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 30, 2002

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

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

As of November 4, 2002, 14,980,152 shares of common stock were outstanding with no par value.

PACIFIC NORTHWEST BANCORP

INDEX

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.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

*Dollars in thousands, except share data*	Common Stock, no par value Shares		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Debt Related To ESOP			Total
January 1, 2001	15,494,357		$	26,291		$	159,613		$	(5,500	)	$	(1,668	)	$	178,736

Dividends declared, $0.42 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

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

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF 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

See accompanying notes to consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A BASIS OF PRESENTATION

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.

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.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management 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.

The unaudited consolidated financial statements have 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

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

NOTE C NET INCOME PER SHARE

Basic 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.

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

	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

NOTE D CONVERSION AND INTEGRATION EXPENSES

During the year ended December 31, 2000, PNWB initiated the process of converting its various 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.

NOTE E BUSINESS SEGMENT INFORMATION

Between the period August 31, 1996 and October 1999, PNWB acquired six commercial banking institutions. Subsequent to the acquisitions of Pacific Northwest Bank, First National Bank of Port Orchard, Pioneer Bank and Kittitas Valley Bank in 1998, PNWB was managed at the individual subsidiary bank level. Each subsidiary bank had a Board of Directors and an executive management team that was responsible for the operation and performance of the respective subsidiary bank.

During the year ended December 31, 2000, PNWB merged the subsidiary banks into one commercial bank. In addition, PNWB consolidated its executive management functions and implemented a new organizational structure, while converting separate banking systems into a single operating system. As 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 nine-month periods ended September 30, 2002 and 2001.

NOTE F SECURITIES PLEDGED UNDER AGREEMENTS TO REPURCHASE

PNWB has sold certain securities of the U.S. government and its agencies and other approved investments under agreements to repurchase. The securities sold were classified as securities available for sale with an estimated fair value of $91.3 million and $147.9 million as of September 30, 2002 and December 31, 2001, respectively.

NOTE G ACCOUNTING CHANGES

In July 2002, the FASB issued SFAS No. 146 “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.

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

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.

In July 2001, the FASB issued SFAS No. 142 “Accounting 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 indicators arise. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. This Statement became effective on January 1, 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. The adoption of SFAS No. 142 is expected to reduce PNWB’s goodwill amortization expense by approximately $1.1 million on an annual basis. A reconciliation of reported net income to net income adjusted to exclude goodwill amortization for the three- and nine- month periods ended September 30, 2002 and 2001 is as follows:

	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 H SUBSEQUENT EVENT

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.

On November 1, 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.

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

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.

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.

On July 22, 2002, 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.

A source of future growth may be through mergers and acquisitions. PNWB’s management believes that many other financial institutions are considering selling their institutions for a variety of reasons, including lack of shareholder liquidity, management succession issues, technology challenges, and increasing competition. PNWB actively reviews proposals for various acquisition opportunities. PNWB has a due diligence review process to evaluate potential acquisitions and has established parameters for potential acquisitions relating to market factors, financial performance and certain non-financial factors. Successful completion of acquisitions by PNWB depends on several factors such as the availability of suitable acquisition candidates, necessary regulatory and shareholder approval and compliance with applicable capital requirements. No assurance can be made that acquisition activity will continue in the future.

Upon the completion of the Bank of the Northwest acquisition, Pacific Northwest Bank will operate 59 Financial Centers in western and central Washington, and the metropolitan area of Portland, Oregon. Investments are available through Pacific Northwest Financial Services and insurance products are available through Pacific Northwest Insurance Agency, both wholly owned subsidiaries of Pacific Northwest Bank.

RESULTS OF OPERATIONS

PNWB had net income of $8.0 million for the three-month period ended September 30, 2002, compared to $6.1 million for the three-month period ended September 30, 2001. Diluted net income per share was $0.51 for the three-month period ended September 30, 2002, compared to $0.39 for the three-month period ended September 30, 2001. PNWB’s return on average shareholders’ equity was 15.81 percent for the three-month period ended September 30, 2002, compared to 12.83 percent for the three-month period ended September 30, 2001. PNWB’s return on average assets was 1.13 percent for the three-month period ended September 30, 2002, compared to 0.88 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 following table summarizes net income, net income per share and key financial ratios for the three- and nine-month periods ended September 30:

	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		%

Net 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. Net 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.

