**SECURITIES AND EXCHANGE COMMISSION**

#### **Washington, D.C. 20549**

** **

## **FORM 10-K**

 

| **ý**                          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------|-----------------------------------------------------------------------------------------------|
|                                |                                                                                          |
|                                | **For the Fiscal Year Ended December 31,  2002 OR**                                           |
|                                |                                                                                          |
| **o**                               | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                |
| **Commission File Number: 0-26632** |

 

**Pacific Northwest Bancorp**

(Exactname of registrant as specified in its charter)

 

| **Washington**                                                        |   | **91-1691216**                        |
|-----------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of incorporation or  organization)       |   | (I.R.S. Employer  Identification No.) |
|                                                                  |   |                                  |
| **1111 Third Avenue, Suite 250, Seattle,  Washington**                |   | **98101**                             |
| (Address of principal executive offices)                              |   | (Zip Code)                            |
|                                                                  |   |                                  |
| Registrant’s telephone number, including area code               |   | **(206) 624-9761**                    |
|                                                                  |   |                                  |
| Securities registered pursuant to Section 12(b) of the  Act: **None** |   |                                  |

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**Common Stock, no par value per share**

(Titleof Class)

 

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. YES ý    NO  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.

 

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

 

The aggregate market value of the common stockheld by non-affiliates of the Registrant was $475,880,559 based upon theclosing price of the Registrant’s common stock as quoted on the Nasdaq NationalMarket on June 28, 2002 of $31.32.

 

As of February 24, 2003, there were issued andoutstanding 16,861,303 shares of the Registrant’s common stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

1.               ManagementDiscussion and Analysis and Consolidated Financial Statements included in the2002 Financial Information distributed to shareholders with the 2002 AnnualReport (Part II).

2.               Proxy Statementfor the 2003 Annual Meeting of Shareholders (“Proxy Statement”). (Part III).

 

 

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***Forward-LookingStatements***

* *

*This document, including information included with orincorporated by reference in this document, contains forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of1995.  These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressedin, or implied by, our forward-looking statements.  Words such as “expects,” “anticipates,” “believes,” “estimates,”“intends,” “strategy,” other similar expressions or future or conditional verbssuch as “will,” “may,” “should,” “would,” and “could” are intended to identifysuch forward-looking statements. Readers should not rely solely on the forward-looking statements andshould consider all uncertainties and risks throughout this document.  The statements are representative only as ofthe date they are made, and PNWB undertakes no obligation to update anyforward-looking statement.*

* *

*Possibleevents or factors that could cause results or performance to differ materiallyfrom those expressed in our forward-looking statements include, but are notlimited to, the following:  changes ingeneral economic conditions and economic conditions in the geographicareas  in which PNWB operates which mayaffect, among other things, the level of nonperforming loans, charge-offs, andprovision expense; changes in the interest rate environment which may reduceinterest margins and impact funding sources; litigation liabilities, including costs, expenses, settlements andjudgments; changes in tax laws, rules and regulations as well as InternalRevenue Service (IRS) or other governmental agencies’ interpretations thereof;legislative, regulatory and accounting changes affecting the banking andfinancial services industry; competition with other local, regional and nationalbanks, thrifts, credit unions and other nonbank financial institutions; abilityto grow core businesses; ability to develop and introduce new banking-relatedproducts, services and enhancements and gain market acceptance of suchproducts; mergers and acquisitions and their integration into PNWB;  and management’s ability to manage these andother risks.*

 

**PART I**

**Item 1.  Business**

 

**General**

 

Pacific Northwest Bancorp (Bancorp) is aWashington corporation registered as a bank holding company under the Bank HoldingCompany Act of 1956.  The consolidatedentity includes Bancorp and its wholly owned subsidiaries and is collectivelyreferred to as PNWB.  As of December 31,2002, Bancorp’s wholly owned subsidiaries were Pacific Northwest Bank,InterWest Capital Trust I, and Pacific Northwest Statutory Trust I.  As of December 31, 2002, PNWB hadconsolidated total assets of $3.1 billion, total loans receivable of $2.1billion, total deposits of $2.1 billion and shareholders’ equity of $261.6million. Bancorp was incorporated in 1994.

 

Pacific Northwest Bank is a Washington state-chartered commercialbank.  Pacific Northwest Bank offers afull range of financial services to commercial and individual customers,including short-term and medium-term loans, revolving credit facilities,inventory and accounts receivable financing, equipment financing, residentialand commercial construction lending, agricultural lending, mortgage lending,equipment leasing, various savings programs, checking accounts, installment andpersonal loans, and bank credit cards. Pacific Northwest Bank also provides a broad range of depository andlending services to commercial, industrial and agricultural enterprises,governmental entities and individuals.

 

Bancorp and Pacific Northwest Bank previouslyconducted business as InterWest Bancorp, Inc. and InterWest Bank,respectively.  In July 1991, InterWestBank went public. Between 1996 and 1999, Bancorp completed theacquisition of six commercial banking institutions and added commercial bankingassets of approximately $668 million, measured as of each acquisition date. Theacquisitions were accounted for using either the pooling-of-interests orpurchase method of accounting.

 

In July 2000, InterWest Bank converted its charterfrom a state savings bank to a state commercial bank.  This was consistent with the company’s redefined focus oncommercial banking activities. Effective September 1, 2000, InterWest Bancorp, Inc. changed its name toPacific Northwest Bancorp and InterWest Bank changed its name to PacificNorthwest Bank.  In conjunction with thename changes, PNWB moved its corporate headquarters to Seattle.

 

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On November 13, 2002, Bancorp completed the acquisition of Bank of theNorthwest (BKNW) headquartered in Portland, Oregon and added approximately$383.1 million commercial banking assets, measured as of the acquisition date.

 

PNWBintends to continue to emphasize changing the composition of the loan portfolioand the deposit base as part of the migration to a commercial bank.  These changes are intended to have apositive impact on net interest income and service fee revenue while continuingto meet the needs of PNWB’s customers. Investment products are also available through Pacific NorthwestFinancial Services, Inc. and insurance products are available through PacificNorthwest Insurance Agency, Inc., both wholly owned subsidiaries of PacificNorthwest Bank.

 

# **Availability of Filings**

 

You may access, free ofcharge, copies of the following reports of PNWB on the company’s website atwww.pnwbank.com:

1)             AnnualReports on Form 10-K; and

2)             QuarterlyReports on Form 10-Q.

PNWBposts these documents on its website as soon as reasonably practicable after wefiling or furnishing them electronically with or to the Securities and ExchangeCommission.  In addition, the CurrentReports of PNWB filed on or after November 15, 2002 will be posted on thewebsite as of the filing date of this Annual Report.  The information contained on the company’s website is notincorporated by reference into this document and should not be considered apart of this Annual Report.  Thecompany’s website address is included in this document as an inactive textualreference only.

 

**BusinessSegment Information**

 

PNWBoperates a single business segment.  Thefinancial information that is used by the chief operating decision maker inallocating resources and assessing performance is only provided for onereportable segment as of December 31, 2002 and 2001.  At the time of the acquisition of Bank of the Northwest, Bank ofthe Northwest was merged into Pacific Northwest Bank and PNWB consolidated themanagement function of Bank of the Northwest into PNWB’s existingorganizational structure.  PNWB alsoconverted Bank of the Northwest information systems and operational processesto those of Pacific Northwest Bank.

 

**MarketArea**

 

Presently, PNWB conducts its business through58 Financial Centers in the Pacific Northwest, including the metropolitan areasof Seattle and Bellevue, Washington and Portland, Oregon. With the acquisitionof Bank of the Northwest in November 2002, PNWB expanded its market area alongthe I-5 corridor to serve from the Canadian border south to Oregon.  This market has benefited in recent yearsfrom growth in home construction necessitated by population increases.  PNWB’s other primary market area are theOlympic peninsula and central Washington, including Wenatchee, Ellensburg andYakima, which is characterized by an agricultural base and less rapidpopulation growth.

