** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****Quarterly Report Pursuantto Section 13 or 15(d) of the Securities and Exchange Act of 1934**

 

**Forthe quarterly period ended June 30, 2002**

 

**o****Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For the transition period         fromto        **

 

**Commission file number   0-26632**

 

**Pacific Northwest Bancorp**

(Exact name of registrant asspecified in its charter)

 

**Washington**

(State or other jurisdiction ofincorporation or organization)

 

**91-1691216**

(I.R.S. Employer IdentificationNo.)

 

**1111 Third Avenue, Suite 250**

**Seattle, Washington**

(Address of principal executiveoffices)

 

**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 the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES ý  NO o

 

Asof July 29, 2002, 15,202,659 shares of common stock were outstanding with nopar value.

 

 

----

 

**PACIFIC NORTHWEST BANCORP**

 

**INDEX**

 
| **PART I.**       |   | **FINANCIAL INFORMATION**                                                                                         |
|-------------------|--------|-------------------------------------------------------------------------------------------------------------------|
| **Item 1.**       |   | **Financial Statements**                                                                                          |
|              |   |                                                                                                              |
|              |   | **Consolidated  Statements of Financial Condition as of June 30, 2002 and December 31, 2001**                     |
|              |   |                                                                                                              |
|              |   | **Consolidated  Statements of Income for the three- and six-month periods ended June 30, 2002  and 2001**         |
|              |   |                                                                                                              |
|              |   | **Consolidated  Statements of Shareholders’ Equity for the six-month periods ended June 30,  2002 and 2001** |
|              |   |                                                                                                              |
|              |   | **Consolidated  Statements of Cash Flows for the six-month periods ended June 30, 2002 and  2001**                |
|              |   |                                                                                                              |
|              |   | **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**                                                   |
|              |   |                                                                                                              |
| **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**    |
|              |   |                                                                                                              |
| **CERTIFICATION** |

 

----

 

CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

 
| **Dollars in  thousands**                                                   |   | **June 30, 2002** |      | **December 31, 2001** |   |
|-----------------------------------------------------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                                                                        |   |              |      |                  |   |
| *Assets*                                                                    |   |              |      |                  |   |
|                                                                        |   |              |      |                  |   |
| Cash and due from banks                                                     |   |              |      |                  |   |
| Non-interest-bearing                                                        |   | $                 | 67,502    |                  | $      | 58,134 |   |
| Interest-bearing                                                            |   | 2,124             |      | 491                   |   |
| Federal funds sold and securities purchased under  agreements to resell     |   | 31,900            |      | —                |   |
| Securities available for sale                                               |   | 771,853           |      | 757,018               |   |
| Loans receivable                                                            |   | 1,837,215         |      | 1,808,555             |   |
| Allowance for losses on loans                                               |   | (21,928           | )         | (20,123               | )      |
| Net loans receivable                                                        |   | 1,815,287         |      | 1,788,432             |   |
|                                                                        |   |              |      |                  |   |
| Loans held for sale                                                         |   | 23,021            |      | 43,757                |   |
| Interest receivable                                                         |   | 13,709            |      | 14,808                |   |
| Other real estate                                                           |   | 5,873             |      | 5,762                 |   |
| Premises and equipment                                                      |   | 49,448            |      | 50,837                |   |
| Goodwill                                                                    |   | 16,137            |      | 16,137                |   |
| Other intangible assets                                                     |   | 1,526             |      | 1,985                 |   |
| Bank owned life insurance                                                   |   | 50,499            |      | —                |   |
| Other assets                                                                |   | 8,162             |      | 4,147                 |   |
|                                                                        |   |              |      |                  |   |
| Total assets                                                                |   | $                 | 2,857,041 |                  | $      | 2,741,508 |   |
|                                                                        |   |              |      |                  |   |
| *Liabilities*                                                               |   |              |      |                  |   |
|                                                                        |   |              |      |                  |   |
| Deposits:                                                                   |   |              |      |                  |   |
| Non-interest-bearing                                                        |   | $                 | 220,267   |                  | $      | 241,674 |   |
| Interest-bearing                                                            |   | 1,622,536         |      | 1,363,181             |   |
| Total deposits                                                              |   | 1,842,803         |      | 1,604,855             |   |
|                                                                        |   |              |      |                  |   |
| Federal Home Loan Bank (FHLB) advances                                      |   | 626,821           |      | 714,526               |   |
| Federal funds purchased and securities sold under  agreements to repurchase |   | 114,244           |      | 149,504               |   |
| Guaranteed preferred beneficial interests in  subordinated debt             |   | 36,000            |      | 37,500                |   |
| Other borrowings                                                            |   | 12,075            |      | 12,621                |   |
| Other liabilities                                                           |   | 23,047            |      | 22,016                |   |
|                                                                        |   |              |      |                  |   |
| Total liabilities                                                           |   | 2,654,990         |      | 2,541,022             |   |
|                                                                        |   |              |      |                  |   |
| *Shareholders’ Equity*                                                 |   |              |      |                  |   |
|                                                                        |   |              |      |                  |   |
| Common stock, no par value, authorized shares  30,000,000                   |   |              |      |                  |   |
| Issued and outstanding: 15,194,143 and 15,595,204  shares                   |   | —            |      | —                |   |
| Paid-in-capital                                                             |   | 13,819            |      | 26,757                |   |
| Retained earnings                                                           |   | 184,108           |      | 172,967               |   |
| Accumulated other comprehensive  income                                     |   | 4,124             |      | 1,305                 |   |
| Debt related to employee stock ownership plan (ESOP)                        |   | —            |      | (543                  | )      |
|                                                                        |   |              |      |                  |   |
| Total shareholders’ equity                                             |   | 202,051           |      | 200,486               |   |
|                                                                        |   |              |      |                  |   |
| Total liabilities and shareholders’ equity                             |   | $                 | 2,857,041 |                  | $      | 2,741,508 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

1

----

 

CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)

For the three and six month periods ended June 30, 2002 and 2001

 
|                                                            |   | **Three-month periods** |   | **Six-month periods** |   |
|-----------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **Dollars in  thousands, except per share amounts**             |   | **2002**                |   | **2001**              |   | **2002** |   | **2001** |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| *Interest Income*                                               |   |                    |   |                  |   |   |   |   |   |
| Loans receivable and loans held for sale                        |   | $                       | 34,548 |                  | $      | 39,369 |   | $ | 69,057 |   | $ | 79,104 |   |
| Securities available for sale                                   |   | 10,391                  |   | 13,305                |   | 20,791 |   | 27,286 |   |
| Other                                                           |   | 67                      |   | 106                   |   | 74 |   | 437 |   |
|                                                            |   | 45,006                  |   | 52,780                |   | 89,922 |   | 106,827 |   |
| *Interest Expense*                                              |   |                    |   |                  |   |   |   |   |   |
| Deposits                                                        |   | 9,744                   |   | 16,123                |   | 18,621 |   | 34,013 |   |
| FHLB advances and other borrowings                              |   | 6,331                   |   | 8,285                 |   | 12,905 |   | 17,573 |   |
| Securities sold under agreements to repurchase                  |   | 996                     |   | 2,869                 |   | 2,191 |   | 7,147 |   |
| Guaranteed preferred beneficial interests in  subordinated debt |   | 901                     |   | 988                   |   | 1,827 |   | 1,975 |   |
|                                                            |   | 17,972                  |   | 28,265                |   | 35,544 |   | 60,708 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Net interest income                                             |   | 27,034                  |   | 24,515                |   | 54,378 |   | 46,119 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Provision for losses on loans                                   |   | 1,700                   |   | 1,400                 |   | 3,400 |   | 2,800 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Net interest income after provision for losses on loans         |   | 25,334                  |   | 23,115                |   | 50,978 |   | 43,319 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| *Non-interest Income*                                           |   |                    |   |                  |   |   |   |   |   |
| Service fees                                                    |   | 3,281                   |   | 2,889                 |   | 6,458 |   | 5,691 |   |
| Mortgage banking revenue                                        |   | 707                     |   | 518                   |   | 1,455 |   | 971 |   |
| Investment product fees and insurance commissions               |   | 508                     |   | 647                   |   | 836 |   | 1,222 |   |
| Bank owned life insurance income                                |   | 499                     |   | —                |   | 499 |   | — |   |
| Gain on sale of securities available for sale                   |   | 40                      |   | 446                   |   | 40 |   | 1,144 |   |
| Gain on sale of partnership                                     |   | —                  |   | —                |   | — |   | 574 |   |
| Other                                                           |   | 329                     |   | 610                   |   | 661 |   | 1,150 |   |
|                                                            |   | 5,364                   |   | 5,110                 |   | 9,949 |   | 10,752 |   |
| *Non-interest Expense*                                          |   |                    |   |                  |   |   |   |   |   |
| Compensation and employee benefits                              |   | 9,977                   |   | 9,663                 |   | 19,796 |   | 19,081 |   |
| General and administrative                                      |   | 4,292                   |   | 5,491                 |   | 8,557 |   | 10,026 |   |
| Occupancy and equipment                                         |   | 3,042                   |   | 3,126                 |   | 6,163 |   | 6,102 |   |
| Data processing                                                 |   | 1,397                   |   | 1,510                 |   | 2,782 |   | 2,989 |   |
| Other real estate owned                                         |   | 8                       |   | 10                    |   | 10 |   | 14 |   |
| Conversion and integration                                      |   | —                  |   | 434                   |   | — |   | 1,290 |   |
| Severance and employment agreements                             |   | —                  |   | 200                   |   | — |   | 200 |   |
|                                                            |   | 18,716                  |   | 20,434                |   | 37,308 |   | 39,702 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Income before income tax expense                                |   | 11,982                  |   | 7,791                 |   | 23,619 |   | 14,369 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Income tax expense                                              |   | 4,070                   |   | 2,916                 |   | 8,143 |   | 5,373 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Net income                                                      |   | $                       | 7,912  |                  | $      | 4,875 |   | $ | 15,476 |   | $ | 8,996 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Basic net income per share                                      |   | $                       | 0.52   |                  | $      | 0.31 |   | $ | 1.00 |   | $ | 0.58 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Diluted net income per share                                    |   | $                       | 0.50   |                  | $      | 0.31 |   | $ | 0.98 |   | $ | 0.57 |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Dividends declared per share                                    |   | $                       | 0.14   |                  | $      | 0.14 |   | $ | 0.28 |   | $ | 0.28 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

2

----

 

