 

**NOTE G**  SECURITIES PLEDGED UNDER AGREEMENTS TOREPURCHASE

 

PNWB has sold certain securities of the U.S. government and itsagencies and other approved investments under agreements to repurchase.  The securities sold were classified assecurities available for sale with an estimated fair value of $73.1 million and$82.2 million as of June 30, 2003 and December 31, 2002, respectively.

 

10

----

 

 

**NOTE H **OFF BALANCE SHEET LOAN COMMITTMENTS

 

As of June 30, 2003, PNWB had approximately $197.0 million in realestate loan commitments to extend credit. Other loan commitments to extend credit, which include commercial andconsumer lines of credit, totaled approximately $539.8 million as of June 30,2003.  Outstanding commitments to extendcredit under standby letters of credit and commercial letters of credit totaledapproximately $63.4 million and $16.2 million, respectively, as of June 30,2003.

 

**NOTE I**  ACCOUNTING CHANGES

 

In January 2003, the Financial AccountingStandards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), *Consolidation of Variable Interest Entities*.The Interpretation provides guidance on how to identify a variable interest anddetermine when the assets, liabilities, noncontrolling interests and results ofoperations of a variable interest entity should be consolidated by the primarybeneficiary. The primary beneficiary is the enterprise that will absorb amajority of the variable interest entity’s expected losses or receive amajority of the expected residual returns as a result of holding variableinterests. The recognition and measurement provisions of this Interpretationapply at inception to any variable interest entities formed after January 31,2003, and become effective for existing variable interest entities on the firstinterim or annual reporting period beginning after June 15, 2003. However,qualifying special-purpose entities defined under SFAS No. 140, Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities,are not required to be consolidated in the financial statements of a transferor.The Company adopted the provisions of FIN 46 for variable interest entitiesformed on or after February 1, 2003, which did not have a material effect onthe Company’s consolidated financial statements. The Company will adopt theprovisions of FIN 46 for existing variable interest entities on July 1, 2003,which will result in the deconsolidation of InterWest Capital Trust I andPacific Northwest Statutory Trust I.

 

On May 15, 2003, the FASB issued SFAS No. 150(“FAS 150”), *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*. FAS150 requires that certain financial instruments, which under previous guidancecould be accounted for as equity, be classified as liabilities in statements offinancial position. FAS 150 represents a significant change in practice inaccounting for a number of financial instruments, including mandatorilyredeemable equity instruments and certain equity derivatives that frequentlyare used in connection with share repurchase programs. FAS 150 is effective forfinancial instruments entered into or modified after May 31, 2003, and isotherwise effective for the Company at the beginning of the first interimperiod beginning after June 15, 2003. Adoption of the Statement did not resultin an impact on the Company’s statement of financial position or results ofoperations.

 

11

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| **Item 2.** | **MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------------------------------------------------------------------------------------|

 

 

## **FORWARD-LOOKINGSTATEMENTS**

 

*This document,including information included with or incorporated by reference in thisdocument, contains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involvecertain risks, uncertainties and assumptions that are difficult topredict.  Actual outcomes and resultsmay differ materially from those expressed in, or implied by, ourforward-looking statements.  Words suchas “expects,” “anticipates,” “believes,” “estimates,” “intends,” “strategy,”other similar expressions or future or conditional verbs such as “will,” “may,”“should,” “would,” and “could” are intended to identify such forward-lookingstatements.  Readers should not rely solelyon the forward-looking statements and should consider all uncertainties andrisks throughout this document.  Thestatements are representative only as of the date they are made, and PNWBundertakes no obligation to update any forward-looking statement.*

 

*Possible events orfactors that could cause results or performance to differ materially from thoseexpressed in our forward-looking statements include, but are not limited to,the following:  changes in general economicconditions and economic conditions in the geographic areas in which PNWBoperates which may affect, among other things, the level of nonperformingloans, charge-offs, and provision expense; changes in the interest rateenvironment which may reduce interest margins and impact funding sources;litigation liabilities, including costs, expenses, settlements and judgments; changes in tax laws, rules andregulations as well as Internal Revenue Service (IRS) or other governmentalagencies’ interpretations thereof; legislative, regulatory and accountingchanges affecting the banking and financial services industry; competition withother local, regional and national banks, thrifts, credit unions and othernon-bank financial institutions; ability to grow core businesses; ability todevelop and introduce new banking-related products, services and enhancementsand gain market acceptance of such products; mergers and acquisitions and theirintegration into PNWB; and management’s ability to manage these and otherrisks.*

 

## **OVERVIEW**

 

Headquartered in Seattle,Washington, Pacific Northwest Bancorp is a Washington based bank holdingcompany providing financial services through its commercial banking subsidiary,Pacific Northwest Bank.  PacificNorthwest Bank operates 58 Financial Centers in the Pacific Northwest,including the metropolitan areas of Seattle and Bellevue, Washington, andPortland, Oregon, and other areas of western and central Washington. PacificNorthwest Bank offers a wide range of financial services to businesses andindividuals in its market area, including investment products available throughits subsidiary, Pacific Northwest Financial Services, Inc. and insuranceproducts available through its subsidiary, Pacific Northwest Insurance Agency,Inc. As part of the migration to a commercial bank, PNWB has made significantprogress in restructuring its balance sheet since mid-2000 so that it is morereflective of a commercial bank.

 

PNWBis currently involved in a pending merger with Wells Fargo & Company(“Wells Fargo”) (see details in footnote C). The merger is subject to severalconditions, including receipt of applicable regulatory approvals and approvalby PNWB shareholders, as well as a $30 million termination fee if the merger isnot finalized for reasons defined in the merger agreement. Management expectsthe merger to close late in the third quarter of 2003.

 

12

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**RESULTSOF OPERATIONS**

 

PNWB had net income of $8.2 million for thethree-month period ended June 30, 2003, compared to $7.9 million for thethree-month period ended June 30, 2002. Diluted net income per share was $0.47 for the three-month period endedJune 30, 2003 and $0.50 for the same period in 2002. PNWB’s return on averageshareholders’ equity was 12.05 percent for the three-month period ended June30, 2003, compared to 15.78 percent for the three-month period ended June 30,2002.  PNWB’s return on average assetswas 1.06 percent for the three-month period ended June 30, 2003, compared to1.12 percent for the three-month period ended June 30, 2002.

 

PNWB had net income of $16.6 million for thesix-month period ended June 30, 2003 compared to $15.5 million for thesix-month period ended June 30, 2002. Diluted net income per share was $0.95 for the six-month period endedJune 30, 2003, compared to $0.98 for the six-month period ended June 30,2002.  PNWB’s return on averageshareholders’ equity was 12.37 percent for the six-month period ended June 30,2003, compared to 15.40 percent for the six-month period ended June 30, 2002.PNWB’s return on average assets was 1.07 percent for the six-month period endedJune 30, 2003, compared to 1.11 percent for the six-month period ended June 30,2002.