 

PNWBdoes business in several different non-metropolitan communities, some of whichare economically linked because of geographic proximity or significantlyimpacted by a small number of significant employers, while other areas may beinfluenced by different economic variables. Economic activity in centralWashington is not closely linked to western Washington.  The areas served have diverse, and to someextent independent, economic characteristics, strengths and weaknesses,although all of these depend to various degrees on agriculture, small business,and construction and, in some cases, a small number of significant employers.

 

**GrowthStrategy**

 

PNWB’sgrowth strategy is to increase its emphasis on commercial banking. Theacquisition of Central Bancorporation in August of 1996 was an important firststep in the implementation of this strategy. In the ensuing three years, Bancorp completed five additionalacquisitions.  These acquisitions addedcommercial banking assets of approximately $668 million, measured as of eachacquisition date.  Additionally, theacquisition of BKNW in November of 2002 further expanded PNWB’s business alongthe I-5 corridor to Oregon.  PNWB believesthat its growth strategy will allow it to achieve greater diversification ofits markets and products, enhance shareholder value 

 

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bymore effectively leveraging equity capital, and more effectively positionitself to take advantage of acquisition opportunities in the rapidly changingfinancial services industry.

 

Management believes that growth will have to come primarily fromincreased customer penetration in existing markets and expansion into newmarkets and services and therefore its strategy emphasizes:  increasing commercial lending; acquiringcommercial banks; de novo branching; providing non-deposit investment products;and improving technology to enhance services and realize operatingefficiencies.

 

A source of future growth may be through 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 actively reviews proposals for variousacquisition opportunities.  PNWB has adue diligence review process to evaluate potential acquisitions.  The objective of acquisitions will be to increasethe opportunity for quality earning asset growth, deposit generation andfee-based income opportunities; diversify the earning assets portfolio and coredeposit base through expansion into new geographic markets; maintain a wellcapitalized position after the acquisition; improve the potential profits fromthe combined operations through economies of scale; and enhance shareholdervalue measured through increasing return on equity and/or increasing earningsper share.

 

PNWB’s ability to make future acquisitions depends on several factorssuch as the availability of suitable acquisition candidates, necessaryregulatory and shareholder approval, compliance with applicable capitalrequirements and, in the case of cash acquisitions, on its cash assets orability to acquire cash.  PNWB may needto obtain additional debt and equity capital in pursuing its businessstrategy.  PNWB’s access to capitalmarkets or the costs of this capital can be impacted by economic, financial,competitive and other conditions beyond PNWB’s control.  Further, acquisition candidates may not beavailable in the future on favorable terms. There are only a limited number ofsuitable acquisition candidates with in PNWB’s existing and potential marketareas, and many of these candidates would also be attractive acquisitioncandidates for other financial institutions. This competition is likely to affect PNWB’s ability to makeacquisitions, increase the price paid for certain acquisitions, and increasethe costs of analyzing possible acquisitions. Therefore, no assurance can be made that acquisition activity willcontinue in the future.

 

Managing growth through acquisitions is a challenging process thatincludes integration and training of personnel, developing common products andpricing, combining office and operations policies and procedures, dataprocessing conversion and various other matters.  PNWB has grown, and intends to continue to grow, throughacquisitions of banks and other financial institutions.  After any such acquisition(s), PNWB mayexperience adverse changes in results of operations of acquired entities,unforeseen liabilities, asset quality problems of acquired entities, loss ofkey personnel, loss of customers because of change in identity, difficulties inintegrating data processing and operational procedures, and deterioration inlocal economic conditions.  PNWBbelieves it has taken steps to address the issues resulting from acquisitionsin recent years.

 

**Key Operating Ratios**

 

The“five-year selected consolidated financial data” section contained in“Management Discussion and Analysis” in the 2002 Financial Information, whichis listed as an exhibit under Item 15, is incorporated herein by reference.

 

## **Distribution of Assets,Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential**

 

The section “Net Interest Income” contained in“Management Discussion and Analysis” in the 2002 Financial Information, whichis listed as an exhibit under Item 15, is incorporated herein by reference.

 

**Investment Activities**

 

Thesection “Securities and Other Interest-Earning Assets” contained in “ManagementDiscussion and Analysis” in the 2002 Financial Information, which is listed asan exhibit under Item 15, is incorporated herein by reference.

 

The following table presents the name of the issuerand the aggregate amortized cost and aggregate estimated fair value ofsecurities of each issuer for those securities in PNWB’s portfolio for whichthe aggregate amortized cost exceeds 10 percent of PNWB’s shareholders’ equityas of December 31, 2002.

 

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| **Dollars in thousands**                     |   | **Estimated  Amortized Cost** |       | **Fair Value** |       |
|----------------------------------------------|--------|-------------------------------|------------|----------------|------------|
|                                         |   |                          |       |           |       |
| Federal  Home Loan Mortgage Corp             |   | **$**                         | 231,425    | ** **     | **$**      | 234,400 | ** ** |
| **Federal National Mortgage  Association**   |   | **184,466**                   | ** ** | **184,953**    | ** ** |
| Federal  Home Loan Bank                      |   | 88,140                        |       | 89,021         |       |
| **Residential Funding Mortgage  Security I** |   | **60,509**                    | ** ** | **61,680**     | ** ** |
| Government  National Mortgage Association    |   | 35,597                        |       | 36,105         |       |
|                                              |        |                               |            |                |            |  |  |

 

### **Lending Activities**

 

The section “Loans Receivable and Loans Heldfor Sale” contained in “Management Discussion and Analysis” in the 2002Financial Information, which is listed as an exhibit under Item 15, isincorporated herein by reference.

### ** **

### **Allowance for Losses onLoans**

 

The section “Allowance for Losses on Loans” contained in“Management Discussion and Analysis” in the 2002 Financial Information, whichis listed as an exhibit under Item 15, is incorporated herein by reference.

 

**Non-performing Assets**

 

The section “Non-performing Assets” contained in“Management Discussion and Analysis” in the 2002 Financial Information, whichis listed as an exhibit under Item 15, is incorporated herein by reference.

 

**Deposits**

 

The section “Deposits” contained in “ManagementDiscussion and Analysis” in the 2002 Financial Information, which is listed asan exhibit under Item 15, is incorporated herein by reference.

 

## **Borrowings**

 

The sections “FHLB Advances and Securities SoldUnder Agreements to Repurchase” and “Guaranteed Preferred Beneficial Interestsin Subordinated Debt” contained in “Management Discussion and Analysis” in the2002 Financial Information, which is listed as an exhibit under Item 15, isincorporated herein by reference.

 

**Personnel**

 

As of December 31, 2002, Bancorp, including itssubsidiaries, had 863 full-time equivalent employees.  PNWB believes that employees play a vital role in the success ofa service company such as PNWB and that PNWB’s relationship with its employeesis good.  The employees are notrepresented by a collective bargaining unit.

 

**Competition**

 

The banking industry is highly competitive.  Pacific Northwest Bank faces strongcompetition in attracting deposits and in originating loans.  The most direct competition for deposits hashistorically come from other commercial banks, savings institutions and creditunions located in the primary market area. As with all banking organizations,PNWB also has competition from nonbanking sources, including mutual funds,corporate and governmental debt securities and other investmentalternatives.  PNWB expects increasingcompetition from other financial institutions and nonbanking sources in thefuture.  Many of PNWB’s competitors havemore significant financial resources, larger market share and greater namerecognition than PNWB. The existence of such competitors may make it difficultfor PNWB to achieve its financial goals.