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

 
| **Dollars in thousands, except 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, 2001                                                                                           |   | 15,494,357                              |   | $                    | 26,291 |                   | $      | 159,613                                              |   | $                           | (5,500) |      | $      | (1,668) |   | $ | 178,736 |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Dividends declared, $0.28 per share                                                                       |   |                                    |   |                 |   | (4,350                 | )      |                                                 |   |                        |    | (4,350    | )      |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Issuance of common stock:                                                                                 |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Stock option plans                                                                                        |   | 45,718                                  |   | 454                  |   |                   |   |                                                 |   |                        |    | 454       |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| ESOP debt repayment                                                                                       |   | 21,254                                  |   |                 |   |                   |   |                                                 |   | 582                         |    | 582       |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Comprehensive income:                                                                                     |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Net income                                                                                                |   |                                    |   |                 |   | 8,996                  |   |                                                 |   |                        |    | 8,996     |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Other comprehensive income -                                                                              |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Reclassification of securities held to maturity to  securities available for sale, net of taxes of $(321) |   |                                    |   |                 |   |                   |   | (597                                                 | )      |                        |    | (597      | )      |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Unrealized gain on securities available for sale, net  of taxes of $2,079                                 |   |                                    |   |                 |   |                   |   | 3,861                                                |   |                        |    | 3,861     |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Reclassification adjustment for gains included in net  income, net of taxes of $(401)                     |   |                                    |   |                 |   |                   |   | (743                                                 | )      |                        |    | (743      | )      |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Total comprehensive  income *                                                                             |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    | 11,517    |   |
| June 30, 2001                                                                                             |   | 15,561,329                              |   | $                    | 26,745 |                   | $      | 164,259                                              |   | $                           | (2,979  | )         | $      | (1,086 | ) | $ | 186,939 |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| 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                                                                   |   | (532,651                                | )      | (14,435              | )      |                   |   |                                                 |   |                        |    | (14,435   | )      |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| ESOP debt repayment                                                                                       |   | 17,664                                  |   |                 |   |                   |   |                                                 |   | 543                         |    | 543       |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Comprehensive income:                                                                                     |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Net income                                                                                                |   |                                    |   |                 |   | 15,476                 |   |                                                 |   |                        |    | 15,476    |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| Other comprehensive income -                                                                              |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
|                                                                                                      |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    |      |   |
| 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 taxesof $(22)                       |   |                                    |   |                 |   |                   |   | (40                                                  | )      |                        |    | (40       | )      |
| Total comprehensive  income*                                                                              |   |                                    |   |                 |   |                   |   |                                                 |   |                        |    | 18,295    |   |
| June 30, 2002                                                                                             |   | 15,194,143                              |   | $                    | 13,819 |                   | $      | 184,108                                              |   | $                           | 4,124   |      | $      | 0 |   | $ | 202,051 |   |
|                                                                                                           |        |                                         |        |                      |        |                        |        |                                                      |        |                             |         |           |        |  |  |  |  |  |  |  |  |

 

----

* Comprehensive income for the three months ended June 30, 2002 and 2001was $13,414 and $3,462, respectively.

 

Seeaccompanying notes to consolidated financial statements.

 

3

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CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)

 
|                                                                                               |   | **Six-month periods ended June 30,** |     |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
| **Dollars in  thousands**                                                                          |   | **2002**                             |     | **2001** |   |
|                                                                                               |   |                                 |     |   |   |
| *Operating Activities*                                                                             |   |                                 |     |   |   |
|                                                                                               |   |                                 |     |   |   |
| Net income                                                                                         |   | $                                    | 15,476   |   | $ | 8,996 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                 |   |                                 |     |   |   |
| Depreciation                                                                                       |   | 2,638                                |     | 3,238 |   |
| Amortization of intangible assets                                                                  |   | 458                                  |     | 1,277 |   |
| Provision for losses on loans                                                                      |   | 3,400                                |     | 2,800 |   |
| Amortization (accretion) of premiums and discounts, net                                            |   | 946                                  |     | (105 | ) |
| Gain on sale of mortgage banking assets                                                            |   | (1,455                               | )        | (971 | ) |
| Gain on sale of securities available for sale                                                      |   | (40                                  | )        | (1,144 | ) |
| (Gain) loss on sale of other real estate                                                           |   | 35                                   |     | (58 | ) |
| Write-downs on other real estate                                                                   |   | 32                                   |     | — |   |
| Loss on disposal of premises and equipment                                                         |   | 82                                   |     | — |   |
| Income from bank owned life insurance                                                              |   | (499                                 | )        | — |   |
| Loan fees deferred, net of amortization                                                            |   | 602                                  |     | 1,391 |   |
| FHLB stock dividends                                                                               |   | (1,381                               | )        | (1,435 | ) |
| Changes in operating assets and liabilities:                                                       |   |                                 |     |   |   |
| Decrease in interest receivable                                                                    |   | 1,067                                |     | 2,525 |   |
| Increase in other assets                                                                           |   | (4,015                               | )        | (4,108 | ) |
| Decrease in other liabilities                                                                      |   | (433                                 | )        | (8,165 | ) |
|                                                                                               |   |                                 |     |   |   |
| Net cash provided by operating activities                                                          |   | $                                    | 16,913   |   | $ | 4,241 |   |
|                                                                                               |   |                                 |     |   |   |
| *Investing Activities*                                                                             |   |                                 |     |   |   |
|                                                                                               |   |                                 |     |   |   |
| Purchases of securities  available for sale                                                        |   | (200,796                             | )        | (211,438 | ) |
| Proceeds from maturing and principal repayments on  securities available for sale                  |   | 188,751                              |     | 258,501 |   |
| Proceeds from sale of securities available for sale                                                |   | 2,040                                |     | 35,026 |   |
| Proceeds from sale of mortgage banking assets                                                      |   | 104,324                              |     | 66,588 |   |
| Net increase in loans  receivable                                                                  |   | (116,796                             | )        | (120,403 | ) |
| Proceeds from sale of other real estate                                                            |   | 3,881                                |     | 3,839 |   |
| Improvements capitalized to  other real estate                                                     |   | (263                                 | )        | (825 | ) |
| Purchases of premises and  equipment                                                               |   | (1,394                               | )        | (3,565 | ) |
| Proceeds from sales of premises  and equipment                                                     |   | 62                                   |     | 5,200 |   |
| Purchase of bank owned life  insurance                                                             |   | (50,000                              | )        | — |   |
| Net  increase in federal funds sold and securities purchased under agreements to  resell           |   | (31,900                              | )        | (5,083 | ) |
|                                                                                               |   |                                 |     |   |   |
| Net cash provided by (used in) investing activities                                                |   | $                                    | (102,091 | ) | $ | 27,840 |   |
|                                                                                               |   |                                 |     |   |   |
| *Financing Activities*                                                                             |   |                                 |     |   |   |
|                                                                                               |   |                                 |     |   |   |
| Net increase (decrease) in deposits                                                                |   | $                                    | 115,727  |   | $ | (10,591 | ) |
| Net increase (decrease) in  certificates of deposit                                                |   | 122,221                              |     | (3,773 | ) |
| Proceeds from FHLB advances, securities sold under  agreements to repurchase, and other borrowings |   | 2,543,963                            |     | 1,362,150 |   |
| Repayment of FHLB advances,  securities sold underagreements to  repurchase and other borrowings   |   | (2,666,931                           | )        | (1,388,770 | ) |
| Purchase of Interwest Capital  Trust I - capital securities                                        |   | (1,500                               | )        | — |   |
| Dividends paid to shareholders                                                                     |   | (4,363                               | )        | (4,354 | ) |
| Purchase and retirement of  common stock                                                           |   | (14,435                              | )        | — |   |
| Issuance of common stock from exercise of stock options                                            |   | 1,497                                |     | 454 |   |
|                                                                                               |   |                                 |     |   |   |
| Net cash provided by (used in) financing activities                                                |   | 96,179                               |     | (44,884 | ) |
|                                                                                               |   |                                 |     |   |   |
| Net increase (decrease) in cash  and due from banks                                                |   | 11,001                               |     | (12,803 | ) |
|                                                                                               |   |                                 |     |   |   |
| *Cash and due from banks*                                                                          |   |                                 |     |   |   |
| Beginning of period                                                                                |   | 58,625                               |     | 78,861 |   |
|                                                                                               |   |                                 |     |   |   |
| End of period                                                                                      |   | $                                    | 69,626   |   | $ | 66,058 |   |
|                                                                                               |   |                                 |     |   |   |
| *Supplemental Disclosures of Cash Flow Information*                                                |   |                                 |     |   |   |
|                                                                                               |   |                                 |     |   |   |
| Cash paid during the period for:                                                                   |   |                                 |     |   |   |
| Interest                                                                                           |   | $                                    | 33,257   |   | $ | 60,318 |   |
| Income taxes                                                                                       |   | 11,500                               |     | 5,500 |   |
| Non-cash investing and financing activities:                                                       |   |                                 |     |   |   |
| Loans receivable transferred to other real estate                                                  |   | 3,796                                |     | 3,612 |   |
| Transfer of securities from held to maturity To  available for sale                                |   | —                               |     | 64,741 |   |
| ESOP debt repayment                                                                                |   | 543                                  |     | 582 |   |
|                                                                                                    |        |                                      |          |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

4

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NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

**NOTE A** BASIS OF PRESENTATION

 

Pacific Northwest Bancorp is a bank holding company incorporated in theState of Washington.  Through itscommercial bank subsidiary, Pacific Northwest Bank, a wide range of financialservices is offered to businesses and individuals throughout western andcentral Washington State.  Financialservices of Pacific Northwest Bank include the banking activities of acceptingdeposits from businesses and individuals and originating commercial andcommercial real estate loans, residential loans and consumer loans.

 

The unaudited consolidated financial statements include the accounts ofPacific Northwest Bancorp and its wholly owned subsidiaries (collectivelyPNWB).  As of June 30, 2002, Pacific NorthwestBancorp’s wholly owned subsidiaries were Pacific Northwest Bank and InterWestCapital Trust I.  All materialinter-company transactions and balances have been eliminated in consolidation.

 

The preparation of the consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect amounts reported inthe consolidated financial statements. Changes in these estimates and assumptions are considered reasonablypossible and may have a material impact on the consolidated financialstatements and thus actual results could differ from the amounts reported anddisclosed herein.

 

The unaudited consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.  In the opinion ofmanagement, all adjustments necessary for a fair presentation are reflected inthe unaudited interim consolidated financial statements.  The consolidated statements of income forthe three- and six-month periods ended June 30, 2002 and 2001 are notnecessarily indicative of the operating results for the full year.  For further information, refer to theconsolidated financial statements and footnotes filed on the Form 10-K for themost recent annual period ended December 31, 2001.