 

The followingtable summarizes net income, net income per share and key financial ratios forthe three- and six-month periods ended June 30:

 
|                                                |   | **Three  months** |   | **Six months** |   |
|-----------------------------------------------------|--------|-------------------|--------|----------------|--------|
| **Dollars in thousands, except per  share amounts** |   | **2003**          |   | **2002**       |   | **2003** |   | **2002** |   |
|                                                |   |              |   |           |   |   |   |   |   |
| Net income                                          |   | $                 | 8,220  |           | $      | 7,912 |   | $ | 16,602 |   | $ | 15,476 |   |
|                                                |   |              |   |           |   |   |   |   |   |
| Basic net income per share                          |   | $                 | 0.48   |           | $      | 0.52 |   | $ | 0.98 |   | $ | 1.00 |   |
|                                                |   |              |   |           |   |   |   |   |   |
| Diluted net income per share                        |   | $                 | 0.47   |           | $      | 0.50 |   | $ | 0.95 |   | $ | 0.98 |   |
|                                                |   |              |   |           |   |   |   |   |   |
| Return on average shareholders’ equity         |   | 12.05             | %      | 15.78          | %      | 12.37 | % | 15.40 | % |
|                                                |   |              |   |           |   |   |   |   |   |
| Return on average assets                            |   | 1.06              | %      | 1.12           | %      | 1.07 | % | 1.11 | % |
|                                                |   |              |   |           |   |   |   |   |   |
| Net interest margin                                 |   | 3.59              | %      | 4.12           | %      | 3.74 | % | 4.19 | % |
|                                                |   |              |   |           |   |   |   |   |   |
| Efficiency ratio                                    |   | 58.13             | %      | 57.77          | %      | 57.93 | % | 58.00 | % |

 

 

*Net Interest Income* |PNWB’s net income is significantly affected bychanges in net interest income, which is the interest income received on loansreceivable and other interest-earning assets less the interest expense ondeposits and borrowings. PNWB’s net interest income is sensitive to changes ininterest rates.  Net interest incomebefore the provision for losses on loans was $25.3 million for the three-monthperiod ended June 30, 2003 and $27.0 million for the same period in2002. Net interest income before theprovision for losses on loans was $52.7 million for the six-month periodended June 30, 2003 and $54.4 million for the same period in 2002.

 

Net interest margin, which is net interest income dividedby average interest-earning assets, was 3.59 percent for the three-month periodended June 30, 2003, compared to 4.12 percent for the three-month period endedJune 30, 2002. Net interest margin was 3.74 percent and 4.19 for the six-monthperiods ended June 30, 2003 and 2002, respectively. Net interest margindecreased as a result of PNWB’s asset sensitive position in the low and 

 

13

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decreasing interest rate environment during the pastyear. The decrease in net interest margin in 2003 is due primarily toaccelerated prepayments on mortgage backed investment securities and single-familyresidential mortgage loans. In addition, newloans have been added to the loan portfolio at lower rates that were not fullyoffset by deposit re-pricing.

 

Interest income was $40.7 million for the three-monthperiod ended June 30, 2003, compared to $45.0 million for the three-monthperiod ended June 30, 2002. This decrease was primarily due to lower yieldsearned on loans and securities, partially offset by increases in volume in theloan portfolio during the second quarter of 2003. The yield on interest-earningassets was 5.76 percent and 6.86 percent for the three-month periods ended June30, 2003 and 2002, respectively. Interest income was $83.7 million and $89.9million for the six-month periods ended June 30, 2003 and 2002, respectively.The yield on interest-earning assets was 5.94 percent for the six-month periodended June 30, 2003 and 6.93 percent for the six-month period ended June 30,2002.

 

Interest expense was $15.3 million for the three-monthperiod ended June 30, 2003, compared to $18.0 million for the three-monthperiod ended June 30, 2002.  Interestexpense was $31.1 million for the six-month period ended June 30, 2003 comparedto $35.5 million for the same period in 2002. The decrease in interest expensewas primarily due to a decrease in the cost of funds as a result of reductionsof market interest rates and management’s restructuring of the funding base.This included an increase in average non-interest bearing deposits of $96million. The average balances of lower-costing deposits increased while thehigher-costing borrowings decreased from the first quarter of 2003. The cost offunds was 2.47 percent for the three-month period ended June 30, 2003, comparedto 3.03 percent for the same period in 2002. The cost of funds was 2.51 percent and 3.08 percent for the six-monthperiods ended June 30, 2003 and 2002 respectively.

 

*Average Rates and Balances* | The following table indicates the averagebalance and average interest rates earned or paid, interest rate spread and netinterest margin for the three-month periods ended June 30:

 

 
|                                                                                          |   | **2003**             |      | **2002** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------|-----------|----------|--------|
| **Dollars in thousands**                                                                      |   | **Average  Balance** |      | **Rate** |   | **Average  Balance** |   | **Rate** |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Loans receivable and loans held for sale                                                      |   | $                    | 2,048,507 |     | 6.63   | % | $ | 1,855,023 |   | 7.46 | % |
| Securities available for sale, securities held to maturity and other  interest-earning assets |   | 786,601              |      | 3.48     | %      | 770,341 |   | 5.43 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Total interest-earning assets                                                                 |   | 2,835,108            |      | 5.76     | %      | 2,625,364 |   | 6.86 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Interest-bearing deposits                                                                     |   | 1,663,258            |      | 1.79     | %      | 1,567,378 |   | 2.49 | % |
| FHLB advances, securities sold under agreements to repurchase and  other borrowings           |   | 830,634              |      | 3.82     | %      | 810,035 |   | 4.07 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Total interest-bearing liabilities                                                            |   | 2,493,892            |      | 2.47     | %      | 2,377,413 |   | 3.03 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Non-interest-bearing deposits                                                                 |   | $                    | 320,986   |     |   |   | $ | 224,498 |   |   |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Net interest spread                                                                           |   |                 |      | 3.29     | %      |   |   | 3.83 | % |
| Net interest margin                                                                           |   |                 |      | 3.59     | %      |   |   | 4.12 | % |

 

 

The following table indicatesthe average balance and average interest rates earned or paid, interest ratespread and net interest margin for the six-month periods ended June 30:

 

14

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|                                                                                          |   | **2003**             |      | **2002** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------|-----------|----------|--------|
| **Dollars in thousands**                                                                      |   | **Average  Balance** |      | **Rate** |   | **Average  Balance** |   | **Rate** |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Loans receivable and loans held for sale                                                      |   | $                    | 2,038,757 |     | 6.75   | % | $ | 1,847,448 |   | 7.51 | % |
| Securities available for sale, securities held to maturity and other  interest-earning assets |   | 795,831              |      | 3.88     | %      | 756,527 |   | 5.52 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Total interest-earning assets                                                                 |   | 2,834,588            |      | 5.94     | %      | 2,603,975 |   | 6.93 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Interest-bearing deposits                                                                     |   | 1,671,688            |      | 1.83     | %      | 1,478,010 |   | 2.54 | % |
| FHLB advances, securities sold under agreements to repurchase and  other borrowings           |   | 826,909              |      | 3.87     | %      | 848,469 |   | 4.02 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Total interest-bearing liabilities                                                            |   | 2,498,597            |      | 2.51     | %      | 2,326,479 |   | 3.08 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Non-interest-bearing deposits                                                                 |   | $                    | 311,907   |     |   |   | $ | 225,562 |   |   |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Net interest spread                                                                           |   |                 |      | 3.43     | %      |   |   | 3.85 | % |
| Net interest margin                                                                           |   |                 |      | 3.74     | %      |   |   | 4.19 | % |

 