 

Competition has further increased as a result ofWashington banking laws that permit statewide branching of Washington-domiciledfinancial institutions and acquisition of Washington-based financialinstitutions by out-of-state bank holding companies.

 

Management believes that the principal competitive factors affectingPNWB’s markets include interest rates paid on deposits and charged on loans,the range of banking products available, and customer service and support.  Although management believes that PNWB’sproducts currently compete favorably with respect to these factors, there canbe 

 

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no assurance that PNWB can maintain its competitive position againstcurrent and potential competitors, especially those with significantly greaterfinancial resources.

 

PNWB’s competition for loans comes principallyfrom other commercial banks, savings institutions, credit unions and mortgagebanking companies.  PNWB competes forloans principally through the efficiency and quality of the services it providesborrowers, real estate brokers and home builders, and the interest rates andloan fees it charges.

 

PNWB competes for deposits by offering depositorsa wide variety of checking accounts, savings accounts, certificates and otherservices.  PNWB’s ability to attract andretain deposits depends on its ability to provide deposit products that satisfythe requirements of customers as to interest rates, liquidity, transactionfees, risk of loss of deposit, convenience and other factors.  Deposit relationships are actively solicitedthrough a sales and service system.

 

Changes in technology, mostly from the growing useof computers and computer-based technology, present competitive challenges toPNWB.  Large banking institutionstypically have the ability to devote significant resources to developing andmaintaining technology-based services such as on-line banking and other bankingproducts and services over the Internet, including deposit services andmortgage loans.  Some new bankingcompetitors offer all of their services on-line.  Customers who bank by computer or by telephone may not need tophysically go to a branch location. PNWB’s high service philosophy emphasizes face-to-face contact withtellers, loan officers and other employees. PNWB believes a personal approach to banking is a competitive advantage,one that will remain popular in the communities that are its naturalmarketplace.  However, customerpreferences may change, and the rapid growth of on-line banking could, at somepoint, render PNWB’s personal, branch-based approach obsolete.  PNWB has partially offset this risk byoffering on-line banking services to its customers, and by continuing toprovide 24-hour banking services.  Therecan be no assurance that these efforts will be successful in preventing theloss of customers to competitors.

 

**SUPERVISIONAND REGULATION**

 

##### **Introduction**

 

Thefollowing generally refers to certain statutes and regulations affecting thebanking industry.  These referencesprovide brief summaries only and are not intended to be complete.  They are qualified in their entirety by thereferenced statutes and regulations.  Inaddition, some statutes and regulations may exist which apply to and regulatethe banking industry, but are not referenced below.

 

Bancorp is a bank holding company.  Its wholly owned subsidiaries are PacificNorthwest Bank, InterWest Capital Trust I and Pacific Northwest Statutory TrustI.  The Bank Holding Company Act of1956, as amended (“BHCA”) subjects Bancorp and its subsidiaries to supervision andexamination by the Federal Reserve Bank (“FRB”), and Bancorp files annualreports of operations with the FRB.

 

##### **Bank Holding CompanyRegulation**

 

In general, the BHCA limits bank holding companybusiness to owning or controlling banks and engaging in other banking-relatedactivities.  Bank holding companies mustobtain the FRB’s approval before they: (1) acquire direct or indirect ownershipor control of any voting shares of any bank that results in total ownership orcontrol, directly or indirectly, of more than 5 percent of the voting shares ofsuch bank; (2) merge or consolidate with another bank holding company; or (3)acquire substantially all of the assets of any additional banks.  Subject to certain state laws, such as ageand contingency restrictions, a bank holding company that is adequatelycapitalized and adequately managed may acquire the assets of both in-state andout-of-state banks.

 

With certainexceptions, the BHCA prohibits bank holding companies from acquiring direct orindirect ownership or control of voting shares in any company that is not abank or a bank holding company unless the FRB determines that the activities ofsuch company are incidental or closely related to the business of banking.  If a bank holding company is well-capitalizedand meets certain criteria specified by the FRB, it may engage de novo incertain permissible nonbanking activities without prior FRB approval.

 

The Change in BankControl Act of 1978, as amended, requires a person (or group of persons actingin concert) acquiring “control” of a bank holding company to provide the FRBwith 60 days’ prior written notice of the proposed acquisition.  Following receipt of this notice, the FRBhas 60 days within which to issue a notice disapproving the proposedacquisition, but the FRB may extend this time period for up to another 30days.  An acquisition may be 

 

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completed beforeexpiration of the disapproval period if the FRB issues written notice of itsintent not to disapprove the transaction. In addition, any “company” must obtain the FRB’s approval beforeacquiring 25% (5% if the “company” is a bank holding company) or more of theoutstanding shares or otherwise obtaining control over Bancorp.

#####  

##### **Transactions with Affiliates**

 

Bancorpand its subsidiaries are deemed affiliates within the meaning of the FederalReserve Act, and transactions between affiliates are subject to certainrestrictions.  Accordingly, Bancorp andits subsidiaries must comply with Sections 23A and 23B of the Federal ReserveAct.  Generally, Sections 23A and 23B(1) limit the extent to which a financial institution or its subsidiaries mayengage in “covered transactions” with an affiliate, as defined, to an amountequal to 10% of such institution’s capital and surplus and an aggregate limiton all such transactions with all affiliates to an amount equal to 20% of suchcapital and surplus, and (2) require all transactions with an affiliate,whether or not “covered transactions,” to be on terms substantially the same,or at least as favorable to the institution or subsidiary, as those provided toa non-affiliate.  The term “coveredtransaction” includes the making of loans, purchase of assets, issuance of aguarantee and other similar types of transactions.

 

##### **Regulation of Management**

 

Federal law: (1) sets forth the circumstances underwhich officers or directors of a financial institution may be removed by theinstitution’s federal supervisory agency; (2) places restraints on lending byan institution to its executive officers, directors, principal shareholders,and their related interests; and (3) prohibits management personnel fromserving as a director or in other management positions with another financialinstitution which has assets exceeding a specified amount or which has anoffice within a specified geographic area.

 

##### **Tie-In Arrangements**

 

Bancorpand its subsidiaries are prohibited from engaging in certain tie-inarrangements in connection with any extension of credit, sale or lease ofproperty or furnishing of services.  Forexample, with certain exceptions, neither Bancorp nor its subsidiaries maycondition an extension of credit on either a requirement that the customerobtain additional services provided by it or an agreement by the customer to refrainfrom obtaining other services from a competitor.

 

##### **State Law Restrictions**

 

As a Washington corporation, Bancorp may be subject tocertain limitations and restrictions as provided under applicable Washingtoncorporate laws.

 

**SecuritiesRegistration and Reporting**

 

Bancorp common stock is registered with the Securitiesand Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 andthus Bancorp is subject to the periodic reporting and proxy solicitationrequirements and the insider-trading restrictions of that Act.  The periodic reports, proxy statements, andother information filed by Bancorp under that Act can be inspected and copiedat or obtained from the Washington, D.C. office of the SEC.  In addition, the securities issued byBancorp are subject to the registration requirements of the Securities Act of1933 and applicable state securities laws unless exemptions are available.

