Bank of the Northwest Announces Merger with Pacific Northwest Bancorp.

Business Editors

PORTLAND, Ore.--(BUSINESS WIRE)--July 22, 2002

Bank of the Northwest (Nasdaq:BKNW) announced today that it has signed a definitive agreement with Pacific Northwest Bancorp (Nasdaq:PNWB) providing for the merger of Bank of the Northwest into Pacific Northwest Bank in a cash and stock transaction presently valued at $85 million.

The combined organization will have assets of $3.2 billion and 59 banking offices in Oregon and Washington.

"We believe that this transaction creates the premier community banking franchise in the Northwest," said Patrick M. Fahey, president and CEO of Pacific Northwest Bancorp. "Bank of the Northwest is a high-performing organization with a compatible culture, excellent credit quality and client service, and an outstanding reputation in the market. With the combined management talent of these two organizations and capital to grow the franchise in Oregon, this combination will allow us to provide superior banking services to more customers throughout Oregon."

Bank of the Northwest has total assets of $354.4 million and operates through its five Portland metropolitan area banking offices. Founded in 1996 with $15.5 million in capitalization and bolstered by a secondary public offering in 2001, the bank has assembled a management team of highly experienced banking professionals and has quickly established a significant presence in the Oregon market as a full-service commercial bank providing commercial, private, real estate, and professional banking services.

According to Daniel J. Durkin, chairman and CEO of Bank of the Northwest, "Our merger with Pacific Northwest Bancorp will provide a number of benefits to our existing customers, including higher lending limits and an expanded product line which will continue to be delivered by our dedicated staff of local bankers. It will also allow us to serve a broader segment of the Oregon market. Our shareholders are expected to receive a premium on their investment and a more liquid stock that carries a cash dividend."

Durkin will become vice chairman of Pacific Northwest Bancorp and will join the board of Pacific Northwest Bank as well. Another Bank of the Northwest board member to be named will also join the two boards. Additionally, a Portland-area advisory board will be established and comprised of current Bank of the Northwest board members as well as current Executive Vice President Kathryn L.M. Spere. Christian R. Rasmussen, president of Bank of the Northwest, will become president of Pacific Northwest Bank-Oregon, and will report directly to CEO Pat Fahey.

According to Rasmussen, "We expect to continue local decision-making in Oregon including credit administration for loan approvals, which will allow us to continue to deliver on our promise to customers of prompt, professional responses to their banking needs and continue our history of community involvement in the Portland area."

Under the terms of the merger agreement, the purchase price will be paid approximately 65% in stock and 35% in cash. Pacific Northwest Bancorp will issue approximately 1.75 million shares of Pacific Northwest Bancorp common stock (or .82 shares per Bank of the Northwest common share exchanged for stock) and approximately $25.8 million in cash in exchange for all outstanding shares of Bank of the Northwest common stock. To the extent that Bank of the Northwest shareholders receive stock in the merger, the exchange of stock is expected to be tax-free to shareholders.

Bank of the Northwest shareholders may choose to receive stock or cash, or a combination, in the merger, provided that the aggregate cash payment by Pacific Northwest Bancorp will equal in all cases approximately $25.8 million. The combination of shares of Pacific Northwest Bancorp common stock and cash per share to be received by each Bank of the Northwest shareholder will be determined based on the trading price of Pacific Northwest Bancorp common stock shortly before closing and on elections made by shareholders. If more shareholders elect to receive stock or cash than is available, shareholders may receive a mix of stock and cash that differs from their elections.

The parties to the merger anticipate that the transaction will close in the fourth quarter of 2002 and be accretive to Pacific Northwest Bancorp earnings during 2003. After the closing and the completion of systems conversions, the combined bank will operate in Bank of the Northwest's former market under the name "Pacific Northwest Bank," and bank headquarters will be located in Seattle, Wash. The transaction, which has been approved by the boards of directors of both companies, is subject to approval by the shareholders of Bank of the Northwest and banking regulators, and to other conditions described in the merger agreement.

Bank of the Northwest is being advised in this transaction by the investment bank of D.A. Davidson & Co. Pacific Northwest Bancorp is being advised by Sandler O'Neil & Partners, L.P.

Conference Call

Pacific Northwest Bancorp and Bank of the Northwest will co-host a conference call for investors, analysts and other interested parties at 1:00 p.m. EDT, Tuesday, July 23, 2002. The reservation number is 800/215-6519 and the access number is 20776065.

Participants will include:

-- Patrick Fahey, president and CEO of Pacific Northwest Bancorp

-- Daniel J. Durkin, chairman and CEO of Bank of the Northwest

-- Christian Rasmussen, president of Bank of the Northwest

-- Bette Floray, chief financial officer of Pacific Northwest Bancorp

This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose of availing the parties to the protections of the safe harbor provisions of the PSLRA. The forward-looking statements contained herein are subject to factors, risks and uncertainties that may cause actual results to differ materially from those projected. 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 factors, including increased competition with community, regional and national financial institutions; fluctuating interest-rate environments; higher-than-expected loan delinquencies; and similar matters. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only at the date of this release.

Additional factors that may cause results to differ materially from those implied by or described in forward-looking statements can be found in the 2001 Annual Reports on Form 10-K and other reports of Pacific Northwest Bancorp and Bank of the Northwest filed with the Securities and Exchange Commission ("SEC") and Federal Deposit Insurance Corporation ("FDIC"), respectively. Filings with the SEC are available for review by the public at the SEC's website located at http://www.sec.gov. Filings with the FDIC are available at the FDIC at 550 17th Street N.W., Washington, D.C.

The parties undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this release.

Additional information and where to find it:

Pacific Northwest Bancorp plans to file a registration statement with the SEC on Form S-4 in connection with the merger; this document will also be filed by Bank of the Northwest with the FDIC. The parties will mail a proxy statement/prospectus to Bank of the Northwest shareholders containing information about the companies and the merger. Investors and security holders are urged to read the registration statement and the proxy statement/prospectus carefully when they are available. The registration statement and the proxy statement/prospectus will contain important information about Pacific Northwest Bancorp, Bank of the Northwest, the merger and related matters. Investors and security holders will be able to obtain free copies of these documents through the web site maintained by the SEC at http://www.sec.gov. Free copies are also available from Bank of the Northwest by writing Investor Relations, Bank of the Northwest, 600 Pioneer Tower, 888 S.W. Fifth Avenue, Portland, Oregon 97204.

Bank of the Northwest, its directors, executive officers and certain members of management and employees will be soliciting proxies from Bank of the Northwest shareholders in favor of approval of the merger agreement. A description of any interests, direct or indirect, that Bank of the Northwest's directors and executive officers have in the merger will be included in the proxy statement/prospectus.