 The following table provides information on changes in net interestincome for the periods that are attributable to changes in interest rates andchanges in volume:

 
|                                                                                           |   | **Three-month  periods ended  June 30, 2003 vs. 2002  Increase (Decrease)  Due to changes in** |   | **Six-month  periods ended  June 30, 2003 vs. 2002  Increase (Decrease)  Due to changes in** |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|--------|
| **Dollars in thousands**                                                                       |   | **Rate**                                                                                       |   | **Volume**                                                                                   |   | **Total** |   | **Rate** |   | **Volume** |   | **Total** | ** ** |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Interest-earning  assets                                                                       |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Loans receivable  and loans held for sale                                                      |   | $                                                                                              | (4,034 | )                                                                                            | 3,416  |   | $ | (618 | ) | $ | (10,950 | ) | 10,393 |   | $ | (557 | ) |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Securities  available for sale, securities held to maturity and other interest-earning  assets |   | (3,830                                                                                         | )      | 216                                                                                          |   | (3,614 | ) | (7,398 | ) | 1,963 |   | (5,435 | ) |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Total net change  in income on interest-earning assets                                         |   | (7,864                                                                                         | )      | 3,632                                                                                        |   | (4,232 | ) | (18,348 | ) | 12,356 |   | (5,992 | ) |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Interest-earning  liabilities                                                                  |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits                                                                     |   | 2,895                                                                                          |   | (574                                                                                         | )      | 2,321 |   | 7,336 |   | (3,907 | ) | 3,429 |   |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| FHLB advances,  securities sold under agreements to repurchase and other borrowings            |   | 515                                                                                            |   | (206                                                                                         | )      | 309 |   | 614 |   | 427 |   | 1,041 |   |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Total net change  in expense on interest-bearing liabilities                                   |   | 3,410                                                                                          |   | (780                                                                                         | )      | 2,630 |   | 7,950 |   | (3,480 | ) | 4,470 |   |
|                                                                                           |   |                                                                                           |   |                                                                                         |   |   |   |   |   |   |   |   |   |
| Net change in  interest income                                                                 |   | $                                                                                              | (4,454 | )                                                                                            | 2,852  |   | $ | (1,602 | ) | $ | (10,398 | ) | 8,876 |   | $ | (1,522 | ) |

 

 

*Provision for losses on loans |* The provision for losses on loans was $1.3million for the three-month period ended June 30, 2003 compared to $1.7 millionfor the three-month period ended June 30, 2002. The provision for losses onloans was $2.5 million for the six-month period ended June 30, 2003 compared to$3.4 million for the same 

 

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period in 2002. The level of theprovision was based on management’s evaluation of the current Pacific Northwestregional economy and its resulting impact on the loan portfolio. Thelevel of provision for the three and six-month periods was lower than the same periodsof 2002 as a result of our quarterly assessment of the risk inherent within ourloan portfolio in consideration with the level of the allowance for losses onloans. Management continues to assess thelevel of the provision for loan losses based on the known and inherent riskcharacteristics in the loan portfolio.  Theserisk characteristics include changes in the size and composition of the loanportfolio, delinquency levels, actual loan loss experience, detailed analysisof individual loans for which full collectibility may not be assured, andcurrent economic conditions in PNWB’s market area.  

 

*Non-interest Income* | Non-interest income was $5.7 million for thethree-month period ended June 30, 2003, compared to $5.4 million for thethree-month period ended June 30, 2002. The increase was primarily due to higher service fees, a gain on sale ofinvestment securities, partially offset by a decrease in gains on sale ofloans. Non-interest income was $11.2 million for the six-month period endedJune 30, 2003 and $9.9 million for the same period in 2002. This increase wasprimarily due to an increase of $1.5 million increase in service fees and anincrease of $623,000 in bank owned life insurance income from the same periodlast year.

 

Service fees increased to $4.2 million forthe quarter ended June 30, 2003 compared to $3.3 million for the same quarterin 2002 primarily as a result of the Bank of the Northwest acquisitioncompleted November 13, 2002.  Service fees were $8.0 million for thesix-month period ended June 30, 2003 compared to $6.5 million for the sameperiod in 2002.  The majority of theincrease was seen in deposit and loan service fees.

 

During the second quarter of 2002, PNWBimplemented the financial strategy to purchase $50.0 million of BOLI on certainkey employees. PNWB is the beneficiary of these BOLI contracts and the proceedsfrom the death benefit payments will be used to offset the cost of employeebenefits. In addition, PNWB added another $5.3 million of BOLI through the BKNWacquisition in November 2002. BOLI income was $538,000 for the second quarterof 2003, compared to $499,000 for the same period in 2002. BOLI income was $1.1 million for the first halfof 2003 compared to $499,000 for the same period in 2002. The investment inBOLI increased to $58.1 million as of June 30, 2003 from $50.5 million one yearago.

 

Gain on sale of securities available for saleincreased to $247,000 for the quarter ended June 30, 2003 compared to $40,000for the same quarter in 2002. Gain on sale of securities available for sale was$245,000 for the six-month period ended June 30, 2003 compared to $40,000 forthe same period in 2002.

 

The increase in non-interestincome was partially offset by a decrease in gain on sale of loans.This decrease was due to the outsourcing of the residential mortgage lendingfunction beginning in the first quarter of 2003. This was done to reducemortgage banking business risk and improve operational efficiencies.  As a result, PNWB expects gain on sale ofloans to decrease further for the remainder of 2003.

 

*Non-interest Expense*| Non-interest expense was $18.0 million for the three-month period ended June30, 2003, compared to $18.7 million for the three-month period ended June 30,2002. Non-interest expense was $37.0 million for the six-month period endedJune 30, 2003 compared to $37.3 million for the same period one year ago. Thedecrease from prior period is due partially to the reversal of an accrual for$619,000 related to the termination of an employment contract that did notrequire cash payment.

 

General and administrative expenses were $3.9million for the quarter ended June 30, 2003, compared to $4.3 million for thequarter ended June 30, 2002. General and administrative expenses were $8.0million for the first half of 2003 compared to $8.6 million for the same periodin 2002. The decrease from the second quarter of 2002 was primarily due tolower mortgage banking related expenses and management’s initiatives for costreductions.

 

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Theefficiency ratio is computed by dividing total operating expenses by netinterest income and non-interest income. An increase in the efficiency ratio indicates that more resources arebeing utililized to generate the same volume of income while a decrease wouldindicate a more efficient allocation of resources.  The efficiency ratio for the three-month period ended June 30,2003 was 58.1 percent, compared to 57.8 percent for the three-month periodended June 30, 2002.  The efficiencyratio for the six-month period ended June 30, 2003 was 57.9 percent compared to58.0 percent for the six-month period ended June 30, 2002.

 

*Income Tax Expense*| Income tax expense was $3.5 million for thethree-month period ended June 30, 2003, compared to $4.1 million for thethree-month period ended June 30, 2002. Income tax expense was $7.8 million and $8.1 million for the six-monthperiods June 30, 2003 and 2002, respectively. The effective tax rate was 30.0percent and 34.0 percent for the three-month periods ended June 30, 2003 and2002, respectively.  The effective taxrate was 31.9 percent and 34.5 percent for the six-month periods ended June 30,2003 and 2002 respectively. The decrease in income tax expense from priorperiods was due primarily to a decrease in estimated taxable income in 2003.

 

## **REVIEW OF FINANCIAL CONDITION**

 

PNWB’sconsolidated assets were $3.1 billion as of June 30, 2003, and December 31,2002.

 

*Securities*| As of June 30, 2003, PNWB had $738.3 million ofsecurities available for sale, compared to $788.5 million as of December 31,2002.

 

PNWBmaintains liquidity in accordance with an internal liquidity policy.  Liquidity levels may be increased ordecreased depending upon the yields on investment alternatives, management’sjudgment as to the attractiveness of the yields then available in relation toother opportunities, and management’s expectation of the yield that will beavailable in the future.  Management’sprojections as to the short-term demand for funds to be used for loanoriginations and other activities can also affect liquidity levels.