 

# **Disclosure Controls and Procedures**

 

The Sarbanes-Oxley Act of 2002 and relatedrulemaking by the SEC, which effect sweeping corporate disclosure and financialreporting reform, generally require public companies to focus on theirdisclosure controls and procedures.  Asa result, public companies such as Pacific Northwest Bancorp, now must havedisclosure controls and procedures in place and make certain disclosures aboutthem in their periodic SEC reports (*i.e.*, Forms 10-K and 10-Q) and their chiefexecutive and chief financial officers must certify in these filings that theyare responsible for developing and evaluating disclosure controls andprocedures and disclose the results of an evaluation conducted by them withinthe 90-day period preceding the filing of the relevant report, among otherthings.  PNWB is monitoring the statusof other related ongoing rulemaking by the SEC and other regulatoryentities.  Currently, managementbelieves that PNWB is in compliance with the rulemaking promulgated to date.

 

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##### **Pacific Northwest Bank**

 

##### **General**

 

Applicable federal and state statutes and regulationsgoverning a bank’s operations relate, among other matters, to capitalrequirements, required reserves against deposits, investments, loans, legallending limits, certain interest rates payable, mergers and consolidations,borrowings, issuance of securities, payment of dividends, establishment ofbranches, and dealings with affiliated persons.  The Federal Deposit Insurance Corporation (“FDIC”) has authorityto prohibit banks under their supervision from engaging in what they considerto be unsafe or unsound practices in conducting their business.

 

Pacific Northwest Bank is a state-chartered commercialbank subject to extensive regulation and supervision by both the WashingtonDepartment of Financial Institutions and the FDIC.  The federal laws that apply to Pacific Northwest Bank regulate,among other things, the scope of its business, its investments, its reservesagainst deposits, the timing of the availability of deposited funds, and thenature and amount of and collateral for loans. The laws and regulations governing Pacific Northwest Bank generally havebeen promulgated to protect depositors and not to protect shareholders of suchinstitutions or their holding companies.

 

*CRA. *The CommunityReinvestment Act requires that, in connection with examinations of financialinstitutions within their jurisdiction, the Federal Reserve or the FDICevaluates the record of the financial institutions in meeting the credit needsof their local communities, including low and moderate income neighborhoods,consistent with the safe and sound operation of those banks.  These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch orfacility.

 

*Insider Credit Transactions.*Pacific Northwest Bank isalso subject to certain restrictions imposed by the Federal Reserve Act onextensions of credit to executive officers, directors, principal shareholders,or any related interests of such persons. Extensions of credit (i) must be made on substantially the same terms,including interest rates and collateral, and follow credit underwritingprocedures that are not less stringent than those prevailing at the time forcomparable transactions with persons not covered above and who are notemployees; and (ii) must not involve more than the normal risk of repayment orpresent other unfavorable features. Pacific Northwest Bank is also subject to certain lending limits andrestrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment ofsubstantial civil monetary penalties on the affected bank or any officer,director, employee, agent, or other person participating in the conduct of theaffairs of Pacific Northwest Bank, the imposition of a cease and desist order,and other regulatory sanctions.

 

*FDICIA. *Under theFederal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”),each federal banking agency has prescribed, by regulation, noncapital safetyand soundness standards for institutions under its authority.  These standards cover internal controls,information systems, and internal audit systems, loan documentation, creditunderwriting, interest rate exposure, asset growth, compensation, fees andbenefits, such other operational and managerial standards as the agencydetermines to be appropriate, and standards for asset quality, earnings andstock valuation.  An institution thatfails to meet these standards must develop a plan acceptable to the agency,specifying the steps that the institution will take to meet the standards.  Failure to submit or implement such a planmay subject the institution to regulatory sanctions.  Management of Bancorp believes that Pacific Northwest Bank meetsall such standards, and therefore, does not believe that these regulatory standardsmaterially affect Bancorp’s business operations.

 

##### **Loans to One Borrower**

 

PacificNorthwest Bank is subject to limitations on the aggregate amount of loans thatit can make to any one borrower, including related entities.  Applicable regulations generally limit loansto one borrower to 20 percent of unimpaired capital and surplus.

 

##### **Interstate Banking andBranching**

 

TheRiegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the“Interstate Act”) permits nationwide interstate banking and branching undercertain circumstances.  This legislationgenerally authorizes interstate branching and relaxes federal law restrictionson interstate banking. Currently, bank holding companies may purchase banks in anystate, and states may not prohibit such purchases.  Additionally, banks are permitted to merge 

 

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withbanks in other states as long as the home state of neither merging bank has“opted out.”  The Interstate Actrequires regulators to consult with community organizations before permittingan interstate institution to close a branch in a low-income area.

 

With regard to interstate bank mergers, Washington has “opted in” to the Interstate Actand allows in-state banks to merge with out-of-state banks subject to certainaging requirements.  Washington lawgenerally authorizes the acquisition of an in-state bank by an out-of-statebank or bank holding company through the acquisition of or a merger with a Washingtonfinancial institution that has been in existence for at least five years priorto the acquisition.

 

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##### **Deposit Insurance**

 

Thedeposits of Pacific Northwest Bank are currently insured to a maximum of$100,000 per depositor through the Savings Association Insurance Fund (the“SAIF”) administered by the FDIC.  Allinsured banks are required to pay semi-annual deposit insurance premiumassessments to the FDIC.

 

TheFDICIA included provisions to reform the Federal Deposit Insurance System,including the implementation of risk-based deposit insurance premiums.  The FDICIA also permits the FDIC to makespecial assessments on insured depository institutions in amounts determined bythe FDIC to be necessary to give it adequate assessment income to repay amountsborrowed from the U.S. Treasury and other sources, or for any other purpose theFDIC deems necessary.  The FDIC hasimplemented a risk-based insurance premium system under which banks areassessed insurance premiums based on how much risk they present to theSAIF.  Banks with higher levels ofcapital and a low degree of supervisory concern are assessed lower premiumsthan banks with lower levels of capital or a higher degree of supervisoryconcern.

 

##### **Dividends**

 

Theprincipal source of Bancorp’s revenue is dividends received from PacificNorthwest Bank.  The payment ofdividends is subject to government regulation. Without prior approval of the director of financial institutions in thestate of Washington, no Washington state bank is permitted to declare or payany cash dividends in an amount greater than its retained earnings.  In addition, regulatory authorities mayprohibit banks and bank holding companies from paying dividends that wouldconstitute an unsafe or unsound banking practice.  Other than the laws and regulations noted above, which apply toall banks and bank holding companies, neither Bancorp nor Pacific NorthwestBank is currently subject to any regulatory restrictions on its dividends.

 

##### **Capital Adequacy**

 

Federalbank regulatory agencies use capital adequacy guidelines in the examination andregulation of bank holding companies and banks.  If capital falls below minimum guideline levels, the holdingcompany or bank may be denied approval to acquire or establish additional banksor nonbank businesses or to open new facilities.

 

TheFDIC and Federal Reserve use risk-based capital guidelines for banks and bankholding companies.  These are designedto make such capital requirements more sensitive to differences in riskprofiles among banks and bank holding companies, to account for off-balancesheet exposure and to minimize disincentives for holding liquid assets. Assetsand off-balance sheet items are assigned to broad risk categories, each withappropriate weights.  The resultingcapital ratios represent capital as a percentage of total risk-weighted assetsand off-balance sheet items.  Theguidelines are minimums, and the Federal Reserve has noted that bank holdingcompanies contemplating significant expansion programs should not allow expansionto diminish their capital ratios and should maintain ratios well in excess ofthe minimum.  The current guidelinesrequire all bank holding companies and federally-regulated banks to maintain aminimum risk-based total capital ratio equal to 8 percent, of which at least 4percent must be Tier I capital. Tier I capital for bank holding companiesincludes common shareholders’ equity, certain qualifying perpetual preferredstock and minority interests in equity accounts of consolidated subsidiaries, lessintangibles except as described above.

