UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September~~June 30, ~~2002~~2003

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

For the transition period from to

Commission file number 0-26632

Pacific Northwest Bancorp

(Exact name of registrant as specified in its charter)

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

Washington
(State or other jurisdiction of incorporation or organization)

91-1691216
(I.R.S. Employer Identification No.)

1111 Third Avenue, Suite 250 Seattle, Washington
(Address of principal executive offices)

98101
(Zip Code)

Registrant’s telephone number including area code: (206) 624-0600

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

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

As of ~~November~~July 430, ~~2002,~~2003 1417,~~980~~115,~~152~~390 shares of common stock were outstanding with no par value.

PACIFIC NORTHWEST BANCORP

INDEX

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2003 and December 31, 2002

	Consolidated Statements of Income for the three- and six-month periods ended June 30, 2003 and 2002

	Consolidated Statements of Shareholders’ Equity for the six-month periods ended June 30, 2003 and 2002

	Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2003 and 2002

	Notes to Unaudited Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 4.	Submission of Matters to a Vote of Security Holders

Item 6.	Exhibits and Reports on Form 8-K

SIGNATURES

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of September 30, 2002 and December 31, 2001
	Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2002 and 2001
	Consolidated Statements of Shareholders’ Equity for the nine-month periods ended September 30, 2002 and 2001
	Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2002 and 2001
	Notes to Unaudited Consolidated Financial Statements
Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations About Market Risk
Item 3.	Quantitative and Qualitative Disclosures
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

Dollars in thousands	September 30, 2002			December 31, 2001
Assets
Cash and due from banks
Non-interest-bearing	$	57,504		$	58,134
Interest-bearing	4,064			491
Federal funds sold and securities purchased under agreements to resell	5,150			—
Securities available for sale	795,265			757,018
Loans receivable	1,816,046			1,808,555
Allowance for losses on loans	(22,785		)	(20,123		)
Net loans receivable	1,793,261			1,788,432
Loans held for sale	22,166			43,757
Interest receivable	13,687			14,808
Other real estate	7,478			5,762
Premises and equipment	48,750			50,837
Goodwill	16,137			16,137
Other intangible assets	1,267			1,985
Bank owned life insurance	51,039			—
Other assets	9,820			4,147
Total assets	$	2,825,588		$	2,741,508
Liabilities
Deposits:
Non-interest-bearing	$	253,569		$	241,674
Interest-bearing	1,566,714			1,363,181
Total deposits	1,820,283			1,604,855
Federal Home Loan Bank (FHLB) advances	602,461			714,526
Federal funds purchased and securities sold under agreements to repurchase	115,402			149,504
Guaranteed preferred beneficial interests in subordinated debt	48,000			37,500
Other borrowings	12,073			12,621
Other liabilities	25,036			22,016
Total liabilities	2,623,255			2,541,022
Shareholders’ Equity
Common stock, no par value, authorized shares 30,000,000 Issued and outstanding: 14,977,547 and 15,595,204 shares	—			—
Paid-in-capital	7,054			26,757
Retained earnings	189,963			172,967
Accumulated other comprehensive income	5,316			1,305
Debt related to employee stock ownership plan (ESOP)	—			(543		)
Total shareholders’ equity	202,333			200,486
Total liabilities and shareholders’ equity	$	2,825,588		$	2,741,508

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

For the three and nine month periods ended September 30, 2002 and 2001

	Three-month periods				Nine-month periods
Dollars in thousands, except per share amounts	2002		2001		2002		2001
Interest Income
Loans receivable and loans held for sale	$	34,115	$	38,354	$	103,172	$	117,457
Securities available for sale	10,046		12,166		30,837		39,452
Other	33		143		108		580
	44,194		50,663		134,117		157,489
Interest Expense
Deposits	9,381		13,652		28,001		47,665
FHLB advances and other borrowings	6,193		7,231		19,098		24,804
Securities sold under agreements to repurchase	783		2,168		2,975		9,314
Guaranteed preferred beneficial interests in subordinated debt	896		987		2,723		2,963
	17,253		24,038		52,797		84,746
Net interest income	26,941		26,625		81,320		72,743
Provision for losses on loans	1,700		1,550		5,100		4,350
Net interest income after provision for losses on loans	25,241		25,075		76,220		68,393
Non-interest Income
Service fees	3,338		2,845		9,796		8,536
Mortgage banking revenue	452		584		1,907		1,556
Investment product fees and insurance commissions	513		571		1,349		1,792
Bank owned life insurance income	540		—		1,039		—
Gain on sale of securities available for sale	—		514		40		1,658
Gain on sale of partnership	—		—		—		574
Other	327		596		987		1,747
	5,170		5,110		15,118		15,863
Non-interest Expense
Compensation and employee benefits	9,743		9,732		29,539		28,812
General and administrative	4,180		5,824		12,738		16,148
Occupancy and equipment	3,025		3,120		9,188		8,924
Data processing	1,412		1,604		4,193		4,593
Other real estate owned	42		147		52		161
Conversion and integration	—		—		—		1,290
Severance and employment agreements	—		—		—		200
	18,402		20,427		55,710		60,128
Income before income tax expense	12,009		9,758		35,628		24,128
Income tax expense	4,056		3,651		12,199		9,024
Net income	$	7,953	$	6,107	$	23,429	$	15,104
Basic net income per share	$	0.53	$	0.39	$	1.53	$	0.97
Diluted net income per share	$	0.51	$	0.39	$	1.49	$	0.96
Dividends declared per share	$	0.14	$	0.14	$	0.42	$	0.42

See accompanying notes to consolidated financial statements.

CONSOLIDATEDPART STATEMENTSI. OFFINANCIAL SHAREHOLDERS’ EQUITY (UNAUDITED)INFORMATION

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, $0.42 per share						(6,537		)							(6,537		)
Issuance of common stock:
Stock option plans	71,538		722												722
ESOP debt repayment	30,241											854			854
Comprehensive income:
Net income						15,104									15,104
Other comprehensive income (loss) -
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 $6,690									12,423						12,423
Reclassification adjustment for gains included in net income, net of taxes of $580									(1,078		)				(1,078		)
Total comprehensive income*															25,852
September 30, 2001	15,596,136		$	27,013		$	168,180		$	5,248		$	(814	)	$	199,627
January 1, 2002	15,595,204		$	26,757		$	172,967		$	1,305		$	(543	)	$	200,486
Dividends declared, $0.42 per share						(6,433		)							(6,433		)
Issuance of common stock:
Stock option plans	145,504		1,992												1,992
Purchase and retirement of common stock	(780,825	)	(21,695		)										(21,695		)
ESOP debt repayment	17,664											543			543
Comprehensive income:
Net income						23,429									23,429
Other comprehensive income -
Unrealized gain on securities available for sale, net of taxes of $2,175									4,040						4,040
Reclassification adjustment for gains included in net income, net of taxes of $(11)									(29		)				(29		)
Total comprehensive income*															27,440
September 30, 2002	14,977,547		$	7,054		$	189,963		$	5,316		$	0		$	202,333

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

* Comprehensive income for the three months ended September 30, 2002 and 2001 was $9,145 and $14,335, respectively.

Dollars in thousands	June 30, 2003			December 31, 2002
	(UNAUDITED)

Assets

Cash and due from banks
Non-interest bearing	$	73,084		$	92,541
Interest-bearing	8,300			7,461
Federal funds sold and securities purchased under agreements to resell	27,975			950
Securities available for sale	738,335			788,546
Loans held for sale	13,822			25,621
Loans receivable	2,046,318			2,029,753
Allowance for losses on loans	(27,433		)	(26,940		)
Net loans receivable	2,018,885			2,002,813

Interest receivable	13,523			14,306
Other real estate	6,323			7,152
Premises and equipment	44,449			48,082
Goodwill	67,732			67,732
Other intangible assets	9,678			10,505
Bank owned life insurance (BOLI)	58,118			56,995
Other assets	3,966			4,305

Total assets	$	3,084,190		$	3,127,009

Liabilities

Deposits:
Non-interest bearing	$	395,459		$	345,571
Interest-bearing	1,649,628			1,708,739
Total deposits	2,045,087			2,054,310

Federal Home Loan Bank (FHLB) advances	557,171			609,581
Federal funds purchased and securities sold under agreements to repurchase	130,257			120,706
Guaranteed preferred benefical interests in subordinated debt	52,000			48,000
Other borrowings	10,063			10,072
Other liabilities	15,716			22,727

Commitments and contingencies	—			—

Total liabilities	2,810,294			2,865,396

Shareholders’ Equity

Common stock, no par value, authorized shares 30,000,000 issued and outstanding: 17,081,478 and 16,799,472 shares	—			—
Paid-in-capital	69,681			64,995
Retained Earnings	204,794			192,942
Accumulated other comprehensive income/(loss)	(579		)	3,676

Total shareholders’ equity	273,896			261,613

Total liabilities and shareholders’ equity	$	3,084,190		$	3,127,009

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME ~~CASH FLOWS~~ (UNAUDITED)

	Nine-month periods ended September 30,
Dollars in thousands	2002			2001
Operating Activities
Net income	$	23,429		$	15,104
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	3,935			4,763
Amortization of intangible assets	718			1,908
Provision for losses on loans	5,100			4,350
Amortization (accretion) of premiums and discounts, net	1,837			(214		)
Gain on sale of mortgage banking assets	(1,907		)	(1,556		)
Gain on sale of securities available for sale	(40		)	(1,658		)
(Gain) loss on sale of other real estate	52			(523		)
Write-downs on other real estate	388			542
Loss on disposal of premises and equipment	85			—
Income from bank owned life insurance	(1,039		)	—
Loan fees deferred, net of amortization	564			1,752
FHLB stock dividends	(2,099		)	(2,220		)
Changes in operating assets and liabilities:
Decrease in interest receivable	1,121			2,879
Increase in other assets	(5,673		)	(16,215		)
Increase (decrease) in other liabilities	959			(6,444		)
Net cash provided by operating activities	$	27,430		$	2,468
Investing Activities
Purchases of securities available for sale	(337,540		)	(282,995		)
Proceeds from maturing and principal repayments on securities available for sale	303,729			356,556
Proceeds from sale of securities available for sale	2,040			67,350
Proceeds from sale of mortgage banking assets	134,429			104,256
Net increase in loans receivable	(128,489		)	(167,958		)
Proceeds from sale of other real estate	5,484			8,527
Improvements capitalized to other real estate	(575		)	(1,136		)
Purchases of premises and equipment	(1,997		)	(4,442		)
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	(5,150		)	2,367
Net cash provided by (used in) investing activities	$	(78,007	)	$	87,725
Financing Activities
Net increase in deposits	$	160,265		$	28,260
Net increase (decrease) in certificates of deposit	55,162			(62,172		)
Proceeds from FHLB advances, securities sold under agreements to repurchase, and other borrowings	3,709,578			2,241,045
Repayment of FHLB advances, securities sold under agreements to repurchase and other borrowings	(3,855,749		)	(2,309,916		)
Purchase of Interwest Capital Trust I – capital securities	(1,500		)	(1,500		)
Issuance of Pacific Northwest Statutory Trust I - capital securities	12,000			—
Dividends paid to shareholders	(6,533		)	(6,525		)
Purchase and retirement of common stock	(21,695		)	—
Issuance of common stock from exercise of stock options	1,992			722
Net cash provided by (used in) financing activities	53,520			(110,086		)
Net increase (decrease) in cash and due from banks	2,943			(19,893		)
Cash and due from banks
Beginning of period	58,625			78,861
End of period	$	61,568		$	58,968
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	55,980		$	88,020
Income taxes	14,500			7,800
Non-cash investing and financing activities:
Loans receivable transferred to other real estate	7,065			4,440
Premises and equipment transferred to other real estate	—			923
Transfer of securities from held to maturity To available for sale	—			64,741
ESOP debt repayment	543			854

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

See accompanying notes to consolidated financial statements.

	Three-month periods					Six-month periods
Dollars in thousands, except per share amounts	2003			2002		2003			2002

Interest Income
Loans receivable and loans held for sale	$	33,930		$	34,548	$	68,500		$	69,057
Securities available for sale	6,708			10,391		15,172			20,791
Other	33			67		52			74
	40,671			45,006		83,724			89,922

Interest Expense
Deposits	7,423			9,744		15,192			18,621
FHLB advances and other borrowings	6,190			6,331		12,375			12,905
Securities sold under agreements to repurchase	692			996		1,426			2,191
Guaranteed preferred beneficial interests in subordinated debt	1,037			901		2,081			1,827
	15,342			17,972		31,074			35,544

Net interest income	25,329			27,034		52,650			54,378

Provision for losses on loans	1,250			1,700		2,500			3,400

Net interest income after provision for losses on loans	24,079			25,334		50,150			50,978

Non-interest Income
Service fees	4,150			3,281		7,986			6,458
Investment product fees and insurance commissions	384			508		811			836
Gain on sale of loans	142			707		546			1,455
Gain on sale of securities available for sale	247			40		245			40
Bank owned life insurance income	538			499		1,122			499
Other	250			329		510			661
	5,711			5,364		11,220			9,949

Non-interest Expense
Compensation and employee benefits	9,631			9,977		19,524			19,796
General and administrative	3,892			4,292		7,996			8,557
Occupancy and equipment	3,279			3,042		6,480			6,163
Data processing	1,490			1,397		2,944			2,782
Severance and employment agreements	(619		)	—		(407		)	—
Conversion and integration	176			—		127			—
Other real estate owned	194			8		336			10
	18,043			18,716		37,000			37,308

Income before income tax expense	11,747			11,982		24,370			23,619

Income tax expense	3,527			4,070		7,768			8,143

Net income	$	8,220		$	7,912	$	16,602		$	15,476

Basic net income per share	$	0.48		$	0.52	$	0.98		$	1.00

Diluted net income per share	$	0.47		$	0.50	$	0.95		$	0.98

Dividends declared per share	$	0.14		$	0.14	$	0.28		$	0.28

4See accompanying notes to consolidated financial statements.

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~4

~~NOTE A~~CONSOLIDATED ~~BASIS~~STATEMENTS OF SHAREHOLDERS’ ~~PRESENTATION~~EQUITY (UNAUDITED)

Pacific Northwest Bancorp is a bank holding company incorporated in the State of Washington. Through its commercial bank subsidiary, Pacific Northwest Bank, a wide range of financial services is offered to businesses and individuals throughout western and central Washington State. Financial services of Pacific Northwest Bank include the banking activities of accepting deposits from businesses and individuals and originating commercial and commercial real estate loans, residential loans and consumer loans.

Dollars in thousands, except per share data	Common Stock, no par value Shares		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Debt Related to ESOP			Total
January 1, 2002	15,595,204		$	26,757		$	172,967		$	1,305		$	(543	)	$	200,486

Dividends declared, $0.28 per share						(4,335		)							(4,335		)

Issuance of common stock:
Stock option plans	113,926		1,497												1,497

Purchase and retirement of common stock	(532,621	)	(14,435		)										(14,435		)

ESOP debt repayment	17,664											543			543

Comprehensive income:
Net income						15,476									15,476

Unrealized gain on securities available for sale, net of taxes of $1,540									2,859						2,859

Reclassification adjustment for gains included in net income, net of taxes									(40		)				(40		)
Total comprehensive income *						15,476			2,819			—			18,295
June 30, 2002	15,194,173		$	13,819		$	184,108		$	4,124		$	—		$	202,051

The unaudited consolidated financial statements include the accounts of Pacific Northwest Bancorp and its wholly owned subsidiaries (collectively PNWB). As of September 30, 2002, Pacific Northwest Bancorp’s wholly owned subsidiaries were Pacific Northwest Bank and InterWest Capital Trust I and Pacific Northwest Statutory Trust I. All material inter-company transactions and balances have been eliminated in consolidation.