 

Securities classified as available for sale are reportedat estimated fair value, with unrealized gains (net of income taxes) reportedin accumulated other comprehensive income/(loss), a separate component ofshareholders’ equity. Periodically management assesses the gross unrealizedlosses in the securities portfolio and determines whether the losses weretemporary or other than temporary. Duringthis process, PNWB considers (1) recent performance of the security, (2) thecredit rating of the security, (3) the amount of credit support available forthe security, if any, (4) circumstances contributing to the decline in value,(5) the length of time and extent to which the fair value has been less thancost or carrying value, and (6) the intent and ability of PWNB to retain theinvestment for a period of time sufficient to allow for anticipated recovery.In consideration of the above factors, management deems the gross unrealizedlosses in PNWB’s securities portfolio as of June 30, 2003 to be temporary.

 

*Loans Held for Sale* | Loans held for sale totaled $13.8million as of June 30, 2003 comparedto $25.6 million as of December 31, 2002. Loans held for sale are primarily construction loans, single-familymortgage loans, and loans originated under the Small Business Administrationprogram.  Loans held for sale arecarried at the lower of cost or estimated fair value in aggregate.  Loans held for sale are typically sold toother financial institutions. The significant decrease from December 31, 2002is due to loans sold during the first half of 2003 and the fact that themortgage banking function is now outsourced.

 

*Net Loans Receivable* | Net loans receivable were $2.02 billionas of June 30, 2003, compared to$2.00 billion as of December 31, 2002. We continue to experience moderate growth in the commercial loanportfolio despite the sluggish economic conditions in our market area.

 

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Total commercial loans outstanding increasedto $1.51 billion or 73.6 percent of the loan portfolio as of June 30, 2003, compared to $1.39 billion or68.3 percent as of December 31, 2002. The growth since December 31, 2002 in thecommercial loan portfolio was primarily in the commercial real estate loancategory.

 

Single-family residential mortgage loansoutstanding decreased to $173.3 million as of June30, 2003 compared to $231.2 million as of December 31, 2002.  The decrease was primarily due to earlypayoffs associated with the current interest rate environment and management’sdecision not to originate and retain single-family mortgage loans in our loanportfolio.

 

The following table sets forth thecomposition of PNWB’s loan portfolio by type as of the dates indicated:

 
| **Dollars in  thousands**        |   | **June 30, 2003** |      | **December 31, 2002** |   |
|----------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                             |   |              |      |                  |   |
| Commercial loans:                |   |              |      |                  |   |
| Commercial                       |   | $                 | 572,212   |                  | $      | 571,283 |   |
| Commercial real estate           |   | 889,434           |      | 770,413               |   |
| Agriculture                      |   | 52,326            |      | 51,653                |   |
| Total commercial loans:          |   | 1,513,972         |      | 1,393,349             |   |
|                             |   |              |      |                  |   |
| Single-family residential        |   | 173,302           |      | 231,232               |   |
| Real estate construction         |   | 238,145           |      | 274,581               |   |
| Consumer loans                   |   | 129,680           |      | 139,784               |   |
|                             |   | 2,055,099         |      | 2,038,946             |   |
| Less:                            |   |              |      |                  |   |
| Allowance for losses on loans    |   | 27,433            |      | 26,940                |   |
| Deferred loan fees and discounts |   | 8,781             |      | 9,193                 |   |
| Net loans receivable             |   | $                 | 2,018.885 |                  | $      | 2,002,813 |   |

 

*Non-performing Assets* | Loans are generally placed on non-accrual whenthey become past due over 90 days, or 120 days if they are single-familymortgage loans, or when the collection of interest or principal is consideredunlikely.  Loans past due over 90 or 120days that are not on non-accrual status must be well-secured by tangiblecollateral and in the process of collection. PNWB does not return a loan to accrual status until it is broughtcurrent with respect to both principal and interest and future principalpayments are no longer in doubt.  When aloan is placed on non-accrual status, any previously accrued and uncollected interestis reversed from interest income.  PNWBperforms a review of its loan portfolio for weaknesses in credit quality on anongoing basis to identify problem loans. This review results in internal loan classifications based on riskcharacteristics and loan performance. The overall objective of this review process is to identify trends inthe credit quality of the loan portfolio and to determine the level of lossexposure to evaluate the need for an adjustment to the allowance for losses onloans.

 

Non-accrual loans totaled $19.0 million as of June 30,2003 compared to $11.9 million as of December 31, 2002. Other real estate was$6.3 million as of June 30, 2003 compared to $7.2 million as of December 31,2002. Total non-performing assets, including non-accrual loans and other realestate, totaled $25.3 million or 0.82 percent of consolidated assets as of June30, 2003, compared to $19.1 million or 0.61 percent of consolidated assets asof December 31, 2002.  The increase innon-accrual loans from December 31, 2002 is due primarily to one borrower withloan balances of approximately $8.5 million at June 30, 2003.

 

The following table summarizesnon-performing assets as of the dates indicated:

 

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| **Dollars in  thousands**   |   | **June 30, 2003** |   | **December 31, 2002** |   |
|-----------------------------|--------|-------------------|--------|-----------------------|--------|
|                        |   |              |   |                  |   |
| *Non-accrual loans*         |   |              |   |                  |   |
|                        |   |              |   |                  |   |
| Commercial loans:           |   |              |   |                  |   |
| Commercial                  |   | $                 | 6,560  |                  | $      | 5,562 |   |
| Commercial real estate      |   | 8,635             |   | 657                   |   |
| Agriculture                 |   | 1,095             |   | 1,658                 |   |
| Total commercial loans:     |   | 16,290            |   | 7,877                 |   |
|                        |   |              |   |                  |   |
| Single-family residential   |   | 2,322             |   | 3,733                 |   |
| Real estate construction    |   | 235               |   | 130                   |   |
| Consumer loans              |   | 148               |   | 173                   |   |
|                        |   |              |   |                  |   |
| Total non-accrual loans     |   | 18,995            |   | 11,913                |   |
|                        |   |              |   |                  |   |
| Other real estate           |   | 6,323             |   | 7,152                 |   |
|                        |   |              |   |                  |   |
| Total non-performing assets |   | $                 | 25,318 |                  | $      | 19,065 |   |

 

*Allowance for Losses on Loans* | The allowance for losses on loans was $27.4million or 1.34 percent of loans receivable as of June 30, 2003, compared to$26.9 million or 1.33 percent of loans receivable as of December 31, 2002.  Net loan charge-offs were $2.0 million or0.20 percent (annualized) of the average balance of loans outstanding for thesix-month period ended June 30, 2003, compared to $1.6 million or 0.17 percent(annualized) of the average balance of loans outstanding for the six-monthperiod ended June 30, 2002.

 

Whenavailable information confirms that specific loans, or portions thereof, areuncollectible, these amounts are charged off against the allowance for losseson loans. The existence of some or all of the following criteria will generallyconfirm that a loss has been incurred: the loan is significantly delinquent andthe 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 hasinsufficient assets to pay the debt; the fair value of the loan collateral issignificantly below the current loan balance, and there is little or nonear-term prospect for improvement.  Aprovision for losses on loans, which is a charge against income, is added tothe allowance for losses on loans based on ongoing assessments of credit riskin the loan portfolio.