 

**NOTE B** RECLASSIFICATIONS

 

Certain reclassifications have been made to prior financial statementsto conform to current presentation.  Theeffects of the reclassifications are not considered material.

 

**NOTE****C** NET INCOME PER SHARE

 

Basic net incomeper share is calculated by dividing net income by the weighted average numberof common shares outstanding during the period.  Diluted net income per share is calculated by dividing net incomeby diluted weighted average shares outstanding, which includes common stockequivalent shares outstanding using the treasury stock method, unless suchshares are anti-dilutive.  Common stockequivalents include shares issuable upon exercise of stock options.  Unallocated shares relating to the employeestock ownership plan debt obligation are deducted in the calculation ofweighted average shares outstanding.

 

5

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The following tablepresents the computation of basic and diluted net income per share for thethree- and six-month periods ended June 30:

 
|                                                                      |   | **Three  months** |   | **Six months** |   |
|---------------------------------------------------------------------------|--------|-------------------|--------|----------------|--------|
| **Dollars in  thousands, except share and per share amounts**             |   | **2002**          |   | **2001**       |   | **2002** |   | **2001** |   |
|                                                                      |   |              |   |           |   |   |   |   |   |
| **Numerator:**                                                            |   |              |   |           |   |   |   |   |   |
|                                                                      |   |              |   |           |   |   |   |   |   |
| Net income                                                                |   | $                 | 7,912  |           | $      | 4,875 |   | $ | 15,476 |   | $ | 8,996 |   |
|                                                                      |   |              |   |           |   |   |   |   |   |
| **Denominator:**                                                          |   |              |   |           |   |   |   |   |   |
|                                                                      |   |              |   |           |   |   |   |   |   |
| Denominator for basic net income per share-                               |   |              |   |           |   |   |   |   |   |
| Weighted average shares                                                   |   | 15,353,873        |   | 15,534,482     |   | 15,443,721 |   | 15,522,934 |   |
| Effect of dilutive securities:                                            |   |              |   |           |   |   |   |   |   |
| Stock options                                                             |   | 456,355           |   | 165,605        |   | 395,898 |   | 126,623 |   |
| Denominator for diluted net income per share-                             |   |              |   |           |   |   |   |   |   |
| Weighted average shares and assumed conversion of  dilutive stock options |   | 15,810,228        |   | 15,700,087     |   | 15,839,619 |   | 15,649,557 |   |
|                                                                      |   |              |   |           |   |   |   |   |   |
| Basic net income per share                                                |   | $                 | 0.52   |           | $      | 0.31 |   | $ | 1.00 |   | $ | 0.58 |   |
|                                                                      |   |              |   |           |   |   |   |   |   |
| Diluted net income per share                                              |   | $                 | 0.50   |           | $      | 0.31 |   | $ | 0.98 |   | $ | 0.57 |   |

 

**NOTE D**CONVERSION AND INTEGRATION EXPENSES

 

During the year ended December 31, 2000, PNWB initiated the process ofconverting its various subsidiary bank operating systems to a single enhancedoperating system.  The conversion wascompleted on April 9, 2001.  Conversionand integration expenses were expensed as incurred.  Total expenses associated with conversion and integration effortswere $0.4 and $1.3 million during the three- and six-month periods ended June30, 2001, respectively.   No conversionand integration expenses were incurred in 2002.

 

**NOTE E**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 separate bankingsystems into a single operating system. As a result of these organizational and system changes, the financialinformation that is used by the chief operating decision maker in allocatingresources and assessing performance is only provided for one reportable segmentfor the three- and six-month periods ended June 30, 2002 and 2001.

 

**NOTE F**SECURITIES PLEDGED UNDER AGREEMENTS TO REPURCHASE

 

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 $94.3 million and$147.9 million as of June 30, 2002 and December 31, 2001, respectively.

 

6

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**NOTE G**ACCOUNTING CHANGES

 

In April 2002, theFASB issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44, and 62,Amendment of FASB Statement No. 13, and Technical Corrections”.  SFAS No. 145 rescinds the classification ofextinguishment of debt as extraordinary as previously required under SFAS No. 4and establishes new criteria for the classification of gains and losses onextinguishment of debt.  SFAS No. 145also amends SFAS No. 13 to require certain modifications to capital leases be treatedas a sale-leaseback and modifies the accounting for sub-leases when theoriginal lessee remains a secondary obligor. SFAS No. 145 becomes effective onJanuary 1, 2003 with the exception of the amendment and technical correctionsrelated to SFAS No. 13, which were effective on May 15, 2002.  Management does not expect the adoption ofSFAS No. 145 to have a material impact on PNWB’s financial condition or resultsof operations.

 

In October 2001,the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets”. SFAS No. 144 supersedes SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf”.  This statement, which excludesgoodwill, provides a single accounting model for recognition and impairment oflong-lived assets to be held for sale or disposed of.  SFAS No. 144 retains many of the fundamental recognition andmeasurement provisions of SFAS No. 121; however, it significantly changes thecriteria that would have to be met to classify an asset as either held-for-saleor to be disposed of. SFAS No. 144 became effective on January 1, 2002.  The adoption of this statement did not havea material impact on PNWB’s financial condition or results of operations.

 

In July 2001, the FASB issued SFAS No. 142 “Accounting for Goodwill andOther Intangible Assets”.  Under SFASNo. 142, goodwill and indefinite lived intangible assets are no longeramortized but are reviewed annually for impairment or more frequently ifimpairment indicators arise.  Separableintangible assets that are not deemed to have an indefinite life will continueto be amortized over their useful lives. This Statement became effective on January 1, 2002.  During the first quarter of 2002, PNWBperformed the transitional impairment assessment of its goodwill as of January1, 2002 and noted that such assessment did not indicate any impairment ofgoodwill.  The adoption of SFAS No. 142is expected to reduce PNWB’s goodwill amortization expense by approximately$1.1 million on an annual basis.  Areconciliation of reported net income to net income adjusted to excludegoodwill amortization for the three- and six- month periods ended June 30, 2002and 2001 is as follows:

 
|                                               |   | **Three-month periods** |   | **Six-month periods** |   |
|----------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **Dollars in  thousands, except per share amount** |   | **2002**                |   | **2001**              |   | **2002** |   | **2001** |   |
|                                               |   |                    |   |                  |   |   |   |   |   |
| Income statement:                                  |   |                    |   |                  |   |   |   |   |   |
| Reported net income                                |   | $                       | 7,912  |                  | $      | 4,875 |   | $ | 15,476 |   | $ | 8,996 |   |
| Adjustment for goodwill amortization               |   | —                  |   | 280                   |   | — |   | 560 |   |
| Adjusted net income                                |   | $                       | 7,912  |                  | $      | 5,155 |   | $ | 15,476 |   | 9,556 |   |
|                                               |   |                    |   |                  |   |   |   |   |   |
| Basic net income per share:                        |   |                    |   |                  |   |   |   |   |   |
| Reported basic net income per share                |   | $                       | 0.52   |                  | $      | 0.31 |   | $ | 1.00 |   | 0.58 |   |
| Adjustment for goodwill amortization               |   | —                  |   | 0.02                  |   | — |   | 0.04 |   |
| Adjusted basic net income per share                |   | $                       | 0.52   |                  | $      | 0.33 |   | $ | 1.00 |   | 0.62 |   |
|                                               |   |                    |   |                  |   |   |   |   |   |
| Diluted net income per share:                      |   |                    |   |                  |   |   |   |   |   |
| Reported diluted net income per  share             |   | $                       | 0.50   |                  | $      | 0.31 |   | $ | 0.98 |   | $ | 0.57 |   |
| Adjustment for goodwill amortization               |   | —                  |   | 0.02                  |   | — |   | 0.04 |   |
| Adjusted diluted net income per  share             |   | $                       | 0.50   |                  | $      | 0.33 |   | $ | 0.98 |   | $ | 0.61 |   |

 

7

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NOTE H  SUBSEQUENT EVENT

 

On July 22, 2002, PNWB entered into a definitive agreement to acquireBank of the Northwest of Portland, Oregon. PNWB will issue approximately 1.75 million shares of common stock and$25.8 million of cash in a transaction in which Bank of the Northwestshareholders will have an opportunity to choose between stock and cashconsideration. The transaction is valued at approximately $85.0 million and theallocation of the purchase price will be approximately 65 percent stock and 35percent cash.  As of June 30, 2002, Bankof the Northwest had total assets of $354.4 million and stockholders’ equity of$27.4 million.  Bank of the Northwestoperates five branch offices in the metropolitan Portland, Oregon marketarea.  This acquisition is expected tobe completed in the fourth quarter of 2002, pending approvals by the regulatorsand the shareholders of Bank of the Northwest.

 

8

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

 

The followingdiscussion is provided for the unaudited consolidated financial condition andresults of operations of Pacific Northwest Bancorp, which includes its whollyowned subsidiaries (collectively PNWB). As of June 30, 2002, Pacific Northwest Bancorp’s wholly ownedsubsidiaries were Pacific Northwest Bank and InterWest Capital Trust I.  The purpose of this discussion is to focuson significant factors concerning PNWB’s financial condition and results ofoperations.  This discussion should beread along with the unaudited consolidated financial statements for anunderstanding of the following discussion and analysis. Certainreclassifications have been made to prior period balances to conform to currentpresentation.  The effects of suchreclassifications are not considered material.

 

Pacific Northwest Bancorp is a bank holding company incorporated in theState of Washington.  PNWB is afinancial services company providing a variety of products and services forboth business and individual customers. Financial services of PNWB include the banking activities of acceptingdeposits from businesses and individuals and originating commercial andcommercial real estate loans, residential loans, and consumer loans.  As part of the migration to a commercialbank, PNWB has made significant progress in restructuring its balance sheetsince mid-2000 so that it is more reflective of a commercial bank.

 

On July 22, 2002, PNWB entered into a definitive agreement to acquireBank of the Northwest headquartered in Portland, Oregon. Bank of the Northwestis a commercial bank with total assets of $354.4 million and stockholders’ equityof $27.4 million as of June 30, 2002. Bank of the Northwest operates five branch offices in the metropolitanPortland, Oregon market area.  PNWB willissue approximately 1.75 million shares of common stock and $25.8 million ofcash in a transaction in which Bank of the Northwest shareholders will have anopportunity to choose between stock and cash consideration. The transaction isvalued at approximately $85.0 million and the allocation of the purchase pricewill be approximately 65 percent stock and 35 percent cash.  This acquisition provides PNWB an entry intoPortland, Oregon and is consistent with management’s strategy to expand alongthe I-5 corridor. PNWB anticipates completing the acquisition in the fourthquarter of 2002, pending regulatory approvals and the approval of theshareholders of Bank of the Northwest. This acquisition will be accounted for using the purchase method ofaccounting in accordance with accounting principles generally accepted in theUnited States.