Dollars in thousands, except per share data	Common Stock, no par value Shares		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Debt Related to ESOP		Total
January 1, 2003	16,799,472		$	64,995		$	192,942		$	3,676		$	—	$	261,613

Dividends declared, $0.28 per share						(4,750		)						(4,750		)

Issuance of common stock:
Stock option plans	386,297		5,876											5,876

Tax deduction on stock option exercises			1,580											1,580

Purchase and retirement of common stock	(104,291	)	(2,770		)									(2,770		)

Comprehensive income:
Net income						16,602								16,602

Unrealized loss on securities available for sale, net of taxes of $1,080									(4,256		)			(4,256		)

Reclassification adjustment for gains included in net income, net of taxes									1					1
Total comprehensive income *						16,602			(4,255		)	—		12,348
June 30, 2003	17,081,478		$	69,681		$	204,794		$	(579	)	$	—	$	273,896

~~The~~* ~~preparation~~Total ofcomprehensive ~~the~~income ~~consolidated~~for ~~financial statements in conformity with accounting principles generally accepted in~~ the ~~United~~ ~~States requires management to make estimates and assumptions that affect~~three ~~amounts~~months ~~reported~~ended inJune ~~the~~30, ~~consolidated~~2003 ~~financial statements. Changes in these estimates~~ and ~~assumptions are~~2002 ~~considered~~was ~~reasonably~~$5,967 ~~possible~~ and ~~may~~$13,414, ~~have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein~~respectively.

~~The unaudited consolidated financial~~See ~~statements~~accompanying ~~have~~notes ~~been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions~~ to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the unaudited interim consolidated financial statements. The consolidated statements of income for the three- and nine-month periods ended September 30, 2002 and 2001 are not necessarily indicative of the operating results for the full year. For further information, refer to the consolidated financial statements and footnotes filed on the Form 10-K for the most recent annual period ended December 31, 2001.

~~NOTE B RECLASSIFICATIONS~~5

~~Certain~~CONSOLIDATED ~~reclassifications~~STATEMENT ~~have~~OF ~~been~~CASH ~~made~~FLOWS ~~to prior financial statements to conform to current presentation. The effects of the reclassifications are not considered material.~~(UNAUDITED)

NOTE C NET INCOME PER SHARE

	Six-month periods ended June 30,
Dollars in thousands	2003			2002

Operating Activities

Net income	$	16,602		$	15,476
Adjustments to reconcile net income to net cash provided cash provided by operating activities:
Depreciation	2,601			2,638
Amortization of intangible assets	827			458
Provision for losses on loans	2,500			3,400
Amortization of premiums and discounts, net	3,213			946
Gain on sale of mortgage banking assets	(546		)	(1,455		)
(Gain)/Loss on sale of securities available for sale	106			(40		)
(Gain)/Loss on sale of other real estate	(44		)	35
Write-downs on other real estate	205			32
(Gain)/Loss on disposal of premises and equipment	(221		)	82
Income from bank owned life insurance	(1,122		)	(499		)
Loan fees deferred, net of amortization	(364		)	602
FHLB stock dividends	(1,563		)	(1,381		)
Changes in operating assets and liabilities:
Decrease in interest receivable	1,926			1,067
Increase in other assets	(1,239		)	(4,015		)
Decrease in other liabilities	(2,945		)	(433		)

Net cash provided by operating activities	$	19,936		$	16,913

Investing Activities

Purchases of securities available for sale	(305,083		)	(200,796		)
Proceeds from maturing and principal repayments on securities available for sale	242,485			188,751
Proceeds from sale of securities available for sale	104,332			2,040
Proceeds from sale of loans	12,016			104,324
Net increase in loans receivable	(20,734		)	(116,796		)
Proceeds from sale of other real estate	4,029			3,881
Improvements capitalized to other real estate	(506		)	(263		)
Purchases of premises and equipment	(1,983		)	(1,394		)
Proceeds from sales of premises and equipment	3,237			62
Purchase of bank owned life insurance	—			(50,000		)
Net increase in federal funds sold and securities purchased under agreements to resell	(27,025		)	(31,900		)

Net cash provided by (used in) investing activities	$	10,768		$	(102,091	)

~~Basic~~See ~~net~~accompanying ~~income~~notes per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by diluted weighted average shares outstanding, which includes common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive. Common stock equivalents include shares issuable upon exercise of stock options. Unallocated shares relating to ~~the~~ ~~employee~~consolidated ~~stock~~financial ~~ownership plan debt obligation are deducted in the calculation of weighted average shares outstanding~~statements.

The following table presents the computation of basic and diluted net income per share for the three- and nine-month periods ended September 30:

	Six-month periods ended June 30,
Dollars in thousands	2003			2002

Financing Activities

Net increase in deposits	$	5,312		$	115,727
Net increase (decrease) in certificates of deposits	(14,535		)	122,221
Proceeds from FHLB advances, securties sold under agreements to repurchase, and other borrowings	469,551			2,543,963
Repayment of FHLB advances, securities sold under agreements to repurchase, and other borrowings	(512,419		)	(2,666,931		)
Proceeds from re-issuance of guaranteed subordinated debt	4,373			—
Purchase of InterWest Capital Trust I - capital securities	—			(1,500		)
Dividends paid to shareholders	(4,710		)	(4,363		)
Issuance of common stock from exercise of stock options	5,876			1,497
Purchase and retirement of common stock	(2,770		)	(14,435		)

Net cash provided by (used in) financing activities	$	(49,322	)	$	96,179

Net increase (decrease) in cash and cash equivalents	(18,618		)	11,001

Cash and due from banks:
Beginning of year	100,002			58,625
End of year	$	81,384		$	69,626

Supplemental Disclosures of Cash Flow Information

Cash paid during the year for:
Interest	$	28,950		$	33,257
Income taxes	165			11,500

Non-cash investing and financing activities:
Loans receivable transferred to other real estate	$	2,856		$	3,796
ESOP debt repayment	—			543

	Three months				Nine months
Dollars in thousands, except share and per share amounts	2002		2001		2002		2001
Numerator:
Net income	$	7,953	$	6,107	$	23,429	$	15,104
Denominator:
Denominator for basic net income per share - Weighted average shares	15,104,147		15,583,115		15,329,286		15,543,215
Effect of dilutive securities:
Stock options	448,939		167,660		416,844		154,077
Denominator for diluted net income per share - Weighted average shares and assumed conversion of dilutive stock options	15,553,086		15,750,775		15,746,130		15,697,292
Basic net income per share	$	0.53	$	0.39	$	1.53	$	0.97
Diluted net income per share	$	0.51	$	0.39	$	1.49	$	0.96

See accompanying notes to consolidated financial statements.

~~NOTE D CONVERSION AND INTEGRATION EXPENSES~~7

~~During~~NOTES ~~the year~~TO ~~ended~~UNAUDITED ~~December 31, 2000, PNWB initiated the process of converting its~~CONSOLIDATED ~~various~~FINANCIAL subsidiary bank operating systems to a single enhanced operating system. The conversion was completed on April 9, 2001. Conversion and integration expenses were expensed as incurred. Total expenses associated with conversion and integration efforts were $0 and $1.3 million during the three- and nine-month periods ended September 30, 2001, respectively. No conversion and integration expenses were incurred in 2002.STATEMENTS

NOTE A EBASIS ~~BUSINESS SEGMENT INFORMATION~~OF PRESENTATION

~~Between~~Pacific ~~the~~Northwest ~~period~~Bancorp ~~August~~is ~~31, 1996~~a ~~and~~bank ~~October~~holding ~~1999,~~company ~~PNWB~~incorporated ~~acquired~~in ~~six~~the state ~~commercial~~of ~~banking institutions~~Washington. Through its ~~Subsequent~~commercial tobanking ~~the~~subsidiary, ~~acquisitions of~~ Pacific Northwest Bank, ~~First~~a ~~National~~wide ~~Bank~~ range of financial ~~Port~~services ~~Orchard,~~is ~~Pioneer~~offered ~~Bank~~to businesses and ~~Kittitas~~individuals ~~Valley Bank~~ in ~~1998,~~its ~~PNWB~~market ~~was~~area ~~managed~~including atinvestment ~~the~~products ~~individual~~available through its subsidiary, ~~bank~~Pacific Northwest ~~level~~Financial Services, Inc. ~~Each~~ and insurance products available through its subsidiary, ~~bank~~Pacific ~~had~~Northwest aInsurance ~~Board~~Agency, ofInc. Pacific ~~Directors~~Northwest ~~and~~Bank anoperates ~~executive management~~58 ~~team~~Financial ~~that~~Centers ~~was~~in ~~responsible~~the Pacific ~~for~~Northwest, including the ~~operation~~metropolitan areas of Seattle and ~~performance~~Bellevue, Washington, and Portland, Oregon, and other areas of ~~the~~western ~~respective subsidiary~~and ~~bank~~central Washington.

~~During~~The ~~the year~~unaudited ~~ended~~consolidated ~~December~~financial ~~31,~~statements ~~2000, PNWB merged~~ include the ~~subsidiary~~accounts ~~banks~~of ~~into~~Pacific ~~one commercial~~Northwest ~~bank. In~~Bancorp ~~addition,~~and ~~PNWB consolidated~~ its ~~executive~~wholly ~~management~~owned ~~functions and implemented a new~~subsidiaries ~~organizational~~(collectively ~~structure, while converting separate banking systems into a single operating system~~PNWB). As ~~a result~~ of ~~these organizational~~June ~~and system changes~~30, 2003, ~~the~~Pacific ~~financial~~Northwest ~~information~~Bancorp’s ~~that~~wholly isowned ~~used~~subsidiaries bywere Pacific ~~the~~Northwest ~~chief~~Bank, ~~operating~~InterWest ~~decision~~Capital ~~maker~~Trust inI ~~allocating resources~~ and ~~assessing performance~~Pacific isNorthwest ~~only~~Statutory ~~provided~~Trust I. All ~~for~~material ~~one reportable segment for the three~~inter-company transactions and ~~nine-month~~ ~~periods~~balances ~~ended~~have ~~September~~been ~~30,~~eliminated ~~2002~~in ~~and 2001~~consolidation.

~~NOTE~~The Fpreparation ~~SECURITIES~~of the consolidated financial statements in conformity with accounting principles generally accepted in the ~~PLEDGED~~United ~~UNDER~~States ~~AGREEMENTS~~requires TOmanagement ~~REPURCHASE~~to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein.

~~PNWB~~The ~~has~~unaudited ~~sold~~consolidated ~~certain~~financial statements have been prepared in accordance with accounting principles ~~securities~~generally ofaccepted in the U.United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, ~~government~~they ~~and~~do ~~its~~not ~~agencies~~include all of the information and ~~other~~footnotes ~~approved~~required by accounting principles generally accepted ~~investments~~in ~~under~~the ~~agreements~~United toStates ~~repurchase~~for complete financial statements. In the opinion of management, all ~~The~~adjustments ~~securities~~necessary ~~sold~~for ~~were~~a ~~classified~~fair aspresentation ~~securities~~are ~~available~~reflected ~~for~~in ~~sale~~the unaudited ~~with~~interim anconsolidated ~~estimated~~financial ~~fair~~statements. The ~~value~~consolidated statements of ~~$91.3~~income ~~million~~for the three and ~~$147.9~~six-month periods ~~million~~ended asJune 30, 2003 and 2002 are not necessarily indicative of the operating results for the full year. ~~September~~For 30further information, ~~2002~~refer to the consolidated financial statements and footnotes filed on the Form 10-K for the most recent annual period ended December 31, ~~2001, respectively~~2002.

6NOTE B RECLASSIFICATIONS

~~NOTE~~Certain Greclassifications ~~ACCOUNTING~~have been made to prior financial statements to conform to current presentation. The effects of ~~CHANGES~~the reclassifications are not considered material.

InNOTE ~~July~~C ~~2002, the FASB issued SFAS No. 146~~BUSINESS “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to when a plan is developed as required by EITF Issue No. 94-3. SFAS No. 146 will become effective on January 1, 2003. Management does not expect the adoption of SFAS No. 146 to have a material impact on PNWB’s financial condition or results of operations.COMBINATION

InOn May ~~April~~20, ~~2002~~2003, ~~the~~PNWB ~~FASB~~announced ~~issued~~that ~~SFAS~~it ~~No.~~had ~~145 “Rescission~~signed ofan ~~FASB~~Agreement ~~Statements No. 4, 44,~~ and ~~62,~~Plan ~~Amendment~~ of Reorganization ~~FASB~~with ~~Statement No.~~Wells 13Fargo & Company, ~~and~~a ~~Technical~~Delaware ~~Corrections~~corporation (“Wells Fargo”). ~~SFAS~~ ~~No.~~Under ~~145 rescinds~~ the ~~classification~~terms of ~~extinguishment~~the ofagreement, ~~debt~~a ~~as extraordinary~~wholly-owned assubsidiary ~~previously~~of ~~required~~Wells Fargo ~~under~~will ~~SFAS~~be ~~No.~~merged 4with and ~~establishes~~into ~~new criteria~~PNWB. ~~for~~PNWB ~~the~~will ~~classification~~survive ofthe ~~gains~~merger and become ~~losses~~a onwholly ~~extinguishment~~owned subsidiary of ~~debt. SFAS~~ NoWells Fargo. ~~145~~Each ~~also~~share ~~amends~~of ~~SFAS~~PNWB ~~No.~~common 13stock outstanding immediately prior to ~~require~~the ~~certain~~closing ~~modifications~~of tothe ~~capital~~merger ~~leases~~will be ~~treated~~converted and asexchanged ~~a sale-leaseback~~into ~~and~~Wells ~~modifies~~Fargo ~~the~~common ~~accounting~~stock ~~for~~with ~~sub-leases~~a ~~when~~value ~~the~~of ~~original~~$35.00, based on ~~lessee~~the ~~remains~~average aof ~~secondary~~the ~~obligor.~~closing ~~SFAS~~prices ~~No.~~of ~~145~~Wells ~~becomes~~Fargo ~~effective~~common stock on ~~January~~the New York 1,Stock ~~2003~~Exchange ~~with~~as ~~the~~reported ~~exception~~by Bloomberg, L.P. for each of the ~~amendment~~20 ~~and~~consecutive trading ~~technical~~days ~~corrections~~prior ~~related~~ to ~~SFAS~~the ~~No.~~special ~~13,~~meeting ~~which~~of ~~were~~PNWB’s ~~effective~~shareholders onto ~~May~~vote ~~15,~~on ~~2002~~the merger. ~~Management~~ ~~does~~The ~~not~~agreement with ~~expect~~Wells ~~the~~Fargo ~~adoption~~limits ofcertain ~~SFAS~~lending ~~No.~~and ~~145~~investing toactivities ~~have~~of aPNWB ~~material~~without ~~impact~~the onprior ~~PNWB’s~~approval ~~financial~~of ~~condition~~Wells orFargo ~~results~~and ofrequires ~~operations.~~PNWB to pay Wells

In October 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. This statement, which excludes goodwill, provides a single accounting model for recognition and impairment of long-lived assets to be held for sale or disposed of. SFAS No. 144 retains many of the fundamental recognition and measurement provisions of SFAS No. 121; however, it significantly changes the criteria that would have to be met to classify an asset as either held-for-sale or to be disposed of. SFAS No. 144 became effective on January 1, 2002. The adoption of this statement did not have a material impact on PNWB’s financial condition or results of operations.8

~~In July 2001, the FASB issued~~Fargo ~~SFAS~~a ~~No.~~$30 million ~~142~~termination ~~“Accounting~~fee ~~for Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment or more frequently~~ if ~~impairment~~the ~~indicators~~merger ~~arise. Separable~~is ~~intangible assets that are~~ not ~~deemed~~ tocompleted ~~have~~by anreason ~~indefinite life will continue to be amortized over their~~of ~~useful lives. This Statement became effective on January 1, 2002.~~ PNWB ~~performed~~ ~~the~~having ~~transitional~~received ~~impairment~~a ~~assessment~~superior ofcompeting ~~its~~acquisition ~~goodwill as of January 1~~proposal, ~~2002~~ and ~~noted~~the ~~that such assessment did not indicate any impairment of~~failure ~~goodwill. The adoption~~ of ~~SFAS No. 142 is expected to reduce~~ PNWB’s ~~goodwill~~board ~~amortization~~of ~~expense~~directors ~~by approximately~~to ~~$1.1~~recommend ~~million~~approval onor ancall ~~annual~~a ~~basis. A reconciliation~~special meeting of ~~reported~~PNWB ~~net~~shareholders ~~income~~ to ~~net~~vote ~~income~~on ~~adjusted to exclude goodwill amortization for~~ the ~~three-~~merger ~~and~~prior ~~nine-~~to ~~month periods ended September~~December 15, 302003, ~~2002~~as ~~and~~required ~~2001~~by isthe ~~as follows:~~agreement.