 

Theallowance for losses on loans is maintained at an amount to sufficientlyprovide for estimated losses based on evaluating known and inherent risks inthe loan portfolio.  Management analyzescertain factors underlying the quality of the loan portfolio.  These factors include changes in the sizeand composition of the loan portfolio, delinquency levels, actual loan lossexperience, detailed analysis of individual loans for which full collectibilitymay not be assured, and current economic conditions in PNWB’s market area.  Management has assessed the impact of thePacific Northwest regional economy on the credit risk in the loanportfolio.  To date, delinquency trendsand classified loan levels relative to comparable periods do not indicate anymaterial deterioration in the loan portfolio. Management continues to closely monitor PNWB’s credit quality and focuson identifying potential problem credits and any loss exposure in a timelymanner.  Industry concentration andrelated limits will also be subject to on-going assessment.

 

PNWBhas established its allowance for losses on loans in accordance with accountingprinciples generally accepted in the United States.  However, there can be no assurance that in the future,regulators, when reviewing PNWB’s loan portfolio, will not request PNWB toincrease its allowance for losses on loans, thereby affecting 

 

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PNWB’sfinancial condition and results of operations. Substantial increases may be necessary should the quality of loansdeteriorate as a result of the factors discussed above.

 

PNWB’s allowance for losses on loans is allocated tospecific loans, certain loan categories based on the relative riskcharacteristics, asset classifications and actual loss experience of the loanportfolio.  Although the allocation ofthe allowance for losses on loans is an important credit management tool, theentire allowance for losses on loans is available for the entire loanportfolio.  Management reviewed theallocations in the various loan categories and believes the allowance forlosses on loans was adequate as of June 30, 2003.

 

The following tables summarize the activity in allowancefor losses on loans during the three- and six-month periods ended June 30:

 
|                                |   | **Three months** |   | **Six months** |   |
|-------------------------------------|--------|------------------|--------|----------------|--------|
| **Dollars in  thousands**           |   | **2003**         |   | **2002**       |   | **2003** |   | **2002** |   |
|                                |   |             |   |           |   |   |   |   |   |
| Allowance as of beginning of period |   | $                | 27,080 |           | $      | 21,099 |   | $ | 26,940 |   | $ | 20,123 |   |
|                                |   |             |   |           |   |   |   |   |   |
| Provision for losses on loans       |   | 1,250            |   | 1,700          |   | 2,500 |   | 3,400 |   |
|                                |   |             |   |           |   |   |   |   |   |
| Recoveries                          |   | 85               |   | 115            |   | 227 |   | 245 |   |
|                                |   |             |   |           |   |   |   |   |   |
| Charge-offs                         |   | (982             | )      | (986           | )      | (2,234 | ) | (1,840 | ) |
|                                |   |             |   |           |   |   |   |   |   |
| Allowance as of end of period       |   | $                | 27,433 |           | $      | 21,928 |   | $ | 27,433 |   | $ | 21,928 |   |

 

*Goodwill and Other Intangible Assets*|Goodwill and other intangible assets totaled $77.4 million or 2.50 percent oftotal assets and 28.2 percent of total shareholder’s equity as of June 30,2003. Goodwill and other intangible assets totaled $78.2 million or 2.50percent of total assets and 29.9 percent of total shareholder’s equity as ofDecember 31, 2002. The decrease in goodwill and other intangible assets is dueto amortization of mortgage servicing intangibles and core deposit intangibles.

 

Goodwill arising fromacquisitions represents the excess of the purchase price over the estimatedfair value of net assets acquired. Prior to 2002, goodwill was amortized usingthe straight-line method over periods not exceeding twenty years.  Effective January 1, 2002, upon adoption ofSFAS No. 142 “Accounting for Goodwill and Other Intangible Assets”, PNWB nolonger amortizes its goodwill. PNWB reviews its goodwill for impairmentannually or more frequently if impairment indicators arise.  PNWB’s annual goodwill impairment evaluationin the fourth quarter of 2002 indicated no impairment of goodwill.

 

Other intangible assets consist of core depositintangibles and mortgage servicing rights, and are amortized usingstraight-line and accelerated methods over periods not exceeding twentyyears.  Mortgage servicing rights arecapitalized when acquired either through the purchase or origination of loansthat are subsequently sold or securitized with the servicing rightsretained.  The estimated fair value ofmortgage servicing rights at the date of the sale of loans is determined basedon the discounted present value of expected future cash flows using keyassumptions for servicing income and costs and prepayment rates on theunderlying loans. The estimated fair value is periodically evaluated forimpairment by comparing actual cash flows and estimated future cash flows fromthe servicing assets to those estimated at the time servicing assets wereoriginated.  Mortgage servicing rightsare amortized as an offset to service fees in proportion to and over the periodof estimated net servicing income.

 

Goodwill and other intangible assets consistedof the following as of the dates indicated:

 

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| **Dollars in  thousands**      |   | **June 30, 2003** |   | **December 31, 2002** |   |
|--------------------------------|--------|-------------------|--------|-----------------------|--------|
|                           |   |              |   |                  |   |
| Goodwill                       |   | $                 | 67,732 |                  | $      | 67,732 |   |
| Mortgage servicing intangibles |   | 572               |   | 836                   |   |
| Core deposit intangibles       |   | 9,106             |   | 9,669                 |   |
|                           |   | $                 | 77,410 |                  | $      | 78,237 |   |

 

*Deposits* | PNWB offers various types ofdeposit accounts, including checking accounts, savings accounts, money marketaccounts and certificate of deposit accounts. Deposit accounts vary as to terms; the principal differences are theminimum balance required, the time period the funds must remain on deposit, theinterest rate, and the deposit or withdrawal option.  PNWB relies on generating deposits through a marketing strategythat employs a sales staff responsible for retaining and generating newcustomer relationships.  We emphasizedeveloping total client relationships in order to increase our core depositbase.

 

Non-interest-bearing deposits were $395.5million as of June 30, 2003 compared to $345.6 million as of December 31,2002.  Non-interest-bearing depositsrepresented 19.4 percent and 16.8 percent of total deposits as of June 30, 2003and December 31, 2002, respectively. Interest-bearing transaction accounts (which include interest-bearingchecking, money market and savings accounts) totaled $859.4 million as of June30, 2003 compared to $904.0 million as of December 31, 2002.  Interest-bearing transaction accountsrepresented 42.0 percent of total deposits as of June 30, 2003, compared to44.0 percent as of December 31, 2002.

 

Certificates of deposit totaled $790.2 millionas of June 30, 2003, compared to $804.7 million as of December 31, 2002.  Certificates of deposit represented 38.6percent of total deposits as of June 30, 2003, compared to 39.2 percent as ofDecember 31, 2002. The increase in the core deposit balances (which includenon-interest bearing and non-interest bearing transactional accounts) and thedecrease in certificate of deposit balance reflect management’s efforts torestructure the deposit portfolio as a means to reduce the costs of funds.

 

The following table setsforth the balances of deposits by account type as of the dates indicated:

 
| **Dollars in  thousands**          |   | **June 30, 2003** |      | **December 31, 2002** |   |
|------------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                               |   |              |      |                  |   |
| Non-interest-bearing deposits      |   | $                 | 395,459   |                  | $      | 345,571 |   |
| Interest-bearing checking accounts |   | 264,073           |      | 263,591               |   |
| Money market accounts              |   | 485,054           |      | 531,698               |   |
| Savings accounts                   |   | 110,307           |      | 108,721               |   |
| Certificates of deposit            |   | 790,194           |      | 804,729               |   |
|                               |   |              |      |                  |   |
| Total                              |   | $                 | 2,045,087 |                  | $      | 2,054,310 |   |

 

*FHLB Advances and Securities Sold UnderAgreements to Repurchase* | PNWB borrows through advances from the Federal Home Loan Bank (FHLB)and securities sold under agreements to repurchase with third parties. Theseborrowing sources decreased to $687.4 million as of June 30, 2003 compared to$730.3 million as of December 31, 2002. With less funds invested in available for sale securities due to the lowreturn, more cash is available, thus requiring less need for these types ofborrowings.