 

A source of future growth may be through mergers and acquisitions.  PNWB’s management believes that many otherfinancial institutions are considering selling their institutions for a varietyof reasons, including lack of shareholder liquidity, management successionissues, technology challenges, and increasing competition. PNWB activelyreviews proposals for various acquisition opportunities.  PNWB has a due diligence review process toevaluate potential acquisitions and has established parameters for potentialacquisitions relating to market factors, financial performance and certainnon-financial factors.  Successfulcompletion of acquisitions by PNWB depends on several factors such as theavailability of suitable acquisition candidates, necessary regulatory andshareholder approval and compliance with applicable capital requirements.  No assurance can be made that acquisitionactivity will continue in the future.

 

Currently, PNWB conducts itsbusiness through 54 financial centers in western and central Washington State.Investments are available through Pacific Northwest Financial Services andinsurance products are available through Pacific Northwest Insurance Agency,both wholly owned subsidiaries of Pacific Northwest Bank.

 

9

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RESULTS OFOPERATIONS

 

PNWB had netincome of $7.9 million for the three-month period ended June 30, 2002, comparedto $4.9 million for the three-month period ended June 30, 2001.  Diluted net income per share was $0.50 forthe three-month period ended June 30, 2002, compared to $0.31 for thethree-month period ended June 30, 2001. PNWB’s return on average shareholders’equity was 15.78 percent for the three-month period ended June 30, 2002,compared to 10.45 percent for the three-month period ended June 30, 2001.  PNWB’s return on average assets was 1.12percent for the three-month period ended June 30, 2002, compared to 0.69percent for the three-month period ended June 30, 2001.

 

PNWB had netincome of $15.5 million for the six-month period ended June 30, 2002 comparedto $9.0 million for the six-month period ended June 30, 2001.  Diluted net income per share was $0.98 forthe six-month period ended June 30, 2002, compared to $0.57 for the six-monthperiod ended June 30, 2001.  PNWB’sreturn on average shareholders’ equity was 15.40 percent for the six-monthperiod ended June 30, 2002, compared to 9.79 percent for the six-month periodended June 30, 2001. PNWB’s return on average assets was 1.11 percent for thesix-month period ended June 30, 2002, compared to 0.63 percent for thesix-month period ended June 30, 2001.

 

The following tablesummarizes net income, net income per share and key financial ratios for thethree- and six-month periods ended June 30:

 
|                                                |   | **Three months** |   | **Six months** |   |
|-----------------------------------------------------|--------|------------------|--------|----------------|--------|
| **Dollars in  thousands, except per share amounts** |   | **2002**         |   | **2001**       |   | **2002** |   | **2001** |   |
|                                                |   |             |   |           |   |   |   |   |   |
| Net income                                          |   | $                | 7,912  |           | $      | 4,875 |   | $ | 15,476 |   | $ | 8,996 |   |
|                                                |   |             |   |           |   |   |   |   |   |
| Basic net income per share                          |   | $                | 0.52   |           | $      | 0.31 |   | $ | 1.00 |   | $ | 0.58 |   |
|                                                |   |             |   |           |   |   |   |   |   |
| Diluted net income per share                        |   | $                | 0.50   |           | $      | 0.31 |   | $ | 0.98 |   | $ | 0.57 |   |
|                                                |   |             |   |           |   |   |   |   |   |
| Return on average shareholders’ equity         |   | 15.78            | %      | 10.45          | %      | 15.40 | % | 9.79 | % |
|                                                |   |             |   |           |   |   |   |   |   |
| Return on average assets                            |   | 1.12             | %      | 0.69           | %      | 1.11 | % | 0.63 | % |
|                                                |   |             |   |           |   |   |   |   |   |
| Net interest margin                                 |   | 4.12             | %      | 3.68           | %      | 4.19 | % | 3.48 | % |
|                                                |   |             |   |           |   |   |   |   |   |
| Efficiency ratio                                    |   | 57.77            | %      | 68.98          | %      | 58.00 | % | 69.81 | % |

 

*Net InterestIncome* | PNWB’s net incomeis significantly affected by changes in net interest income, which is theinterest income received on loans receivable and other interest-earning assetsless the interest expense on deposits and borrowings.  Net interest income was $27.0 million for the three-month periodended June 30, 2002, compared to $24.5 million for the three-month period endedJune 30, 2001.  Net interest income was$54.4 million and $46.1 million for the six-month periods ended June 30, 2002and 2001, respectively.  PNWB’s netinterest income is sensitive to changes in interest rates.  The decreases in market interest ratesthroughout 2001 had a positive impact on PNWB’s net interest income due toPNWB’s liability sensitive position at that time. When interest ratesdecreased, PNWB experienced a greater reduction in funding costs in comparisonto reduction in earnings on loans and investments.  During the first quarter of 2002, PNWB completed initiatives tocreate more of an interest rate neutral position to minimize the impact on netinterest income from future interest rate changes.  As such, management does not expect net interest income and net interestmargin to continue to improve at the same rate in 2002 as was achieved in 2001,if at all.

 

Interest income was $45.0 million for the three-month period ended June30, 2002, compared to $52.8 million for the three-month period ended June 30,2001. Interest income was $89.9 million for the six-month period ended June 30,2002, compared to $106.8 million for the six-month period ended June 30,2001.  The decreases for the three- andsix-month periods ended June 30, 2002 were due to lower yields earned on bothloans receivable and investment securities as a result of lower market interestrates.  The yields on interest-earningassets were 6.86 

 

10

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percent and 6.93 percent for the three- and six-month periods ended June30, 2002, compared to 7.96 percent and 8.08 percent for the same periods in2001.  However, the decreases ininterest income were partially offset by increases in the average balance ofloans receivable and changes in the composition of average loans receivablewith a greater percentage comprised of commercial and commercial real estateloans compared to single-family residential mortgage loans.

 

Interest expense was $18.0 million for the three-month period ended June30, 2002, compared to $28.3 million for the three-month period ended June 30,2001.  The decrease in interest expensefor the three-month period ended June 30, 2002 was primarily due to a decreasein the cost of funds as a result of reductions of market interest rates andmanagement’s restructuring of the funding base.  The cost of funds was 3.03 percent for the three-month periodended June 30, 2002, compared to 4.76 percent for the same period in 2001.  During the past year, certificates ofdeposit repriced according to maturity schedules and borrowings matured and werereplaced with borrowings with relatively lower interest rates.  In addition, management also restructuredthe funding base with a greater percentage comprised of lower-costing deposits.  However, the decrease in interest expensewas partially offset by an increase in the average balance of interest-bearingdeposits.

 

Interest expense was $35.5 million for the six-month period ended June30, 2002, compared to $60.7 million for the six-month period ended June 30,2001.  This decrease was primarily dueto decreases in both the cost of funds and the average balances ofinterest-bearing liabilities.  The costof funds for the six-month period ended June 30, 2002 was 3.08 percent,compared to 5.10 percent for the same period in 2001 primarily due to lower marketinterest rates.

 

Net interest margin, which is net interest income divided by averageinterest-earning assets, was 4.12 percent for the three-month period ended June30, 2002, compared to 3.68 percent for the three-month period ended June 30,2001.  Net interest margin was 4.19percent for the six-month period ended June 30, 2002, compared to 3.48 percentfor the same period in 2001.  Theincreases in net interest margin for the three- and six-month periods endedJune 30, 2002 were due to changes in the mix of earning assets and decreases incost of funds which resulted from reductions in market interest rates and therestructuring of the funding base.  Theincrease in net interest margin for the three-month period ended June 30, 2002compared to the same period in 2001 was partially offset by implementation ofthe BOLI initiative in early April 2002. The funding of BOLI contracts increased average interest-bearingliabilities and interest expense, while the income from BOLI, representing atax-exempt increase in cash surrender value of these contracts, was classifiedwith “non-interest income”.

 

11

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*Average Ratesand Balances* | Thefollowing table indicates the average balance and average interest rates earnedor paid, interest rate spread and net interest margin for the three-monthperiods ended June 30:

 
|                                                                                          |   | **2002**             |      | **2001** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------|-----------|----------|--------|
| **Dollars in thousands**                                                                      |   | **Average  Balance** |      | **Rate** |   | **Average  Balance** |   | **Rate** |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Loans receivable and loans held for sale                                                      |   | $                    | 1,855,023 |     | 7.46   | % | $ | 1,811,001 |   | 8.71 | % |
| Securities available for sale, securities held to  maturity and other interest-earning assets |   | 770,341              |      | 5.43     | %      | 847,456 |   | 6.33 | % |
| Total interest-earning assets                                                                 |   | 2,625,364            |      | 6.86     | %      | 2,658,457 |   | 7.96 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Interest-bearing deposits                                                                     |   | 1,567,378            |      | 2.49     | %      | 1,486,962 |   | 4.35 | % |
| FHLB advances, securities sold under agreements to  repurchase and other borrowings           |   | 810,035              |      | 4.07     | %      | 893,365 |   | 5.45 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Total interest-bearing liabilities                                                            |   | 2,377,413            |      | 3.03     | %      | 2,380,327 |   | 4.76 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Non-interest-bearing deposits                                                                 |   | $                    | 224,498   |     |   |   | $ | 234,312 |   |   |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Net interest spread                                                                           |   |                 |      | 3.83     | %      |   |   | 3.20 | % |
| Net interest margin                                                                           |   |                 |      | 4.12     | %      |   |   | 3.68 | % |

 