7The merger is subject to several conditions, including receipt of applicable regulatory approvals and approval by shareholders of PNWB. Management expects the merger to close by the end of the third quarter 2003.

	Three-month periods				Nine-month periods
Dollars in thousands, except per share amount	2002		2001		2002		2001
Income statement:
Reported net income	$	7,953	$	6,107	$	23,429	$	15,104
Adjustment for goodwill amortization	—		280		—		840
Adjusted net income	$	7,953	$	6,387	$	23,429	15,944
Basic net income per share:
Reported basic net income per share	$	0.53	$	0.39	$	1.53	0.97
Adjustment for goodwill amortization	—		0.02		—		0.06
Adjusted basic net income per share	$	0.53	$	0.41	$	1.53	1.03
Diluted net income per share:
Reported diluted net income per share	$	0.51	$	0.39	$	1.49	$	0.96
Adjustment for goodwill amortization	—		0.02		—		0.06
Adjusted diluted net income per share	$	0.51	$	0.41	$	1.49	$	1.02

NOTE D STOCK BASED COMPENSATION

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

On July 22, 2002, PNWB entered into a definitive agreement to acquire Bank of the Northwest of Portland, Oregon. On October 29, 2002, PNWB received all required regulatory approvals and approval by Bank of the Northwest shareholders for the acquisition. The acquisition is schedule to close on November 13, 2002 subject to contingencies set forth in the merger agreement. PNWB will issue approximately 1.75 million shares of common stock and pay $25.8 million of cash in a transaction in which Bank of the Northwest shareholders will have an opportunity to choose between common stock and cash consideration. The transaction is valued at approximately $85.0 million based on PNWB’s stock price on July 22, 2002, and the allocation of the purchase price will be approximately 65 percent common stock and 35 percent cash. The final merger consideration will be determined based on the average of the closing prices for PNWB common stock during the ten consecutive trading days ending November 8, 2002 assuming a November 13, 2002 closing. As of September 30, 2002, Bank of the Northwest had total assets of $385.4 million and stockholders’ equity of $29.5 million. Bank of the Northwest operates five branch offices in the metropolitan Portland, Oregon market area.

		Three-months ended June 30,				Six-months ended June 30,
Dollars in thousands, except per share amounts		2003		2002		2003		2002

Net income, as reported		$	8,220	$	7,912	$	16,602	$	15,476
Less:	Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax related effects	250		359		513		753
Pro forma net income		$	7,970	$	7,553	$	16,089	$	14,723

Earnings per share:
Basic - as reported		$	0.48	$	0.52	$	0.98	$	1.00
Basic - pro forma		$	0.47	$	0.50	$	0.95	$	0.95

Diluted - as reported		$	0.47	$	0.50	$	0.95	$	0.98
Diluted - pro forma		$	0.45	$	0.48	$	0.92	$	0.93

OnNOTE E NET ~~November~~INCOME 1,PER 2002, PNWB announced that it would outsource its residential mortgage lending operations and discontinue its internal mortgage loan operations effective January 1, 2003. As a result, PNWB estimates that it will recognize a one-time charge of approximately $1.2 million during the fourth quarter of 2002. The charge will include costs related to severance, outplacement services, fixed-asset write-offs and miscellaneous other items.SHARE

8Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by diluted weighted average shares outstanding, which includes common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive. Common stock equivalents include shares issuable upon exercise of stock options. Unallocated shares relating to the employee stock ownership plan debt obligation are deducted in the calculation of weighted average shares outstanding.

~~Item~~The following ~~2. MANAGEMENT~~table ~~DISCUSSION~~presents ~~AND~~the ~~ANALYSIS~~computation ~~OF FINANCIAL~~of ~~CONDITION~~basic ~~AND~~and ~~RESULTS~~diluted OFnet income per ~~OPERATIONS~~share for the three- and six-month periods ended June 30:

The following discussion is provided for the unaudited consolidated financial condition and results of operations of Pacific Northwest Bancorp, which includes its wholly owned subsidiaries (collectively PNWB). As of September 30, 2002, Pacific Northwest Bancorp’s wholly owned subsidiaries were Pacific Northwest Bank, InterWest Capital Trust I and Pacific Northwest Statutory Trust I. The purpose of this discussion is to focus on significant factors concerning PNWB’s financial condition and results of operations. This discussion should be read along with the unaudited consolidated financial statements for an understanding of the following discussion and analysis. Certain reclassifications have been made to prior period balances to conform to current presentation. The effects of such reclassifications are not considered material.9

Headquartered in Seattle, WA, Pacific Northwest Bancorp is a bank holding company incorporated in the State of Washington. PNWB is a financial services company providing a variety of products and services for both business and individual customers. Financial services of PNWB include the banking activities of accepting deposits from businesses and individuals and originating commercial and commercial real estate loans, residential loans, and consumer loans. As part of the migration to a commercial bank, PNWB has made significant progress in restructuring its balance sheet since mid-2000 so that it is more reflective of a commercial bank.

	Three months				Six months
Dollars in thousands, except per share amounts	2003		2002		2003		2002

Numerator:

Net income	$	8,220	$	7,912	$	16,602	$	15,476

Denominator:

Denominator for basic net income per share - Weighted average shares	16,967,621		15,353,873		16,910,123		15,443,721
Effect of dilutive securities:
Stock options	665,275		456,355		647,438		395,898
Denominator for diluted net income per share - Weighted average shares and assumed conversion of dilutive stock options	17,632,896		15,810,228		17,557,561		15,839,619

Basic net income per share	$	0.48	$	0.52	$	0.98	$	1.00

Diluted net income per share	$	0.47	$	0.50	$	0.95	$	0.98

OnNOTE ~~July~~F ~~22,~~BUSINESS ~~2002,~~SEGMENT PNWB entered into a definitive agreement to acquire Bank of the Northwest headquartered in Portland, Oregon. On October 29, 2002, PNWB received all required regulatory approvals and approval by Bank of the Northwest shareholders for the acquisition. The acquisition is scheduled to close on November 13, 2002 subject to contingencies set forth in the definitive agreement. PNWB will issue approximately 1.75 million shares of common stock and pay $25.8 million of cash as consideration for its acquistion of Bank of the Northwest. Bank of the Northwest shareholders will have an opportunity to choose between common stock and/or cash consideration. The transaction is valued at approximately $85.0 million based on PNWB’s stock price on July 22, 2002, and the allocation of the purchase price will be approximately 65 percent common stock and 35 percent cash. The final merger consideration will be determined based on the average of the closing prices for PNWB common stock during the ten consecutive trading days ending November 8, 2002 assuming a November 13, 2002 closing. As of September 30, 2002, Bank of the Northwest had total assets of $385.4 million and stockholders’ equity of $29.5 million. Bank of the Northwest operates five branch offices in the metropolitan Portland, Oregon market area. This acquisition provides PNWB an entry into Portland, Oregon and is consistent with management’s strategy to expand along the I-5 corridor. This acquisition will be accounted for using the purchase method of accounting in accordance with accounting principles generally accepted in the United States.INFORMATION

ABetween ~~source~~the ofperiod ~~future~~August ~~growth~~31, ~~may be~~1996 ~~through~~and ~~mergers~~October ~~and~~1999, ~~acquisitions.~~ PNWB’s ~~management~~acquired ~~believes~~six commercial ~~that~~banking ~~many other financial~~ institutions. ~~are considering~~Subsequent ~~selling~~to ~~their~~the ~~institutions~~acquisitions ~~for~~of aPacific Northwest ~~variety~~Bank, ofFirst ~~reasons,~~National ~~including~~Bank ~~lack~~ of ~~shareholder~~Port ~~liquidity~~Orchard, ~~management~~Pioneer ~~succession~~Bank ~~issues,~~and ~~technology challenges,~~Kittitas ~~and~~Valley ~~increasing~~Bank ~~competition.~~in 1998, PNWB ~~actively~~was ~~reviews~~managed ~~proposals~~at ~~for~~the ~~various acquisition~~individual ~~opportunities~~subsidiary bank level. ~~PNWB~~Each ~~has~~subsidiary ~~a due~~bank ~~diligence~~had ~~review~~a ~~process~~Board of toDirectors ~~evaluate potential acquisitions~~ and ~~has established~~an ~~parameters~~executive ~~for~~management ~~potential~~team ~~acquisitions~~that ~~relating~~was toresponsible ~~market~~for ~~factors,~~the ~~financial~~operation and performance ~~and~~of ~~certain~~the ~~non-financial~~respective ~~factors~~subsidiary bank. ~~Successful~~ ~~completion~~During ofthe ~~acquisitions~~year ~~by PNWB~~ended ~~depends~~December on31, ~~several~~2000, ~~factors~~PNWB merged ~~such~~the assubsidiary ~~the~~banks ~~availability~~into ofone ~~suitable acquisition~~commercial ~~candidates~~bank. In addition, ~~necessary~~PNWB ~~regulatory~~consolidated ~~and~~its ~~shareholder~~executive ~~approval~~management ~~and~~functions ~~compliance~~and ~~with~~implemented ~~applicable~~a ~~capital~~new ~~requirements. No~~organizational ~~assurance~~structure, ~~can~~while beconverting ~~made~~separate banking ~~that~~systems ~~acquisition~~into ~~activity~~a ~~will~~single ~~continue in~~operating ~~the future~~system.

~~Upon~~On ~~the~~November ~~completion~~13, of2002, PNWB completed the acquisition of Bank of the Northwest ~~acquisition,~~(BKNW) ~~Pacific~~and ~~Northwest~~merged ~~Bank~~BKNW ~~will~~into ~~operate~~its ~~59 Financial~~commercial ~~Centers~~bank insubsidiary, ~~western~~Pacific ~~and~~Northwest ~~central~~Bank. BKNW ~~Washington,~~operated ~~and~~five branch offices in the metropolitan ~~area of~~ Portland, ~~Oregon~~market area. ~~Investments~~On ~~are~~December ~~available~~9, ~~through~~2002, ~~Pacific~~PNWB ~~Northwest~~successfully ~~Financial Services~~completed ~~and~~the ~~insurance~~information ~~products~~systems and ~~are~~data ~~available~~conversion ~~through~~of ~~Pacific~~BKNW ~~Northwest Insurance~~and ~~Agency,~~all ~~both~~of ~~wholly~~the ~~owned~~five ~~subsidiaries~~BKNW ofbranches were renamed Pacific Northwest Bank.

9As a result of these organizational and system changes, the financial information that is used by the chief operating decision maker in allocating resources and assessing performance is only provided for one reportable segment for the three and six-month periods ended June 30, 2003 and 2002.

~~RESULTS~~NOTE OFG SECURITIES ~~OPERATIONS~~PLEDGED UNDER AGREEMENTS TO REPURCHASE

PNWB ~~had~~has ~~net~~sold ~~income~~certain securities of $8the U.0S. ~~million~~government ~~for~~and ~~the~~its agencies ~~three-month~~and ~~period~~other ~~ended September~~approved ~~30,~~investments ~~2002,~~under ~~compared~~agreements to $6repurchase.1 The ~~million~~securities ~~for~~sold ~~the~~were ~~three-month~~classified ~~period ended~~as ~~September~~securities ~~30,~~available ~~2001. Diluted net income per share was $0.51~~ for ~~the~~sale ~~three-month~~with ~~period~~an ~~ended~~estimated ~~September~~fair ~~30,~~value ~~2002, compared~~of to $073.391 ~~for~~million ~~the three-month period ended September 30, 2001. PNWB’s~~and ~~return on average shareholders’ equity was 15~~$82.812 ~~percent~~million ~~for~~as ~~the~~of ~~three-month period~~June ~~ended September~~ 30, ~~2002,~~2003 ~~compared~~and toDecember ~~12.83 percent for the three-month period ended September 30~~31, ~~2001. PNWB’s return on average assets was 1.13 percent for the three-month period ended September 30,~~ 2002, ~~compared to 0~~respectively.~~88 percent for the three-month period ended September 30, 2001.~~

PNWB had net income of $23.4 million for the nine-month period ended September 30, 2002 compared to $15.1 million for the nine-month period ended September 30, 2001. Diluted net income per share was $1.49 for the nine-month period ended September 30, 2002, compared to $0.96 for the nine-month period ended September 30, 2001. PNWB’s return on average shareholders’ equity was 15.50 percent for the nine-month period ended September 30, 2002, compared to 10.81 percent for the nine-month period ended September 30, 2001. PNWB’s return on average assets was 1.12 percent for the nine-month period ended September 30, 2002, compared to 0.71 percent for the nine-month period ended September 30, 2001.

~~The~~NOTE ~~following~~H OFF ~~table~~BALANCE ~~summarizes~~SHEET ~~net~~LOAN ~~income, net income per share and key financial ratios for the three- and nine-month periods ended September 30:~~COMMITTMENTS

	Three months						Nine months
Dollars in thousands, except per share amounts	2002			2001			2002			2001
Net income	$	7,953		$	6,107		$	23,429		$	15,104
Basic net income per share	$	0.53		$	0.39		$	1.53		$	0.97
Diluted net income per share	$	0.51		$	0.39		$	1.49		$	0.96
Return on average shareholders’ equity	15.81		%	12.83		%	15.50		%	10.81		%
Return on average assets	1.13		%	0.88		%	1.12		%	0.71		%
Net interest margin	4.10		%	4.04		%	4.16		%	3.67		%
Efficiency ratio	57.31		%	64.37		%	57.77		%	67.86		%

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

~~Net Interest~~NOTE Income | PNWB’s net income is significantly affected by changes in net interest income, which is the interest income received on loans receivable and other interest-earning assets less the interest expense on deposits and borrowings.I ~~Net~~ACCOUNTING interest income was $26.9 million for the three-month period ended September 30, 2002, compared to $26.6 million for the three-month period ended September 30, 2001. Net interest income was $81.3 million and $72.7 million for the nine-month periods ended September 30, 2002 and 2001, respectively. PNWB’s net interest income is sensitive to changes in interest rates. The decreases in market interest rates throughout 2001 had a positive impact on PNWB’s net interest income due to PNWB’s liability sensitive position at that time. When interest rates decreased, PNWB experienced a greater reduction in funding costs in comparison to reduction in earnings on loans and investments. During the first quarter of 2002, PNWB completed initiatives related to the interest rate risk position of the company. As of September 30, 2002, PNWB was in a slightly asset sensitive position. As such, management does not expect net interest income to improve in 2002 as a result of decreases in market interest rates.CHANGES

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. The Interpretation provides guidance on how to identify a variable interest and ~~income~~determine ~~was~~when ~~$44~~the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated by the primary beneficiary.2 ~~million~~The ~~for~~primary beneficiary is the ~~three-month~~enterprise ~~period~~that ~~ended~~will ~~September~~absorb ~~30,~~a majority ~~2002,~~of the variable interest entity’s expected losses or receive a majority of the expected residual returns as a result of holding variable ~~compared~~interests. The recognition and measurement provisions of this Interpretation apply at inception to ~~$50.7~~any ~~million~~variable interest entities formed after January 31, 2003, and become effective for existing variable interest entities on the ~~three-month~~first interim or annual reporting period ~~ended~~beginning ~~September~~after 30June 15, ~~2001~~2003. However, ~~Interest~~qualifying ~~income~~special-purpose ~~was~~entities ~~$134~~defined under SFAS No.1 ~~million~~140, Accounting for Transfers ~~the~~and ~~nine-month~~Servicing ~~period~~of ~~ended~~Financial ~~September 30,~~Assets ~~2002~~and Extinguishments of Liabilities, are ~~compared~~not required to ~~$157.5~~be ~~million~~consolidated ~~for~~in the ~~nine-month~~financial ~~period~~statements ~~ended~~of ~~September 30,~~a ~~2001~~transferor. The ~~decreases~~Company ~~for~~adopted the ~~three-~~provisions of FIN 46 for variable interest entities ~~and~~formed ~~nine-month~~on ~~periods~~or ~~ended~~after ~~September~~February 301, ~~2002~~2003, ~~were~~which ~~due~~did tonot have a material effect on the ~~balances~~Company’s ~~and~~consolidated financial statements. The Company will adopt the ~~lower~~provisions ~~yields~~of ~~earned~~FIN on46 ~~both~~for ~~loans~~existing ~~receivable~~variable ~~and~~interest ~~investment~~entities ~~securities~~on asJuly a1, 2003, which will result in the deconsolidation of ~~lower~~InterWest ~~market~~Capital Trust I and Pacific Northwest Statutory Trust I.