Interest income was $44.2 million for the three-month period ended September 30, 2002, compared to $50.7 million for the three-month period ended September 30, 2001. Interest income was $134.1 million for the nine-month period ended September 30, 2002, compared to $157.5 million for the nine-month period ended September 30, 2001. The decreases for the three- and nine-month periods ended September 30, 2002 were due to the balances and lower yields earned on both loans receivable and investment securities as a result of lower market

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.

Interest 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 for the three-month period ended September 30, 2002, compared 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.

Interest expense was $52.8 million for the nine-month 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.

Net interest margin, which is net interest income divided by average interest-earning assets, was 4.10 percent for the three-month period ended September 30, 2002, compared to 4.04 percent for the three-month period ended September 30, 2001. Net interest margin was 4.16 percent for the nine-month period ended September 30, 2002, compared to 3.67 percent for the same period in 2001. The increases in net interest margin for the three- and nine-month periods ended September 30, 2002 were due to changes in the mix of earning assets and decreases in cost of funds which resulted from reductions in market interest rates and the restructuring of the funding base. The increases in net interest margin were partially offset by implementation of the bank owned life insurance (BOLI) initiative in early April 2002. The funding of BOLI contracts increased average interest-bearing liabilities and interest expense, while the income from BOLI, representing a tax-exempt increase in cash surrender value of these contracts, was classified within “non-interest income”.

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:

	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	%

The following table indicates the average balance and average interest rates earned or paid, interest rate spread and net interest margin for the nine-month periods ended September 30:

	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	%

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 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

Provision for losses on loans | The provision for losses on loans was $1.7 million for the three-month period ended September 30, 2002, compared to $1.6 million for the three-month period ended 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-month periods ended September 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

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

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.

Service fees were $3.3 million for the three-month period ended September 30, 2002 compared to $2.8 million for the three-month period ended September 30, 2001. Service fees were $9.8 million for the nine-month period ended September 30, 2002 compared to $8.5 million for the nine-month period ended September 30, 2001. The increases were primarily due to increases in fees received on deposit accounts and fees from commercial loan commitments.

Consistent with management’s expectation, mortgage banking revenue was $452,000 for the three-month period ended September 30, 2002, compared to $584,000 for the three-month period ended September 30, 2001. Mortgage banking revenue was negatively impacted by a decrease in single-family mortgage production volume (especially from mortgage refinancing) as a result of the increase in mortgage rates during second quarter and first half of third quarter of 2002. Mortgage banking revenue was $1.9 million for the nine-month period ended September 30, 2002 compared to $1.6 million for the nine-month period ended September 30, 2001.

Non-interest Expense | Non-interest expense was $18.4 million for the three-month period ended September 30, 2002, compared to $20.1 million for the three-month period ended September 30, 2001 (excluding $280,000 of goodwill amortization expense). Non-interest expense was $55.7 million for the nine-month period ended September 30, 2002, compared to $57.8 million for the nine-month period ended September 30, 2001 (excluding $1.5 million conversion and severance expenses and $840,000 goodwill amortization expense).

General and administrative expenses were $4.2 million for the three-month period ended September 30, 2002, compared to $5.5 million for the three-month period ended September 30, 2001 (excluding $280,000 of goodwill amortization expense). General and administrative expenses were $12.7 million for the nine-month period ended September 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.

Income Tax Expense | Income tax expense was $4.1 million for the three-month period ended September 30, 2002, compared to $3.7 million for the three-month period ended September 30, 2001. Income tax expense was $12.2 million for the nine-month period ended September 30, 2002, compared to $9.0 million for the nine-month period ended September 30, 2001. The increases in income tax expense from 2001 were primarily due to the

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.

REVIEW OF FINANCIAL CONDITION

PNWB’s consolidated assets were $2.83 billion as of September 30, 2002, compared to $2.74 billion as of December 31, 2001.