The following table indicates the average balance and average interest ratesearned or paid, interest rate spread and net interest margin for the six-monthperiods ended June 30:

 
|                                                                                          |   | **2002**             |      | **2001** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------|-----------|----------|--------|
| **Dollars in thousands**                                                                      |   | **Average  Balance** |      | **Rate** |   | **Average  Balance** |   | **Rate** |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Loans receivable and loans held for sale                                                      |   | $                    | 1,847,448 |     | 7.51   | % | $ | 1,801,679 |   | 8.83 | % |
| Securities available for sale, securities held to  maturity and other interest-earning assets |   | 756,527              |      | 5.52     | %      | 853,725 |   | 6.49 | % |
| Total interest-earning assets                                                                 |   | 2,603,975            |      | 6.93     | %      | 2,655,404 |   | 8.08 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Interest-bearing deposits                                                                     |   | 1,478,010            |      | 2.54     | %      | 1,496,737 |   | 4.58 | % |
| FHLB advances, securities sold under agreements to  repurchase and other borrowings           |   | 848,469              |      | 4.02     | %      | 902,758 |   | 5.96 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Total interest-bearing liabilities                                                            |   | 2,326,479            |      | 3.08     | %      | 2,399,495 |   | 5.10 | % |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Non-interest-bearing deposits                                                                 |   | $                    | 225,562   |     |   |   | $ | 230,162 |   |   |   |
|                                                                                          |   |                 |      |     |   |   |   |   |   |
| Net interest spread                                                                           |   |                 |      | 3.85     | %      |   |   | 2.97 | % |
| Net interest margin                                                                           |   |                 |      | 4.19     | %      |   |   | 3.48 | % |

 

12

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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 June 30, 2002 vs. 2001  Increase (Decrease)  Due to changes in** |   | **Six-month periods June 30, 2002 vs. 2001  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                                                      |   | $                                                                                      | (5,762 | )                                                                                    | $      | 941 |   | $ | (4,821 | ) | $ | (12,045 | ) | $ | 1,997 |   | $ | (10,048 | ) |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Securities available for sale, securities held to  maturity and other interest-earning assets |   | (1,800                                                                                 | )      | (1,153                                                                               | )      | (2,953 | ) | (3,899 | ) | (2,958 | ) | (6,857 | ) |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Total net change in income on interest-earning assets                                         |   | (7,562                                                                                 | )      | (212                                                                                 | )      | (7,774 | ) | (15,944 | ) | (961 | ) | (16,905 | ) |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| *Interest-bearing liabilities*                                                                |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                                                     |   | 7,192                                                                                  |   | (813                                                                                 | )      | 6,379 |   | 14,973 |   | 420 |   | 15,393 |   |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| FHLB advances, securities sold under agreement to  repurchase and other borrowings            |   | 2,859                                                                                  |   | 1,055                                                                                |   | 3,914 |   | 8,247 |   | 1,524 |   | 9,771 |   |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Total net change in expense on interest-bearing  liabilities                                  |   | 10,051                                                                                 |   | 242                                                                                  |   | 10,293 |   | 23,220 |   | 1,944 |   | 25,164 |   |
|                                                                                          |   |                                                                                   |   |                                                                                 |   |   |   |   |   |   |   |   |   |
| Net change in net interest income                                                             |   | $                                                                                      | 2,489  |                                                                                 | $      | 30 |   | $ | 2,519 |   | $ | 7,276 |   | $ | 983 |   | $ | 8,259 |   |

 

*Provision forlosses on loans |* Theprovision for losses on loans was $1.7 million for the three-month period endedJune 30, 2002, compared to $1.4 million for the three-month period ended June30, 2001.  The provision for losses onloans was $3.4 million for the six-month period ended June 30, 2002, compared to$2.8 million for the same period in 2001. The provision was at a higher level for the three- and six-month periodsended June 30, 2002 compared to the same periods last year was in part due tomanagement’s evaluation about the current Pacific Northwest regional economyand its resulting impact on the loan portfolio, the change in the loan mix, andmanagement’s review of the loan portfolio. Management continues to assess the level of the provision for loanlosses based on the known and inherent risk characteristics in the loanportfolio.  These riskcharacteristics 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-interestIncome* | Non-interestincome was $5.4 million for the three-month period ended June 30, 2002,compared to $5.1 million for the three-month period ended June 30, 2001.  This increase was primarily due to incomefrom BOLI during the second quarter of 2002, higher service fees and mortgagebanking revenue, partially offset by the lower gain on securities available forsale.  Non-interest income was $9.9million for the six-month period ended June 30, 2002, compared to $10.8 millionfor the same period ended June 30, 2001. This

 

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decrease was primarily due to lower gain on sale of securities availablefor sale, a one-time gain on sale of the equity interest in a partnershipduring the first quarter of 2001, partially offset by higher service fees,higher mortgage banking revenue and BOLI income.  The gains on securities available for sale during the three- andsix-month period ended June 30, 2001 were primarily from the sale ofmortgage-backed securities that were securitized from PNWB’s single-familymortgage loan portfolio in prior periods.

 

During the secondquarter 2002, PNWB implemented the financial strategy to purchase $50.0 millionof BOLI on certain key employees. PNWB is the beneficiary of these BOLIcontracts and the proceeds from the death benefit payments will be used tooffset the cost of employee benefits. The $499,000 income from BOLI represented the tax-exempt increases incash surrender value of BOLI contracts for the three-month period ended June30, 2002.

 

Service fees were$3.3 million for the three-month period ended June 30, 2002 compared to $2.9million for the three-month period ended June 30, 2001.  Service fees were $6.5 million for thesix-month period ended June 30, 2002 compared to $5.7 million for the six-monthperiod ended June 30, 2001. The increases were primarily due to increases infees received on deposit accounts and fees from commercial loan commitments.

 

Mortgage bankingrevenue was $707,000 for the three-month period ended June 30, 2002 compared to$518,000 for the three-month period ended June 30, 2001.  Mortgage banking revenue was $1.5 millionfor the six-month period ended June 30, 2002 compared to $971,000 for thesix-month period ended June 30, 2001. To date, mortgage banking revenue in 2002has benefited from higher single-family mortgage loan volume due to our focuson improving mortgage banking activities as well as lower interest ratescreating additional volume from refinancing activities.  However, management expects thatsingle-family mortgage loan production will slow down during the second half of2002, and therefore the mortgage banking revenue will not likely remain at thesame level compared to the first half of 2002.

 

*Non-interestExpense* | Non-interestexpense was $18.7 million for the three-month period ended June 30, 2002,compared to $20.4 million for the three-month period ended June 30, 2001including $634,000 of conversion and severance expenses and $280,000 ofgoodwill amortization expense. Non-interest expense was $37.3 million for the six-month period endedJune 30, 2002, compared to $39.7 million for the six-month period ended June30, 2001. Non-interest expense for the six-month period ended June 30, 2001 included$1.5 million of conversion and severance expenses and $560,000 of goodwillamortization expense, both of which were $0 for the three- and six-monthperiods ended June 30, 2002.

 

General and administrative expenses were $4.3million for the three-month period ended June 30, 2002, compared to $5.5million for the three-month period ended June 30, 2001.  General and administrative expenses were$8.6 million for the six-month period ended June 30, 2002, compared to $10.0million for the six-month period ended June 30, 2001.  Apart from the elimination of goodwill amortization expense as aresult of the adoption of SFAS No. 142 “Accounting For Goodwill and OtherIntangible Assets”, the decreases in general and administrative expenses wereprimarily the result of operational efficiencies and cost reduction initiativesimplemented by management in the past year.

 

The efficiency ratio is computed by dividing totaloperating expenses by net interest income and non-interest income.  An increase in the efficiency ratioindicates that more resources are being utililized to generate the same (orgreater) volume of income while a decrease would indicate a more efficientallocation of resources.  The efficiencyratio for the three-month period ended June 30, 2002 was 57.8 percent, comparedto 69.0 percent for the three-month period ended June 30, 2001.  The efficiency ratio for the six-monthperiod ended June 30, 2002 was 58.0 percent, compared to 70.0 percent for thesix-month period ended June 30, 2001. Excluding the conversion and severance expenses and goodwillamortization expense incurred in 2001, the efficiency ratios were 65.9 percentand 66.2 percent for the three- and six-month periods ended June 30, 2001,respectively.

 

*Income TaxExpense*| Income tax expensewas $4.1 million for the three-month period ended June 30, 2002, compared to$2.9 million for the three-month period ended June 30, 2001.  Income tax expense was $8.1 million for thesix-month period ended June 30, 2002, compared to $5.4 million for thesix-month period ended June 30, 2001. The increases in income tax expense from2001 were primarily due to the higher income before taxes,

 

14

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partially offset by lower effective tax rate. The effective tax rate was34.0 percent and 34.5 percent for the three- and six-month periods ended June30, 2002, compared to 37.4 percent for both the three- and six-month periodsended June 30, 2001.  The decreases ineffective tax rate from 2001 were primarily due to the elimination of non-taxdeductible goodwill amortization expense arising from the adoption of SFAS No.142 “Accounting For Goodwill and Other Intangible Assets” as well as thetax-exempt BOLI income.

 

**REVIEW OF FINANCIAL CONDITION**

 

PNWB’s consolidated assets were $2.86 billion as of June 30, 2002,compared to $2.74 billion as of December 31, 2001.

 

*Securities*| As of June 30, 2002, PNWB had $771.9 million ofsecurities available for sale, compared to $757.0 million as of December 31,2001. The increase was primarily due to investment of the additional funds fromdeposit growth.

 

PNWB maintains liquidityin accordance with an internal liquidity policy.  Liquidity levels may be increased or decreased depending upon theyields on investment alternatives, management’s judgment as to theattractiveness of the yields then available in relation to other opportunities,and management’s expectation of the yield that will be available in thefuture.  Management’s projections as tothe short-term demand for funds to be used for loan originations and otheractivities can also affect liquidity levels.

 

Securities classified as available for sale arereported at estimated fair value, with unrealized gains (net of income taxes)reported in accumulated other comprehensive income, a separate component ofshareholders’ equity.

 

*Net LoansReceivable* | Net loansreceivable were $1.82 billion as of June 30, 2002, compared to $1.79 billion asof December 31, 2001.

 

Total commercial loansoutstanding were $1.17 billion or 63.5 percent of the loan portfolio as of June30, 2002, compared to $1.06 billion or 58.4 percent as of December 31, 2001.This increase in total commercial loans outstanding was primarily due thegrowth of commercial real estate loans. To date, the growth in the commercial loan portfolio was consistent withmanagement’s expectations.   However,due to the current condition of the Pacific Northwest regional economy and itsslow recovery, commercial loans may not grow at the same rate for the remainderof 2002.

 

Single-family residentialmortgage loans outstanding totaled $270.0 million as of June 30, 2002 comparedto $321.2 million as of December 31, 2001. The decrease was primarily due to early payoffs associated with the currentinterest rate environment and the change to the mortgage banking model oforigination and sale of single-family mortgages.