10On May 15, 2003, the FASB issued SFAS No. 150 (“FAS 150”), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. FAS 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in statements of financial position. FAS 150 represents a significant change in practice in accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the Company at the beginning of the first interim period beginning after June 15, 2003. Adoption of the Statement did not result in an impact on the Company’s statement of financial position or results of operations.

interest rates. The yields on interest-earning assets were 6.73 percent and 6.86 percent for the three- and nine-month periods ended September 30, 2002, compared to 7.69 percent and 7.95 percent for the same periods in 2001. However, the decreases in interest income were partially offset by increases in the average balance of loans receivable and changes in the composition of average loans receivable with a greater percentage comprised of commercial and commercial real estate loans compared to single-family residential mortgage loans.11

~~Interest~~Item expense was $17.3 million for the three-month period ended September 30, 2002, compared to $24.0 million for the three-month period ended September 30, 2001. The decrease in interest expense for the three-month period ended September 30, 2002 was primarily due to a decrease in the cost of funds as a result of reductions of market interest rates and management’s restructuring of the funding base. The cost of funds was 2.92 ~~percent~~MANAGEMENT ~~for~~DISCUSSION ~~the~~AND ~~three-month~~ANALYSIS ~~period~~OF ~~ended~~FINANCIAL ~~September~~CONDITION ~~30,~~AND ~~2002,~~RESULTS ~~compared~~OF to 4.07 percent for the same period in 2001. During the past year, certificates of deposit repriced according to maturity schedules and borrowings matured and were replaced with borrowings with relatively lower interest rates. In addition, cost of funds decreased due to management’s restructuring of the funding base with a greater percentage comprised of lower-costing deposits.OPERATIONS

Interest expense was $52.8 million for the nineFORWARD-monthLOOKING period ended September 30, 2002, compared to $84.7 million for the nine-month period ended September 30, 2001. This decrease was primarily due to decreases in both the cost of funds and the average balances of interest-bearing liabilities. The cost of funds for the nine-month period ended September 30, 2002 was 3.03 percent, compared to 4.76 percent for the same period in 2001 primarily due to lower market interest rates. Average balances of interest-bearing liabilities for the first nine months of 2002 decreased $46.6 million compared to the same period in 2001.STATEMENTS

~~Net~~This ~~interest margin~~document, including ~~which~~information isincluded ~~net~~with ~~interest income~~or ~~divided~~incorporated by ~~average~~reference ~~interest-earning~~in ~~assets~~this document, ~~was~~contains ~~4.10~~forward-looking ~~percent~~statements ~~for~~within the ~~three-month~~ ~~period~~meaning ~~ended~~of ~~September 30, 2002, compared to 4.04 percent for~~ the Private ~~three-month~~Securities ~~period~~Litigation ~~ended~~Reform ~~September~~Act ~~30,~~of ~~2001~~1995. ~~Net~~These ~~interest~~statements ~~margin~~are ~~was~~not ~~4.16~~guarantees ~~percent~~of ~~for~~future ~~the~~performance ~~nine-month~~and ~~period ended~~involve ~~September~~certain 30risks, ~~2002,~~uncertainties ~~compared~~and toassumptions ~~3.67~~that ~~percent~~are ~~for~~difficult ~~the same period in 2001~~to predict. ~~The~~Actual ~~increases~~outcomes inand ~~net interest margin for the~~results ~~three-~~may ~~and~~differ ~~nine-month~~materially ~~periods~~from ~~ended~~those ~~September~~expressed 30in, ~~2002~~or ~~were~~implied ~~due~~by, toour forward-looking ~~changes~~statements. Words insuch ~~the~~as ~~mix~~“expects,” of“anticipates,” ~~earning~~“believes,” ~~assets~~“estimates,” ~~and~~“intends,” ~~decreases~~“strategy,” other insimilar ~~cost~~expressions ofor ~~funds~~future ~~which~~or ~~resulted~~conditional ~~from~~verbs ~~reductions in~~such ~~market~~as ~~interest~~“will,” ~~rates~~“may,” “should,” “would,” and ~~the~~“could” ~~restructuring~~are ofintended ~~the~~to ~~funding~~identify ~~base~~such forward-looking statements. ~~The~~Readers ~~increases~~should innot ~~net~~rely ~~interest margin were~~solely ~~partially~~on ~~offset~~the byforward-looking ~~implementation~~statements ofand ~~the~~should ~~bank~~consider ~~owned~~all ~~life~~uncertainties ~~insurance (BOLI)~~and ~~initiative~~risks inthroughout ~~early~~this ~~April 2002~~document. The ~~funding~~statements ofare ~~BOLI~~representative ~~contracts~~only ~~increased~~as ~~average~~of ~~interest-bearing liabilities and interest expense, while~~ the ~~income~~date ~~from~~they ~~BOLI~~are made, ~~representing~~and ~~a tax-exempt~~PNWB ~~increase~~undertakes inno ~~cash~~obligation ~~surrender~~to ~~value~~update ofany ~~these contracts, was classified within “non~~forward-~~interest~~looking ~~income”~~statement.

11Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include, but are not limited to, the following: changes in general economic conditions and economic conditions in the geographic areas in which PNWB operates which may affect, among other things, the level of nonperforming loans, charge-offs, and provision expense; changes in the interest rate environment which may reduce interest margins and impact funding sources; litigation liabilities, including costs, expenses, settlements and judgments; changes in tax laws, rules and regulations as well as Internal Revenue Service (IRS) or other governmental agencies’ interpretations thereof; legislative, regulatory and accounting changes affecting the banking and financial services industry; competition with other local, regional and national banks, thrifts, credit unions and other non-bank financial institutions; ability to grow core businesses; ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance of such products; mergers and acquisitions and their integration into PNWB; and management’s ability to manage these and other risks.

Average Rates and Balances | The following table indicates the average balance and average interest rates earned or paid, interest rate spread and net interest margin for the three-month periods ended September 30:OVERVIEW

	2002				2001
Dollars in thousands	Average Balance		Rate		Average Balance		Rate
Loans receivable and loans held for sale	$	1,833,291	7.41	%	$	1,822,369	8.38	%
Securities available for sale, securities held to maturity and other interest-earning assets	784,108		5.14	%	803,699		6.13	%
Total interest-earning assets	2,617,399		6.73	%	2,626,068		7.69	%
Interest-bearing deposits	1,581,163		2.35	%	1,455,181		3.72	%
FHLB advances, securities sold under agreements to repurchase and other borrowings	765,508		4.08	%	888,959		4.64	%
Total interest-bearing liabilities	2,346,671		2.92	%	2,344,140		4.07	%
Non-interest-bearing deposits	$	236,066			$	226,947
Net interest spread			3.81	%			3.62	%
Net interest margin			4.10	%			4.04	%

Headquartered in Seattle, Washington, Pacific Northwest Bancorp is a Washington based bank holding company providing financial services through its commercial banking subsidiary, Pacific Northwest Bank. Pacific Northwest Bank operates 58 Financial Centers in the Pacific Northwest, including the metropolitan areas of Seattle and Bellevue, Washington, and Portland, Oregon, and other areas of western and central Washington. Pacific Northwest Bank offers a wide range of financial services to businesses and individuals in its market area, including investment products available through its subsidiary, Pacific Northwest Financial Services, Inc. and insurance products available through its subsidiary, Pacific Northwest Insurance Agency, Inc. As part of the migration to a commercial bank, PNWB has made significant progress in restructuring its balance sheet since mid-2000 so that it is more reflective of a commercial bank.

~~The~~PNWB is ~~following~~currently ~~table~~involved ~~indicates~~in ~~the~~a ~~average~~pending merger with Wells Fargo & Company ~~balance~~(“Wells ~~and~~Fargo”) ~~average~~(see ~~interest~~details ~~rates~~in ~~earned~~footnote orC). ~~paid~~The merger is subject to several conditions, ~~interest~~including ~~rate~~receipt ~~spread~~of applicable regulatory approvals and ~~net~~approval by PNWB shareholders, as well as a $30 million termination fee if the merger is ~~interest~~not ~~margin~~finalized for reasons defined in the ~~nine-month~~merger ~~periods~~agreement. ~~ended~~Management ~~September~~expects the ~~30:~~merger to close late in the third quarter of 2003.

	2002				2001
Dollars in thousands	Average Balance		Rate		Average Balance		Rate
Loans receivable and loans held for sale	$	1,842,677	7.48	%	$	1,808,652	8.67	%
Securities available for sale, securities held to maturity and other interest-earning assets	765,821		5.39	%	836,749		6.38	%
Total interest-earning assets	2,608,498		6.87	%	2,645,401		7.95	%
Interest-bearing deposits	1,512,772		2.47	%	1,482,733		4.30	%
FHLB advances, securities sold under agreements to repurchase and other borrowings	820,511		4.04	%	897,124		5.53	%
Total interest-bearing liabilities	2,333,283		3.03	%	2,379,857		4.76	%
Non-interest-bearing deposits	$	229,136			$	229,079
Net interest spread			3.84	%			3.19	%
Net interest margin			4.16	%			3.67	%

12RESULTS OF OPERATIONS

~~The~~PNWB ~~following~~had ~~table~~net ~~provides~~income of $8.2 million for the three-month period ended June 30, 2003, compared to $7.9 million for the ~~information~~three-month onperiod ~~changes~~ended inJune ~~net~~30, ~~interest~~2002. Diluted net income per share was $0.47 for the ~~periods~~three-month ~~that~~period ~~are~~ended June 30, 2003 and $0.50 for the same period in 2002. PNWB’s return on average ~~attributable~~shareholders’ equity was 12.05 percent for the three-month period ended June 30, 2003, compared to ~~changes~~15.78 inpercent ~~interest~~for ~~rates~~the ~~and~~three-month ~~changes~~period inended ~~volume:~~June 30, 2002. PNWB’s return on average assets was 1.06 percent for the three-month period ended June 30, 2003, compared to 1.12 percent for the three-month period ended June 30, 2002.

	Three-month periods Sept. 30, 2002 vs. 2001 Increase (Decrease) Due to changes in									Nine-month periods Sept. 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	$	(4,465	)	$	226		$	(4,239	)	$	(16,461	)	$	2,176		$	(14,285	)
Securities available for sale, securities held to maturity and other interest-earning assets	(1,935		)	(294		)	(2,229		)	(5,883		)	(3,205		)	(9,088		)
Total net change in income on interest-earning assets	(6,400		)	(68		)	(6,468		)	(22,344		)	(1,029		)	(23,373		)
Interest-bearing liabilities
Interest-bearing deposits	5,370			(1,099		)	4,271			20,612			(947		)	19,665
FHLB advances, securities sold under agreement to repurchase and other borrowings	1,163			1,350			2,513			9,324			2,961			12,285
Total net change in expense on interest-bearing liabilities	6,533			251			6,784			29,936			2,014			31,950
Net change in net interest income	$	133		$	183		$	316		$	7,592		$	985		$	8,577

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

~~Provision for losses on loans |~~ The ~~provision for losses on loans was $1.7 million for the three-month period~~following ~~ended~~table ~~September~~summarizes ~~30,~~net ~~2002~~income, ~~compared~~net toincome ~~$1.6~~per ~~million~~share ~~for~~and ~~the~~key ~~three-month~~financial ~~period ended~~ratios ~~September 30, 2001. The provision~~ for ~~losses on loans was $5.1 million for the nine-month period ended September~~ ~~30, 2002, compared to $4.4 million for~~ the ~~same period in 2001. The provision was at a higher level for the~~ three- and ~~nine~~six-month periods ended ~~September~~June 30, 2002 compared to the same periods in the prior year in part due to management’s evaluation about the current Pacific Northwest regional economy and its resulting impact on the loan portfolio, the change in the loan mix, and management’s review of the loan portfolio. Management continues to assess the level of the provision for loan losses based on the known and inherent risk characteristics in the loan portfolio. These risk characteristics include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, detailed analysis of individual loans for which full collectibility may not be assured, and current economic conditions in PNWB’s market area. :

Non-interest Income | Non-interest income was $5.2 million for the three-month period ended September 30, 2002, compared to $5.1 million for the three-month period ended September 30, 2001. This increase was primarily due to income from bank owned life insurance (BOLI) during the third quarter of 2002, higher service fees, partially offset by the lower gains on securities available for sale. Non-interest income was $15.1 million for the nine-month period ended September 30, 2002, compared to $15.9 million for the same period ended September 30, 2001. This

	Three months						Six months
Dollars in thousands, except per share amounts	2003			2002			2003			2002

Net income	$	8,220		$	7,912		$	16,602		$	15,476

Basic net income per share	$	0.48		$	0.52		$	0.98		$	1.00

Diluted net income per share	$	0.47		$	0.50		$	0.95		$	0.98

Return on average shareholders’ equity	12.05		%	15.78		%	12.37		%	15.40		%

Return on average assets	1.06		%	1.12		%	1.07		%	1.11		%

Net interest margin	3.59		%	4.12		%	3.74		%	4.19		%

Efficiency ratio	58.13		%	57.77		%	57.93		%	58.00		%

13Net Interest Income |PNWB’s net income is significantly affected by changes in net interest income, which is the interest income received on loans receivable and other interest-earning assets less the interest expense on deposits and borrowings. PNWB’s net interest income is sensitive to changes in interest rates. Net interest income before the provision for losses on loans was $25.3 million for the three-month period ended June 30, 2003 and $27.0 million for the same period in 2002. Net interest income before the provision for losses on loans was $52.7 million for the six-month period ended June 30, 2003 and $54.4 million for the same period in 2002.