 

TheFHLB provides credit for member financial institutions.  As members, financial institutions arerequired to own capital stock in the FHLB, and are authorized to apply foradvances on the security of such stock, certain home mortgages and other assets(principally securities that are obligations of, or guaranteed by, the UnitedStates).  Advances are made to memberfinancial institutions pursuant to several different programs.  These

 

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programsare generally designed to meet the financial institution’s need while stillreflecting market terms and conditions. PNWB uses advances from the FHLB to supplement funds available to lendand to meet liquidity guidelines. Interest rates on these advances vary in response to general economicconditions.  PNWB also uses thesecurities market for borrowings by utilizing its securities available for saleas collateral. These borrowings are collateralized by securities with anestimated fair value exceeding the face value of the borrowings.

 

*Other borrowings*****| Other borrowings were $10.1 million as of June 30,2003 and December 31, 2002.  Thebalances were comprised primarily of notes from another financial institution.This borrowing qualifies as Tier II capital under the capital guidelines of theFederal Reserve Board.

 

*Guaranteed Preferred Beneficial Interests inSubordinated Debt*  | On September 26, 2002, $12 millionof Capital Securities were issued by Pacific Northwest Statutory Trust I (theTrust).  The Trust is a business trustorganized in September 2002, and Bancorp owns 100 percent of the common equityof the Trust.  The proceeds of theoffering were invested by the Trust in junior subordinated debentures ofPacific Northwest Bancorp.  Thedebentures held by the Trust are the sole assets of Pacific Northwest StatutoryTrust I.  The Capital Securities aresubject to mandatory redemption, in whole or in part, upon repayment of thedebentures.  The debentures will notmature earlier than September 26, 2007, and not later than September 26, 2012.The interest rate on the Capital Securities is based upon three-month LIBORplus 3.55 percent and adjusts on a quarterly basis.  As of June 30, 2003, the interest rate on the Capital Securitieswas 4.83 percent.  Pacific NorthwestBancorp entered into agreements which, taken collectively, fully andunconditionally guarantee the capital securities subject to the terms of eachof the guarantees.  Upon the adoption ofFASB Interpretation No. 46, *Consolidation ofVariable Interest Entities,*an interpretation of Accounting ResearchBulletin (ARB) No. 51*,*on July 1,2003, the Trusts will be deconsolidated from the financial statements of theCompany. Adoption of the provision FIN 46 will not have a significant impact onour consolidated financial statements.

 

On November 15, 1999, $40 million of 9.875percent Capital Securities were issued by InterWest Capital Trust I (the TrustI).  The Trust I is a business trustorganized in November 1999, and Bancorp owns 100 percent of the common equityof the Trust I.  The proceeds of theoffering were invested by the Trust I in junior subordinated debentures of Bancorp.  The debentures held by the Trust I are thesole assets of the Trust I. At the Bancorp’s option, the debentures will notmature earlier than November 15, 2009, and not later than November 15, 2029.  After November 15, 2019, the debentures canbe redeemed at par value. Distributions on the capital securities issued by theTrust I are payable semiannually at 9.875 percent per annum, which is equal tothe interest rate being earned by the Trust I on the debentures it held.  The capital securities are subject tomandatory redemption, in whole or in part, upon repayment of the debentures.Bancorp has entered into agreements which, taken collectively, fully andunconditionally guarantee the capital securities subject to the terms of eachof the guarantees. The capital securities qualify as Tier I capital under thecapital guidelines of the Federal Reserve Board.  Pacific Northwest Bancorp purchased $4.0 million of the capitalsecurities (guaranteed subordinated debt) during 2002 and the $4.0 millioncapital securities were subsequently reissued at a premium of $372,500 duringthe first quarter of 2003.  The premiumwill be amortized using the straight-line method through November 9, 2009. Uponthe adoption of FASB Interpretation No. 46, *Consolidationof Variable Interest Entities,*an interpretation of AccountingResearch Bulletin (ARB) No. 51*,*onJuly 1, 2003, the Trusts will be deconsolidated from the financial statementsof the Company. Adoption of the provision FIN 46 will not have a significantimpact on our consolidated financial statements.

 

*Shareholders’ Equity*| PNWB is committed to managing capital for maximum shareholder benefit andmaintaining strong protection for depositors and creditors.  PNWB manages various capital levels at boththe holding company and subsidiary bank level to maintain adequate capitalratios and levels in accordance with external regulations and capitalguidelines established by the Board of Directors.

 

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On January 28, 2003, the Board of Directors of PacificNorthwest Bancorp authorized the purchase of up to five percent of PacificNorthwest Bancorp’s outstanding shares of common stock over the next twelvemonths. As of June 30, 2003 PNWB repurchased, on the open market, a total of104,291 shares at an average price of $27.56.

 

PNWB’s totalshareholders’ equity was $273.9 million as of June 30, 2003, compared to $261.6million as of December 31, 2002.  Theincrease in shareholders’ equity during the first six months of 2003 was primarilydue to net income of $16.6 million, stock issued under stock option plans of$5.9 million, a tax deduction on stock option exercises of $1.6 million, offsetby the decrease in the estimated fair value of securities available for sale of$4.3 million (net of tax), cash dividends declared of $0.28 per share or $4.8million, and repurchases of common stock totaling $2.8 million.  Book value per share was $16.03 as of June30, 2003, compared to $15.57 as of December 31, 2002.

 

### **SUPERVISION AND REGULATION**

 

PacificNorthwest Bancorp is a registered bank holding company under the Bank HoldingCompany Act of 1956 (BHCA) and is subject to the supervision of, and regulationby, the Board of Governors of the Federal Reserve System  (FRB). Under the BHCA, Pacific Northwest Bancorp files with the FRB annualreports of operations and such additional information as the FRB mayrequire.  Under the BHCA, a bank holdingcompany may engage in banking, managing or controlling banks, furnishing orperforming services for banks it controls, and conducting activities that theFRB has determined to be closely related to banking.

 

PacificNorthwest Bank is a member of the Federal Deposit Insurance Corporation (FDIC),and as such, is subject to examination thereby.  Pacific Northwest Bank is a state-chartered commercial banksubject to regulation and supervision by the Washington Department of FinancialInstitutions, Division of Banks.  Inpractice, the primary regulator makes regular examinations of the subsidiarybank subject to its regulatory review or participates in joint examinationswith other regulators.  Areas subject toregulation by federal or state authorities include the allowance for losses onloans, investments, loans, mergers and acquisitions, issuance of securities,payment of dividends, establishment of branches and other aspects ofoperations.

 

Theenforcement powers available to banking regulators are substantial and include,among other things, the ability to assess civil monetary penalties, to issuecease-and-desist or removal orders and to initiate injunctive actions againstbanking organizations and institution-affiliated parties, as defined.  In general, enforcement actions must beinitiated for violations of laws and regulations and unsafe or unsound practices.Other actions, or inactions, may provide the basis for enforcement action,including misleading or untimely reports filed with regulatoryauthorities.  Applicable law alsorequires public disclosure of final enforcement actions.