 

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The following table sets forth the composition of PNWB’s loan portfolioby type as of the dates indicated:

 
| **Dollars in  thousands**        |   | **June 30, 2002** |      | **December 31, 2001** |   |
|----------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                             |   |              |      |                  |   |
| Commercial loans:                |   |              |      |                  |   |
| Commercial                       |   | $                 | 579,599   |                  | $      | 591,663 |   |
| Commercial real estate           |   | 592,391           |      | 470,408               |   |
| Total commercial loans:          |   | 1,171,990         |      | 1,062,071             |   |
|                             |   |              |      |                  |   |
| Single-family residential        |   | 269,987           |      | 321,246               |   |
| Real estate construction         |   | 286,416           |      | 319,228               |   |
| Consumer loans                   |   | 117,871           |      | 115,440               |   |
|                             |   | 1,846,264         |      | 1,817,985             |   |
| Less:                            |   |              |      |                  |   |
| Allowance for losses on loans    |   | 21,928            |      | 20,123                |   |
| Deferred loan fees and discounts |   | 9,049             |      | 9,430                 |   |
| Net loans receivable             |   | $                 | 1,815,287 |                  | $      | 1,788,432 |   |

 

*Loans Held forSale* | Loans heldfor sale totaled $23.0 million as of June 30, 2002 compared to $43.8 million asof December 31, 2001.  Loans held forsale are primarily single-family mortgage loans and, to a much less extent,loans originated under a Small Business Administration program.  Loans held for sale are carried at the lowerof cost or estimated fair value in aggregate. Loans held for sale are typically sold to other financial institutions.

 

*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 principal paymentsare no longer in doubt.  When a loan isplaced 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 $14.9 million as of June 30, 2002 compared to$16.1 million as of December 31, 2001. This decrease was primarily due to adecrease in construction loans that were over 90 days past due as of June 30,2002 as a result of several construction loans being brought current during thefirst half of 2002.  Other real estatewas $5.9 million as of June 30, 2002 compared to $5.8 million as of December31, 2001.  Total non-performing assets,including non-accrual loans and other real estate, totaled $20.8 million or0.73 percent of consolidated assets as of June 30, 2002, compared to $21.9million or 0.80 percent of consolidated assets as of December 31, 2001.

 

16

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The following table summarizes non-performing assets as of the datesindicated:

 
| **Dollars in  thousands**   |   | **June 30, 2002** |   | **December 31, 2001** |   |
|-----------------------------|--------|-------------------|--------|-----------------------|--------|
|                        |   |              |   |                  |   |
| *Non-accrual loans*         |   |              |   |                  |   |
|                        |   |              |   |                  |   |
| Commercial loans:           |   |              |   |                  |   |
| Commercial                  |   | $                 | 8,066  |                  | $      | 8,119 |   |
| Commercial real estate      |   | 989               |   | 1,100                 |   |
| Total commercial loans:     |   | 9,055             |   | 9,219                 |   |
|                        |   |              |   |                  |   |
| Single-family residential   |   | 5,235             |   | 5,425                 |   |
| Real estate construction    |   | 392               |   | 1,199                 |   |
| Consumer loans              |   | 198               |   | 245                   |   |
|                        |   |              |   |                  |   |
| Total non-accrual loans     |   | 14,880            |   | 16,088                |   |
|                        |   |              |   |                  |   |
| Other real estate           |   | 5,873             |   | 5,762                 |   |
|                        |   |              |   |                  |   |
| Total non-performing assets |   | $                 | 20,753 |                  | $      | 21,850 |   |

 

*Allowance forLosses on Loans* | Theallowance for losses on loans was $21.9 million or 1.19 percent of loansreceivable as of June 30, 2002, compared to $20.1 million or 1.11 percent ofloans receivable as of December 31, 2001. Net loan charge-offs were $1.6 million or 0.17 percent (annualized) of theaverage balance of loans outstanding for the six-month period ended June 30,2002, compared to $1.4 million or 0.16 percent (annualized) of the averagebalance of loans outstanding for the six-month period ended June 30, 2001.

 

When availableinformation 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.

 

The allowance forlosses on loans is maintained at an amount to sufficiently provide forestimated losses based on evaluating known and inherent risks in the loanportfolio.  Management analyzes certainfactors underlying the quality of the loan portfolio.  These factors include changes in the size and composition of theloan portfolio, delinquency levels, actual loan loss experience, detailedanalysis of individual loans for which full collectibility may 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. Currently, management is not aware of any unusually large loanconcentrations in industries negatively impacted by the economy. Managementcontinues to closely monitor PNWB’s credit quality and focus on identifyingpotential problem credits and any loss exposure in a timely manner.  Industry concentration and related limitswill also be subject to on-going assessment.

 

PNWB believes it hasestablished 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 PNWB’s financialcondition and results of operations. Substantial increases may be necessary should the quality of loansdeteriorate as a result of the factors discussed above.

 

17

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PNWB’s allowance for losses on loans is allocated to specific loans,certain loan categories based on the relative risk characteristics, assetclassifications and actual loss experience of the loan portfolio.  Although the allocation of the allowance forlosses on loans is an important credit management tool, the entire allowancefor losses on loans is available for the entire loan portfolio.  Management reviewed the allocations in thevarious loan categories and believes the allowance for losses on loans wasadequate as of June 30, 2002.

 

The following tables summarize the activity in allowance for losses onloans during the three- and six-month periods ended June 30:

 
|                                |   | **Three months** |   | **Six months** |   |
|-------------------------------------|--------|------------------|--------|----------------|--------|
| **Dollars in  thousands**           |   | **2002**         |   | **2001**       |   | **2002** |   | **2001** |   |
|                                |   |             |   |           |   |   |   |   |   |
| Allowance as of beginning of period |   | $                | 21,099 |           | $      | 18,303 |   | $ | 20,123 |   | $ | 17,561 |   |
|                                |   |             |   |           |   |   |   |   |   |
| Provision for losses on loans       |   | 1,700            |   | 1,400          |   | 3,400 |   | 2,800 |   |
|                                |   |             |   |           |   |   |   |   |   |
| Recoveries                          |   | 115              |   | 192            |   | 245 |   | 488 |   |
|                                |   |             |   |           |   |   |   |   |   |
| Charge-offs                         |   | (986             | )      | (979           | )      | (1,840 | ) | (1,933 | ) |
|                                |   |             |   |           |   |   |   |   |   |
| Allowance as of end of period       |   | $                | 21,928 |           | $      | 18,916 |   | $ | 21,928 |   | $ | 18,916 |   |

 

*Goodwilland Other Intangible Assets*| Goodwill arising from acquisitions represents theexcess of the purchase price over the estimated fair value of net assetsacquired. Prior to 2002, goodwill was amortized using the straight-line methodsover periods not exceeding twenty years. Effective January 1, 2002, upon adoption of SFAS No. 142 “Accounting forGoodwill and Other Intangible Assets”, PNWB no longer amortizes its goodwill,and as such, expects annual goodwill amortization expense to reduce byapproximately $1.1 million starting in 2002. PNWB reviews its goodwill for impairment annually or more frequently ifimpairment indicators arise.  During thefirst quarter of 2002, PNWB performed the transitional impairment assessment ofits goodwill as of January 1, 2002 and noted that such assessment did notindicate any impairment of goodwill.  Areconciliation of reported net income to net income adjusted to excludegoodwill amortization for the three- and six-month periods as of June 30, 2002and 2001 is as follows:

 
|                                               |   | **Three-month periods** |   | **Six-month periods** |   |
|----------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
| **Dollars in  thousands, except per share amount** |   | **2002**                |   | **2001**              |   | **2002** |   | **2001** |   |
|                                               |   |                    |   |                  |   |   |   |   |   |
| Income statement:                                  |   |                    |   |                  |   |   |   |   |   |
| Reported net income                                |   | $                       | 7,912  |                  | $      | 4,875 |   | $ | 15,476 |   | $ | 8,996 |   |
| Adjustment for goodwill amortization               |   | —                  |   | 280                   |   | — |   | 560 |   |
| Adjusted net income                                |   | $                       | 7,912  |                  | $      | 5,155 |   | $ | 15,476 |   | 9,556 |   |
|                                               |   |                    |   |                  |   |   |   |   |   |
| Basic net income per share:                        |   |                    |   |                  |   |   |   |   |   |
| Reported basic net income per share                |   | $                       | 0.52   |                  | $      | 0.31 |   | $ | 1.00 |   | 0.58 |   |
| Adjustment for goodwill amortization               |   | —                  |   | 0.02                  |   | — |   | 0.04 |   |
| Adjusted basic net income per share                |   | $                       | 0.52   |                  | $      | 0.33 |   | $ | 1.00 |   | 0.62 |   |
|                                               |   |                    |   |                  |   |   |   |   |   |
| Diluted net income per share:                      |   |                    |   |                  |   |   |   |   |   |
| Reported diluted net income per  share             |   | $                       | 0.50   |                  | $      | 0.31 |   | $ | 0.98 |   | $ | 0.57 |   |
| Adjustment for goodwill amortization               |   | —                  |   | 0.02                  |   | — |   | 0.04 |   |
| Adjusted diluted net income per  share             |   | $                       | 0.50   |                  | $      | 0.33 |   | $ | 0.98 |   | $ | 0.61 |   |

 

Other intangibleassets consist of mortgage servicing intangibles and core depositintangibles.  Mortgage servicingintangibles are capitalized when acquired either through the purchase ororigination of loans that are subsequently sold or securitized with the servicingrights retained. The estimated fair value of mortgage servicing intangibles atthe date of the sale of loans is determined based on the discounted presentvalue of expected future cash flows using key assumptions for servicing incomeand costs and prepayment rates on the underlying loans. The estimated fairvalue is periodically evaluated for impairment by comparing actual cash

 

18

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flows andestimated future cash flows from servicing assets to those estimated at thetime servicing assets were originated. Mortgage servicing intangibles are amortized using the acceleratedmethods as an offset to service fees in proportion to and over the period ofestimated net servicing income.  Sincemid-2000, PNWB has changed its strategy with regards to the origination andretention of single-family mortgage loans and the majority of those loans arenow sold to the secondary market with servicing rights released.