~~decrease~~Net ~~was~~interest ~~primarily~~margin, ~~due~~which ~~to lower~~is ~~gain~~net oninterest ~~sale~~income ofdivided by ~~securities~~average ~~available~~interest-earning ~~for sale~~assets, awas ~~one-time~~3.59 ~~gain~~percent onfor ~~sale of~~ the ~~equity~~three-month ~~interest~~period ended inJune a30, ~~partnership~~2003, ~~during~~compared ~~the~~to ~~first~~4.12 ~~quarter~~percent offor ~~2001, partially~~the ~~offset~~three-month byperiod ~~higher~~ended June ~~service fees~~30, ~~higher~~2002. ~~mortgage~~Net ~~banking~~interest ~~revenue~~margin ~~and BOLI~~was ~~income~~3. ~~The~~74 ~~gains~~percent onand ~~securities available~~4.19 for ~~sale during~~ the ~~three~~six- ~~and nine-~~month periods ~~period~~ ended ~~September~~June 30, ~~2001~~ ~~were~~2003 ~~primarily~~and ~~from~~2002, ~~the~~respectively. ~~sale~~Net ofinterest ~~mortgage-backed~~margin decreased ~~securities~~as ~~that~~a ~~were~~result ~~securitized from~~of PNWB’s ~~single-family~~asset ~~mortgage~~sensitive ~~loan~~position ~~portfolio~~ in ~~prior~~the ~~periods.~~low and

During the second quarter 2002, PNWB implemented the financial strategy to purchase $50.0 million of BOLI on certain key employees. PNWB is the beneficiary of these BOLI contracts and the proceeds from the death benefit payments will be used to offset the cost of employee benefits. The $540,000 and $1.0 million of income from BOLI represented tax-exempt increases in the cash surrender value of BOLI contracts for the three- and nine-month period ended September 30, 2002, respectively.13

~~Service~~decreasing ~~fees~~interest ~~were~~rate ~~$3.3~~environment ~~million~~during ~~for~~ the past ~~three-month~~year. ~~period~~The ~~ended~~decrease ~~September~~in ~~30,~~net ~~2002~~interest ~~compared~~margin toin ~~$2.8~~2003 ~~million~~is ~~for~~due ~~the three-month~~primarily ~~period ended September 30, 2001.~~ to ~~Service~~accelerated ~~fees~~prepayments ~~were~~on ~~$9.8~~mortgage ~~million~~backed ~~for~~investment ~~the~~securities ~~nine-month~~and ~~period ended September~~single-family ~~30,~~residential ~~2002~~mortgage ~~compared to $8~~loans.5 ~~million~~In ~~for the nine-month period ended September 30~~addition, new ~~2001.~~loans ~~The~~have ~~increases~~been ~~were~~added ~~primarily due~~ to ~~increases~~the inloan ~~fees~~portfolio ~~received~~at onlower ~~deposit accounts~~rates ~~and~~that ~~fees~~were ~~from~~not ~~commercial~~fully offset ~~loan~~by ~~commitments~~deposit re-pricing.

~~Consistent~~Interest ~~with~~income ~~management’s expectation, mortgage banking revenue~~ was $~~452,000~~40.7 million for the three-month period ended ~~September~~ June 30, ~~2002~~2003, compared to $~~584,000~~45.0 million for the three-month period ended ~~September~~ June 30, ~~2001~~2002. ~~Mortgage~~ ~~banking revenue~~This decrease was ~~negatively~~primarily ~~impacted~~due byto alower ~~decrease in single-family mortgage production~~yields ~~volume~~earned ~~(especially~~on ~~from~~loans ~~mortgage~~and ~~refinancing)~~securities, aspartially aoffset ~~result~~by ofincreases ~~the~~in ~~increase~~volume in the ~~mortgage~~loan ~~rates~~portfolio during the second quarter of 2003. The yield on interest-earning assets was 5.76 percent and ~~first~~6.86 ~~half~~percent offor ~~third~~the ~~quarter~~three-month ofperiods ended June 30, 2003 and 2002, respectively. ~~Mortgage~~ ~~banking~~Interest ~~revenue~~income was $183.7 million and $89.9 million for the ~~nine~~six-month ~~period~~periods ended ~~September~~June 30, 2003 and 2002, ~~compared~~respectively. The toyield $1on interest-earning assets was 5.694 percent for the six-month period ~~million~~ended June 30, 2003 and 6.93 percent for the ~~nine~~six-month period ended ~~September~~June 30, ~~2001~~ 2002.

~~Non-interest~~Interest ~~Expense | Non-interest~~ expense was $1815.43 million for the three-month period ended ~~September~~June 30, ~~2002~~2003, compared to $2018.10 million for the three-month period ended ~~September~~June 30, ~~2001 (excluding $280,000 of goodwill amortization expense)~~2002. ~~Non-interest~~Interest expense was $5531.71 million for the ~~nine~~six-month period ended ~~September~~June 30, 2003 compared to $35.5 million for the same period in 2002,. The decrease in interest expense ~~compared~~was primarily due to ~~$57~~a decrease in the cost of funds as a result of reductions of market interest rates and management’s restructuring of the funding base.8 This included an increase in average non-interest bearing deposits of $96 million. The average balances of lower-costing deposits increased while the higher-costing borrowings decreased from the first quarter of 2003. The cost of funds was 2.47 percent for the ~~nine~~three-month period ended ~~September~~June 30, ~~2001~~2003, compared ~~(excluding~~to $13.503 ~~million~~percent ~~conversion~~for ~~and~~the ~~severance~~same ~~expenses~~period in 2002. The cost of funds was 2.51 percent and ~~$840,000~~3.08 ~~goodwill~~percent for the six-month ~~amortization~~periods ~~expense)~~ended June 30, 2003 and 2002 respectively.

~~General~~ Average Rates and ~~administrative~~Balances ~~expenses~~| ~~were~~The ~~$4.2~~following ~~million~~table ~~for~~indicates the ~~three-month period ended~~average ~~September~~balance ~~30,~~and ~~2002,~~average ~~compared~~interest torates ~~$5.5~~earned ~~million~~or ~~for the three-month period ended September 30~~paid, ~~2001~~interest ~~(excluding~~rate ~~$280,000~~spread ~~of goodwill amortization expense). General~~ and ~~administrative expenses were~~net ~~$12.7~~interest ~~million~~margin for the ~~nine~~three-month ~~period~~periods ended ~~September~~June 30, 2002, compared to $15.3 million for the nine-month period ended September 30, 2001 (excluding $840,000 goodwill amortization expense. Apart from the elimination of goodwill amortization expense as a result of the adoption of SFAS No. 142 “Accounting For Goodwill and Other Intangible Assets”, the decreases in general and administrative expenses were primarily the result of operational efficiencies and cost reduction initiatives implemented by management in 2002.:

The efficiency ratio is computed by dividing total operating expenses by net interest income and non-interest income. An increase in the efficiency ratio indicates that more resources are being utililized to generate the same volume of income while a decrease would indicate a more efficient allocation of resources. The efficiency ratio for the three-month period ended September 30, 2002 was 57.3 percent, compared to 64.4 percent for the three-month period ended September 30, 2001. The efficiency ratio for the nine-month period ended September 30, 2002 was 57.8 percent, compared to 67.9 percent for the nine-month period ended September 30, 2001. Excluding the conversion and severance expenses and goodwill amortization expense incurred in 2001, the efficiency ratios were 63.5 percent and 65.2 percent for the three- and nine-month periods ended September 30, 2001, respectively.

	2003				2002
Dollars in thousands	Average Balance		Rate		Average Balance		Rate

Loans receivable and loans held for sale	$	2,048,507	6.63	%	$	1,855,023	7.46	%
Securities available for sale, securities held to maturity and other interest-earning assets	786,601		3.48	%	770,341		5.43	%

Total interest-earning assets	2,835,108		5.76	%	2,625,364		6.86	%

Interest-bearing deposits	1,663,258		1.79	%	1,567,378		2.49	%
FHLB advances, securities sold under agreements to repurchase and other borrowings	830,634		3.82	%	810,035		4.07	%

Total interest-bearing liabilities	2,493,892		2.47	%	2,377,413		3.03	%

Non-interest-bearing deposits	$	320,986			$	224,498

Net interest spread			3.29	%			3.83	%
Net interest margin			3.59	%			4.12	%

~~Income~~The ~~Tax~~following ~~Expense~~table ~~| Income tax expense was $4.1 million for the~~indicates ~~three-month~~the ~~period~~average ~~ended~~balance ~~September~~and ~~30,~~average ~~2002,~~interest ~~compared~~rates toearned ~~$3.7~~or ~~million for the three-month period ended September 30~~paid, ~~2001. Income~~interest ~~tax expense was $12.2 million for the nine-month period ended September~~rate ~~30,~~spread ~~2002,~~and ~~compared~~net tointerest ~~$9.0~~margin ~~million~~ for the ~~nine~~six-month ~~period~~periods ended ~~September 30,~~June ~~2001. The increases in income tax expense from 2001 were primarily due to the~~30:

higher income before taxes. The effective tax rate was 33.8 percent and 34.2 percent for the three- and nine-month periods ended September 30, 2002, compared to 37.4 percent for both the three- and nine-month periods ended September 30, 2001. The decreases in effective tax rate from 2001 were primarily due to the elimination of non-tax deductible goodwill amortization expense arising from the adoption of SFAS No. 142 “Accounting For Goodwill and Other Intangible Assets” as well as the tax-exempt BOLI income in 2002.

	2003				2002
Dollars in thousands	Average Balance		Rate		Average Balance		Rate

Loans receivable and loans held for sale	$	2,038,757	6.75	%	$	1,847,448	7.51	%
Securities available for sale, securities held to maturity and other interest-earning assets	795,831		3.88	%	756,527		5.52	%

Total interest-earning assets	2,834,588		5.94	%	2,603,975		6.93	%

Interest-bearing deposits	1,671,688		1.83	%	1,478,010		2.54	%
FHLB advances, securities sold under agreements to repurchase and other borrowings	826,909		3.87	%	848,469		4.02	%

Total interest-bearing liabilities	2,498,597		2.51	%	2,326,479		3.08	%

Non-interest-bearing deposits	$	311,907			$	225,562

Net interest spread			3.43	%			3.85	%
Net interest margin			3.74	%			4.19	%

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

	Three-month periods ended June 30, 2003 vs. 2002 Increase (Decrease) Due to changes in								Six-month periods ended June 30, 2003 vs. 2002 Increase (Decrease) Due to changes in
Dollars in thousands	Rate			Volume		Total			Rate			Volume		Total

Interest-earning assets

Loans receivable and loans held for sale	$	(4,034	)	3,416		$	(618	)	$	(10,950	)	10,393		$	(557	)

Securities available for sale, securities held to maturity and other interest-earning assets	(3,830		)	216		(3,614		)	(7,398		)	1,963		(5,435		)

Total net change in income on interest-earning assets	(7,864		)	3,632		(4,232		)	(18,348		)	12,356		(5,992		)

Interest-earning liabilities

Interest-bearing deposits	2,895			(574	)	2,321			7,336			(3,907	)	3,429

FHLB advances, securities sold under agreements to repurchase and other borrowings	515			(206	)	309			614			427		1,041

Total net change in expense on interest-bearing liabilities	3,410			(780	)	2,630			7,950			(3,480	)	4,470

Net change in interest income	$	(4,454	)	2,852		$	(1,602	)	$	(10,398	)	8,876		$	(1,522	)

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

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

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

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

During the second quarter of 2002, PNWB implemented the financial strategy to purchase $50.0 million of BOLI on certain key employees. PNWB is the beneficiary of these BOLI contracts and the proceeds from the death benefit payments will be used to offset the cost of employee benefits. In addition, PNWB added another $5.3 million of BOLI through the BKNW acquisition in November 2002. BOLI income was $538,000 for the second quarter of 2003, compared to $499,000 for the same period in 2002. BOLI income was $1.1 million for the first half of 2003 compared to $499,000 for the same period in 2002. The investment in BOLI increased to $58.1 million as of June 30, 2003 from $50.5 million one year ago.

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

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

Non-interest Expense | Non-interest expense was $18.0 million for the three-month period ended June 30, 2003, compared to $18.7 million for the three-month period ended June 30, 2002. Non-interest expense was $37.0 million for the six-month period ended June 30, 2003 compared to $37.3 million for the same period one year ago. The decrease from prior period is due partially to the reversal of an accrual for $619,000 related to the termination of an employment contract that did not require cash payment.

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

The efficiency ratio is computed by dividing total operating expenses by net interest income and non-interest income. An increase in the efficiency ratio indicates that more resources are being utililized to generate the same volume of income while a decrease would indicate a more efficient allocation of resources. The efficiency ratio for the three-month period ended June 30, 2003 was 58.1 percent, compared to 57.8 percent for the three-month period ended June 30, 2002. The efficiency ratio for the six-month period ended June 30, 2003 was 57.9 percent compared to 58.0 percent for the six-month period ended June 30, 2002.

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

REVIEW OF FINANCIAL CONDITION

PNWB’s consolidated assets were $23.831 billion as of ~~September~~June 30, ~~2002~~2003, ~~compared~~and ~~to $2.74 billion as of~~ December 31, ~~2001~~ 2002.

Securities | As of ~~September~~June 30, ~~2002~~2003, PNWB had $~~795~~738.3 million of securities available for sale, compared to $~~757~~788.05 million as of December 31, ~~2001. The increase was primarily due to investment of the~~ ~~additional funds from deposit growth~~2002.

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

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

~~Net~~ Loans ~~Receivable~~Held for Sale | ~~Net~~Loans ~~loans~~held ~~receivable~~for ~~were~~sale totaled $113.~~79 billion~~8 million as of ~~September~~June 30, ~~2002,~~2003 compared to $125.796 ~~billion~~million as of December 31, ~~2001~~2002. Loans held for sale are primarily construction loans, single-family mortgage loans, and loans originated under the Small Business Administration program. Loans held for sale are carried at the lower of cost or estimated fair value in aggregate. Loans held for sale are typically sold to other financial institutions. The significant decrease from December 31, 2002 is due to loans sold during the first half of 2003 and the fact that the mortgage banking function is now outsourced.

~~Total~~Net ~~commercial~~Loans Receivable | Net loans ~~outstanding~~receivable were $12.1702 billion ~~or 64.4 percent~~ ~~of the loan portfolio~~ as of ~~September~~June 30, ~~2002~~2003, compared to $12.0600 billion ~~or 58.4 percent~~ as of December 31, ~~2001~~2002. ~~This increase in total commercial loans~~ ~~outstanding~~We ~~was~~continue ~~primarily~~to ~~due~~experience ~~the~~moderate growth ~~of commercial real estate loans. To date, the growth~~ in the commercial loan portfolio ~~was~~despite ~~consistent with management’s expectations. However, due to~~ the ~~current~~sluggish ~~condition~~economic ~~of the~~conditions ~~Pacific~~in ~~Northwest~~our ~~regional~~market ~~economy and its slow recovery, commercial loans may not grow at the same rate for the remainder of 2002~~area.

Single-family residential mortgage loans outstanding totaled $248.4 million as of September 30, 2002 compared to $321.2 million as of December 31, 2001. The decrease was primarily due to early payoffs associated with the current interest rate environment and the change to the mortgage banking model of origination and sale of single-family mortgages.17

15Total commercial loans outstanding increased to $1.51 billion or 73.6 percent of the loan portfolio as of June 30, 2003, compared to $1.39 billion or 68.3 percent as of December 31, 2002. The growth since December 31, 2002 in the commercial loan portfolio was primarily in the commercial real estate loan category.

Single-family residential mortgage loans outstanding decreased to $173.3 million as of June 30, 2003 compared to $231.2 million as of December 31, 2002. The decrease was primarily due to early payoffs associated with the current interest rate environment and management’s decision not to originate and retain single-family mortgage loans in our loan portfolio.