 

Pacific Northwest Bancorpand Pacific Northwest Bank are subject to risk-based capital guidelinesrequiring minimum capital levels based on the credit risk of assets.  Failure to meet minimum capital requirementscan initiate certain mandatory and possibly additional discretionary, actionsby regulators that, if undertaken, could have a material effect on PNWB’sconsolidated financial statements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, Pacific Northwest Bancorp and Pacific Northwest Bankmust meet specific capital guidelines that involve quantitative measures ofassets, liabilities and certain off-balance-sheet items as calculated underregulatory accounting practices. Capital classifications are also subject to qualitative judgments by theregulators about components, risk weightings and other factors.

 

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

 
|                           |   | **Total  Capital (to Risk  Weighted Assets)** |   | **Tier 1 (to  Risk  Weighted Assets)** |   | **Tier 1 (to  Average Assets)** |   |
|--------------------------------|--------|-----------------------------------------------|--------|----------------------------------------|--------|---------------------------------|--------|
| 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                      |   |

 

Pacific Northwest Bancorpissubject torisk-basedcapital guidelinesissuedbytheFRB,which establish a risk-adjusted ratio relating capital to different categoriesof assets.  Tier I capital is comprisedof shareholders’ equity and guaranteed preferred beneficial interests insubordinated debt less certain intangibles, and excludes the equity impact ofadjusting securities available for sale to estimated fair value. Total capitalis Tier I capital, the allowance for losses on loans and certain long-term debtthat qualifies for inclusion as regulatory capital.  The FRB’s risk-based capital rules have been supplemented by aleverage capital ratio, defined as Tier I capital to adjusted quarterly averagetotal assets.  As of June 30, 2003,under the FRB’s capital guidelines, PNWB’s levels of consolidated regulatorycapital exceeded the FRB’s well-capitalized requirements.  The capital amounts and ratios for PacificNorthwest Bancorp and Pacific Northwest Bank as of June 30, 2003 and December31, 2002, are presented in the following table:

 

**CAPITAL RATIOS**

 
|                                     |   | **Amount** |    | **For  Capital  Adequacy Purposes** |   | **To Be Well  Capitalized  Under Prompt  Corrective Action Provisions** |   |
|------------------------------------------|--------|------------|---------|-------------------------------------|--------|-------------------------------------------------------------------------|--------|
| **Dollars in thousands**                 |   | **Amount** |    | **Ratio**                           |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| **June 30, 2003**                        |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
|                                     |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| **Pacific Northwest Bancorp:**           |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 284,685 |                                | 11.66  | %                                                                       | $      | 195,382 |   | 8.0 | % | $ | 244,228 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets) |   | 246,867    |    | 10.11                               | %      | 97,691                                                                  |   | 4.0 | % | 146,537 |   | 6.0 | % |
| Tier I capital (to average assets)       |   | 246,867    |    | 8.21                                | %      | 120,311                                                                 |   | 4.0 | % | 150,389 |   | 5.0 | % |
|                                     |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| **Pacific Northwest Bank:**              |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 272,109 |                                | 11.23  | %                                                                       | $      | 193,789 |   | 8.0 | % | $ | 242,236 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets) |   | 244,286    |    | 10.08                               | %      | 96,894                                                                  |   | 4.0 | % | 145,342 |   | 6.0 | % |
| Tier I capital (to average assets)       |   | 244,286    |    | 8.08                                | %      | 120,931                                                                 |   | 4.0 | % | 151,163 |   | 5.0 | % |

 

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|                                     |   | **Amount** |    | **For  Capital  Adequacy Purposes** |   | **To Be Well  Capitalized  Under Prompt  Corrective Action Provisions** |   |
|------------------------------------------|--------|------------|---------|-------------------------------------|--------|-------------------------------------------------------------------------|--------|
| **Dollars in thousands**                 |   | **Amount** |    | **Ratio**                           |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| **December 31, 2002**                    |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
|                                     |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| **Pacific Northwest Bancorp:**           |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 264,965 |                                | 11.03  | %                                                                       | $      | 192,262 |   | 8.0 | % | $ | 240,328 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets) |   | 227,653    |    | 9.47                                | %      | 96,131                                                                  |   | 4.0 | % | 144,197 |   | 6.0 | % |
| Tier I capital (to average assets)       |   | 227,653    |    | 7.77                                | %      | 117,201                                                                 |   | 4.0 | % | 146,502 |   | 5.0 | % |
|                                     |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| **Pacific Northwest Bank:**              |   |       |    |                                |   |                                                                    |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 257,462 |                                | 10.80  | %                                                                       | $      | 190,747 |   | 8.0 | % | $ | 238,434 |   | 10.0 | % |
| Tier I capital (to risk-weighted assets) |   | 230,150    |    | 9.65                                | %      | 95,374                                                                  |   | 4.0 | % | 143,060 |   | 6.0 | % |
| Tier I capital (to average assets)       |   | 230,150    |    | 7.87                                | %      | 116,902                                                                 |   | 4.0 | % | 146,128 |   | 5.0 | % |

 

As of June 30, 2003,Pacific Northwest Bancorp and Pacific Northwest Bank were in compliance withwell-capitalized capital requirements. Management believes that under thecurrent regulations the Bank and the Bancorp will continue to meetwell-capitalized capital requirements in the foreseeable future.  However, events beyond the control of theBank and Bancorp, such as a downturn in the economy in areas where PacificNorthwest Bank has most of its loans, could adversely affect future earningsand, consequently, the ability of Pacific Northwest Bank to meet futurewell-capitalized capital requirements.

 

# **LIQUIDITYRESOURCES**

 

Liquidity managementfocuses on the need to meet both short-term funding requirements and PNWB’slong-term strategies and goals. Specifically, the objective of liquiditymanagement is to ensure the continuous availability of funds to meet thedemands of depositors, creditors and borrowers. Management manages the balancesheet to meet these needs. PNWB desires to attract and retain business and retailcustomer relationships with a focus on transaction accounts and commercial andconsumer lending.  PNWB also useswholesale funds through advances from the FHLB and the sale of securities underagreements to repurchase to fund asset growth and meet liquidity needs. PNWBalso uses wholesale and brokered certificates of deposit to supplementwholesale borrowings.  Other sources offunds for liquidity include loan repayments, loan sales, security sales andmortgage-backed and related security repayments. Repayments on loans andmortgage-backed and related securities and deposit inflows and outflows areaffected by changes in interest rates.

 

PNWB has the capacity to borrow funds from the FHLB throughpre-approved credit lines.  These creditlines have pledge requirements whereby PNWB must maintain unencumberedcollateral with a value at least equal to the outstanding balance. PNWB alsouses the securities market as a vehicle for borrowing by utilizing itssecurities available for sale as collateral. If the estimated fair value of the securities were to decline as aresult of an increase in interest rates or other factors, PNWB would berequired to pledge additional securities or cash as collateral. In addition,PNWB has the ability to borrow funds from the Federal Reserve.

 

The analysis ofliquidity also includes a review of PNWB’s consolidated statement of cash flowsfor the six-month period ended June 30, 2003. The consolidated statement of cash flows details PNWB’s operating, 

 

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investing and financingactivities during the period.  The mostsignificant items under operating activities include net income of $16.6million for the six-month period ended June 30, 2003, an increase in other assetsof $1.2 million, and a decrease in accrued expenses and other liabilities of$2.9 million.  Also included inoperating activities are the add-back of non-cash depreciation, amortization ofintangible assets, provision for losses of loans, and amortization of premiumon investments totaling $9.1 million. Investing activities included purchasesof securities available for sale of $305.1 million, proceeds from maturing andprincipal repayments on securities available for sale of $242.5 million, andproceeds from sale of securities available for sale of $104.3 million. Duringthe period, financing activities included $42.9 million in borrowingrepayments, net of borrowing proceeds, a $9.2 million net decrease in deposits,$4.4 million of cash proceeds from re-issuance of guaranteed subordinated debt,$3.1 million of proceeds received related to the issuance of stock, net ofstock repurchased, and $4.7 million paid in cash dividends to shareholders.