Securities | As of September 30, 2002, PNWB had $795.3 million of securities available for sale, compared to $757.0 million as of December 31, 2001. The increase was primarily due to investment of the additional funds from deposit growth.

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, a separate component of shareholders’ equity.

Net Loans Receivable | Net loans receivable were $1.79 billion as of September 30, 2002, compared to $1.79 billion as of December 31, 2001.

Total commercial loans outstanding were $1.17 billion or 64.4 percent of the loan portfolio as of September 30, 2002, compared to $1.06 billion or 58.4 percent as of December 31, 2001. This increase in total commercial loans outstanding was primarily due the growth of commercial real estate loans. To date, the growth in the commercial loan portfolio was consistent with management’s expectations. However, due to the current condition of the Pacific Northwest regional economy and its slow recovery, commercial loans may not grow at the same rate for the remainder of 2002.

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.

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

*Dollars in thousands*	September 30, 2002		December 31, 2001

Commercial loans:
Commercial	$	584,853	$	591,663
Commercial real estate	589,605		470,408
Total commercial loans:	1,174,458		1,062,071

Single-family residential	248,410		321,246
Real estate construction	281,945		319,228
Consumer loans	120,084		115,440
	1,824,897		1,817,985
Less:
Allowance for losses on loans	22,785		20,123
Deferred loan fees and discounts	8,851		9,430
Net loans receivable	$	1,793,261	$	1,788,432

Loans Held for Sale | Loans held for sale totaled $22.2 million as of September 30, 2002 compared to $43.8 million as of December 31, 2001. Loans held for sale are primarily single-family mortgage loans and, to a much less extent, loans originated under a Small Business Administration program. Loans held for sale are carried at the lower of cost or estimated fair value in aggregate. Loans held for sale are typically sold to other financial institutions.

Non-performing Assets | Loans are generally placed on non-accrual when they become past due over 90 days, or 120 days if they are single-family mortgage loans, or when the collection of interest or principal is considered unlikely. Loans past due over 90 or 120 days that are not on non-accrual status 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 is placed on non-accrual status, any previously accrued and uncollected interest is reversed from interest income. PNWB performs a review of its 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 characteristics and loan performance. The overall objective of this review process is to identify trends in the credit quality of the loan portfolio and to determine the level of loss exposure to evaluate the need for an adjustment to the allowance for losses on loans.

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.

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 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.

PNWB’s allowance for losses on loans is allocated to specific loans, certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. Although the allocation of the allowance for losses on loans is an important credit management tool, the entire allowance for losses on loans is available for the entire loan portfolio. Management reviewed the allocations in the various loan categories and believes the allowance for losses on loans was adequate as of September 30, 2002.

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

	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

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-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

Other intangible assets consist of mortgage servicing intangibles and core deposit intangibles. Mortgage servicing intangibles 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 intangibles 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 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

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 $253.6 million as of September 30, 2002 compared to $241.7 million as of December 31, 2001. Non-interest-bearing deposits represented 13.9 percent and 15.1 percent of total deposits as of September 30, 2002 and December 31, 2001, respectively. Interest-bearing transaction accounts (which include interest-bearing checking, money market and savings accounts) totaled $780.4 million as of September 30, 2002 compared to $632.0 million as of December 31, 2001. Interest-bearing transaction accounts represented 42.9 percent of total deposits as of September 30, 2002, compared to 39.4 percent as of December 31, 2001. 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 $786.3 million as of September 30, 2002, compared to $731.1 million as of December 31, 2001. Certificates of deposit represented 43.2 percent of total deposits as of September 30, 2002, compared to 45.6 percent as of December 31, 2001. The increase in the balance of certificates of deposit was driven by a sales campaign that was completed during the second quarter 2002 as a result of management’s initiative to create more of an interest rate neutral position of the balance sheet.