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

Dollars in thousands	~~September~~June 30, ~~2002~~2003		December 31, ~~2001~~2002
Commercial loans:
Commercial	$	~~584~~572,~~853~~212	$	~~591~~571,~~663~~283
Commercial real estate	~~589~~889,~~605~~434		~~470~~770,~~408~~413
Total commercial loans:	1,174,458		1,062,071
Agriculture	52,326		51,653
Single-family residential	248,410		321,246
Total commercial loans:	1,513,972		1,393,349
Real estate construction	281,945		319,228
Single-family residential	173,302		231,232
Consumer loans	120,084		115,440
Real estate construction	238,145		274,581
	1,824,897		1,817,985
Consumer loans	129,680		139,784
	2,055,099		2,038,946
Less:
Allowance for losses on loans	2227,~~785~~433		2026,~~123~~940
Deferred loan fees and discounts	8,~~851~~781		9,~~430~~193
Net loans receivable	$	12,~~793,261~~018.885	$	12,~~788~~002,~~432~~813

~~Loans~~Non-performing ~~Held~~Assets ~~for Sale~~ | Loans ~~held~~are ~~for~~generally ~~sale~~placed ~~totaled~~on ~~$22.2~~non-accrual when ~~million~~they asbecome ofpast ~~September~~due 30over 90 days, ~~2002~~or ~~compared~~120 todays ~~$43.8~~if ~~million~~they asare single-family mortgage loans, or when the collection of ~~December~~interest ~~31,~~or principal is considered ~~2001~~unlikely. Loans ~~held~~past ~~for~~due ~~sale~~over ~~are~~90 ~~primarily~~or 120 ~~single~~days that are not on non-~~family~~accrual ~~mortgage~~status ~~loans~~must be well-secured by tangible collateral and, in the process of collection. PNWB does not return a loan to accrual status until it is brought current with respect to both principal and interest and future principal payments are no longer in doubt. When a loan ~~much~~is ~~less~~placed ~~extent~~on non-accrual status, ~~loans~~any ~~originated~~previously ~~under~~accrued and uncollected interest is reversed from interest income. PNWB performs a ~~Small~~review ~~Business~~of ~~Administration~~its ~~program~~loan portfolio for weaknesses in credit quality on an ongoing basis to identify problem loans. This review results in internal loan classifications based on risk ~~Loans~~characteristics ~~held~~and ~~for~~loan ~~sale~~performance. The ~~are~~overall ~~carried~~objective atof this review process is to identify trends in the ~~lower~~credit quality of ~~cost~~the orloan ~~estimated~~portfolio ~~fair~~and ~~value in~~to ~~aggregate. Loans~~determine ~~held~~the ~~for~~level ~~sale~~of ~~are~~loss ~~typically~~exposure ~~sold~~to evaluate the need for an adjustment to ~~other~~the ~~financial~~allowance ~~institutions~~for losses on loans.

Non-~~performing Assets | Loans are generally placed on non-~~accrual ~~when they~~loans ~~become~~totaled ~~past~~$19.0 ~~due~~million ~~over~~as 90of ~~days,~~June ~~or 120 days if they are single-family~~30, ~~mortgage~~2003 ~~loans,~~compared orto ~~when~~$11.9 ~~the~~million ~~collection~~as of ~~interest~~December or31, ~~principal is considered unlikely~~2002. ~~Loans~~ ~~past~~Other ~~due~~real ~~over~~estate ~~90 or 120~~was ~~days~~$6.3 ~~that~~million ~~are~~as ~~not on non-accrual status must be well secured by tangible collateral and in the process~~ of ~~collection. PNWB~~June ~~does~~30, ~~not~~2003 ~~return~~compared ~~a loan~~ to ~~accrual~~$7.2 ~~status~~million ~~until~~as itof isDecember ~~brought~~31, ~~current with respect to both principal and interest and future principal payments are no longer in doubt~~2002. ~~When~~ ~~a loan~~Total isnon-performing ~~placed~~assets, onincluding non-accrual ~~status,~~loans ~~any previously accrued~~ and ~~uncollected~~other real ~~interest~~estate, istotaled ~~reversed~~$25.3 ~~from~~million ~~interest~~or ~~income~~0. ~~PNWB~~82 ~~performs~~percent ~~a review~~ of ~~its~~consolidated ~~loan~~assets ~~portfolio~~as ~~for~~of ~~weaknesses in credit~~June ~~quality~~30, on2003, ancompared ~~ongoing basis~~ to ~~identify~~$19.1 ~~problem~~million ~~loans~~or 0. ~~This~~61 ~~review~~percent ~~results~~of inconsolidated ~~internal~~assets ~~loan~~as ~~classifications~~of ~~based~~December on31, ~~risk characteristics and loan performance~~2002. The ~~overall~~increase ~~objective of this review process~~in isnon-accrual toloans ~~identify~~from ~~trends~~December in31, ~~the~~2002 ~~credit~~is ~~quality~~due ofprimarily ~~the~~to ~~loan~~one ~~portfolio~~borrower ~~and to~~with ~~determine~~loan ~~the~~balances ~~level~~ of ~~loss~~approximately ~~exposure~~$8.5 tomillion ~~evaluate~~at ~~the~~June ~~need~~30, ~~for an adjustment to the allowance for losses on loans~~2003.

Non-accrual loans totaled $10.9 million as of September 30, 2002 compared to $16.1 million as of December 31, 2001. This decrease was primarily due to decreases in construction loans and single family mortgage loans that were over 90 or 120 days past due as of September 30, 2002, respectively, as a result of payoffs or being brought current during 2002. In addition, non-accrual commercial loans decreased primarily due to the foreclosure and related transfer to other real estate of a $1.5 million non-accrual commercial loan and the payoff of a $950,000 commercial loan during the third quarter of 2002. Other real estate was $7.5 million as of September 30, 2002 compared to $5.8 million as of December 31, 2001. The increase was primarily due to the foreclosure of the $1.5 million non-accrual commercial loan previously discussed. Total non-performing assets, including non-accrual loans and other real estate, totaled $18.4 million or 0.65 percent of consolidated assets as of September 30, 2002, compared to $21.9 million or 0.80 percent of consolidated assets as of December 31, 2001.

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

Dollars in thousands	September 30, 2002		December 31, 2001
Non-accrual loans
Commercial loans:
Commercial	$	5,806	$	8,119
Commercial real estate	1,157		1,100
Total commercial loans:	6,963		9,219
Single-family residential	3,284		5,425
Real estate construction	323		1,199
Consumer loans	356		245
Total non-accrual loans	10,926		16,088
Other real estate	7,478		5,762
Total non-performing assets	$	18,404	$	21,850

Allowance for Losses on Loans | The allowance for losses on loans was $22.8 million or 1.25 percent of loans receivable as of September 30, 2002, compared to $20.1 million or 1.11 percent of loans receivable as of December 31, 2001. Net loan charge-offs were $2.4 million or 0.18 percent (annualized) of the average balance of loans outstanding for the nine-month period ended September 30, 2002, compared to $2.3 million or 0.17 percent (annualized) of the average balance of loans outstanding for the nine-month period ended September 30, 2001.

Dollars in thousands	June 30, 2003		December 31, 2002

Non-accrual loans

Commercial loans:
Commercial	$	6,560	$	5,562
Commercial real estate	8,635		657
Agriculture	1,095		1,658
Total commercial loans:	16,290		7,877

Single-family residential	2,322		3,733
Real estate construction	235		130
Consumer loans	148		173

Total non-accrual loans	18,995		11,913

Other real estate	6,323		7,152

Total non-performing assets	$	25,318	$	19,065

Allowance for Losses on Loans | The allowance for losses on loans was $27.4 million or 1.34 percent of loans receivable as of June 30, 2003, compared to $26.9 million or 1.33 percent of loans receivable as of December 31, 2002. Net loan charge-offs were $2.0 million or 0.20 percent (annualized) of the average balance of loans outstanding for the six-month period ended June 30, 2003, compared to $1.6 million or 0.17 percent (annualized) of the average balance of loans outstanding for the six-month period ended June 30, 2002.

When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the allowance for losses on loans. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; there is no recourse to the borrower, or if there is recourse, the borrower has insufficient assets to pay the debt; the fair value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. A provision for losses on loans, which is a charge against income, is added to the allowance for losses on loans based on ongoing assessments of credit risk in the loan portfolio.

The allowance for losses on loans is maintained at an amount to sufficiently provide for estimated losses based on evaluating known and inherent risks in the loan portfolio. Management analyzes certain factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, delinquency levels, actual loan loss experience, detailed analysis 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 the Pacific Northwest regional economy on the credit risk in the loan portfolio. To date, delinquency trends and classified loan levels relative to comparable periods do not indicate any material deterioration in the loan portfolio. Management continues to closely monitor PNWB’s credit quality and focus on identifying potential problem credits and any loss exposure in a timely manner. Industry concentration and related limits will also be subject to on-going assessment.

PNWB has established its allowance for losses on loans in accordance with accounting ~~principles~~ principles 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 to increase its allowance for losses on loans, thereby affecting ~~PNWB’s financial condition and results of operations. Substantial increases may be necessary should the quality of loans deteriorate as a result of the factors discussed above.~~

1719

PNWB’s ~~allowance~~financial ~~for~~condition ~~losses on loans is allocated to specific loans, certain loan categories based on the relative risk characteristics, asset classifications~~ and ~~actual~~results ~~loss experience~~ of ~~the loan portfolio~~operations. ~~Although the allocation of the allowance for losses on loans is~~ anSubstantial ~~important~~increases ~~credit~~may ~~management~~be ~~tool,~~necessary should the ~~entire~~quality ~~allowance~~of ~~for losses on~~ loans isdeteriorate ~~available~~as ~~for~~a ~~the~~result ~~entire~~of ~~loan portfolio. Management reviewed~~ the ~~allocations~~factors indiscussed ~~the various loan categories and believes the allowance for losses on loans was adequate as of September 30, 2002~~above.

~~The~~PNWB’s allowance for losses on loans is allocated to specific loans, certain loan categories based on the relative risk ~~following~~characteristics, ~~tables~~asset ~~summarize~~classifications and actual loss experience of the ~~activity~~loan portfolio. Although inthe allocation of the allowance for losses on loans ~~during~~is an important credit management tool, the entire allowance for losses on loans is available for the entire loan portfolio. Management reviewed the allocations ~~three-~~in the various loan categories and ~~nine-month~~believes ~~periods~~the ~~ended~~allowance ~~September~~for losses on loans was adequate as of June 30:, 2003.

	Three months						Nine months
Dollars in thousands	2002			2001			2002			2001
Allowance as of beginning of period	$	21,928		$	18,916		$	20,123		$	17,561
Provision for losses on loans	1,700			1,550			5,100			4,350
Recoveries	81			535			326			1,023
Charge-offs	(924		)	(1,383		)	(2,763		)	(3,316		)
Allowance as of end of period	$	22,785		$	19,618		$	22,785		$	19,618

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

Goodwill and Other Intangible Assets | Goodwill arising from acquisitions represents the excess of the purchase price over the estimated fair value of net assets acquired. Prior to 2002, goodwill was amortized using the straight-line method over periods not exceeding twenty years. Effective January 1, 2002, upon adoption of SFAS No. 142 “Accounting for Goodwill and Other Intangible Assets”, PNWB no longer amortizes its goodwill, and as such, expects annual goodwill amortization expense to reduce by approximately $1.1 million starting in 2002. PNWB reviews its goodwill for impairment annually or more frequently if impairment indicators arise. During the first quarter of 2002, PNWB performed the transitional impairment assessment of its goodwill as of January 1, 2002 and noted that such assessment did not indicate any impairment of goodwill. A reconciliation of reported net income to net income adjusted to exclude goodwill amortization for the three- and nine-month periods as of September 30, 2002 and 2001 is as follows:

	Three months						Six months
Dollars in thousands	2003			2002			2003			2002

Allowance as of beginning of period	$	27,080		$	21,099		$	26,940		$	20,123

Provision for losses on loans	1,250			1,700			2,500			3,400

Recoveries	85			115			227			245

Charge-offs	(982		)	(986		)	(2,234		)	(1,840		)

Allowance as of end of period	$	27,433		$	21,928		$	27,433		$	21,928

	Three-month periods				Nine-month periods
Dollars in thousands, except per share amount	2002		2001		2002		2001
Income statement:
Reported net income	$	7,953	$	6,107	$	23,429	$	15,104
Adjustment for goodwill amortization	—		280		—		840
Adjusted net income	$	7,953	$	6,387	$	23,429	15,944
Basic net income per share:
Reported basic net income per share	$	0.53	$	0.39	$	1.53	0.97
Adjustment for goodwill amortization	—		0.02		—		0.06
Adjusted basic net income per share	$	0.53	$	0.41	$	1.53	1.03
Diluted net income per share:
Reported diluted net income per share	$	0.51	$	0.39	$	1.49	$	0.96
Adjustment for goodwill amortization	—		0.02		—		0.06
Adjusted diluted net income per share	$	0.51	$	0.41	$	1.49	$	1.02

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

~~Other~~Goodwill arising from ~~intangible~~acquisitions ~~assets~~represents ~~consist~~the excess of ~~mortgage~~the ~~servicing~~purchase ~~intangibles~~price ~~and~~over ~~core~~the ~~deposit~~estimated ~~intangibles. Mortgage~~fair ~~servicing intangibles~~value ~~are~~of ~~capitalized~~net ~~when~~assets acquired. ~~either~~Prior ~~through~~to ~~the~~2002, ~~purchase~~goodwill ~~or origination~~was ofamortized ~~loans~~using the ~~that~~straight-line ~~are~~method ~~subsequently~~over ~~sold~~periods ornot ~~securitized~~exceeding ~~with~~twenty ~~the servicing rights retained~~years. Effective ~~The~~January ~~estimated~~1, ~~fair~~2002, ~~value~~upon ofadoption ~~mortgage servicing~~of ~~intangibles~~SFAS atNo. ~~the~~142 ~~date~~“Accounting offor ~~the~~Goodwill ~~sale~~and ofOther ~~loans~~Intangible isAssets”, ~~determined~~PNWB ~~based on the~~no ~~discounted~~longer ~~present~~amortizes ~~value~~its ofgoodwill. ~~expected~~PNWB ~~future~~reviews ~~cash~~its ~~flows~~goodwill ~~using~~for ~~key assumptions~~impairment ~~for~~annually ~~servicing~~or ~~income~~more ~~and~~frequently ~~costs~~if ~~and~~impairment ~~prepayment~~indicators ~~rates~~arise. PNWB’s onannual ~~the~~goodwill ~~underlying~~impairment ~~loans.~~evaluation ~~The~~in ~~estimated~~the ~~fair~~fourth ~~value~~quarter isof ~~periodically~~2002 ~~evaluated~~indicated ~~for~~no impairment byof ~~comparing actual cash~~goodwill.

18Other intangible assets consist of core deposit intangibles and mortgage servicing rights, and are amortized using straight-line and accelerated methods over periods not exceeding twenty years. Mortgage servicing rights are capitalized when acquired either through the purchase or origination of loans that are subsequently sold or securitized with the servicing rights retained. The estimated fair value of mortgage servicing rights at the date of the sale of loans is determined based on the discounted present value of expected future cash flows using key assumptions for servicing income and costs and prepayment rates on the underlying loans. The estimated fair value is periodically evaluated for impairment by comparing actual cash flows and estimated future cash flows from the servicing assets to those estimated at the time servicing assets were originated. Mortgage servicing rights are amortized as an offset to service fees in proportion to and over the period of estimated net servicing income.

flows and estimated future cash flows from servicing assets to those estimated at the time servicing assets were originated. Mortgage servicing intangibles are amortized using the accelerated methods as an offset to service fees in proportion to and over the period of estimated net servicing income. Since mid-2000, PNWB has changed its strategy with regards to the origination and retention of single-family mortgage loans and the majority of those loans are now sold to the secondary market with servicing rights released.

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

Dollars in thousands	September 30, 2002		December 31, 2001
Goodwill	$	16,137	$	16,137
Mortgage servicing intangibles	975		1,562
Core deposit intangibles	292		423
	$	17,404	$	18,122

Dollars in thousands	June 30, 2003		December 31, 2002

Goodwill	$	67,732	$	67,732
Mortgage servicing intangibles	572		836
Core deposit intangibles	9,106		9,669
	$	77,410	$	78,237

Deposits | PNWB offers various types of deposit accounts, including checking accounts, savings accounts, money market accounts and certificate of deposit accounts. Deposit accounts vary as to terms; the principal differences are the minimum balance required, the time period the funds must remain on deposit, the interest rate, and the deposit or withdrawal option. PNWB relies on generating deposits through a marketing strategy that employs a sales staff responsible for retaining and generating new customer relationships. We emphasize developing total client relationships in order to increase our core deposit base.