 

Goodwill and otherintangible assets consisted of the following as of the dates indicated:

 
| **Dollars in  thousands**      |   | **June 30, 2002** |   | **December 31, 2001** |   |
|--------------------------------|--------|-------------------|--------|-----------------------|--------|
|                           |   |              |   |                  |   |
| Goodwill                       |   | $                 | 16,137 |                  | $      | 16,137 |   |
| Mortgage servicing intangibles |   | 1,191             |   | 1,562                 |   |
| Core deposit intangibles       |   | 335               |   | 423                   |   |
|                           |   | $                 | 17,663 |                  | $      | 18,122 |   |

 

*Deposits* | PNWBoffers various types of deposit accounts, including checking accounts, savingsaccounts, money market accounts and certificate of deposit accounts.  Deposit accounts vary as to terms; theprincipal differences are the minimum balance required, the time period thefunds must remain on deposit, the interest rate, and the deposit or withdrawaloption.  PNWB relies on generatingdeposits through a marketing strategy that employs a sales staff responsiblefor retaining and generating new customer relationships.  We emphasize developing total clientrelationships in order to increase our core deposit base.

 

Non-interest-bearingdeposits were $220.3 million as of June 30, 2002 compared to $241.7 million asof December 31, 2001. Non-interest-bearing deposits represented 12.0 percent and 15.1 percentof total deposits as of June 30, 2002 and December 31, 2001, respectively.  Interest-bearing transaction accounts (whichinclude interest-bearing checking, money market and savings accounts) totaled$769.2 million as of June 30, 2002 compared to $632.0 million as of December31, 2001.  Interest-bearing transactionaccounts represented 41.7 percent of total deposits as of June 30, 2002,compared to 39.4 percent as of December 31, 2001. The increase ininterest-bearing transaction accounts were primarily due to the increase inmoney market accounts as a result of short-term deposits of businesscustomers.  The balance of the moneymarket account deposits may not remain at the same level in the near future dueto the short-term nature of these deposits.

 

Certificates ofdeposit totaled $853.4 million as of June 30, 2002, compared to $731.1 millionas of December 31, 2001.  Certificatesof deposit represented 46.3 percent of total deposits as of June 30, 2002,compared to 45.6 percent as of December 31, 2001. The increase in certificatesof deposit was driven by a sales campaign that was completed during the secondquarter 2002 as a result of management’s initiative to create more of aninterest rate neutral position of the balance sheet.

 

The following table sets forth the balances of deposits by account typeas of the dates indicated:

 
| **Dollars in  thousands**          |   | **June 30, 2002** |      | **December 31, 2001** |   |
|------------------------------------|--------|-------------------|-----------|-----------------------|--------|
|                               |   |              |      |                  |   |
| Non-interest-bearing deposits      |   | $                 | 220,267   |                  | $      | 241,674 |   |
| Interest-bearing checking accounts |   | 229,809           |      | 214,098               |   |
| Money market accounts              |   | 439,132           |      | 322,554               |   |
| Savings accounts                   |   | 100,234           |      | 95,390                |   |
| Certificates of deposit            |   | 853,361           |      | 731,139               |   |
|                               |   |              |      |                  |   |
| Total                              |   | $                 | 1,842,803 |                  | $      | 1,604,855 |   |

 

*FHLB Advancesand Securities Sold Under Agreements to Repurchase* | PNWB borrows through advances from the FederalHome Loan Bank (FHLB) and securities sold under agreements to repurchase withthird parties. These borrowing sources totaled $741.1 million as of June 30,2002 compared to $864.0 million as of December 31, 2001.  The need for this type of borrowingsdecreased primarily as a result of the increase in deposits.

 

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The FHLB providescredit for member financial institutions. As members, financial institutions are required to own capital stock inthe FHLB, and are authorized to apply for advances on the security of suchstock, certain home mortgages and other assets (principally securities that areobligations of, or guaranteed by, the United States).  Advances are made to member financial institutions pursuant toseveral different programs.  Theseprograms are generally designed to meet the financial institution’s need whilestill reflecting 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.

 

*Otherborrowings*| Otherborrowings were $12.1 million as of June 30, 2002, compared to $12.6 million asof December 31, 2001.  They wereprimarily notes from another financial institution. This borrowing qualifies asTier II capital under the capital guidelines of the Federal Reserve Board.  The decrease from December 31, 2001 was dueto the payoff of a loan by Pacific Northwest Bancorp Employee Stock OwnershipPlan that Pacific Northwest Bancorp guaranteed.

 

*GuaranteedPreferred Beneficial Interests in Subordinated Debt*  | On November 15, 1999, $40 million of 9.875 percentCapital Securities were issued by InterWest Capital Trust I (the Trust).  The proceeds of the offering were investedby the Trust in junior subordinated debentures of Pacific NorthwestBancorp.  The debentures held by theTrust are the sole assets of the Trust. The capital securities are subject to mandatory redemption, in whole orin part, upon repayment of the debentures. The debentures will not mature earlier than November 15, 2009, and notlater than November 15, 2029.  PacificNorthwest Bancorp entered into agreements which, taken collectively, fully andunconditionally guarantee the capital securities subject to the terms of eachof the guarantees.  The capitalsecurities qualify as Tier I capital under the capital guidelines of theFederal Reserve Board.  To date, PacificNorthwest Bancorp has purchased $4.0 million of the capital securities sincethey were issued.

 

*Shareholders’Equity* | PNWB is committed to managing capital for maximumshareholder benefit and maintaining strong protection for depositors andcreditors.  PNWB manages various capitallevels at both the holding company and subsidiary bank level to maintainadequate capital ratios and levels in accordance with external regulations andcapital guidelines established by the Board of Directors.

 

On January 22, 2002, the Board of Directors approved a stock repurchaseplan of up to five percent of Pacific Northwest Bancorp’s outstanding shares ofcommon stock over the next twelve months. During the six-month period ended June 30, 2002, PNWB repurchased, onthe open market, approximately 533,000 shares at a total price of $14.4 millionunder this repurchase plan.  Therepurchased common stock was acquired for an average price of $27.10 per commonshare.

 

PNWB’s total shareholders’ equity was $202.1 million as of June 30,2002, compared to $200.5 million as of December 31, 2001.  The increase in shareholders’ equity duringthe first half of 2002 was primarily due to net income of $15.5 million, anincrease in the estimated fair value of securities available for sale of $2.8million (net of tax), partially offset by stock repurchase of $14.4 million andcash dividends declared of $0.28 per share or $4.3 million.  Book value per share was $13.30 as of June30, 2002, compared to $12.86 as of December 31, 2001.

 

**SUPERVISION AND REGULATION**

 

Pacific Northwest Bancorp is a registered bankholding company under the Bank Holding Company Act of 1956 (BHCA) and issubject to the supervision of, and regulation by, the Board of Governors of theFederal Reserve System  (FRB).  Under the BHCA, Pacific Northwest Bancorpfiles with the FRB annual reports of operations and such additional informationas the FRB may require.  Under the BHCA,a bank holding company may engage in banking, managing or controlling banks,furnishing or performing services for banks it controls, and conducting activitiesthat the FRB has determined to be closely related to banking.

 

Pacific Northwest Bank isa member of the Federal Deposit Insurance Corporation (FDIC), and as such, issubject to examination thereby.  PacificNorthwest Bank is a state-chartered commercial bank subject to regulation andsupervision by the Washington Department of Financial Institutions, Division ofBanks.  In

 

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practice, the primaryregulator makes regular examinations of the subsidiary bank subject to itsregulatory review or participates in joint examinations with otherregulators.  Areas subject to regulationby federal or state authorities include the allowance for losses on loans,investments, loans, mergers and acquisitions, issuance of securities, paymentof dividends, establishment of branches and other aspects of operations.

 

The enforcement powersavailable to banking regulators are substantial and include, among otherthings, 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 unsoundpractices. Other actions, or inactions, may provide the basis for enforcementaction, including misleading or untimely reports filed with regulatoryauthorities.  Applicable law alsorequires public disclosure of final enforcement actions.

 

Pacific Northwest Bancorp and Pacific Northwest Bank are subject torisk-based capital guidelines requiring minimum capital levels based on thecredit risk of assets.  Failure to meetminimum capital requirements can initiate certain mandatory and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a materialeffect on PNWB’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory frameworkfor prompt corrective action, Pacific Northwest Bancorp and Pacific NorthwestBank must meet specific capital guidelines that involve quantitative measuresof assets, 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.

 

The regulations define the relevant capital levels for the fivecategories.  In general terms, thecapital 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-basedcapitalguidelinesissuedbytheFRB, which establish a risk-adjusted ratiorelating capital to different categories of assets.  Tier I capital is comprised of shareholders’ equity andguaranteed preferred beneficial interests in subordinated debt less certainintangibles, and excludes the equity impact of adjusting securities availablefor sale to estimated fair value. Total capital is Tier I capital, theallowance for losses on loans and certain long-term debt that qualifies forinclusion as regulatory capital.  TheFRB’s risk-based capital rules have been supplemented by a leverage capitalratio, defined as Tier I capital to adjusted quarterly average totalassets.  As of June 30, 2002, under theFRB’s capital guidelines, PNWB’s levels of consolidated regulatory capitalexceeded the FRB’s well-capitalized requirements.  The capital amounts and ratios for Pacific Northwest Bancorp andPacific Northwest Bank as of June 30, 2002 and December 31, 2001, are presentedin the following table:

 