 

TheFederal Reserve also employs a leverage ratio, which is Tier I capital as apercentage of total assets less intangibles, to be used as a supplement torisk-based guidelines.  The principalobjective of the leverage ratio is to constrain the maximum degree to which abank holding company may leverage its equity capital base.  The Federal Reserve requires a minimumleverage ratio of 3 percent.

 

FDICIAcreated a statutory framework of supervisory actions indexed to the capitallevel of the individual institution. Under regulations adopted by the FDIC, an institution is assigned to oneof five capital categories depending on its total risk-based capital ratio,Tier I risk-based capital ratio, and leverage ratio, together with certainsubjective factors.  Institutions whichare deemed to be “undercapitalized” depending on the category to which they areassigned are subject to certain mandatory supervisory corrective actions.  Bancorp does not believe that these regulationshave any material effect on its operations currently.

 

Referenceis made to Note 18 of the Notes to the Consolidated Financial Statements in the2002 Financial Information, which is listed as an exhibit under Item 15, foradditional information concerning regulatory capital.

 

10

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##### **Effects of GovernmentMonetary Policy**

 

Theearnings and growth of Bancorp and its subsidiaries are affected not only bygeneral economic conditions, but also by the fiscal and monetary policies ofthe federal government, particularly the Federal Reserve.  The Federal Reserve can and does implementnational monetary policy for such purposes as curbing inflation and combatingrecession, but its open market operations in U.S. government securities,control of the discount rate applicable to borrowings from the Federal Reserve,and establishment of reserve requirements against certain deposits, influencethe growth of bank loans, investments and deposits, and also affect interest ratescharged on loans or paid on deposits. The nature and impact of future changes in monetary policies and theirimpact on Bancorp and its subsidiaries cannot be predicted with certainty.

#####  

##### **Changes in Banking Lawsand Regulations**

 

OnNovember 12, 1999, the President of the United States signed into law theFinancial Services Modernization Act of 1999. Generally, the legislation (i) repeals the historical restrictions onpreventing banks from affiliating with securities firms, (ii) provides auniform framework for the activities of banks, savings institutions and theirholding companies, (iii) broadens the activities that may be conducted bynational banks and banking subsidiaries of bank holding companies, (iv)provides an enhanced framework for protecting the privacy of consumers’information and (v) addresses a variety of other legal and regulatory issuesaffecting both day-to-day operations and long-term activities of financialinstitutions.

 

TheFinancial Services Modernization Act of 1999 permits bank holding companies toengage in a wider variety of financial activities than permitted under previouslaw, particularly with respect to insurance and securities activities.  In addition, in a change from previous law,bank holding companies are in a position to be owned, controlled or acquired byany company engaged in financially related activities, so long as such companymeets certain regulatory requirements.

 

Thislegislation has not materially affected the operations of Bancorp or itssubsidiaries.  However, to the extentthe legislation permits banks, securities firms and insurance companies toaffiliate, the financial services industry may experience furtherconsolidation.  This consolidation couldresult in a growing number of larger financial institutions that offer a widervariety of financial services than PNWB currently offers and that canaggressively compete in the markets currently served by PNWB.

 

# **Customer Information Security**

 

The FDIC and other bankregulatory agencies have adopted final guidelines for establishing standardsfor safeguarding nonpublic personal information about customers that implementprovisions of the Financial Services Modernization Act of 1999 (the“Guidelines”).  Among other things, theGuidelines require each financial institution, under the supervision andongoing oversight of its Board of Directors or an appropriate committeethereof, to develop, implement and maintain a comprehensive written informationsecurity program designed to ensure the security and confidentiality ofcustomer information; and to protect against any anticipated threats or hazardsto the security or integrity of such information; and to protect againstunauthorized access to or use of such information that could result insubstantial harm or inconvenience to any customer.

 

# **Privacy**

 

The FDIC and otherregulatory agencies have published final privacy rules pursuant to provisionsof the Financial Services Modernization Act of 1999 (“Privacy Rules”).  The Privacy Rules, which govern thetreatment of nonpublic personal information about consumers by financialinstitutions, require a financial institution to provide notice to customers(and other consumers in some circumstances) about its privacy policies andpractices, describe the conditions under which a financial institution maydisclose nonpublic personal information to nonaffiliated third parties andprovide a method for consumers to prevent a financial institution fromdisclosing that information to most nonaffiliated third parties by “opting out”of that disclosure, subject to certain exceptions.

 

11

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# **USAPatriot Act**

 

The USA Patriot Act of2001 (the “USA Patriot Act “), designed to deny terrorists and others theability to obtain anonymous access to the U.S. financial system, hassignificant implications for depository institutions, broker-dealers and otherbusinesses involved in the transfer of money. The USA Patriot Act, together with the implementing regulations ofvarious federal regulatory agencies, require financial institutions, includingPacific Northwest Bank, to implement additionalor amend existing policies and procedures with respect to, among otherthings, anti-money laundering compliance, suspicious activity and currencytransaction reporting and due diligence on customers.  They also permit information sharing for counter-terroristpurposes between federal law enforcement agencies and financial institutions,as well as among financial institutions, subject to certain conditions, andrequire the FRB (and other federal banking agencies) to evaluate theeffectiveness of an applicant in combating money laundering activities whenconsidering applications filed under Section 3 of the BHCA or the BankMerger Act.  Management believes thatPNWB is currently in compliance with all currently effective requirementsprescribed by the USA Patriot Act and all applicable final implementingregulations.

 

# **Future Legislation**

 

Changes to the laws and regulations in the stateswhere PNWB transacts business can affect the operating environment of bankholding companies and their subsidiaries in substantial and unpredictableways.  We cannot accurately predictwhether those changes in laws and regulations will occur, and, if they dooccur, the ultimate effect they would have upon our financial condition orresults of operation.

 

**TAXATION**

 

**Federal Taxation**

 

**General**.  Bancorp and its subsidiaries report theirincome on a fiscal year basis using the accrual method of accounting. Exceptfor interest expense rules pertaining to certain tax exempt income applicableto banks and the recently repealed bad debt reserve deduction, PNWB is subjectto federal income tax, under existing provisions of the Internal Revenue Codeof 1986, as amended, in generally the same manner as other corporations.  The following discussion of tax matters isintended only as a summary and does not purport to be a comprehensivedescription of the tax rules applicable to PNWB.  PNWB has not been audited by the IRS during the past fiveyears.  Reference is made to Note 16 ofthe Notes to Consolidated Financial Statements in the 2002 FinancialInformation, which is listed as an exhibit under Item 15, for additionalinformation concerning income taxes.

 

**Tax Bad Debt Reserve Recapture**.  For taxable years beginning prior to January1, 1996, qualified thrift institutions such as the former InterWest Bank(renamed Pacific Northwest Bank in 2000) were permitted to establish a reservefor bad debts based on actual loss experience or based on a percentage equal to8 percent of the bank’s taxable income, computed with certain adjustments.  Each year, InterWest Bank selected the mostfavorable method for calculating the tax deduction attributable to the tax baddebt reserve.  The Small Business JobProtection Act of 1996 required that InterWest Bank recapture for federalincome tax purposes the portion of the balance of tax bad debt reserves thatexceeded the year end 1987 balance, with certain adjustments.  As a result of this legislation, therecaptured amounts were to be taken into taxable income ratably over a six-yearperiod beginning in fiscal year 1999. This legislation also required banks to calculate the tax bad debtdeduction based on actual current losses beginning in fiscal year 1997.

 

**Dividends-Received Deduction**.  Bancorp may exclude from its income 100percent of dividends received from subsidiary banks as a member of the sameaffiliated group of corporations.

 

**State Taxation**

 

**Washington Taxation.** The state of Washington does not currently have a corporate incometax.  Bancorp and its subsidiaries aresubject to a business and occupation tax which is imposed under Washington law at the rate of 1.50% of grossreceipts; however, interest received on loans secured by mortgages or deeds oftrust on residential properties is not subject to such tax.