Non-interest-bearing deposits were $~~253~~395.6 5 million as of ~~September~~June 30, ~~2002~~ 2003 compared to $~~241~~345.76 million as of December 31, ~~2001~~ 2002. Non-interest-bearing deposits ~~represented~~ 13represented 19.94 percent and 1516.18 percent of total deposits as of ~~September~~June 30, ~~2002 and~~2003 and December 31, ~~2001~~2002, respectively. Interest-bearing transaction accounts (which include interest-bearing checking, money market and savings accounts) totaled $~~780~~859.4 million as of ~~September~~ June 30, ~~2002~~2003 compared to $~~632~~904.0 million as of December 31, ~~2001~~2002. Interest-bearing transaction accounts represented 42.90 percent of total deposits as of ~~September~~June 30, ~~2002~~2003, compared to 39to 44.40 percent as of December 31, ~~2001~~2002. The increase in interest-bearing transaction accounts were partly due to the increase in money market accounts as a result of short-term deposits of business customers. The balance of the money market account deposits may not remain at the same level in the near future due to the short-term nature of these deposits.

Certificates of deposit totaled $~~786~~790.32 million as of ~~September~~June 30, ~~2002~~2003, compared to $~~731~~804.1 7 million as of December 31, ~~2001~~2002. Certificates of deposit represented 4338.2 6 percent of total deposits as of ~~September~~ June 30, ~~2002~~2003, compared to 4539.62 percent as of December 31, ~~2001~~2002. The increase in the ~~balance~~core ~~of certificates of~~ deposit ~~was~~balances ~~driven~~(which byinclude non-interest abearing ~~sales~~and ~~campaign that~~non-interest ~~was~~bearing ~~completed~~transactional ~~during~~accounts) and the decrease ~~second~~in ~~quarter~~certificate ~~2002~~of asdeposit abalance ~~result~~reflect of management’s ~~initiative~~ efforts to restructure ~~create~~the ~~more~~deposit ofportfolio anas ~~interest~~a ~~rate~~means ~~neutral~~to ~~position~~reduce of the ~~balance sheet~~costs of funds.

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

Dollars in thousands	~~September~~June 30, ~~2002~~2003		December 31, ~~2001~~2002
Non-interest-bearing deposits	$	~~253~~395,~~569~~459	$	~~241~~345,~~674~~571
Interest-bearing checking accounts	~~232~~264,~~202~~073		~~214~~263,~~098~~591
Money market accounts	~~443~~485,~~425~~054		~~322~~531,~~554~~698
Savings accounts	~~104~~110,~~785~~307		95108,~~390~~721
Certificates of deposit	~~786~~790,~~302~~194		~~731~~804,~~139~~729
Total	$	12,~~820~~045,~~283~~087	$	12,~~604~~054,~~855~~310

FHLB Advances and Securities Sold Under Agreements to Repurchase | PNWB borrows through advances from the Federal Home Loan Bank (FHLB) and securities sold under agreements to repurchase with third parties. These borrowing sources ~~totaled~~decreased to $~~717~~687.94 million as of ~~September~~ June 30, ~~2002~~2003 compared to $~~864~~730.03 million as of December 31, ~~2001~~2002. ~~The~~ With ~~need~~less funds invested in available for ~~this~~sale ~~type~~securities ofdue ~~borrowings~~to the low ~~decreased~~return, ~~primarily~~more ascash ais ~~result~~available, ofthus ~~the~~requiring ~~increase~~less inneed ~~deposits~~for these types of borrowings.

19The FHLB provides credit for member financial institutions. As members, financial institutions are required to own capital stock in the FHLB, and are authorized to apply for advances on the security of such stock, certain home mortgages and other assets (principally securities that are obligations of, or guaranteed by, the United States). Advances are made to member financial institutions pursuant to several different programs. These

The FHLB provides credit for member financial institutions. As members, financial institutions are required to own capital stock in the FHLB, and are authorized to apply for advances on the security of such stock, certain home mortgages and other assets (principally securities that are obligations of, or guaranteed by, the United States). Advances are made to member financial institutions pursuant to several different programs. These programs are generally designed to meet the financial institution’s need while still reflecting market terms and conditions. PNWB uses advances from the FHLB to supplement funds available to lend and to meet liquidity guidelines. Interest rates on these advances vary in response to general economic conditions. PNWB also uses the securities market for borrowings by utilizing its securities available for sale as collateral. These borrowings are collateralized by securities with an estimated fair value exceeding the face value of the borrowings.21

~~Other~~programs are ~~borrowings |~~generally ~~Other~~designed ~~borrowings~~to ~~were~~meet ~~$12.1~~the ~~million~~financial asinstitution’s ~~of September~~need ~~30,~~while ~~2002,~~still reflecting ~~compared~~market toterms ~~$12~~and conditions.6 PNWB ~~million~~uses asadvances offrom ~~December~~the ~~31,~~FHLB ~~2001. They~~to ~~were~~supplement ~~primarily~~funds ~~notes~~available ~~from~~to ~~another~~lend ~~financial~~and ~~institution~~to meet liquidity guidelines. Interest ~~This~~rates ~~borrowing~~on ~~qualifies~~these asadvances ~~Tier~~vary IIin ~~capital~~response ~~under~~to ~~the~~general economic ~~capital~~conditions. PNWB ~~guidelines~~also ofuses the securities ~~Federal~~market ~~Reserve~~for ~~Board. The~~borrowings ~~decrease~~by ~~from~~utilizing ~~December~~its ~~31,~~securities ~~2001~~available ~~was~~for ~~due~~sale as tocollateral. ~~the~~These ~~payoff~~borrowings ofare ~~a loan~~collateralized by ~~Pacific~~securities ~~Northwest~~with ~~Bancorp~~an estimated ~~Employee~~fair ~~Stock~~value ~~Ownership~~exceeding ~~Plan~~the ~~that~~face ~~Pacific Northwest~~value ~~Bancorp~~of ~~guaranteed~~the borrowings.

~~Guaranteed~~Other ~~Preferred Beneficial Interests in Subordinated Debt~~ borrowings | ~~On November~~Other ~~15,~~borrowings ~~1999,~~were $4010.1 million as of ~~9.875~~June ~~percent Capital Securities were issued~~30, by2003 ~~InterWest~~and ~~Capital~~December ~~Trust~~31, I2002. The ~~proceeds~~balances ~~of the offering~~ were ~~invested~~comprised byprimarily ~~the Trust in junior subordinated debentures~~ of ~~Pacific~~notes ~~Northwest~~from ~~Bancorp. The~~another ~~debentures~~financial ~~held by the Trust are the sole assets of Interwest Capital Trust~~institution. ~~The capital securities~~ ~~are~~This ~~subject~~borrowing toqualifies mandatory redemption, in whole or in part, upon repayment of the debentures. The debentures will not mature earlier than November 15, 2009, and not later than November 15, 2029. Pacific Northwest Bancorp entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The capital securities qualify as Tier I II capital under the capital guidelines of the Federal Reserve Board. ~~To date, Pacific Northwest Bancorp has purchased $4.0 million of the capital securities since they were issued.~~

Guaranteed Preferred Beneficial Interests in Subordinated Debt | On September 26, 2002, $12 ~~million~~ million of Capital Securities were issued by Pacific Northwest Statutory Trust I ~~through~~ (the Trust). The ~~Keefe,~~Trust ~~Bruyette,~~is &a ~~Woods~~business trust organized in September 2002, ~~Inc.~~and ~~Trust~~Bancorp ~~Preferred~~owns ~~Pool~~100 ~~Offering, Preferred~~percent ~~Term~~of ~~Securities~~the ~~VII,~~common ~~LTD~~equity of the Trust. The proceeds of the offering were invested by the Trust in junior subordinated debentures of Pacific Northwest Bancorp. The debentures held by the Trust are the sole assets of Pacific Northwest Statutory Trust I. The Capital Securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The debentures will not mature earlier than September 26, 2007, and not later than September 26, 2012. The interest rate on the Capital Securities is based upon ~~Three~~ three-~~Month~~month LIBOR plus 3.55 percent and adjusts on a quarterly basis. As of ~~September~~June 30, ~~2002~~2003, the interest rate on the Capital Securities was 54.3783 percent. Pacific Northwest Bancorp entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. ~~The~~Upon ~~Capital~~the ~~Securities~~adoption ~~qualify~~of FASB asInterpretation ~~Tier~~No. I46, ~~capital~~Consolidation ~~under~~of Variable ~~the~~Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, on July 1, ~~capital~~2003, ~~guidelines~~the Trusts will be deconsolidated from the financial statements of the Company. ~~Federal~~Adoption ~~Reserve~~of ~~Board~~the provision FIN 46 will not have a significant impact on our consolidated financial statements.

On November 15, 1999, $40 million of 9.875 percent Capital Securities were issued by InterWest Capital Trust I (the Trust I). The Trust I is a business trust organized in November 1999, and Bancorp owns 100 percent of the common equity of the Trust I. The proceeds of the offering were invested by the Trust I in junior subordinated debentures of Bancorp. The debentures held by the Trust I are the sole assets of the Trust I. At the Bancorp’s option, the debentures will not mature earlier than November 15, 2009, and not later than November 15, 2029. After November 15, 2019, the debentures can be redeemed at par value. Distributions on the capital securities issued by the Trust I are payable semiannually at 9.875 percent per annum, which is equal to the interest rate being earned by the Trust I on the debentures it held. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. Bancorp has entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of each of the guarantees. The capital securities qualify as Tier I capital under the capital guidelines of the Federal Reserve Board. Pacific Northwest Bancorp purchased $4.0 million of the capital securities (guaranteed subordinated debt) during 2002 and the $4.0 million capital securities were subsequently reissued at a premium of $372,500 during the first quarter of 2003. The premium will be amortized using the straight-line method through November 9, 2009. Upon the adoption of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) No. 51, on July 1, 2003, the Trusts will be deconsolidated from the financial statements of the Company. Adoption of the provision FIN 46 will not have a significant impact on our consolidated financial statements.

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

~~On January~~ 22, 2002, the Board of Directors approved a stock repurchase plan of up to five percent of Pacific Northwest Bancorp’s outstanding shares of common stock over the next twelve months. On September 16, 2002, Pacific Northwest Bancorp completed the stock repurchase plan. Under this plan, PNWB repurchased, on the open market, a total of 780,825 shares at an average price of $27.85.

~~PNWB’s~~On ~~total~~January ~~shareholders’ equity was $202.3 million as of September 30~~28, ~~2002~~2003, ~~compared~~the toBoard ~~$200.5~~of ~~million as~~Directors of ~~December 31, 2001. The increase~~Pacific inNorthwest ~~shareholders’~~Bancorp ~~equity~~authorized ~~during~~ the ~~first~~purchase ~~nine months~~ of ~~2002~~up ~~was primarily due~~ to ~~net~~five ~~income~~percent of ~~$23.4 million, an increase in the estimated fair value of~~Pacific ~~securities~~Northwest ~~available~~Bancorp’s ~~for~~outstanding ~~sale~~shares of ~~$4.0~~common ~~million~~stock ~~(net~~over ofthe ~~tax),~~next ~~stock issued under~~twelve ~~stock~~months. ~~option~~As ~~plans~~ of ~~$2.0~~June ~~million~~30, ~~partially~~2003 ~~offset~~PNWB byrepurchased, ~~stock~~on ~~repurchase~~the ~~of $21.7~~open ~~million~~market, ~~and~~a ~~cash~~total ~~dividends declared~~ of ~~$0.42 per share or $6.4~~ ~~million. Book~~104,291 ~~value~~shares ~~per~~at ~~share~~an ~~was $13.51~~average asprice of ~~September 30, 2002, compared to~~ $1227.~~86 as of December 31, 2001~~56.

20PNWB’s total shareholders’ equity was $273.9 million as of June 30, 2003, compared to $261.6 million as of December 31, 2002. The increase in shareholders’ equity during the first six months of 2003 was primarily due to net income of $16.6 million, stock issued under stock option plans of $5.9 million, a tax deduction on stock option exercises of $1.6 million, offset by the decrease in the estimated fair value of securities available for sale of $4.3 million (net of tax), cash dividends declared of $0.28 per share or $4.8 million, and repurchases of common stock totaling $2.8 million. Book value per share was $16.03 as of June 30, 2003, compared to $15.57 as of December 31, 2002.

SUPERVISION AND REGULATION

Pacific Northwest Bancorp is a registered bank holding company under the Bank Holding Company Act of 1956 (BHCA) and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (FRB). Under the BHCA, Pacific Northwest Bancorp files with the FRB annual reports of operations and such additional information as 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 activities that the FRB has determined to be closely related to banking.

Pacific Northwest Bank is a member of the Federal Deposit Insurance Corporation (FDIC), and as such, is subject to examination thereby. Pacific Northwest Bank is a state-chartered commercial bank subject to regulation and supervision by the Washington Department of Financial Institutions, Division of Banks. In practice, the primary regulator makes regular examinations of the subsidiary bank subject to its regulatory review or participates in joint examinations with other regulators. Areas subject to regulation by federal or state authorities include the allowance for losses on loans, investments, loans, mergers and acquisitions, issuance of securities, payment of dividends, establishment of branches and other aspects of operations.

The enforcement powers available to banking regulators are substantial and include, among other things, the ability to assess civil monetary penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, enforcement actions must be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions, or inactions, may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Applicable law also requires public disclosure of final enforcement actions.

Pacific Northwest Bancorp and Pacific Northwest Bank are subject to risk-based capital guidelines requiring minimum capital levels based on the credit risk of assets. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on PNWB’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pacific Northwest Bancorp and Pacific Northwest Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

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

	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 Bancorp is subject to risk-based capital guidelines issued by the FRB, which establish a risk-adjusted ratio relating capital to different categories of assets. Tier I capital is comprised of shareholders’ equity and guaranteed preferred beneficial interests in subordinated debt less certain intangibles, and excludes the equity impact of ~~adjusting~~ adjusting securities available for sale to estimated fair value. Total capital is Tier I capital, the allowance for losses on loans and certain long-term debt ~~that~~ that qualifies for inclusion as regulatory capital. The FRB’s risk-based capital rules have been supplemented by a ~~leverage~~ leverage capital ratio, defined as Tier I capital to adjusted quarterly average ~~total~~ total assets. As of ~~September~~June 30, ~~2002~~2003, ~~under~~ under the FRB’s capital guidelines, PNWB’s levels of consolidated regulatory ~~capital~~ capital exceeded the FRB’s well-capitalized requirements. The capital amounts and ratios for Pacific Northwest Bancorp and Pacific Northwest Bank as of ~~September~~June 30, 2003 and December 31, 2002, are presented in the following table:

2002 and December 31, 2001, are presented in the following table:

CAPITAL RATIOS

	Amount				For Capital Adequacy Purposes	~~For Capital Adequacy Purposes~~				To Be Well Capitalized Under Prompt Corrective Action Provisions							~~To Be Well Capitalized Under Prompt Corrective Action Provisions~~
Dollars in thousands	Amount		Ratio		Amount	~~Amount~~		Ratio		Amount		~~Ratio~~	Ratio				~~Amount~~				~~Ratio~~
September 30, 2002
June 30, 2003
Pacific Northwest Bancorp:
Total capital (to risk-weighted assets)	$	~~263~~284,~~461~~685	1211.3766	%	$	$195,382		~~170,340~~8.0	%	$	244,228	~~8.0~~	10.0	%	%		$		~~212,925~~		~~10.0~~		%
Tier I capital (to risk-weighted assets)	~~228~~246,~~491~~867		10.7311	%	97,691	~~85,170~~		4.0	%	146,537		~~4.0~~	6.0	%	%		~~127,755~~				~~6.0~~		%
Tier I capital (to average assets)	~~228~~246,~~491~~867		8.1821	%	120,311	~~111,736~~		4.0	%	150,389		~~4.0~~	5.0	%	%		~~139,669~~				~~5.0~~		%
Pacific Northwest Bank:
Total capital (to risk-weighted assets)	$	~~248~~272,~~381~~109	11.8023	%	%$	193,789	$	8.0	~~168,428~~%	$	242,236		10.0	~~8.0~~%		%		$		~~210,535~~		~~10.0~~	%
Tier I capital (to risk-weighted assets)	~~225~~244,~~411~~286		10.7108	%	96,894	~~84,214~~		4.0	%	145,342		~~4.0~~	6.0	%	%		~~126,321~~				~~6.0~~		%
Tier I capital (to average assets)	~~225~~244,~~411~~286		8.0908	%	120,931	~~111,436~~		4.0	%	151,163		~~4.0~~	5.0	%	%		~~139,296~~				~~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 September 30, 2002, Pacific Northwest Bank was in compliance with well-capitalized capital requirements. Management believes that under the current regulations Pacific Northwest Bank will continue to meet well-capitalized capital requirements in the foreseeable future. However, events beyond the control of Pacific Northwest Bank, such as a downturn in the economy in areas where Pacific Northwest Bank has most of its loans, could adversely affect future earnings and, consequently, the ability of Pacific Northwest Bank to meet future well-capitalized capital requirements.24