 

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**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

PNWB’s results of operations are largely dependent upon its ability tomanage interest rate risk. Management considers interest rate risk to be asignificant market risk that could have a material effect on PNWB’s financialcondition and results of operations.

 

PNWB is sensitive to potential changes in interest rates and theresulting impact on net interest income. It is an objective of management to reduce this sensitivity through theuse of adjustable rate loans and short-term commercial and consumer loans.  This enables PNWB to better match theduration of its deposit base with these types of assets.

 

In addition to adjustable rate loans and short-term commercial andconsumer loans, PNWB uses a number of other strategies to minimize the impactof significant interest rate changes on net income. The strategies utilized byPNWB include sales of long-term, fixed-rate mortgage loans, emphasis on growthin non-interest-bearing deposits and adjustable rate commercial lending.

 

Management uses simulationanalysis to measure PNWB’s interest sensitivity position.  This simulation analysis is used to evaluatethe effects of potential interest rate movements on net interest income.  The simulation analysis model is dynamic innature, and incorporates management’s current balance sheet strategy.Management develops assumptions regarding interest rate spreads, projectedbalances, expected maturities, cash flows and prepayment assumptions underdifferent interest rate scenarios.

 

For further information oninterest rate risk, reference is made to the sections “Net Interest Income” and“Average Rates and Balances” in Item 2. Management Discussion and Analysis ofFinancial Condition and Results of Operations contained in this quarterlyreport on Form 10-Q.  Informationregarding the expected maturities of financial assets and financial liabilitieshas not changed materially from disclosures made in the Annual Report on Form10-K for the year ended December 31, 2002.

 

**Item 4. CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of the period covered by thisreport and pursuant to Rule 13a-15 of the Securities Exchange Act of 1934(the “Exchange Act”), PNWB’s management, including the Chief Executive Officerand Chief Financial Officer, conducted an evaluation of the effectiveness anddesign of the Company’s disclosurecontrols and procedures (as that term is defined in Rules 13a-15(e) and15d-15(e) of the Exchange Act).  Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded, as of the end of the period covered by this report, that the Company’s disclosure controls andprocedures were effective in recording, processing, summarizing and reportinginformation required to be disclosed by the Company, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**Changesin Internal Controls**

 

In addition and as of the end of the periodcovered by this report, there have been no changes in internal control overfinancial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of theExchange Act) during the quarter to which this report relates that havematerially affected or are reasonably likely to materially affect, the internalcontrol over financial reporting.

 

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**PART II. OTHERINFORMATION**

 

### **Item1.  Legal Proceedings**

 

PNWB faces ordinary routine litigationarising in the normal course of business. In the opinion of management, liabilities (if any) arising from suchclaims will not have a material effect upon the business, results of operationsor financial condition of PNWB.

 

**Items2 and 3 are not applicable and have been omitted.**

 

# **Item4.        Submission of Matters to a Voteof Security Holders**

 

The Annual Meeting of Shareholders of PacificNorthwest Bancorp (“Meeting”) was held on April 22, 2003.  The results of the vote on the matterspresented at the Meeting are as follows:

 

(1)           Election of Directors

 

** **
|               |   | **Term to Expire** |   | **Votes For** |   | **Votes Withheld** |   |
|--------------------|--------|--------------------|--------|---------------|--------|--------------------|--------|
| Daniel J. Durkin   |   | 2006               |   | 13,003,944    |   | 529,912            |   |
| Robert D. Krause   |   | 2006               |   | 13,013,767    |   | 520,089            |   |
| C. Stephen Lewis * |   | 2006               |   | 12,772,413    |   | 761,443            |   |

 

----

# *****Mr. Lewis was re-elected

 

The terms of Directors Gary M. Bolyard, Larry Carlson, Michael T.Crawford, Patrick M. Fahey, Jean Gorton, Clark H. Mock, Stephen M. Walden, andBetty Woods continued after the meeting.

 

(2)           The Pacific Northwest Bancorp 2003Long-Term Stock Incentive Plan was adopted. The votes for were 7,618,274 andthe votes withheld were 2,164,396.

 

# **Item 5 is not applicable and has been omitted.**

 

# **Item6.        Exhibits and Reports on Form 8-K**

 

**(a)****        Exhibits**

 
| 3.1 | Articles of Incorporation of  Pacific Northwest Bancorp (incorporated by reference to Exhibit 3.1 to the  Registrant’s Annual Report on Form 10-K for the year ended December 31,  2000).          |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2 | Bylaws of Pacific Northwest  Bancorp (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual  Report on Form 10-K for the year ended December 31, 2000).                              |
| 3.3 | Amendment to the Bylaws of  Pacific Northwest Bancorp (incorporated by reference to Exhibit 3.21 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended September  30, 2001).    |
| 10  | Material contracts of Pacific  Northwest Bancorp (incorporated by reference to Exhibits 10.1 through 10.29  to the Registrant’s Annual Report on Form 10-K for the year ended December  31, 2002). |

 

 

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| 10    | Material contracts of Pacific Northwest  Bancorp (incorporated by reference to Exhibits 10.30 through 10.34 to the  Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2003).                                     |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.35 | Agreement and Plan of Reorganization dated May 19, 2003, with Wells  Fargo & Company (incorporated by reference from the Registrant’s Current  Report on Form 8-K filed with the Securities and Exchange Commission on May  20, 2003). |
| 31.1  | Certification of the Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                   |
| 31.2  | Certification of the Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                   |
| 32.1  | Certification of the Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                   |
| 32.2  | Certification of the Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                   |

 

**(b)   Reports on Form 8-K**

 

PNWB filed a current report on Form 8-K onMay 19, 2003. The report included under Item 5 of Form 8-K announced that anAgreement and Plan of Reorganization had been signed with Wells Fargo &Company.

 

PNWB filed a current report on Form 8-K onJuly 24, 2003. The report included under Item 5 of Form 8-K announced PNWB’ssecond quarter 2003 financial results and unaudited consolidated financialstatements for the three and six-month periods ended June 30, 2003. A copy ofthe press release is attached as Exhibit 99.

 

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**SIGNATURES**

 

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

 

 
|   |   |            | PACIFIC NORTHWEST BANCORP |
|--------|--------|-----------------|---------------------------|
|   |   |            |                      |
|   |   |            |                      |   |   |
|   |   |            |                      | By: | /s/ Patrick M. Fahey |   |
|   |   |            |                      |   | Patrick M. Fahey |
|   |   |            |                      |   | President and Chief Executive  Officer |
|   |   |            |                      |   |   |
|   |   |            |                      |   |   |
|   |   |            |                      |   | /s/ Bette J. Floray |   |
|   |   |            |                      |   | Bette J. Floray |
|   |   |            |                      |   | Executive Vice President and  Chief Financial Officer |
|   |   |            |                      |   |   |
|   |   |            |                      |   |   |
|   | Dated: | August 12, 2003 |                      |   |   |   |
|        |        |                 |                           |  |  |  |  |

 

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