 

12

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**OregonTaxation.** Corporations with nexus in the state of Oregon are subject to acorporate level income tax of up to 6.6%. As PNWB’s operations in Oregonincrease, the state income tax provision will have an increasing effect onPNWB’s effective tax rate and results of operations.

 

**Item 2.  Properties**

 

The main office of Pacific Northwest Bancorp andPacific Northwest Bank, is a leased facility located in Seattle,Washington.  Pacific Northwest Bank alsoowns a significant administrative facility located in Oak Harbor, Washington.Pacific Northwest Bank also leases administrative facilities in Bellevue andTukwila, Washington, and Portland, Oregon. Pacific Northwest Bank operated a total of 58 financial centers as ofDecember 31, 2002, of which 40 are owned by Pacific Northwest Bank and 18 areleased from third parties.  See Note 7in the Notes to Consolidated Financial Statements in the 2002 Financial Information,which is listed under Item 15, for further information with respect toProperties.

 

**Item 3.  LegalProceedings**

 

PNWB is not engaged in any legal proceedings of amaterial nature at the present time. Periodically, there are various claims and lawsuits involving Bancorpand its subsidiaries, principally as defendants, such as claims to enforceliens, condemnation proceedings on properties in which PNWB holds securityinterests, claims involving the making and servicing of real property loans andother issues incident to PNWB’s business. In the opinion of management and PNWB’s legal counsel, no significantloss is expected from any of such pending claims or lawsuits.

 

**Item 4.  Submission ofMatters to a Vote of Security-Holders**

 

None.

 

13

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**PART II**

 

**Item 5.  Market forRegistrant’s Common Equity and Related Stockholder Matters**

 

Bancorp’s common stock trades on The Nasdaq StockMarket under the symbol “PNWB.”  As ofDecember 31, 2002, there were 16,799,472 shares of common stock outstandingheld by approximately 6,900 shareholders.

 

Set forth in the following table are the high andlow sales prices as reported on The Nasdaq Stock Market and the dividendsdeclared on common stock for each quarter.

 
|           |   | **Sales Price** |   | **Dividends** |   |
|----------------|--------|-----------------|--------|---------------|--------|
|           |   | **High**        |   | **Low**       |   | **Declared** |   |
| 2002           |   |            |   |          |   |   |   |
|           |   |            |   |          |   |   |   |
| First Quarter  |   | $               | 26.50  |          | $      | 20.45 |   | $ | 0.14 |   |
| Second Quarter |   | 33.00           |   | 25.50         |   | 0.14 |   |
| Third Quarter  |   | 31.44           |   | 24.15         |   | 0.14 |   |
| Fourth Quarter |   | 27.72           |   | 22.96         |   | 0.14 |   |
|           |   |            |   |          |   |   |   |
| 2001           |   |            |   |          |   |   |   |
|           |   |            |   |          |   |   |   |
| First Quarter  |   | $               | 19.69  |          | $      | 13.31 |   | $ | 0.14 |   |
| Second Quarter |   | 21.20           |   | 16.45         |   | 0.14 |   |
| Third Quarter  |   | 23.71           |   | 19.01         |   | 0.14 |   |
| Fourth Quarter |   | 22.50           |   | 19.90         |   | 0.14 |   |

 

Information related to compensation plans under whichequity securities of Bancorp are authorized for issuance is set forth under“Equity Compensation Plan Information” on page 17 of the Proxy Statement forthe 2003 Annual Meeting of Shareholders to be held on April 22, 2003, and allsuch information is incorporated herein by reference.

 

**Item 6.  SelectedFinancial Data**

 

The “five-year selected consolidated financialdata” section contained in “Management Discussion and Analysis” in the 2002Financial Information, which is listed under Item 15, is incorporated herein byreference.

 

**Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Management Discussion and Analysis for the yearended December 31, 2002 is incorporated herein by reference to the sectioncaption “Management Discussion and Analysis” in the 2002 Financial Information,which is listed under Item 15 herein.

 

**Item 7a. Quantitative and Qualitative Disclosure about MarketRisk**

 

The information required by this item isincorporated herein by reference to the section “Market Risk” in “ManagementDiscussion and Analysis” in the 2002 Financial Information, which is listedunder Item 15 herein.

 

**Item 8.  FinancialStatements and Supplementary Data**

 

The Consolidated Financial Statements contained inthe 2002 Financial Information, which is listed under Item 15, is incorporatedherein by reference.

 

**Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure**

None.

####  

14

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#### **PART III**

 

**Item 10.  Directorsand Executive Officers of the Registrant**

 

The information contained under the sectionscaptioned “Proposal 1 Election of Directors” and “Compliance with Section 16(a)of the Exchange Act” in Bancorp’s Proxy Statement for the 2003 Annual Meetingof Shareholders (“Proxy Statement”) is incorporated herein by reference.

 

The following sets forth the age, position, andthe business experience during the past five years of those executive officersof Pacific Northwest Bancorp who are not also directors of Pacific NorthwestBancorp.

 

Kim S. Brace (56) is Executive Vice President ofPacific Northwest Bancorp and is Executive Vice President and ChiefAdministrative Officer of Pacific Northwest Bank.   Ms. Brace has held these positions since April 2000.  Prior to this time, Ms. Brace was anexecutive officer of the original Pacific Northwest Bank since its formation in1988.  Ms. Brace is the wife of Mr.George P. Brace.

 

GeorgeP. Brace (62) is Executive Vice President of Pacific Northwest Bancorp and isExecutive Vice President and Manager of Commercial Banking of Pacific NorthwestBank.  Mr. Brace has held thesepositions since July 2001.  From March2000 to July 2001, Mr. Brace was Executive Vice President and Puget SoundRegional Manager of Pacific Northwest Bank.  Prior to March 2000, Mr. Brace held various executive officer positionswith the original Pacific Northwest Bank since its formation in 1988.  Mr. Brace is the husband of Ms. Kim S.Brace.

 

Charles A. Foisie (54) was Executive VicePresident of Pacific Northwest Bancorp and was Executive Vice President andBanking Group Manager of Pacific Northwest Bank from January 2000 to February2003.  Mr. Foisie served as a SeniorVice President of Pacific Northwest Bank (formerly InterWest Bank) since 1997.Prior to this time, Mr. Foisie was employed by Key Bank of Washington from 1983to 1997, servicing as a Vice President from 1990 to 1992 and Senior VicePresident from 1992 to 1997.

 

Bette J. Floray (51) is Executive Vice Presidentand Chief Financial Officer of Pacific Northwest Bank and Pacific NorthwestBancorp, positions Ms. Floray has held since July 2000.  Ms. Floray served as a consultant from 1998through June 2000 including consulting services to Pacific Northwest Bancorpduring the period September 1999 through June 2000.  From 1994 to 1998, Ms. Floray was Executive Vice President andChief Financial Officer of Community Bank of Pasadena, California.

 

ChristianR. Rasmussen (53) is Executive Vice President of Pacific Northwest Bancorp andis Executive Vice President and President of Pacific Northwest Bank —Oregon.  Mr. Rasmussen has held thesepositions since November 2002.  Mr.Rasmussen served as a director and the President of Bank of the Northwest sinceJuly 2000.  He joined Bank of theNorthwest in May 2000, after serving as Vice Chairman as well as Executive VicePresident and Manager of the National Market Divisions of US Bancorp since1995.