	Amount				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
Dollars in thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio

December 31, 2002

Pacific Northwest Bancorp:
Total capital (to risk-weighted assets)	$	264,965	11.03	%	$	192,262	8.0	%	$	240,328	10.0	%
Tier I capital (to risk-weighted assets)	227,653		9.47	%	96,131		4.0	%	144,197		6.0	%
Tier I capital (to average assets)	227,653		7.77	%	117,201		4.0	%	146,502		5.0	%

Pacific Northwest Bank:
Total capital (to risk-weighted assets)	$	257,462	10.80	%	$	190,747	8.0	%	$	238,434	10.0	%
Tier I capital (to risk-weighted assets)	230,150		9.65	%	95,374		4.0	%	143,060		6.0	%
Tier I capital (to average assets)	230,150		7.87	%	116,902		4.0	%	146,128		5.0	%

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

LIQUIDITY RESOURCES

Liquidity management focuses on the need to meet both short-term funding requirements and PNWB’s long-term strategies and goals. Specifically, the objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, creditors and borrowers. Management manages the balance sheet to meet these needs. PNWB desires to attract and retain business and retail customer relationships with a focus on transaction accounts and commercial and consumer lending. PNWB also uses wholesale funds through advances from the FHLB and the sale of securities under agreements to repurchase to fund asset growth and meet liquidity needs. PNWB also uses wholesale and brokered certificates of deposit to supplement wholesale borrowings. Other sources of funds for liquidity include loan repayments, loan sales, security sales and mortgage-backed and related security repayments. Repayments on loans and mortgage-backed and related securities and deposit inflows and outflows are affected by changes in interest rates.

22PNWB has the capacity to borrow funds from the FHLB through pre-approved credit lines. These credit lines have pledge requirements whereby PNWB must maintain unencumbered collateral with a value at least equal to the outstanding balance. PNWB also uses the securities market as a vehicle for borrowing by utilizing its securities available for sale as collateral. If the estimated fair value of the securities were to decline as a result of an increase in interest rates or other factors, PNWB would be required to pledge additional securities or cash as collateral. In addition, PNWB has the ability to borrow funds from the Federal Reserve.

~~PNWB~~The ~~has~~analysis ~~the capacity to borrow~~of ~~funds~~liquidity ~~from~~also ~~the~~includes ~~FHLB through pre-approved credit lines. These credit lines have pledge requirements whereby PNWB must maintain unencumbered collateral with~~ a ~~value~~review atof ~~least equal to the outstanding balance.~~ PNWB’s ~~also~~consolidated ~~uses~~statement ~~the~~of ~~securities~~cash ~~market as a vehicle~~flows for ~~borrowing~~the bysix-month ~~utilizing~~period ~~its~~ended ~~securities~~June ~~available~~30, ~~for sale as collateral~~2003. ~~These borrowings are~~ ~~collateralized~~The byconsolidated ~~securities~~statement ~~with an estimated fair value exceeding the face value~~ of ~~the~~cash ~~borrowings.~~flows Ifdetails ~~the estimated fair value of the securities were to decline as a result of an increase in interest rates or other factors,~~ PNWB ~~would~~’s ~~be required to pledge additional securities or cash as collateral. In addition~~operating, ~~PNWB has the ability to borrow funds from the Federal Reserve.~~

The analysis of liquidity also includes a review of PNWB’s consolidated statement of cash flows for the nine-month period ended September 30, 2002. The consolidated statement of cash flows details PNWB’s operating, investing and financing activities during the period. The most significant items under operating activities include net income of $23.4 million for the nine-month period ended September 30, 2002 and an increase in other assets of $5.9 million. Also included in operating activities are the add back of non-cash depreciation, amortization of intangible assets and the provision for losses of loans totaling $9.8 million. Investing activities included proceeds from maturing and principal repayments on securities available for sale of $303.7 million, purchases of securities available for sale of $337.5 million. Investing activities also included a $128.5 million increase in loans receivable, $134.4 million of proceeds from mortgage banking activities and a $5.5 million proceeds from the sale of other real estate. During the period, financing activities included $146.2 million in borrowing repayments, net of borrowing proceeds, a $55.2 million increase in certificates of deposit, a $160.3 million increase in deposits, $21.7 million of cash used for the purchase and retirement of common stock, $12.0 million of cash proceeds from issuance of Pacific Northwest Statutory Trust I capital securities, and $6.5 million paid in cash dividends to shareholders.25

23investing and financing activities during the period. The most significant items under operating activities include net income of $16.6 million for the six-month period ended June 30, 2003, an increase in other assets of $1.2 million, and a decrease in accrued expenses and other liabilities of $2.9 million. Also included in operating activities are the add-back of non-cash depreciation, amortization of intangible assets, provision for losses of loans, and amortization of premium on investments totaling $9.1 million. Investing activities included purchases of securities available for sale of $305.1 million, proceeds from maturing and principal repayments on securities available for sale of $242.5 million, and proceeds from sale of securities available for sale of $104.3 million. During the period, financing activities included $42.9 million in borrowing repayments, net of borrowing proceeds, a $9.2 million net decrease in deposits, $4.4 million of cash proceeds from re-issuance of guaranteed subordinated debt, $3.1 million of proceeds received related to the issuance of stock, net of stock repurchased, and $4.7 million paid in cash dividends to shareholders.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

Management uses simulation analysis to measure PNWB’s interest sensitivity position. This simulation analysis is used to evaluate the effects of potential interest rate movements on net interest income. The simulation analysis model is dynamic in nature, and incorporates management’s current balance sheet strategy. Management develops assumptions regarding interest rate spreads, projected balances, expected maturities, cash flows and prepayment assumptions 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 conditions and management strategies, among other factors.~~

For further information on interest rate risk, reference is made to the sections “Net Interest Income” and “Average Rates and Balances” in Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations contained in this quarterly report on Form 10-Q. Information regarding the expected maturities of financial assets and financial liabilities has not changed materially from disclosures made in the Annual Report on Form 10-K for the year ended December 31, ~~2001~~2002.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

~~PNWB,~~As ~~under~~of the ~~supervision~~end of the period covered by this report and ~~with~~pursuant to Rule 13a-15 of the ~~participation~~Securities Exchange Act of ~~its~~1934 (the “Exchange Act”), PNWB’s management, including ~~its~~the Chief Executive Officer and Chief Financial Officer, ~~carried~~ ~~out~~conducted an evaluation of the effectiveness ~~of the~~ and design ~~and operation~~ of the Company’s disclosure controls and procedures (as ofthat ~~September~~term ~~30,~~is ~~2002~~defined in Rules 13a-15(~~the~~e) and ~~“Evaluation~~15d-15(e) ~~Date”~~of the Exchange Act). Based upon ~~this~~ that evaluation, the Chief Executive Officer and Chief Financial Officer ~~concluded~~ concluded, as of the ~~Evaluation~~end ~~Date~~of the period covered by this report, that ~~PNWB~~the Company’s disclosure controls and procedures were effective ~~for~~in ~~purposes of~~ recording, processing, summarizing and ~~timely~~ reporting ~~material~~ information required to be disclosed inby ~~reports~~the ~~filed~~Company, bywithin the time periods ~~Company~~specified ~~under~~in the Securities and Exchange ~~Act~~Commission’s ofrules ~~1934~~and forms.

Changes in Internal Controls

~~There~~In ~~were~~addition noand ~~significant~~as ~~changes~~of inthe ~~PNWB’s~~end ~~internal~~of ~~controls~~the ~~or in~~period ~~other~~covered ~~factors~~by ~~that~~this ~~could~~report, ~~significantly~~there ~~affect~~have ~~these~~been ~~controls~~no ~~subsequent~~changes toin ~~the~~internal control over ~~Evaluation~~financial ~~Date. PNWB~~reporting ~~did~~(as ~~not~~defined ~~implement~~in Rule 13a-15(f) and 15d-15(f) of the ~~any~~Exchange ~~corrective~~Act) ~~actions~~during ~~with~~the ~~regard~~quarter to ~~any~~which ~~significant~~this ~~deficiency~~report orrelates ~~material~~that have ~~weakness~~materially inaffected ~~its~~or are reasonably likely to materially affect, the internal control ~~controls~~over financial reporting.

FORWARD-LOOKING STATEMENTS

In this quarterly report 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 constitute forward-looking statements. Although PNWB believes that the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bounds of its knowledge of its business and operations, it is possible that actual results may differ materially from these expectations. The following items are among the factors that could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; recent world events and their impact on interest rates, businesses and customers; the regulatory environment; new legislation; vendor quality and efficiency; employee retention factors; rapidly changing technology and evolving banking industry standards; competitive standards; competitive factors, including increased competition with community, regional and national financial institutions; fluctuating interest rate environments; higher than expected loan delinquencies; and similar matters. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Items 2, 3 and 4 are not applicable and have been omitted.

Item 5. Other Information

In accord with Section 10A(I)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, PNWB is responsible for listing the non-audit services approved in the third quarter by PNWB’s Audit Committee to be performed by Ernst & Young, PNWB’s independent auditor. Non-audit services are defined in the law as services other than those provided in connection with an audit or a review of the consolidated financial statements of PNWB. During the third quarter of 2002, the Audit Committee approved additional engagements of Ernst & Young for the following non-audit services: (1) services to support SEC filings related to the Bank of the Northwest acquisition; (2) accounting matter consultations in connection with potential transactions for which fees do not exceed $10,000; (3) other non-audit services for which fees, in aggregate and on an annual basis, do not exceed 20 percent of annual audit fees.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

3.1		Articles of Incorporation of Pacific Northwest Bancorp (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
3.2		Bylaws of Pacific Northwest Bancorp (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000).
3.3		Amendment to the Bylaws of Pacific Northwest Bancorp (incorporated by reference to Exhibit 3.21 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).
10		Material contracts of Pacific Northwest Bancorp (incorporated by reference to Exhibits 10.1 through 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and Exhibits 10.23 through 10.25 to the Registrant’s quarterly Report on Form 10-Q for the quarter ended June 30, 2002).

(b) Reports on Form 8-K

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

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

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

~~SIGNATURES~~PART II. OTHER INFORMATION

PursuantItem to1. theLegal requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.Proceedings

	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: November 7, 2002

28Items 2 and 3 are not applicable and have been omitted.

CERTIFICATIONSItem 4. Submission of Matters to a Vote of Security Holders

~~CERTIFICATION~~The OFAnnual Meeting of Shareholders of Pacific Northwest Bancorp (“Meeting”) was held on April 22, 2003. The results of the vote on the matters ~~QUARTERLY~~presented ~~REPORT~~at ONthe ~~FORM~~Meeting ~~10-Q~~are as follows:

~~PURSUANT~~(1) Election TOof ~~SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002~~Directors

I, Patrick M. Fahey, certify that:

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

1* Mr. I haveLewis reviewed thiswas quarterly report on Form 10re-Q of Pacific Northwest Bancorp;elected

~~2. Based~~The onterms myof ~~knowledge,~~Directors ~~this quarterly~~Gary ~~report~~M. ~~does~~Bolyard, ~~not~~Larry ~~contain~~Carlson, ~~any~~Michael ~~untrue statement of a material fact or~~T. ~~omit~~Crawford, toPatrick ~~state~~M. aFahey, ~~material~~Jean ~~fact~~Gorton, ~~necessary~~Clark toH. ~~make~~Mock, ~~the~~Stephen ~~statements~~M. ~~made~~Walden, ~~in light~~and ofBetty ~~the~~Woods ~~circumstances~~continued ~~under~~after ~~which such statements were made, not misleading with respect to~~ the ~~period covered by this quarterly report;~~meeting.

~~3. Based~~(2) The onPacific ~~my knowledge,~~Northwest ~~the~~Bancorp ~~financial statements, and other financial information included~~2003 inLong-Term ~~this~~Stock ~~quarterly~~Incentive ~~report,~~Plan ~~fairly~~was ~~present~~adopted. inThe ~~all~~votes ~~material~~for ~~respects~~were ~~the financial condition~~7, ~~results of operations and cash flows of the registrant as of~~618,274 and ~~for,~~ the ~~periods~~votes ~~presented~~withheld inwere ~~this quarterly report;~~2,164,396.

4. TheItem registrant’s other5 certifyingis officersnot andapplicable I are responsible for establishing and maintaining disclosurehas controlsbeen and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:omitted.

a) designed suchItem disclosure6. controlsExhibits and proceduresReports toon ensureForm that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;8-K

~~b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report~~ (~~the “Evaluation Date”~~a)~~; and~~ Exhibits

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):28

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

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

(b) ~~any fraud,~~ Reports ~~whether~~on orForm ~~not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~8-K

~~6. The~~PNWB ~~registrant’s other~~filed ~~certifying~~a ~~officers~~current ~~and~~report Ion ~~have~~Form ~~indicated~~8-K inon May ~~this~~19, ~~quarterly~~2003. The report ~~whether or~~included ~~not~~under ~~there~~Item ~~were~~5 ~~significant~~of ~~changes~~Form in8-K ~~internal~~announced ~~controls~~that ~~or in other factors~~an ~~that~~Agreement ~~could~~and ~~significantly~~Plan ~~affect internal controls subsequent to the date~~ of ~~our most~~Reorganization ~~recent~~had ~~evaluation,~~been ~~including~~signed ~~any corrective actions~~ with ~~regard~~Wells ~~to significant~~Fargo ~~deficiencies and material weaknesses~~& Company.

	Date: November 7, 2002
		/s/ Patrick M. Fahey
		Patrick M. Fahey,
		President and Chief Executive Officer

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

~~CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q~~SIGNATURES

~~PURSUANT~~Pursuant TOto ~~SECTION~~the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report ~~302~~to OFbe ~~THE~~signed ~~SARBANES-OXLEY~~on ~~ACT~~its OFbehalf ~~2002~~by the undersigned thereunto duly authorized.

I, Bette J. Floray, certify that:

		PACIFIC NORTHWEST BANCORP


			By:	/s/ Patrick M. Fahey
				Patrick M. Fahey
				President and Chief Executive Officer


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


Dated:	August 12, 2003

~~1. I have reviewed this quarterly report on Form 10-Q of Pacific Northwest Bancorp;~~30

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

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

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	Date: November 7, 2002
		/s/ Bette J. Floray
		Bette J. Floray,
		Executive Vice President and Chief Financial Officer

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned are the Chief Executive Officer and the Chief Financial Officer of Pacific Northwest Bancorp (the “Registrant”). This Certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies the Quarterly Report on Form 10-Q of the Registrant for the quarterly period ended September 30, 2002.

We certify that such Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such 10-Q Report fairly presents, in all material respects, the financial condition and the results of operations of the Registrant.

Date: November 7, 2002
	/s/ Patrick M. Fahey
	Patrick M. Fahey, President and CEO
	/s/ Bette J. Floray
	Bette J. Floray,
	Executive Vice President and Chief Financial Officer

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