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**CAPITALRATIOS**

 
|                                           |   | **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, 2002**                              |   |       | ** ** |                                | ** ** |                                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                           |   |       | ** ** |                                | ** ** |                                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Pacific Northwest Bancorp**                  |   |       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| Total capital  (to risk-weighted assets)       |   | $          | 251,440    |                                | 11.80      | %                                                                       | $          | 170,479 |   | 8.0 | % | $ | 213,099 |   | 10.0 | % |
| Tier I capital  (to risk-weighted assets)      |   | 217,337    |       | 10.20                               | %          | 85,240                                                                  |       | 4.0 | % | 127,860 |   | 6.0 | % |
| Tier I capital  (to average assets)            |   | 217,337    |       | 7.88                                | %          | 110,279                                                                 |       | 4.0 | % | 137,848 |   | 5.0 | % |
|                                           |   |       | * *   |                                | * *   |                                                                    | * *   |   | * * |   | * * |   | * * |
| **Pacific Northwest Bank:**                    |   |       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| Total capital  (to risk-weighted assets)       |   | $          | 246,507    |                                | 11.65      | %                                                                       | $          | 169,276 |   | 8.0 | % | $ | 211,595 |   | 10.0 | % |
| Tier I capital  (to risk-weighted assets)      |   | 224,404    |       | 10.61                               | %          | 84,638                                                                  |       | 4.0 | % | 126,957 |   | 6.0 | % |
| Tier I capital  (to average assets)            |   | 224,404    |       | 8.16                                | %          | 109,989                                                                 |       | 4.0 | % | 137,486 |   | 5.0 | % |
|                                           |   |       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| **December 31, 2001**                          |   |       | ** ** |                                | ** ** |                                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                           |   |       | ** ** |                                | ** ** |                                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Pacific Northwest Bancorp:**                 |   |       | ** ** |                                | ** ** |                                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total capital  (to risk-weighted assets)       |   | $          | 252,089    |                                | 12.09      | %                                                                       | $          | 166,802 |   | 8.0 | % | $ | 208,502 |   | 10.0 | % |
| Tier I capital  (to risk-weighted assets)      |   | 219,966    |       | 10.55                               | %          | 83,401                                                                  |       | 4.0 | % | 125,101 |   | 6.0 | % |
| Tier I capital  (to average assets)            |   | 219,966    |       | 8.02                                | %          | 109,692                                                                 |       | 4.0 | % | 137,115 |   | 5.0 | % |
|                                           |   |       |       |                                |       |                                                                    |       |   |   |   |   |   |   |
| **Pacific Northwest Bank:**                    |   |       | ** ** |                                | ** ** |                                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total capital  (to risk-weighted assets)  |   | $          | 248,486    |                                | 11.96      | %                                                                       | $          | 166,274 |   | 8.0 | % | $ | 207,842 |   | 10.0 | % |
| Tier I capital  (to risk-weighted assets)      |   | 228,363    |       | 10.99                               | %          | 83,137                                                                  |       | 4.0 | % | 124,705 |   | 6.0 | % |
| Tier I capital  (to average assets)            |   | 228,363    |       | 8.35                                | %          | 109,427                                                                 |       | 4.0 | % | 136,783 |   | 5.0 | % |

 

As of June 30, 2002, Pacific Northwest Bank was in compliance withwell-capitalized capital requirements. Management believes that under thecurrent regulations Pacific Northwest Bank will continue to meetwell-capitalized capital requirements in the foreseeable future.  However, events beyond the control ofPacific Northwest Bank, such as a downturn in the economy in areas wherePacific Northwest Bank has most of its loans, could adversely affect futureearnings and, consequently, the ability of Pacific Northwest Bank to meetfuture well-capitalized capital requirements.

 

**LIQUIDITY RESOURCES**

 

Liquidity management focuses on the need to meet both short-termfunding requirements and PNWB’s long-term strategies and goals. Specifically,the objective of liquidity management is to ensure the continuous availabilityof funds to meet the demands of depositors, creditors and borrowers. Managementmanages the balance sheet to meet these needs. PNWB desires to attract andretain business and retail customer relationships with a focus on transactionaccounts and commercial and consumer lending. PNWB also uses wholesale funds through advances from the FHLB and thesale of securities under agreements to repurchase to fund asset growth and meetliquidity needs. PNWB also uses wholesale and brokered certificates of depositto supplement wholesale borrowings. Other sources of funds for liquidity include loan repayments, loansales, security sales and mortgage-backed and related security repayments.Repayments on loans and mortgage-backed and related securities and depositinflows and outflows are affected 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.  These borrowings are collateralized by securities with anestimated

 

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fair value exceeding the face value of the borrowings. If the estimatedfair value of the securities were to decline as a result of an increase ininterest rates or other factors, PNWB would be required to pledge additionalsecurities or cash as collateral. In addition, PNWB has the ability to borrowfunds from the Federal Reserve.

 

The analysis of liquidity also includes a review of PNWB’s consolidatedstatement of cash flows for the six-month period ended June 30, 2002.  The consolidated statement of cash flowsdetails PNWB’s operating, investing and financing activities during the period.  The most significant items under operatingactivities include net income of $15.5 million for the six-month period endedJune 30, 2002 and an increase in other assets of $4.0 million.  Also included in operating activities arethe add back of non-cash depreciation, amortization of intangible assets andthe provision for losses of loans totaling $6.5 million. Investing activitiesincluded proceeds from maturing and principal repayments on securitiesavailable for sale of $188.8 million, purchases of securities available forsale of $200.8 million. Investing activities also included a $116.8 millionincrease in loans receivable, $104.3 million of proceeds from mortgage bankingactivities and a $3.9 million proceeds from the sale of other real estate.During the period, financing activities included $123.0 million in borrowingrepayments, net of borrowing proceeds, a $122.2 million increase incertificates of deposit, a $115.7 million increase in deposits, $14.4 millionof cash used for the purchase and retirement of common stock, and $4.4 millionpaid in cash dividends to shareholders.

 

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**Item3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES 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 simulation analysis to measure PNWB’s interestsensitivity position.  This simulationanalysis is used to evaluate the effects of potential interest rate movementson net interest income.  The simulationanalysis model is dynamic in nature, and incorporates management’s currentbalance sheet strategy. Management develops assumptions regarding interest ratespreads, projected balances, expected maturities, cash flows and prepaymentassumptions under different interest rate scenarios.  Actual results may differ from simulated results due to timing,magnitude, and frequency of interest rate changes and changes in market conditionsand management strategies, among other factors.

 

For further information on interest rate risk, reference is made to thesections “Net Interest Income” and “Average Rates and Balances” in Item 2.Management Discussion and Analysis of Financial Condition and Results ofOperations contained in this quarterly report on Form 10-Q.  Information regarding the expectedmaturities of financial assets and financial liabilities has not changedmaterially from disclosures made in the Annual Report on Form 10-K for the yearended December 31, 2001.

 

**FORWARD-LOOKING STATEMENTS**

 

In this quarterlyreport on Form 10-Q, PNWB has included certain “forward-looking statements”concerning its future operations. Sentences containing words such as “may,” “will,” “expect,” “anticipate,”“believe,” “estimate,” “should,” “projected,” or similar words may constituteforward-looking statements.  AlthoughPNWB believes that the expectations expressed in these forward-lookingstatements are based on reasonable assumptions within the bounds of itsknowledge of its business and operations, it is possible that actual resultsmay differ materially from these expectations. The following items are among the factors that could cause actualresults to differ materially from the forward-looking statements: generaleconomic conditions, including their impact on capital expenditures; businessconditions in the banking industry; recent world events and their impact oninterest rates, businesses and customers; the regulatory environment; new legislation;vendor quality and efficiency; employee retention factors; rapidly changingtechnology and evolving banking industry standards; competitive standards;competitive factors, including increased competition with community, regionaland national financial institutions; fluctuating interest rate environments;higher than expected loan delinquencies; and similar matters.  These factors should be considered inevaluating the forward-looking statements and undue reliance should not beplaced on such statements.

 

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**PART II. OTHERINFORMATION**

 

**Item 1.                    LegalProceedings**

 

PNWB faces ordinary routine litigation arising in the normal course ofbusiness.  In the opinion of management,liabilities (if any) arising from such claims will not have a material effectupon the business, results of operations or financial condition of PNWB.

 

**Items 2 and 3 are not applicable andhave been omitted.**

 

**Item 4.                    Submissionof Matters to a Vote of Security Holders**

 

The Annual Meeting of Shareholders of Pacific Northwest Bancorp(“Meeting”) was held on April 23, 2002. The results of the vote on the matter presented at the Meeting are asfollows:

 

The following individuals were elected as directors:

 
|              |   | **Term to Expire** |   | **Vote For** |   | **Vote Withheld** |   |
|-------------------|--------|--------------------|--------|--------------|--------|-------------------|--------|
|              |   |               |   |         |   |              |   |
| Gary M. Bolyard   |   | 2005               |   | 11,789,962   |   | 380,234           |   |
| Patrick M. Fahey  |   | 2005               |   | 10,561,471   |   | 1,608,725         |   |
| Clark H. Mock     |   | 2005               |   | 11,787,425   |   | 382,771           |   |
| Stephen M. Walden |   | 2005               |   | 10,918,988   |   | 1,251,208         |   |

 

The terms of Directors C. Stephen Lewis, Russel E. Olson, Larry Carlson,Michael T. Crawford, Jean Gorton, and Betty Woods continued after the meeting.

 

**Item 5 is notapplicable and has been omitted.**

 

**Item 6.                    Exhibitsand Reports on Form 8-K**

 

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

 

3.1                                 Articles of Incorporation of Pacific NorthwestBancorp (incorporated by reference to Exhibit 3.1 to the Registrant’s AnnualReport on Form 10-K for the year ended December 31, 2000).

3.2                                 Bylaws of Pacific Northwest Bancorp (incorporatedby reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K forthe year ended December 31, 2000).

3.3                                 Amendment to the Bylaws of Pacific NorthwestBancorp (incorporated by reference to Exhibit 3.21 to the Registrant’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2001).

10                                    Material contracts of Pacific Northwest Bancorp(incorporated by reference to Exhibits 10.1 through 10.22 to the Registrant’sAnnual Report on Form 10-K for the year ended December 31, 2001).

10.23                     Agreement andPlan of Merger between Pacific Northwest Bancorp and Pacific Northwest Bank andBank of the Northwest (incorporated by reference to Exhibit 2 of theRegistrant’s current report on Form 8-K filed with Security and ExchangeCommission on July 25, 2002).

10.24                     Amended and restated Pacific Northwest BancorpEmployee Stock Ownership Plan/Money Purchase Pension Plan is filed with thisreport.

10.25                     First Amendment toSeverance/Change of Control Agreement entered into between Pacific NorthwestBancorp and Patrick M. Fahey is filed with this report.

 

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

 

PNWB filed a currentreport on Form 8-K on July 22, 2002. The report included under Item 5 of Form8-K a press release announcing PNWB’s second quarter 2002 financial results andunaudited consolidated financial statements for the three- and six-monthperiods ended June 30, 2002.

 

 PNWB filed a current report on Form 8-K on July 25, 2002 under item5 announcing the Agreement and Plan of Merger entered into between PacificNorthwest Bancorp and Pacific Northwest Bank and Bank of the Northwest.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned 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:August9, 2002

 

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**CERTIFICATION**

 

To my knowledge, this Report on Form 10-Q for the quarter ended June 30,2002, fully complies with the requirements of Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, and the information contained in this Reportfairly presents, in all material respects, the financial condition and theresults of operation of Pacific Northwest Bancorp.

 
|   |                                                 |
|--------|------------------------------------------------------|
|   | /s/ Patrick M. Fahey                                 |   |
|   | Patrick M. Fahey, President and  CEO                 |
|   |                                                 |
|   |                                                 |
|   | /s/ Bette J. Floray                                  |   |
|   | Bette J. Floray,                                     |
|   | Executive Vice President and Chief Financial Officer |
|   |                                                 |
|        |                                                      |  |  |

 

Dated: August 6, 2002

 

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