 

15

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DavidH. Straus (56) is Executive Vice President of Pacific Northwest Bancorp and isPresident and Chief Operating Officer of Pacific Northwest Bank.  Mr. Straus has held these positions sinceFebruary 2003.  Mr. Straus was theExecutive Vice President of Pacific Northwest Bancorp and Executive VicePresident and Chief Credit Officer of Pacific Northwest Bank during the periodbetween April 2000 and February 2003. Prior to this time, Mr. Straus was anexecutive officer of the original Pacific Northwest Bank since its formation in1988.

 

JosephH. Ward (60) is Executive Vice President of Pacific Northwest Bancorp and isExecutive Vice President and Chief Credit Officer of Pacific NorthwestBank.  Mr. Ward has held these positionssince February 2003. Since joining Pacific Northwest Bank in August 2000, Mr.Ward held the positions of Senior Vice President and Senior Credit Officer andManager of Loan Review.  Prior tojoining Pacific Northwest Bank, Mr. Ward served as Chief Credit Officer atNorth County Bank in Arlington, Washington since its formation in 1998, and wasemployed by First Interstate Bank from 1978 to 1998, serving in various seniormanagerial positions in corporate lending and credit administration.

 

**Item 11.  ExecutiveCompensation**

 

The information contained under the sectioncaptioned - “Executive Compensation” in the Proxy Statement isincorporated herein by reference.

 

**Item 12.  SecurityOwnership of Certain Beneficial Owners and Management**

 

(a) Security Ownership of Certain BeneficialOwners

 

Information required by this item is incorporatedherein by reference to the section captioned “Security Ownership of CertainBeneficial Owners and Management” in the Proxy Statement.

 

(b) Security Ownership of Management

 

Information required by this item is incorporatedherein by reference to the section captioned “Security Ownership of CertainBeneficial Owners and Management” in the Proxy Statement.

 

(c) Changes in Control

 

Bancorp is not aware of any arrangements,including any pledge by any person of securities of Bancorp, the operation ofwhich may at a subsequent date result in a change in control of Bancorp.

 

**Item 13.  CertainRelationships and Related Transactions**

 

The information contained under the sectioncaptioned “Certain Transactions with Management” in the Proxy Statement isincorporated herein by reference.

 

**Item14.  Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

PNWB,under the supervision and with the participation of its management, includingits Chief Executive Officer and Chief Financial Officer, carried out an evaluationof the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of December 31, 2002 (the “Evaluation Date”).  Based upon this evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded as of the EvaluationDate that PNWB’s disclosure controls and procedures were effective for purposesof recording, processing, summarizing and timely reporting material informationrequired to be disclosed in reports filed by the Company under the Securities ExchangeAct of 1934.

 

# **Changes in Internal Controls**

 

There were no significantchanges in PNWB’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the Evaluation Date.  The company did not implement any correctiveactions with regard to any significant deficiency or material weakness in itsinternal controls.

 

16

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**PART IV**

 

###### **Item 15.  Exhibits,Financial Statement Schedules, and Reports on Form 8-K**

 
| (a)    |   | (1)                                        |   | Consolidated  Financial Statements                                                                         |
|--------|--------|--------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|
|   |   |                                       |   |                                                                                                       |
|   |   |                                       |   | Independent Auditors’ Report                                                                          |
|   |   |                                       |   |                                                                                                       |
|   |   | (a)                                        |   | Consolidated Statements of Financial Condition as of  December 31, 2002 and 2001                           |
|   |   | (b)                                        |   | Consolidated Statements of Income For the Years Ended  December 31, 2002, 2001 and 2000                    |
|   |   | (c)                                        |   | Consolidated Statements of Shareholders’ Equity For the  Years Ended December 31, 2002, 2001 and 2000 |
|   |   | (d)                                        |   | Consolidated Statements of Cash Flows For the Years  Ended December 31, 2002, 2001 and 2000                |
|   |   | (e)                                        |   | Notes to Consolidated Financial Statements                                                                 |
|   |   |                                       |   |                                                                                                       |
|   |   | Notes to Consolidated Financial Statements |

 
| (2)    |   | All required financial statement schedules are included  in the Notes to Consolidated Financial Statements.          |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                 |
|   |   | Consolidated Financial Statements and Notes to  Consolidated Financial Statements are included in Exhibit 13 herein. |

 

(b)                                 Reports on Form 8-K

 

OnOctober 18, 2002, PNWB filed a current report on Form 8-K.  The report included under Item 5 of Form 8-Ka press release announcing PNWB’s third quarter 2002 financial results andunaudited consolidated financial statements for the three- and nine-monthperiods ended September 30, 2002.

 

OnOctober 18, 2002, PNWB filed a current report on Form 8-K under item 5announcing that on October 16, 2002, Fitch Ratings upgraded the senior debtratings of Pacific Northwest Bancorp and its banking subsidiary, PacificNorthwest Bank.

 

OnNovember 5, 2002, PNWB filed a current report on Form 8-K under item 5announcing that commencing January 1, 2003, it will outsource its residentialmortgage lending operations.

 

On November 15, 2002, PNWBfiled a current report on Form 8-K under Item 5 and 7 in connection with theissuance of a press release announcing the completion of the acquisition ofBank of the Northwest and the merger consideration results.

 

(c)           Exhibits

 
| (3.1)  |   | Articles of Incorporation of Pacific Northwest Bancorp  (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report  on Form 10-K for the year ended December 31, 2000)                                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3.2)  |   | Bylaws of Pacific Northwest Bancorp (incorporated by  reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for  the year ended December 31, 2000)                                                                                 |
| (3.3)  |   | Amendment to the Bylaws of Pacific Northwest Bancorp  (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2001)                                                         |
| (10.1) |   | Employment Agreement entered into between Pacific  Northwest Bancorp and Daniel J. Durkin.                                                                                                                                                                |
| (10.2) |   | Severance/Change of Control Agreement entered into  between Pacific Northwest Bancorp and Christian R. Rasmussen.                                                                                                                                         |
| (10.3) |   | Consulting Agreement entered into between Pacific  Northwest Bancorp and Kathryn L. M. Spere.                                                                                                                                                             |
| (10.4) |   | Consulting Agreement entered into between Pacific  Northwest Bancorp and Mark A. Coffey.                                                                                                                                                                  |
| (10.5) |   | Employment Agreement entered into between Pacific  Northwest Bancorp and George P. Brace.                                                                                                                                                                 |
| (10.6) |   | Bank  of the Northwest Restated 1996 Stock Incentive Plan and Bank of the Northwest  1996 Executive Warrant Plan (incorporated  by reference to Exhibit 99.1 and 99.2 to the Registrant’s Registration  Statement on Form S-8 (File No. 333-101193)) |

 