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

*Dollars in thousands*	September 30, 2002		December 31, 2001

Non-interest-bearing deposits	$	253,569	$	241,674
Interest-bearing checking accounts	232,202		214,098
Money market accounts	443,425		322,554
Savings accounts	104,785		95,390
Certificates of deposit	786,302		731,139

Total	$	1,820,283	$	1,604,855

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 $717.9 million as of September 30, 2002 compared to $864.0 million as of December 31, 2001. The need for this type of borrowings decreased primarily as a result of the increase in deposits.

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.

Other borrowings | Other borrowings were $12.1 million as of September 30, 2002, compared to $12.6 million as of December 31, 2001. They were primarily notes from another financial institution. This borrowing qualifies as Tier II capital under the capital guidelines of the Federal Reserve Board. The decrease from December 31, 2001 was due to the payoff of a loan by Pacific Northwest Bancorp Employee Stock Ownership Plan that Pacific Northwest Bancorp guaranteed.

Guaranteed Preferred Beneficial Interests in Subordinated Debt | On November 15, 1999, $40 million of 9.875 percent Capital Securities were issued by InterWest Capital Trust I. 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 Interwest Capital Trust. 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 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 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.

On September 26, 2002, $12 million of Capital Securities were issued by Pacific Northwest Statutory Trust I through the Keefe, Bruyette, & Woods, Inc. Trust Preferred Pool Offering, Preferred Term Securities VII, LTD. 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-Month LIBOR plus 3.55 percent and adjusts on a quarterly basis. As of September 30, 2002, the interest rate on the Capital Securities was 5.37 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 Capital Securities qualify as Tier I capital under the capital guidelines of the Federal Reserve Board.

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 total shareholders’ equity was $202.3 million as of September 30, 2002, compared to $200.5 million as of December 31, 2001. The increase in shareholders’ equity during the first nine months of 2002 was primarily due to net income of $23.4 million, an increase in the estimated fair value of securities available for sale of $4.0 million (net of tax), stock issued under stock option plans of $2.0 million, partially offset by stock repurchase of $21.7 million and cash dividends declared of $0.42 per share or $6.4 million. Book value per share was $13.51 as of September 30, 2002, compared to $12.86 as of December 31, 2001.

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 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 qualifies for inclusion as regulatory capital. The FRB’s risk-based capital rules have been supplemented by a leverage capital ratio, defined as Tier I capital to adjusted quarterly average total assets. As of September 30, 2002, under the FRB’s capital guidelines, PNWB’s levels of consolidated regulatory capital exceeded the FRB’s well-capitalized requirements. The capital amounts and ratios for Pacific Northwest Bancorp and Pacific Northwest Bank as of September 30,

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

CAPITAL RATIOS

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

September 30, 2002

Pacific Northwest Bancorp:
Total capital (to risk-weighted assets)	$	263,461	12.37	%		$		170,340		8.0		%		$		212,925		10.0		%
Tier I capital (to risk-weighted assets)	228,491		10.73	%		85,170				4.0		%		127,755				6.0		%
Tier I capital (to average assets)	228,491		8.18	%		111,736				4.0		%		139,669				5.0		%

Pacific Northwest Bank:
Total capital (to risk-weighted assets)	$	248,381	11.80		%		$		168,428		8.0		%		$		210,535		10.0	%
Tier I capital (to risk-weighted assets)	225,411		10.71	%		84,214				4.0		%		126,321				6.0		%
Tier I capital (to average assets)	225,411		8.09	%		111,436				4.0		%		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.

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.

PNWB 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. These borrowings are collateralized by securities with an estimated fair value exceeding the face value of the borrowings. 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.

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.

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.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

PNWB, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2002 (the “Evaluation Date”). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that PNWB’s disclosure controls and procedures were effective for purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934.

Changes in Internal Controls

There were no significant changes in PNWB’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. PNWB did not implement any corrective actions with regard to any significant deficiency or material weakness in its internal controls.

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

Pursuant to the 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.

	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

CERTIFICATIONS

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Patrick M. Fahey, certify that:

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

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;

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):

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

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/ Patrick M. Fahey
		Patrick M. Fahey,
		President and Chief Executive Officer

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Bette J. Floray, certify that:

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

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

	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