17

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| (10.7)  |   | Agreement  and Plan of Merger between Pacific Northwest Bancorp and Pacific Northwest  Bank and Bank of the Northwest (incorporated by reference to Exhibit 2 of the  Registrant’s current report on Form 8-K filed with Security and Exchange  Commission on July 25, 2002). |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.8)  |   | Amended  and restated Pacific Northwest Bancorp Employee Stock Ownership Plan/Money  Purchase Pension Plan (incorporated by  reference to Exhibit 10.24 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002)                               |
| (10.9)  |   | First  Amendment to Severance/Change of Control Agreement entered into between  Pacific Northwest Bancorp and Patrick M. Fahey (incorporated by reference to Exhibit 10.25 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)            |
| (10.10) |   | Amended and Restated Pacific Northwest Bancorp Salary  Deferral 401(K) plan (incorporated by reference to Exhibit 99.1 to the  Registrant’s Registration Statement on Form S-8 (File No. 333-76014))                                                                          |
| (10.11) |   | Amended Pacific Northwest Bancorp 1996 Outside  Directors Stock Options-for-fees Plan (incorporated by reference to Exhibit  10.19 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001)                                               |
| (10.12) |   | Employment Agreement entered into between Pacific  Northwest Bancorp and Kim S. Brace (incorporated by reference to Exhibit  10.20 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001)                                               |
| (10.13) |   | Severance Pay Agreement entered into between Pacific  Northwest Bancorp and Bette J. Floray (incorporated by reference to Exhibit  10.21 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2001)                                         |
| (10.14) |   | Change In Control Agreement entered into between  Pacific Northwest Bancorp and Bette J. Floray (incorporated by reference to  Exhibit 10.22 to the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2001)                                     |
| (10.15) |   | Employment Agreement and its First Amendment entered  into between Pacific Northwest Bancorp and George P. Brace (incorporated by  reference to Exhibit 10.17 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2001)                         |
| (10.16) |   | Employment Agreement entered into between Pacific  Northwest Bancorp and Stephen M. Walden (incorporated by reference to Exhibit  10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2000)                                                |
| (10.17) |   | Severance and Change in Control Agreement between  Pacific Northwest Bancorp and Patrick M. Fahey (incorporated by reference to  Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year  ended December 31, 2000)                                           |
| (10.18) |   | Employment Agreement entered into between Pacific Northwest  Bancorp and Kim S. Brace (incorporated by reference to Exhibit 10.3 to the  Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000)                                                        |
| (10.19) |   | Form of Severance Pay Agreement entered into between  Pacific Northwest Bank and its executive officers (incorporated by reference  to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 2000)                                  |
| (10.20) |   | Pacific Northwest Bancorp Make Whole Benefit Plan  (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2000)                                                                                    |
| (10.21) |   | Pacific Northwest Bancorp Deferred Compensation Plan  (incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report  on Form 10-K for the year ended December 31, 2000)                                                                                        |
| (10.22) |   | Form of Change in Control Agreement entered into  between Pacific Northwest Bank and its executive officers (incorporated by  reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2000)                              |
| (10.23) |   | InterWest Bancorp Amended and Restated 1993 Incentive  Stock Option Plan (incorporated by reference to the Registrant’s Annual  Report on Form 10-K for the year ended September 30, 1998)                                                                                    |
| (10.24) |   | Central  Bancorporation 1992 Employee Stock Option Plan (incorporated by reference to  Exhibit 99.2 to the Registrant’s Registration Statement on Forms S-8 (File  No. 333-13191))                                                                                            |
| (10.25) |   | 1996 Outside Directors Stock Options-for-Fees Plan  (incorporated by reference to Exhibit 99.1 to  the Registrant’s Registration Statement on Form S-8 (File No.  333-24525))                                                                                            |
| (10.26) |   | First  National Bank of Port Orchard 1990 Employee and Director Stock Option Plan  (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration  Statement on Form S-8 (File No. 333-50685))                                                                   |
| (10.27) |   | Pacific  Northwest Bank 1988 Stock Option Plan (incorporated by reference to Exhibit  99.1 to the Registrant’s Registration Statement on Form S-8 (File No.  333-57679))                                                                                                      |

 

18

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| (10.28) |   | Pioneer Bancorp, Inc. Amended and Restated Incentive  Stock Option Plan (incorporated by reference to Exhibit 99.2 to the  Registrant’s Registration Statement on Form S-8 (File No. 333-57679))                              |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10.29) |   | Data Services Contract (P) (incorporated by reference  to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q for the  quarter ended June 30, 2000)                                                                |
| (13)    |   | Management  Discussion and Analysis and Consolidated Financial Statements included in the  2002 Financial Information distributed to shareholders with the 2002 Annual Report                                                      |
| (21)    |   | Subsidiaries of the Registrant                                                                                                                                                                                                     |
| (23.1)  |   | Consent of Independent Auditors                                                                                                                                                                                                    |
| (99.1)  |   | Certifications  of Patrick M. Fahey, Chief Executive Officer, and Bette J. Floray, Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

19

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**SIGNATURES**

 

                Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,Pacific Northwest Bancorp has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                             |   | Pacific Northwest Bancorp |
|----------------------------------|--------|---------------------------|
|                             |   |                      |   |
|  Date:  March 21, 2003 |   | By:                       | /s/ Patrick M. Fahey |   |
|                             |   |                      | Patrick M. Fahey |
|                             |   |                      | President and Chief Executive Officer |
|                             |   |                      | (Principal Executive Officer) |

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on this 21st day of March 2003.

 
| **Signatures**          |   | **Titles**                                              |
|-------------------------|--------|---------------------------------------------------------|
|                    |   |                                                    |
| /s/ Patrick M. Fahey    |   | Director, President and Chief Executive Officer         |
| Patrick M. Fahey        |   |                                                    |
|                    |   |                                                    |
| /s/ Bette J. Floray     |   | Executive Vice President (Principal Financial Officer)  |
| Bette J. Floray         |   |                                                    |
|                    |   |                                                    |
| /s/ Eric Jensen         |   | Chief Accounting Officer (Principal Accounting Officer) |
| Eric Jensen             |   |                                                    |
|                    |   |                                                    |
| /s/ Stephen M. Walden   |   | Chairman of the Board                                   |
| Stephen M. Walden       |   |                                                    |
|                    |   |                                                    |
| /s/ Gary M. Bolyard     |   | Director                                                |
| Gary M. Bolyard         |   |                                                    |
|                    |   |                                                    |
| /s/ Larry Carlson       |   | Director                                                |
| Larry Carlson           |   |                                                    |
|                    |   |                                                    |
| /s/ Michael T. Crawford |   | Director                                                |
| Michael T. Crawford     |   |                                                    |
|                    |   |                                                    |
| /s/ Daniel J. Durkin    |   | Director                                                |
| Daniel J. Durkin        |   |                                                    |
|                    |   |                                                    |
| /s/ Jean Gorton         |   | Director                                                |
| Jean Gorton             |   |                                                    |
|                    |   |                                                    |
| /s/ Robert D. Kraus     |   | Director                                                |
| Robert D. Kraus         |   |                                                    |
|                    |   |                                                    |
| /s/ C. Stephen Lewis    |   | Director                                                |
| C. Stephen Lewis        |   |                                                    |
|                    |   |                                                    |
| /s/ Clark H. Mock       |   | Director                                                |
| Clark H. Mock           |   |                                                    |
|                    |   |                                                    |
| /s/ Russel E. Olson     |   | Director                                                |
| Russel E. Olson         |   |                                                    |
|                    |   |                                                    |
| /s/ Betty Woods         |   | Director                                                |
| Betty Woods             |   |                                                    |

 

20

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# **Certifications**

 

I, Patrick M. Fahey, Chief Executive Officer, certifythat:

 

1.             Ihave reviewed this annual report on Form 10-K of Pacific Northwest Bancorp.

 

2.             Basedon my knowledge, this annual report does not contain any untrue statement ofmaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report.

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)           Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)           Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation date.

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)           Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes to internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Dated: March 21, 2003.

 

 
|   | /s/ Patrick M.  Fahey                  |
|--------|----------------------------------------|
|   | Patrick M. Fahey                       |
|   | President and  Chief Executive Officer |

 

21

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I, Bette J. Floray, Chief Financial Officer, certifythat:

 

1.             Ihave reviewed this annual report on Form 10-K of Pacific Northwest Bancorp.

 

2.             Basedon my knowledge, this annual report does not contain any untrue statement ofmaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report.

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)           Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)           Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)           Presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation date.

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)           Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes to internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Dated: March 21, 2003.

 

 
|   | /s/ Bette J.  Floray                                  |
|--------|-------------------------------------------------------|
|   | Bette J. Floray                                       |
|   | Executive Vice  President and Chief Financial Officer |

 

22

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